Good day, everyone, and welcome to the Credit Acceptance Corporation fourth quarter 2019 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 would like to turn the call over to Credit Acceptance Senior Vice President and Treasurer, Doug Busk.
Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation fourth quarter 2019 earnings call. 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, 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 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.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is now open.
Great, thanks. I was hoping, Doug, you could talk a little bit about the market in the fourth quarter, because it just feels like you had a pretty significant, again, deceleration, and I know you called out the October numbers last quarter, but that seems to have continued. The volume has kind of come down 25%-30% over the last 18 months. It also just feels like your estimates were kind of up through the nine months of the year, but then kind of down in terms of cash flows in the fourth quarter for each of the last three years. Can you just talk about what's going on that would drive that? I've got a follow-up also. Thanks.
Yeah, I think with respect to the cash flow forecast, down $17.7 million for the quarter. Even though it's a down quarter, it's still a pretty small number. We're up for the year. Given the magnitude of the cash flows that we're trying to forecast, about $9 billion, $17 million's a pretty small number. It's a negative data point, but a very small one and not one I'm too concerned about. With respect to the volume, we're obviously trying to grow the business. From that perspective, we didn't meet our objective during the quarter. I think if you break down the numbers in the quarter, volume per dealer was down year-over-year, but sequentially, pretty close to what you might guess if you just looked at the history. Attrition, again, pretty close to what you might expect given the history.
The only number that was maybe different than the trend line was the new dealer signups. Again, if you look at the history there, you'd probably expect new dealers to be somewhere in the 900 to 1,000 range, and it was less than that.
Any thoughts about what that might mean? Three months ago, you did kind of liberalize some of the standards for taking new dealers.
I don't know if we liberalized the standards. We changed the enrollment fee. What we saw during the quarter is our field sales force gave us feedback that they have standards that they have to meet for new dealer enrollments. They thought those standards were too harsh. They thought it was causing them to spend more time enrolling dealers when they would like more discretion to spend their time with existing dealers. So we relaxed those standards. We immediately saw a reduction in new dealer enrollments, and whether that change will pay off long term, we don't know at this stage.
Got you. My follow-up question really is, this is the fourth quarter of the year. We don't get the 10-Q along with earnings. Are there disclosures that we would've gotten either as to CECL updates and what you might be doing come first quarter in terms of the way you're going to report under CECL or any other relevant disclosures that we would've had from that filing?
We'll provide estimated financial impact on our 10-K, which will be filed in fairly short order. As of now, we don't expect to make any material changes to the estimates that we provided in Q3.
Okay, thanks.
Thank you. Our next question comes from the line of John Hecht from Jefferies. Your line is now open.
Thanks, guys. Just going a little bit more into the dealership activity. You cited that there was the net loss, which was a little bit off trend line this quarter. Looking back, we've seen certain second quarters and fourth quarters where there has been a net reduction. I'm wondering, is there anything seasonal with respect to kind of the selling process that we should be thinking about? Kind of just your color on the dealership channel. Have you hit your potential target market share? Is there still a lot of opportunity for you to grow? What are kind of trends in that environment?
When you refer to net loss, what are you talking about?
Your net dealers.
Oh, just the number of dealers in the quarter versus the sequential quarter?
Correct.
Yeah. I think the two big components there are attrition and new dealer sign-ups. I think attrition was in line with, if you look at the history of fourth quarters, the attrition we reported was pretty much in the range of what you've seen historically, maybe a little better than what you might expect. The number that was off was the new dealer enrollments, which I just talked about.
Is there any thoughts on how big the market is and how much you've penetrated in that regard?
There's an awful lot of dealers out there, 60,000, 80,000 dealers, depending on what database you use. Just like there is turnover in our dealer base, there's turnover in that dealer base generally as dealers are bought, sold, handed down to kids, new GM, et cetera. It's really tough to say what the total addressable market is. We think there's a lot of room, but obviously, the recent trend line isn't very encouraging.
Okay. Thank you. Then last question is just, looking at the spread trends, obviously over the course of the last eight or nine years, it's certainly been a changing competitive market and deeper in the economic cycle. I'm wondering, is part of the spread contraction tied to duration or anything? Maybe can you give us any color on what would change in the market to allow you to see an increasing spread?
It's a very competitive market, no question about that. We've said that in prior quarters. That continued to be the case in this quarter. We've also referred in prior quarters to, we don't price by spread. I think if you look at the 10-K or even the last 10-Q, there's some pretty good information in there on the economics of the loans that we're originating. I would probably just refer you to that. The spread table is something we've had in there for many years. Our lenders like to see it, we've continued to include it. I think really the more relevant information is in the Q and the K. From that perspective, I think we're pretty happy with the economics of the business we're writing. We'd just like to write a little bit more of it.
Okay, great. Thanks very much.
Thank you. Our next question comes from the line of Vincent Caintic from Stephens. Your line is now open.
Hey, thank you. Good afternoon. Just kind of a follow-up for the similar topic, looking at the unit volume and the dollar volume that trajectory downward. Just when you were thinking about 2020, do you expect more of the same? Are there changes or maybe this month you've seen an inflection to the upside? Is it just competition? Is it a cyclical thing or is it a secular thing, a cyclical event that we're maybe late stage or is there something else to it? Thank you.
We've been in a very competitive period for a long time, really since late 2011, 2012. It appears that the competitive environment has gotten more intense recently. In terms of 2020, we don't have the ability to forecast what the competitive environment is going to be any better than anyone else. I really can't provide you with an answer to your question on what we see.
Okay. Yeah. I guess, maybe compared to what you've seen in the past in intense competitive cycles, but maybe in an environment where, I don't know, if car sales are slowing or if used car prices are declining, what have you. Any historical takeaways that you could point to?
