Good day, everyone, and welcome to the Credit Acceptance Corporation fourth quarter 2018 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. 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, welcome to the Credit Acceptance Corporation fourth quarter 2018 earnings call. As you read our news release posted on the investor relations section of our website at creditacceptance.com, 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, I will take your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then 1 to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of David Scharf with JMP Securities. Your line is now open.
Hi. Good afternoon. Thanks for taking my questions. A couple to start. Maybe the first one for you, Doug. Wondering, having finished the year, it looks like the average funding cost given where rates had moved was up to 4.5%. Just based on everything you've seen, both your expectations for Fed actions, as well as how spreads have been performing on recent securitizations in the market, is there any kind of best guess you can give us for how we ought to be thinking about average funding throughout 2019?
Well, I don't really have any expectations for how the Fed's going to behave. There are people that are a lot more informed about that than I am. I will say that if the forward LIBOR curve that exists today is correct and our funding mix remains the same, you should expect about a 50% or a 50-basis-point increase in the rate by year-end of 2019. Again, that assumes that the forward curve remains the same, which is unlikely.
Right. Got it. No, it's helpful. Maybe transitioning to the competitive side. It seems like spreads on some deals widened in the last month or so with some competitors, even though the benchmark pulled back. I'm wondering, is that any indication that there may be signs of any competitive shakeout that we've been waiting for years? Or is your sense, based on kind of what you saw with volume per active dealer declining, that it still remains as competitive as it was three and six months ago?
I don't think the combination of benchmarks and credit spreads at this point has really changed enough to materially impact things.
Mm-hmm. Okay. It's status quo. Lastly, I'll get in queue. I'm curious, as we think about forecasting provision expense over the next few quarters, as we think about the fourth quarter and maybe even the third quarter figure that were just reported, are you starting to recognize any allowance reversals on that big kind of $60 million charge that was taken in the fourth quarter of the prior year? Is that kind of factoring into sort of the net allowance charge, this provision expense we're seeing, or are those pools still not being revised upward?
We have thousands of dealer pools and a significant number of Purchase Program loan pools. As we state in our public filings, to the extent that we have an allowance against a specific pool and performance improves, we will reverse that allowance. You can't necessarily say what period the allowance was established and specifically attributable to.
Got it. Okay. Thank you very much.
Thank you. Our next question comes from the line of Moshe Orenbuch with Credit Suisse. Your line is now open.
Great. Kind of continuing on the competitive kind of environment. I guess, as you kind of look at the fourth quarter, from one of the tables here, the forecasted collection percentage is kind of down from where it's been, obviously, you don't have every quarter on here, but it's lower than any of the individual years and had been falling, I guess, during 2018. Could you just talk a little bit about what is driving that and the advance rate kind of rising, and whether any conclusions we should reach from those two facts?
You're just looking at the absolute collection performance for each year?
No. When you look at the forecasted collection percentage for Q4 and the advance rate, they both kind of moved in opposite directions, compressing the spread between the two of them. I guess, if you kind of compare it to the early part of the year, that was down by about 160 basis points and from various other points in history, obviously, differing amounts.
I think the best thing to do there is there's quite a bit of information in the 10-Q or this time the 10-K, that goes through the kind of profit drivers of the loans that we wrote during the quarter. That's probably the best place to look. I know it's not available right now, but if you look at that, I think what you'd see is that the average size of the contract is increasing. The absolute amount of revenue or accretable yield we expect is also increasing on a per contract basis. In percentage terms, there's a little bit of compression there, because if we get a larger contract, we're willing to accept a slightly lower yield to compensate for that. Other than that, and the trends I just talked about really aren't that material.
I think when you look at that, your conclusion will probably be from a profit per loan perspective, Q4 wasn't that remarkable compared to the prior quarter.
Got it. You pointed out that the 10-K is not available for a little while. Anything that we should kind of be thinking about, maybe things that you would otherwise be talking about on the 10-K, things like any update with respect to the accounting method in CECL or anything else that we should be aware of?
No update on the CECL fair value discussion. We continue to do a lot of good work there, and we'll provide additional disclosure when appropriate.
Okay, thanks.
Thank you. Our next question comes from the line of John Rowan with Janney. Your line is now open.
Good afternoon, guys.
Hi.
Did you buy back any stock in the quarter?
Yes, we did. We bought back approximately 337,000 shares at an average price of about $378.
Okay. What was the timing of that in the quarter? Was it back-end loaded, or is the diluted share count from this quarter representative of what it will be going forward?
Yeah. The activity during the quarter reduced the share count by approximately 50,000 shares.
Okay. One thing I noticed is that the average loan was up about $200 between even just the third quarter and the fourth quarter. There wasn't a change in duration. I know it's not a gigantic change, but is there a change in mix of vehicles that you're selling? Is it just the stronger used car market, the pricing in there? I'm trying to understand. In the past, we always could track the increase in the loan-outs then to the consumer with higher duration. Now that didn't come through this quarter. I'm wondering if there was anything else that drove that higher loan to the consumer.
