Credit Acceptance Corporation (CACC) Q3 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Credit Acceptance Corporation Third 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. Sir, you may begin.

Thank you, Chuck. Good afternoon, and welcome to the Credit Acceptance Corporation Third 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 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 Adjusted Financial Results section of our news release, which provides tables showing how non-GAAP measures reconcile to GAAP measures. Beginning this quarter, we'll no longer be doing an overview of the quarter as part of the earnings call. Instead, we will ensure that all information relevant to understanding the quarter is included in the earnings release, and we'll use this call to answer your questions. At this time, Brett Roberts, our Chief Executive Officer; Ken Booth, our Chief Financial Officer; and I will take your questions.

[Operator Instructions] And our first question comes from Daniel Smith with Jayden Capital.

So to go to the question, I know that there wasn't a material change in your estimated collection rates, but I understand from the 10-Q that, that contributed to the higher provisions. But then there was also a statement that -- to the effect that the performance of the loan book, the loan vintages continues to be good. So I was wondering -- I mean, is it just a moderate change in the performance? Like a moderate decline in performance of the loans? Or is there some other contributing factor to the change in estimated collection?

I think it wasn't -- at an average quarter, I would say, I don't think it was outstanding loan performance, but it was in line with expectations. It didn't hurt or help us this quarter.

But obviously the provision was higher, and it sounded like, from the 10-Q, that it was due to the change in estimated collection rate.

Yes. I Mean, the company looks at adjusted earnings, where any changes in expectations are run through the yield. And Doug can go into that in more detail if you want to have a long discussion about GAAP versus adjusted, but the company tends to focus on adjusted earnings. So my comment that loan performance didn't help or hurt us for the quarter reflects the impact on the yield for the adjusted financial results, and it had practically no impact at all. Some quarters we pick up a few basis points from forecast changes, some quarters we lose a few basis points. This quarter was a push.

With a push, you mean -- a push...

It didn't help or hurt. Zero impact for the year.

Okay, I see. But, yes, I understand the difference between adjusted and GAAP. But obviously, because the GAAP provision was higher, it sounds like it was because of the change in estimated collection. There were a couple of vintage years, where collection percentage was down 0.1% or something. Immaterial but...

I mean, if you think about it, the way the GAAP accounting works is approximately half the dealers are going to have a provision at some point. Because anyone that underperforms the average is going to produce a provision, anyone that outperforms the average, it doesn't show up as a recovery. It just is affected through the revenue line. So approximately half of your business, even if everything performs exactly as expected, about half of your business is going to produce a provision. Now in periods where we have favorable variances, that tends to reduce the provision, although it's not a perfect correlation. In a period like this, where roughly questions were approximately equal to expectations, you have a little bit bigger provision, but a lot of times, it's what happens with the individual pools that determine the provision. It's a lack of complexity for nothing, in the company's opinion, so that's why we focus on adjusted.

Yes, okay. Yes, I mean -- yes, I get that. In the same tone, we've been shareholders for a few years, and obviously, we trust you guys, and I'm sure you're performing very well in this measure, but it would be nice, just a suggestion, it would be nice to have some reporting of delinquencies? Is there any reason why you feel like that's not a useful metric for your company?

Delinquency is a very rough measure of loan performance. I think what we provide is more precise. We don't tend to focus on delinquency internally for those reasons. So it would be giving you something that we don't really focus on, which I think, over time, is not particularly useful. Delinquency, obviously, is affected by a lot of things beside just loan performance. If you write a lot of new loans, delinquency goes down. It has nothing to do with loan performance. So rather than look at it in a way that is less precise than what's in there, I think we'll just stick with what we're doing.

What is it -- so when you look at your earnings report, you guys report a lot of good data. What is it that you look at to get the best idea of loan performance?

The variance versus our forecasted collection percentages.

So we compare our current forecast, which -- since it includes all available loan performance data, is our best estimate of what the ultimate collection rate will be, we compare that to our forecast at loan origination. And if our current forecast or ultimately our final collection rate proves to be quite close to our initial forecast, that generally means we're going to hit our targeted levels of profitability.

So if we have an unfavorable variance against our initial forecast, that can only mean one thing. Whereas if delinquency goes up by 10 basis points, it could mean our loan growth slowed, it could mean we decided to write a different mix of business, it could mean a lot of different things. Whereas an unfavorable or a favorable variance can only mean one thing.

Okay. Fair enough. And when we look at this quarter versus last quarter's estimates of collections, it looks -- for the last several quarters, the estimated collection rate has kind of been just kind of gradually going up and up and up, and it seems a couple of years, it went down this quarter, couple of years went up. So it seems like kind of -- you feel like the collection rate has kind of reached a plateau, where like the economy really can't -- collection just can't get any better, or do you not feel that way?

The objective of the forecast is to try to predict exactly what will happen. So when we have a favorable variance, obviously, that has a positive impact in the financial results, so we'd like to see that. But what we're trying to do is predict what will happen accurately. We had a period, obviously, in '09, where we overreacted to the financial crisis in retrospect. We didn't know how those loans were going to perform. We adjusted our forecast down. It's led -- drove a lot of positive variances over time, and you can see we've got a -- it looks like we've gradually caught up to that now. I wouldn't expect a positive or negative variance going forward, but our objective is to try to come pretty close to what's going to happen.

[Operator Instructions] And our next question comes from Mac Sykes with Gabelli & Company.

On the slightly lower average volume per active dealer, is there any way to isolate the effects of the slowdown in used car sales and the dealer loan volumes, or was the negative delta purely from competition this quarter?

I don't think there's any way to separate those 2 things.

Okay. And I think in the Q, you talked about sales in October or loan volumes in October. And assuming we didn't have those extra 2 days, what would be the percentage dollar volume increase?

Well, unit volume would have been up about 3%. Dollar volume up a similar amount.

Okay. And then my last question is, I'm new to the story as you may know, but going to 30,000 feet, if we did have or we've had a nice tailwind in terms of lower interest rates on debt financing, but assuming we ever do get back to an inflationary environment, can you talk about the business strategy in a rising rate environment, how you might think about pricing loans versus managing your cost of capital? And then maybe how that might impact competition, all else equal?

Yes, I think we would always look at it the same way where we look at economic profit, so the difference between our return and our weighted average cost of capital. So in your scenario, the weighted average cost of capital would increase, which would cause us to price the loans differently. But we're always trying to achieve the same thing, which is the highest amount of economic profit given the opportunity we have or given the capital we have. So that doesn't change. But in general, if the weighted average cost of capital goes up, and competition responds as you would think, then we probably shoot for a higher return, all other things being equal.

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

We would like 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.