Typically, the market turns when there's some interruption in the supply of capital. We've been through a few cycles, but the cycles take a long time to play out. We don't have a tremendous number of data points to look at. Historically, that's been the case where the capital supply gets interrupted, and that's what changes the market dynamics. We'll see if that's the same thing this time.
Got you. If that's the case, I guess, the applications or the funnel is coming in, but you're kind of not seeing the economics of those applications compared to whoever else is winning a deal. It's just the economics are being eroded, or is it that the applications are declining or a mix of both?
No, I think as we said a minute ago, we're pretty happy with the economics of the profit per unit part of the equation. We'd just like to figure out how to grow the business a little bit better than we have been.
Okay. Got it. Thanks so much for the help.
Thank you. Our next question comes from the line of Arjun Tuteja from Jarislowsky Fraser. Your line is now open.
Hey, Brett. I have a high-level question on work culture. Credit Acceptance is featured as top 100 companies to work for pretty regularly. Going back in history, can you talk a little bit about the steps you had to take to get there? I'm curious because a lot of your employees are likely dealing with consumers in financial stress. I'm curious, how do you create a positive work environment in such circumstances?
It's a good question. It took us a long time. We started to focus on it many years ago. I think we spent a lot of time communicating. I do town hall meetings every quarter where I meet with every team member. Every quarter, they can ask me a question online. I'll answer it in writing and post it for everyone to see. I do lots of round tables where I sit with team members and we discuss the business. Other leaders do that as well. We do quarterly surveys, so we put a lot of emphasis on the communication process.
I think, hiring is a big part of it. You got to bring the right people into your organization, consistent with our core values that we've articulated and those are some of the big things. You got to have the right people. It's not one thing.
It's been a journey over a long period of time. I think the framework that the Great Place to Work organization uses a pretty good one, and it talks about trust, pride, camaraderie, and so I would encourage you, if you're looking to move in that direction, to just embrace that framework and do all the things that they tell you to do.
When you talk about communication, are you saying that employees feel more valued when they're listened to? Is that what you're trying to say there?
Yep. No question.
Yeah. I think in addition to listening, maybe this is obvious, but we get a tremendous amount of feedback from team members from a variety of channels. I think the important thing is we respond to that feedback. We tell them we need more information, we state what our position is, or we take action, and then we report out what we've done. I think that makes employees feel like they're listened to and makes employees feel like they're empowered.
Okay. I have one more on your sales team. You've hired quite a lot of salespeople over the last three years. Have they all ramped up to what you would call a steady state productivity, or do you still see some improvement in per person productivity there?
It's a work in process, I think at this point. We ramped it up pretty quickly. I think, the market, in my opinion, has gotten more difficult, which makes it a little bit tougher to see whether you're on track. My sense is we still have some work to do to get the productivity where we'd like it to be.
Okay. Thank you.
Thank you. Our next question comes from the line of Benjamin Weinger from 3 Sigma Value. Your line is now open.
Hi. Thanks. Just you said on the last call that there's no change to the economics of the business because of CECL, but you're grossing up the value of your loans, there'll be more assets. You'll have a bigger balance sheet generating the same level of cash flows. Your return on assets will decline. Is that not correct?
No. Your net asset will be unchanged. For the existing book, your net asset will be unchanged until that portfolio runs off. For the new loans, your assets will actually be lower.
The larger point is you don't change the economics of the business by accounting for it differently.
What I'm saying is that your balance sheet is larger now.
You're wrong about that.
There's more assets on your balance sheet.
No.
You're wrong about that. Giving you a second thing you're wrong about, which is that accounting doesn't drive economics. You're wrong on both points.
You're not going to have a larger balance sheet because of CECL?
Correct.
Okay. Also just confirm that there'll be no decrease in your book value upon CECL adoption.
Correct.
Okay. Thank you.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. Our next question comes from the line of Giuliano Bologna from BTIG. Your line is now open.
Thank you, and good afternoon. I guess jumping into a little more of a high-level question, since you've taken out the enrollment fee from the business, have you seen any real change in dealer sign-ups or the pace of dealer sign-ups since then?
I think the numbers for the quarter sort of answer that question. New dealer sign-ups, as I mentioned, were lower than the trend line. We had 753 new active dealers this quarter, 951 the quarter before. Over 1,000 in the second quarter. If you look at that trend line, there was a fall off in Q4, and I went through what I thought the reasons for that were.
On a slightly different question. Looks like there was a couple of revisions to the forecasted cash flows. It looks like the 2018 vintage came down about 30 basis points and then the 2019 vintage came down 20 basis points. It seems like it's the first time since, call it the first quarter of 2018, that the dealer loan portfolio has had a negative revision, or the purchase loan, I should say. Is there anything specific driving that? Is it collections? Is it recoveries on repossessions or anything specific driving those numbers?
The revisions, again, as Brett mentioned earlier, are very small in the context of the $9 billion in net cash flows we're trying to forecast. There wasn't any one factor that accounted for the majority of the change.
That sounds good. The only other thing to have a look at is, when we look at your expense base, obviously you had a ramp up on the sales force side, in terms of increasing your expense base. Is there anything that would continue to drive the expense base higher at the same rate, or should we expect the expense base to taper off as originations come down?
I think part of it is just dependent on the level of growth in the business, and part of it's just dependent on the investments that we think we need to make in the business that aren't directly correlated with immediate growth. Like I said earlier, tough to predict the growth rate and the investments in the business have historically been lumpy, and I would expect that they'd continue to be in the future.
Got it. Thank you, and thanks for taking my questions.
Thank you. 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'd 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.