I think it's the selling price of the vehicle's up a little bit. Again, as you point out, the change is pretty small.
Okay. There was no wholesale shift in the type of vehicle mileage that your dealer partners were retailing, correct?
No. The mix always shifts a little bit, but nothing I would characterize as material.
Okay. Just give us an update as to where we stand with the sales force. Where's the sales force today versus this time last year? What type of growth have we seen? Any more hiring? Just give us an idea of where that growth program stands today.
Well, we've continued to make progress growing the sales force. We're up about, in terms of the number of MAMs, we're up a little over 50 MAMs versus where we were at year-end 2017.
Okay. All right. Thank you very much.
Thank you. Our next question comes from the line of Mark Hammond, Bank of America High Yield. Your line is now open.
Thanks. Hi. I had one question on the capital structure. I see the call price on your 6.821 high-yield bond stepping down to par in February. Just wondering if you're thinking about dealing with those bonds early with secured financing or something like that to counter that possible 50 basis points increase in funding costs that you mentioned, Doug.
Yeah, we continually assess all our options from a funding strategy perspective. Relative to that specific bond, you're right, it goes down to par in February. We've got a bunch of options there. Let it run out until maturity. We can just use available liquidity to pay it off or we could issue ABS and replace it that way. No decision, just assessing our options.
Great. Just to follow up on that, is there any mix that you wouldn't go below in terms of secured financing as a % of total debt financing?
We don't really have an absolute number. What we do is we try to manage the liability side of the balance sheet so that it provides a good result when capital's readily available, and also provides a pretty good result if the capital markets are constrained. The mix of debt leverage, amount of unused availability are all kind of inputs into that analysis. There's a bunch of moving parts there, but no absolute number.
All right. Thanks, Doug.
Thank you. Our next question comes from the line of Kyle Joseph with Jefferies. Your line is now open.
Afternoon, guys. Most of my questions have been answered already. I'm just wondering if you could talk about the outlook for tax refunds in terms of timing and magnitude versus last year.
I don't think we really know. There's a lot been written about potential delays due to the government shutdown. There's a lot been written relative to the size of refunds versus what consumers have historically received. We don't know what's going to transpire, so we'll deal with it when it comes.
Sure. If you could just give us a sense of the health of your underlying consumer. Obviously, you have a pretty broad portfolio geographically, but just talk about overall trends you're seeing from underlying consumers, in terms of their overall health.
I think probably the best way to approach that is just to look at the numbers we provide in the release. On page three of the release, there's a table that shows the change in forecast and net cash flows. This quarter was a positive number, $7.8 million. Very small number relative to the amount of cash flows we're forecasting. I think if you look at that, you'd say, well, our forecast was stable, and that's probably our best assessment of the health of the borrower.
Sure. Then looking at that same table in terms of dealer loans versus purchase loans, can you give a sense for your outlook for the growth opportunities by product and where you're seeing better growth opportunities and vice versa?
You can look at the historical numbers. We obviously have been growing the purchase loan product more rapidly than the portfolio product. That changes from time to time, but typically when the environment's tough, we've relied more on that Purchase Program for growth. When the environment gets easier, the opposite happens. That's kind of the same trend we're seeing this time.
Got it. Thanks for answering my questions.
Thank you. Our next question comes from the line of Dominick Gabriele with Oppenheimer. Your line is now open.
Hey, guys. Thanks for taking my question. Can you just talk a little bit more about your plans around hiring in 2019 and the plans for maybe an acceleration, if possible, or re-acceleration in the number of dealers that you're looking to acquire? What are some of the things that you guys could do in 2019 that could help also re-accelerate the penetration per dealer? Thanks so much.
In terms of the hiring plans, I assume you're talking about the sales force there.
Yeah, exactly. Thanks.
We've gone through a pretty rapid increase in the size of the sales force. We're probably in a period now where we're filling in. I think the last time we did a sales force expansion was 2011. We grew the sales force pretty rapidly over mostly a one-year period, but followed that with a second year of some growth. It took us about five years to fill in that sales force before we got productivity back to where we started. We're now two years and one quarter into this expansion. We've probably reached the number that's pretty close to the target number in terms of the maximum number that we want in this expansion. We're probably in that two to three-year period where we're trying to fill in and get productivity back to where it was.
Great. Thanks a lot.
Thank you. Our next question comes from the line of Daniel Staff with Autonomous Research. Your line is now open.
Hi. Thank you for taking my question. Industry reports suggest there's a meaningful tail of small Buy Here Pay Here dealerships who appear to lend into a similar borrower segment, many of which also do not have an outside financing partner. Can you talk a little bit about the level of receptivity that you see in the field to the Credit Acceptance value proposition, as well as any recurring areas of pushback that you may be getting from these dealers? Thank you.
