Q4 2020 Credit Acceptance Corp Earnings Call

Yes.

Good day everyone.

Welcome to the credit acceptance Corp, fourth quarter 2020 earnings call. Today's call is being recorded a webcast and transcript of today's earnings call will be made.

On credit acceptance website.

This time I would like to turn the call over to credit acceptance Chief Treasury Officer, Doug Busk.

Thank you.

Good afternoon, and welcome to the credit acceptance was fourth quarter of 2020 earnings call.

As you read our news release posted from the Investor Relations section of our website at IR Dot credit acceptance dotcom.

And as you listen to this conference call.

Recognize that both contain forward looking statements within the meaning of federal Securities law.

These forward looking statements are subject to a number of risks and uncertainties.

Many of which are beyond our control.

Which could cause actual results to differ materially from such statements.

These risks and uncertainties include those spelled out in the cautionary statement regarding forward looking information included in the news release.

Consider all forward looking statements in light of those and other risks and uncertainties.

Additionally, I should mention that to comply with the SEC's regulation G.

Please refer to the financial results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures.

At this time, Brett Roberts, our Chief Executive Officer, Ken Booth, our Chief Financial Officer, and I will take your questions.

To ask a question you will need to press star one on your telephone.

Your question press the pound key please standby will be comparable to Q1 day.

Rosner.

Your first question is from David Scharf with JMP Securities.

Hi, yes. Good afternoon, thanks for taking my questions.

I'm just curious can you.

Remind us what the rough mix is.

Among your dealer.

Base.

In terms of independents versus franchised.

Relative to say about that in the past 40.

<unk> 40 per cent franchise.

Okay.

And I'm wondering Brett.

This is probably the least scientific.

Okay.

Observation I can make but I know, having having been in it having been in a dealership in recent months during the pandemic.

There's a there's a certain comfort level I, just kind of emotionally had being in what I viewed as kind of a kind of a large established business and all the.

Processes health wise and screening that they've put in place you know I'm wondering as you reflect upon.

Just foot traffic and volume trends in some headwinds there.

Are you noticing or your dealers noticing sort of a different level of demand during the pandemic for a different magnitude of pressure falloff in foot traffic at independence versus franchised.

I think there's definitely a difference there we saw softer volume from independents and.

In both Q3 and Q4 franchise.

Still declined year over year in Q4, but by a lesser magnitude than the independence for.

Got it and going forward as you think about kind of your product the.

The value proposition to dealers did.

Do you view this debt observation that that phenomenon as you know just a direct result.

Of how consumers are viewing franchises versus maybe independent dealers and businesses during the pandemic.

Or.

Are you rethinking sort of the mix that you might want it.

<unk> direct sales people to call on dealerships.

Okay.

And I think historically, we've we've had a products that appeal to independents universe.

Some franchise dealers, but not all one we developed the purchase product.

That had more appeal for some other franchise dealers who weren't interested in the in the traditional product.

So we have a product for both Oh.

Each individual market area manager can determine.

Where are their best prospects are and how best to utilize their time, so we're not necessarily targeting one over the other.

My observation was just that it seems like independents had a harder time.

Through the pandemic and franchise dealers.

Right right.

I would agree and then maybe just one follow up.

I know fourth quarter is tough because it's seasonally a slower.

Period, and you've got.

The traditional tax refund season coming up in Q1.

But with cheap, but did you notice was there any kind of spike or reaction to diesel to the to the latest stimulus checks that went out.

Oh, we have moves we gave you a january volumes in the release, so I think the certainly.

Oh, I'm, sorry, I didn't I didn't catch those.

Yeah, the stimulus checks and the impact of that probably captured pretty well, but by the January figures we provided.

Okay perfect. Thank you.

Your next question is from Moshe Orenbuch with credit Suisse.

Great. Thanks, maybe following up.

The average size of loans, where the advance you know as has grown and which was bigger in Q4, you had said in three.

Three months ago that part of the issue and I think it was repeated in the release now for quite a b issuance debt you know the wholesale prices were up maybe just give us an update as to where that stands.

Is that still having an impact being offset by the stimulus how do we how do we think about those trends.

Still elevated so the numbers that we track internally.

You know the.

It's moderated to some extent over the last few months, but wholesale values are still higher than they were.

A year ago.

Okay.

Looking at the 8-K that you filed.

I guess im from struggling with trying to understand the verbiage on the share.

P B.

On December 23rd.

They send you a civil investigative demand for investigations hearings and then it should be.

It's true that portion.

