Earnings Call: Q4 2020

Feb 1, 2021

Good day, everyone, and welcome to the Credit Acceptance Corporation 4th Quarter 2020 Earnings Call. Today's call is being recorded. A webcast and transcript of today's earnings call will be made available on Credit Acceptance website. Recorded. At this time, I would like to turn the call over to Credit Acceptance, Chief Treasury Officer, Doug Busk. Recorded. Thank you. Good afternoon and welcome to Credit Acceptance's Q4 2020 earnings call. Recorded. As you read our news release posted on the Investor Relations section of our website at ir. Creditacceptance.com and as you listen to this conference call, recorded. 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 recorded. These risks and uncertainties include those spelled out in the cautionary statement regarding forward looking information included in the news release. Recorded. 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, recorded, which provides tables showing how non GAAP measures reconcile the GAAP measures. At this time, Brett Roberts, Our Chief Executive Officer Ken Booth, our Chief Financial Officer and I will take your questions. Answered. Your first question is from David Scharf with JMP Securities. Hi, 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 independent Good morning, Brett. This is probably the least scientific Observation I can make, but I know having been in a dealership in recent months during the pandemic, There's a certain comfort level I just kind of emotionally had being in what I viewed as kind of a large established business I'm wondering as you reflect upon just foot traffic and volume trends and 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 independents versus franchised? I think there's definitely a difference there. We saw softer volume from independents in both Q3 and Q4 franchise. Still declined year over year in Q4, but by a lesser magnitude than the independents. Got And going forward, as you think about kind of your product, the value proposition to dealers, Do you view this that observation, that phenomenon is 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 as you direct sales people to call on dealerships? I think historically, we've had a product that appealed to independent dealers, Some franchise dealers, but not all. When we developed the purchase product that had more appeal some of the franchise dealers who weren't interested in the traditional product. So we have a product for both and Each individual market area manager can determine where 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 have had a harder time through the pandemic than franchise dealers. Right, right. I would agree. And then maybe just one follow-up. I know Q4 is tough because it's seasonally a slower period and you've got the traditional tax refund season coming up in Q1. But did you notice was there any kind of Spike or reaction to these to the latest stimulus checks that went out? We gave you January volumes in the release. So I think certainly I'm sorry, I didn't catch those. Yes, the stimulus checks and the impact of that probably captured pretty well by the January figures we provided. Okay, Perfect. Thank you. Your next question is from Moshe Orenbuch with the Credit Suisse. Great, thanks. Maybe following up, the average size Of the loan or the advance has grown and was bigger in Q4. You'd said 3 months ago that part of the issue and I think it was repeated in the release now, part of the issue is that the wholesale prices are up. Maybe just give us an update as to where that stands and if that's still having an impact, being offset by the stimulus, how do we think about Those trends? Still elevated. So the numbers that we track internally, It's moderated to some extent over the last few months, but wholesale values are still higher than they were recorded. Looking at the 8 ks that you filed, I guess I'm struggling with trying to understand the verbiage on the CFPB. It It says that on December 23, they sent you a civil investigative demand for investigational hearings and then it said they Withdrew that portion for civil investigative demands, does that mean 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. I think That's the main takeaway from that language. There's not a lot we can add to what's in there. But if you want a clarification, You should read that to me. It continues to be active. Okay. My last question was The company kind of set up, I guess, an options program recorded in December for a number of executives. Have you kind of talked about how that was arrived at and I don't follow the question. Well, I guess I guess the question is, is that I mean, Is there a plan or a program that that's part of? Like what obviously, we saw the Form 4s and the grants. Is there any part of the comp plan? I mean, does it relate to company performance In a particular period or anything like that? Yes. We're just coming off. We have a compensation plan for our senior executives. The last plan was a 4 year plan. 2020 was the 4th year of that. So what we've historically done is Through either 3 year or 4 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 another shown is from John Rowan with Janney. Good afternoon, guys. When you look at the reduction in dealer partner productivity, is it would you categorize it more as Lower foot traffic in CACC dealer partners or is it stable foot traffic or even higher foot traffic, but more loans going to other lenders that might also have relationships with those dealers. So said another way, Is 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, if there is a change in advertising perhaps and there's the way that you advertise the car prices and whether or not That's caused a reduction in foot traffic at CACC dealer partners or if other lenders are just getting more aggressive and taken share from you at dealers. I just want to understand the difference, if there is a difference that you can note for 4Q. Yes. I think we have some information on the market as a whole. It's not Perfect. You get that information on a lag. So we have some visibility into October November, not the full quarter. But I think the trends we Used vehicle volume used vehicle financed volume is pretty stable, even growing a little bit. So we're obviously down. Being That would mean we lost share of the market defined as total used vehicles financed. What you also see in that data is The lower tiers of the credit spectrums are