That market has always been a good source of business for us. I think our program has a lot of advantages over a typical Buy Here Pay Here program. Advantages for the consumer in particular because they can reestablish their credit on our program. We report to the credit bureaus. They can move on and get a newer, nicer vehicle at a lower interest rate, reestablish their credit. Move their life in a positive direction. There's a lot of benefits to our program. Buy Here Pay Here market's large, and we've historically had pretty good success enrolling those former Buy Here Pay Here dealers in our program. That hasn't changed. In terms of our success, really, I just focus on the release. Active dealers increased, consistent with the trend line, double digits.
The issue this quarter and the prior quarter was volume per dealer. We're having good success signing up dealers. Attrition rates are about equal to the long-term trend. Both those numbers are pretty solid. It's just volume per dealer, which was very strong in the first 6 months of the year, has turned the other way in the last 6 months.
Great. Thanks for taking my question.
Thank you. Ladies and gentlemen, as a reminder, that star then one to ask a question. Our next question comes from the line of Vincent Caintic with Stephens. Your line is now open.
Hey, thanks. Good afternoon. Just wanted to follow up on some of the questions about the dealers and broadly wanted to get a sense of the dealer landscape that you're hearing. As we're going into calendar 2019, just kind of wondering what are the conversations you're having with the dealers that might have changed versus calendar 2018 and any sort of things that are resonating with the dealers that are driving your growth.
I don't really think the value proposition that we offer, or the conversation that we're having with the dealers is really different. The environment today isn't a whole lot different than it was a year ago. I think the conversations and the interest and receptivity is the same as it was a year ago.
Okay, got it. Nothing that they're generally worried about or any kind of different features or products that they're looking for that's different?
No.
Okay, got it. That's all I had. Thanks very much.
Thank you. Our next question comes from the line of Jason Han with Principal Global Investors. Your line is now open.
Good afternoon, guys. Just a couple of quick ones. One, with the K not out yet, is there any update or any commentary you can provide regarding the various ongoing investigations by the state AGs?
Yes. We filed an 8-K this afternoon to provide an update on two state matters. The update will be provided in the 10-K, we wanted to provide the disclosure at the time we released earnings.
All right.
That 8-K should be out there. It relates to a state matter in Massachusetts and one in Mississippi.
Okay, thank you. I'll take a look at that. Just more, I guess, broadly, with the sort of steady increase in average contract size and tenor of the loans outstanding, I'm just curious if you could maybe just qualitatively talk about your confidence in sort of extending your modeling to, I guess, what I would view as sort of an increasingly out of sample type of activity.
Yeah, it's not out of sample. We're not writing any loans today that we haven't written before. We have a full amortization schedule behind us for any loan 66 months and shorter. The only ones we don't have a full term behind us on is the 72 months, but we're now up to, I think, 54 months on those. We're almost through that period, and we have a full term behind us on the 66-month loan. We haven't changed anything in quite a while. We're not writing any loans we haven't written before. When you see the average contract size move up, it's just an issue of mix. We offer all different terms, all different sizes, all different payments, and the dealers and customers select which one they prefer, and that drives our mix.
Okay. Thank you very much.
I would add that we've been extending loan terms for a long time, and we use pilot programs to do that. When we extend a term six months, we obviously don't know how those are going to perform, but you can make a pretty good estimate based on the performance data you do have. You run a pilot program, and you accumulate performance data, and you refine your estimate if necessary. Once you're comfortable, you just roll it out more broadly. It's a process we followed for many, many years.
Yeah, good. Thank you. That's helpful color. I appreciate that.
Thank you. Our next question comes from the line of Giuliano Bologna with BTIG. Your line is now open.
Hi, thanks for taking my question. Just thinking about the average loan term in the portfolio, is there any way of thinking about the difference in the term between the dealer and purchase programs over time?
We don't disclose them separately, but I will say at this point, they're not materially different.
Thank you. That makes a lot of sense. Thinking about one of the things that we'll probably find out in the K is, looking at the transfers, it looks like the rate of the number of transfers that are happening between the Portfolio Program and the Purchase Program are increasing on a percentage of the principal on an annualizing quarterly basis. Have those continued, or how should we think about those going forward?
In our 2017 K, we reported in the fourth quarter of last year an amount of transfers that was significantly higher than the prior periods. We'd excluded some disclosure in there that basically said that some of those transfers should have occurred in prior periods. There was a bit of a catch-up there. 2018 transfers have been occurring at a higher rate than early in 2017, but not a materially higher rate. I think the conclusion of higher transfer is just a function of the catch-up we did and the new process we put in place following that.
Thank you. One last one. Just thinking about the average borrower, have you seen any big change in the borrower or the profile of your average borrower in the last few quarters?
No.
That makes sense. That was it for me. I appreciate the time.
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.