For civil investigative demands because that means there were other things in there like how should we I'm not sure I understand it's kind of new to me.

So that continues to be active.

So that's the main takeaway from.

From that language, there's not a lot we can add to what's in there.

But if you wanted a clarification you shouldn't read that to mean, it's it continues to be active.

Okay.

My last.

<unk> was.

The company kind of setup.

Uh huh.

I guess the options program in the.

In December for a for a number of executives.

If you kind of talked about you know how that was arrived at and no debt.

The value.

Of those 330000 options.

I don't follow the question.

Yes.

Well.

I guess the.

Yeah.

I guess the question is is that I mean is it.

Is there a plan or a program that that's part of like what you know right.

Obviously, we saw that.

Form for grants.

You know what was there any part of the comp plan.

Does it relate to the company performance in a particular period or anything like that.

Yeah. So we're just coming off we haven't we have.

Our compensation plan for senior executives.

The last plan was a four year plan.

Our 2024th year of that so what we've historically.

Historically done is who we.

Three year for year cycles, we put a plan in place and then that's the plan that we use for that period.

So the prior plan ended and we started in other plan in the options were part of that plan.

Got it okay. Thank you.

Yeah.

Your next question is from John Rowan with Janney.

Hey, good afternoon guys.

When you look at the reduction in.

Dealer partner productivity is it do you would you categorize it more as you know lower foot traffic in C. ACC dealer partners or is it stable foot traffic for even higher foot traffic, but more loans going to other lenders that might also you have relationships with those dealers.

So said another way is it does it our share of the market or is it the size of the market.

Correct I'm trying to figure out if it's just people you know if there was a change in advertising perhaps in there as you know the way you advertise that.

The new car prices and whether or not that's caused a reduction in foot traffic at C. C. C. You know dealer partners or if you know other lenders are just getting more aggressive and are taking share from you at dealers I I just want to understand the difference. If there is a difference that you can note for for Q.

Yeah.

Yeah, I think we have some information on.

On the market as a whole.

It's not perfect.

You can get that information on a lag. So we have some visibility into October and November.

For quarter.

But I think the trends we saw.

Both in Q3.

In October and November.

The overall market and used vehicle volume used vehicle financing volume.

It's pretty stable, even growing a little bit.

So we're obviously downs that would mean, we lost share of the market defined as total used vehicles finance.

You're also seeing that data.

You know the lower tiers of the credit spectrum are actually down year over year in some cases significantly the further you get down.

So our.

Our wheelhouse as independent dealers in our wheelhouse in the lower current.

But to your customers on that.

Those are the segments of the market that had been negatively impacted the most.

Having said that I do think it's probably fair to say that we last year in Q4 year over year, we lost it to others.

Have you seen the market differently than we do at this point or price more aggressively than in <unk>.

What we're willing to do.

We think for on.

The incremental customer obviously, we did a lot of business.

Added value and those dealers, where we did business or still a niche there for us it just gets a little bit smaller ones.

Some of these external factors come into play including.

Competition.

Well just to get back to that last one for competition. It doesn't seem like you were necessarily giving up rate I mean, the advance rate was was up right I mean from.

What I can see it was up you know in December so it still seems like you're actively pursuing volume.

The loan term has plateaued here at 60 months and loans are now over $25000. So you know it seems as if you were still trying to get volume by incentivizing dealer partners and I'm. Just wondering if we're to this point now where the loans are just too big for your typical customers.

And you're getting you know competition, that's kind of putting your between like a rock and a hard place almost right where you can increase advance anymore or you don't want to increase advance anymore loan term is already 60 months and now your loan portfolio actually just started to decline a little bit sequentially. This quarter. You know it is have we reached kind of a plateau here for the for XI.

Well for you draw on the loan portfolio do you think it continues to come down through 'twenty and 'twenty one.

Well I certainly agree with the statement that we haven't given up.

We're still we're still try it.

As to what's going to happen in the future I don't really know, but I think if you go back and look I think.

I don't know 2016, maybe maybe even the year before that if you read my annual letter I said, hey, unless something happens with the competitive environment given the current trends how many dealers were able to enroll.

The trends in attrition, but trends in volume per dealer, it's probably going to be pretty difficult.

To grow our market from here are to grow our our book from here.

Barring some change in the competitive environment.

And we were able to grow from there we did better than I expected.

But it went up so if you go back pre pandemic fourth quarter and 19.

We had year over year decline in.

Unit volume in the fourth quarter and 19.

Got off to a decent start in January and February pre pandemic were flat in February.

