Credit Acceptance Corporation (CACC) Q2 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Credit Acceptance Corporation's Second Quarter 2012 Earnings Call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Credit Acceptance's website. At this time, I'd like to turn the call over to Credit Acceptance's Senior Vice President and Treasurer, Doug Busk.

Thank you, Sam. Good afternoon, and welcome to the Credit Acceptance Corporation's Second Quarter 2012 Earnings Call. As you read our news release posted on the Investor Relations section of our website at creditacceptance.com and as you listen to this conference call, please 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, and which could cause actual results to differ materially from such estimates. 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 Adjusted Financial Results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures. This afternoon, Brett Roberts, our Chief Executive Officer, and I will provide some comments relating to our operational and financial results, as well as our liquidity position. After we have concluded our prepared remarks, we have set aside some time for questions. To assist us in answering your questions, we also have Ken Booth, our Chief Financial Officer, with us today. At this time, I'd like to turn the call over to Brett.

Thank you, Doug and thank you to everyone who has joined us this afternoon for the call. In our earnings releases, we report both GAAP and adjusted results. Internally, we focus on adjusted results as we believe the adjusted results more closely reflect our true economic performance. The results that I will refer to in the next few minutes are all at an adjusted basis. For the most recent quarter, we earned $54.4 million compared to $47.4 million for the same quarter in 2011. Earnings per diluted share were $2.09, a 15.5% increase over the $1.81 reported last year. Our primary financial performance metric is economic profit. Economic profit is a function of 3 variables: The return on capital, the cost of capital and the amount of capital invested. Our incentive plans are based on growing economic profit. Over the last 10 years, we've been successful at both growing the amount of invested capital and improving the spread between our return and cost of capital. As a result, economic profit improved from a negative $5 million in 2001 to a positive $143 million in 2011. During the most recent quarter, economic profit was $40 million, a 14.3% increase over the $35 million reported the same quarter of the prior year. Economic profit increased during the quarter due to an increase in amount of capital invested in our business and a decrease in our cost of capital, partially offset by a decrease in our return on capital. Average capital invested for the quarter was $1.7 billion, which is up 27.9% from the second quarter of 2011. Our return on capital declined by 200 basis points while our weighted average cost of capital declined by 90 basis points. At this time, Doug will provide some additional comments on our operating and financial results, as well as our liquidity position.

Thanks, Brett. The first thing I'd like to discuss is consumer loan performance. Consumer loan performance is one of the most important variables that determine our financial results. The most important time to assess consumer loan performance is at the time of origination since that is when we determine the amount of the advance or onetime payment to the dealer. If we're able to accurately assess consumer loan performance at the time the loans originated, we will likely attain our target return on capital and produce acceptable financial results. Since assessing consumer loan performance at the time of origination when precision is difficult, we set advance rates so that even if loan performance is worse than we expect, the loans that we originate are still highly likely to be profitable. Overall, consumer loan performance during the quarter ended June 30, 2012, exceeded our expectations at the beginning of the quarter. Forecasted collection rates for loans originated in 2008 and 2010 through 2012 improved, while the forecasted collection rates for loans originated in other years were generally consistent with our expectations at the start of the period. Moving to loan volume, the dollar as unit volume of consumer loan originations increased to 7.9% and 7.3%, respectively during the second quarter of 2012 as compared to the same period in 2011. We believe the decline in our 2012 unit volume growth rates from 2011 levels is a result of increased competition. Moving to financial results. We reported strong financial results for the quarter with GAAP net income of $56.5 million or $2.18 per diluted share compared to net income of $44.8 million or $1.72 per diluted share for the same period in 2011. As Brett mentioned, we also disclosed adjusted financial results. We do so to better help shareholders understand our performance. Our adjusted results include several adjustments to our reported GAAP results. An explanation of the material adjustments is contained in our earnings release. On an adjusted basis, consolidated net income for the quarter was $54.4 million or $2.09 per diluted share compared to $47.4 million or $1.81 per diluted share for the same period in 2011. The increases in both GAAP and adjusted net income for the quarter were primarily due to an increase in finance charges due to growth in our loan portfolio, offset by a decrease in the average yield on the portfolio. The growth was a result of an increase in active dealers, while the yield declined due to lower yields on new loans. Additionally, our results were negatively impacted by a $7.6 million increase in operating expenses due to a $5 million increase in salaries and wages, a $1.8 million increase in salary -- sales and marketing expenses and a $0.8 million increase in general and administrative expenses. The increase in salaries and wages expense is primarily due to the $3.1 million increase stock-based compensation expense, primarily attributable to the 15 year stock award granted to our Chief Executive Officer during the first quarter of 2012 and the increases of $1 million in loan servicing, $0.5 million in loan originations and $0.4 million for support functions. Sales and marketing expense increased primarily due to an increase in the size of our field sales force. The increase in general and administrative expense is primarily due to increased information technology and legal costs. In addition, our GAAP results were positively impacted by a decrease in the provision for credit losses. The provision for credit losses decreased to a provision of $2.7 million for the quarter from a provision of $8.9 million for the same period a year ago. Under GAAP, when the present value of forecasted future cash flows decline, relative to our expectations at the time of loan origination, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established. For purposes of calculating the allowance, dealer loans are grouped by dealer and purchased loans are grouped by month of purchase. As a result, regardless of the overall performance of the portfolio of consumer loans, a provision can be required if any individual loan pool performs worse than expected. The last topic that I want to mention today is our liquidity. We continue to be in a very strong liquidity position with approximately $350 million of unutilized borrowing capacity under our revolving credit facilities as of June 30, 2012, after considering borrowings made in early July to settle the $1 million share tender offer. And now I'd like to turn it over back to Brett.

This concludes our prepared remarks for this afternoon. We would now like to welcome your questions.

[Operator Instructions] And our first question comes from Sanjay Sen of BloombergSen.

Just a question just to see what you're seeing in terms of competitive activity and how it's gone through the year? Just if you could comment on where we are today and what the sort of trend line has been through the year?

I think we're continuing to see more competition. Obviously, the growth rate for the quarter reflects that. We did made a bracketing [ph] change, I think, April 1. That was intended to increase unified growth. We've got some response from that but certainly there's more competition out there today than it was a year ago. As we disclosed, July results were better. But we expect we're probably in the middle of a competitive cycle that will last for -- until something happens to change that it's hard to predict when that will occur.

Got you, right. And you made a comment about that July was a little bit better. Does that mean that, at this moment, we don't know what the future brings, so it's sort of like a little bit of uptick in the improvement of the environment or is it just sort of like trolling along the bottom, given if we look at from January until now?

Yes. I wouldn't put too much emphasis on July. I think it's unlikely the competitive environment changed in July. So I think we're just seeing some variation of the numbers from month to month but, generally, period of more difficult competition.

[Operator Instructions] All right, with no further questions in queue, I'd now like to turn the conference back to Mr. Busk for any additional or closing remarks.

We want to thank everyone for their support and for joining us on our conference call today. If you have any additional follow-up questions, please direct them to our Investor Relations mailbox at ir@creditacceptance.com. 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.