actually down year over year, in some cases significantly, the further you get down. So our wheelhouse is independent dealers and our wheelhouse is the lower I do think it's probably fair to say that we lost share in Q4 year over year and it means we lost it to others who maybe see the market differently than we do at this point or pricing more aggressively than what we're willing to do. Obviously, On the incremental customer, obviously, we did a lot of business. We added value in those dealers when we did business. There's still a niche there for us. It just gets a little bit smaller when Some of these external factors come into play, including competition. Well, just to get back to that last point on competition, it doesn't seem like you were Necessarily giving up, right? I mean the advance rate was up, right? I mean from what I can see it was In December, so it still seems like you're actively pursuing volume. The loan term is plateaued here at 60 months and loans are now over $25,000 So it seems as if you are 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 competition that's kind of putting you between like a rock and a hard place almost, right, where you can't increase Advance anymore You don't want to increase advance anymore. The loan term is already 60 months. And now your loan portfolio actually just started to decline a little bit sequentially this quarter. Is Have we reached kind of the plateau here for the foreseeable future on the loan portfolio? Do you think it continues to come down through 2021? I certainly agree with your statement that we haven't given up. We're still trying. 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, the trends in volume per dealer, it's probably going to be pretty difficult recorded. And we were able to grow from there. We did better than I expected, but it's been tough. So if you go back pre pandemic Q4 2019, we had year over year decline recorded and unifying in the Q4 of 2019. Got off to a decent start in January February pre pandemic. I think we're flat through February, the pandemic hit And then the results were 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 3 or 4 years, maybe even 5 years, I think it was clear at that point that there's a point where it's going difficult to grow barring a change in the competitive environment or some other change, some other insights that we get, Another way for us to add value and that's been tough to come back. And so I added that to the pandemic and wholesale values and the things we've already talked Thank you very much. Your next question is from John Hecht with Jefferies. Recorded. Afternoon. Thanks for taking my questions. First one, I'm 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. We have a disclosure on the bottom of Page 1 of the press release that details that. Okay. Thanks. I'm going to make sure I see that. And then maybe can you guys talk about ongoing effects The pandemic on operations. I mean, how is collection still fairly done from home? Is our Repossession activity normalized and where are you guys in the loan forgiveness program? The vast majority of the company, well over 90% of the team members, Continues to work remotely. So all of our virtually all of our servicing personnel continue to work remotely. Repossessions are Really being handled on a customer by customer basis, depending on each Consumer's individual circumstances. I mean, can you give us a sense of where that activity is Relative to normalized level, I mean are we halfway there, are we approaching normalized levels or how do we think about that? Recorded. We're not back to normal at this point. So again, we're giving the customers a lot of room. We know it's a a difficult environment for many of them. And so we're giving them extra time to make their payments. And so repossessions aren't yet back to where they normally would be. Recorded. Okay. And then last question is just, I guess it's more of your opinion. I mean, it's been, I Extraordinary market in terms of residual values, maybe relative to historical averages, but what we would have thought has 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 shakeout in the market, which would allow you to reestablish market share. I think historically, you just Look at the supply of capital to the industry. Capital is available. Capital is very cheap. And as long as that continues, I think you're 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 loan performance within the industry or some sort of external event. I think had the government response to the pandemic been different than perhaps the pandemic would have been That reason, but because the response and the stimulus Offset any loan performance issues for most of the industry. It didn't play out that way. Okay. Recorded. Your next question is from Rob Wlodack with Autonomous Research. Hi, guys. I just wanted to follow-up on the January volume trends. How long do you think the tailwind from that December stimulus Does the $600 check-in December help sales through February March or is the impact sort of already played out? Yes. 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 February were flat. March April were down sharply. And then you had May June where we had pretty strong growth and then July was sort of a transition month. So I can't tell you the same thing is going to play out this time. But I can say that last time you had 2.5 months What looked like elevated volume. Now that's coming off a couple of months where you had really soft volume. So some of that was a rebound that you might not see 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. Recorded. Okay. And then just on capital return, can you remind us of the repurchase authorization And your thoughts on the potential for share repurchases this year? At the end of the year, we had Approximately 2,500,000 shares under our existing authorization. We continue to think about buybacks The same way we have for a very, very long time. So we're employing the same criteria. Okay. Thanks. Recorded. With no further questions in the queue, I would like to turn the conference back to Mr. Asked for any additional or closing remarks. We would like to thank everyone for their support and for joining us on our conference call today. Recorded. If you have any additional follow-up questions, please direct them to our Investor Relations mailbox at ircreditacceptance.com. Recorded. 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.