Dominic hit and then you know the results.

Or what they were for the rest of 2020. So I think overall my view hasn't changed I think we have a very healthy business a profitable business.

We're able to add considerable value in our niche.

But I think.

Go back three or four years, maybe even five years I think it was clear at that point that there is a business.

Point, where I was going to be difficult to grow barring a change in the competitive environment or you know or some other change some other insights that we get.

Another way for us to add value and that's been tough to come by.

And so Adam.

For the pandemic and wholesale values them things, we've already talked about or disclosed and I think that that explains.

So where we are today.

Thank you very much.

Your next question is from John Hecht with Jefferies.

Afternoon, Thanks for taking my questions.

First one im just interested in the components of the provision.

How much of the provision was tied to newer volumes versus maybe changes in the macro outlook versus changes of your expectations for loss content.

Virtually all of the provision was related to new loans.

Have a disclosure on the bottom of page one of the press release that details out.

Okay. Thanks.

Sure I see that and then.

Maybe can you guys talk about ongoing effects of the pandemic on operations.

How are its collection is still fairly debt.

<unk> for home is.

Our repossession activity normalized.

Are you guys in the loan forgiveness program.

Yeah.

Hum.

The vast majority of the company.

Well over.

90% of the team members.

<unk> continues to work remotely.

So.

All of our virtually all of our servicing personnel.

You know continue to.

Work remotely.

Repossessions are really being handled on a customer by customer basis.

Depending on.

Each consumer's individual circumstances.

Can you give us a sense of where that activity is relative to a normalized level or are we halfway there we go.

Approaching normalized levels or how do we think about that.

Yeah.

Oh, we're not we're not back to normal at this point so.

We're giving the customers a lot of room, we know, it's a difficult environment for many of them and so we're giving them extra.

Extra time to make their payments and so repossessions aren't yet back to where they normally would be.

Okay and then last question is just I guess, it's more of your opinion I mean.

It is it's been extraordinary market in terms of residual values and maybe relative to historical averages, but what we would have thought it's been going on in this type of environment.

What do you guys think it's going to need.

What kind of catalyst do you think is going to need to occur where there could be a bigger shake out in the market, which would allow you to reestablish market share.

Yeah.

I think historically you just have to look at the.

The supply of capital for the industry.

Capital is available capital is very cheap.

Uh huh.

As long as that continues I think youre looking at a very competitive environment.

So what would cause the capital to dry up I mean, there's a variety of things.

One would be low performance within the industry or some sort of external event.

I think Ed.

Uh huh.

The government response to the pandemic and different than perhaps the pandemic would have been.

That reason, but because of the response from the stimulus.

Offset any loan performance issues for most of the industry.

It didn't play out that way.

Okay, alright, thanks very much.

As a reminder, ladies and gentlemen, if you would like to ask a question at this time simply press Star then the number one on your telephone keypad.

Your next question is from Robert <unk> with.

Economists research.

Hey, guys I just wanted to follow up on the January volume trends, how long do you think the tailwind from that December stimulus check will last as a does the $600 second December health sales through February and March or does the impact sort of already played out.

Yes.

Yes, I think it's I think it's probably pretty hard to say.

I mean, you could look at what happened.

May June July.

So we had.

As I mentioned January and February were flat March and April were down sharply and then you had may and June where we had pretty strong growth in July was sort of a transition months. So.

I can't tell you the same thing is going to play out this time.

But I can tell you. The last time, you had two and a half months.

What looked like elevated volume now thats coming off.

A couple of months, where you had.

A really soft volume so some of that was the rebound that you might not see at this time.

Hard to say you have tax season coming up you have maybe another stimulus I think it'll be a unique environment. So it's pretty hard to predict how it's going to play out in terms of.

Either loan volumes or collections.

Okay, and then just on.

Capital return can you remind us of the repurchase authorization and your thoughts on the potential for for share repurchases. This year.

At the end of the year, we had approximately $2 5 million shares.

Under our existing authorization.

We continue to.

We continue to think about buybacks the same way we have for our for very very long time. So we're employing the same criteria.

Yeah.

Okay. Thanks.

With no further questions in the queue I would like to turn the conference back to Mr. Bass for any additional or closing remarks.

We'd like to thank everyone for their support and for joining us on our conference call today for you.

You have any additional follow up questions. Please direct them to our Investor relations mailbox at IR at credit acceptance dotcom.

We look forward to talking to you again next quarter. Thank you.

Once again this does conclude today's conference we thank you for your participation.

Okay.

Okay.

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