Good day, everyone, welcome to the Credit Acceptance Corporation First Quarter 2015 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. Sir, you may begin.
Thank you, Vince. Good afternoon, welcome to the Credit Acceptance Corporation First Quarter 2015 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. At this time, Brett Roberts, our Chief Executive Officer, Ken Booth, our Chief Financial Officer, and I will take your questions.
Ladies and gentlemen, at this time, if you do have a question, please press the star then the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from queue, you may do so by pressing the pound key. Again, if you do have a question, please press star then 1. Our first question comes from John Hecht of Jefferies. Your line is open.
Afternoon. Thank you for taking my questions. First question, just because I want to hear the updates, your kind of generic discussion on competition and what's going on out there.
Really a continuation of the trend we saw last quarter. Obviously, unit volume growth was solid at 28%. Volume per dealer was up again for the second consecutive quarter after many quarters of decline. That was nice to see. Active dealers grew at 18%, which generated the nice result for the quarter. In terms of the competitive environment, we'll probably echo the same thing we said last time. I think the best measure of that is the volume per dealer and the fact that it grew for the second consecutive quarter and actually grew a little bit faster than it did last quarter is certainly a good sign. It's very likely an indicator that the competitive environment is a bit easier than it was a year ago. We don't have a lot of anecdotal evidence to back that up.
If you look at the numbers, the volume per dealer is up about half a contract a month. It's not the kind of thing that a dealer or a salesperson would really notice. In the aggregate numbers, it certainly generates a positive result.
Okay. Is it as simple as some of the indirect lenders are pulling back and you're recapturing market share, or is it more complicated or dynamic than that?
It's still a very competitive marketplace. There's still lots of lenders out there that are writing loans in our part of the market. Nothing dramatic has happened. Again, in the absence of another explanation, we look at the volume per dealer number as a good indicator of where the competitive environment sits.
Okay. Marginal changes like a half contract a month just kind of adds up is kind of what I'm hearing.
Correct.
Okay. Looking at it looks like your advance rate went down, which is obviously a good thing, but then your expected collections went down. Is that related to the duration of loans you're buying or some other commentary around that?
It's primarily the duration, but also the mix of business. The forecasted collection percentage, the absolute amount doesn't matter so much. It's just whether or not we hit that forecast is the important thing that'll drive our returns. 68.7% is what we're forecasting for the business we've written so far in 2015. If we hit 68.7%, that'll be a good number.
Yep. Okay. It's a mix in duration. Last question before I get back in the queue is, both volumes were strong, I guess, across the board this quarter. Your Purchase volume, it's almost doubled year-over-year. I'm wondering, is that a shift in strategic focus, or is that just kind of the volume you're getting from your dealers, number one? Number two, to the extent it is a strategic shift, how will this impact your P&L, I guess predominantly in the provision line going forward?
We've seen the level of Purchase business vary dramatically over the years. Typically, when the market gets more competitive, we write a little bit more Purchase business. When the market gets less competitive, we end up writing the more traditional business. It has been increasing. It's still a fairly modest percentage of the total, particularly relative to where it's been historically. We really view it as a different channel for us. We've come to the realization that there are some dealers out there who just don't have an interest in writing our Portfolio business for one reason or another. We don't want to exclude those dealers from our market. We have begun to pursue those dealers that aren't interested in the traditional business, and we're happy to write Purchase business with those dealers.
Got it. Thanks very much.
Thank you. Our next question comes from David Scharf of JMP Securities. Your line is open.
Hi, good afternoon. Thanks for taking my questions. Actually, maybe reiterate on the competitive front some of the questions just asked. You guys have been doing this for decades. Trying to still get a sense. This is the 30% or so unusually large year-over-year increase in volumes, as well as the double-digit % increase in average volume per dealer. Do you get a sense that it's primarily certain key indirect lenders who are pulling back from the market that have been opening up some opportunity, or is this more perhaps just the kind of maturation of all the salespeople you've added the last few years? Trying to get a sense if this is more competitive or more kind of internally driven.
I think it's difficult to say. If you look at the list of lenders and AutoCount and how much volume people are doing, certainly there's some lenders that have pulled back, but there's many others that seem to have done the opposite. It's tough to get a read on it from that perspective. I'd like to think our sales force is maturing and getting more productive. Certainly, the number of dealers that we enrolled, the new actives during the quarter was a sign of that. We can't enroll a new active without a salesperson out in the field having some success. It was nice to see that number. The other thing that's nice to see is we're not losing as many dealers.
That's not necessarily obvious from the release, but if you look at the sequential increase in our active dealers, and you compare that with historical quarters, you'd see it was a very strong quarter from a dealer retention standpoint, and we were happy to see that as well.
Got it.
Difficult to separate how much we can take credit for and how much of it's just the market.
Yeah. Maybe shifting to just curious, some kind of anecdotal feedback from dealers. For a new dealer to sign up to your program, it takes more of a commitment on a number of levels than for a traditional indirect program. As your salespeople are signing up so many more active dealers, are you hearing any anecdotal evidence from some of the newer dealers that the deepest of subprime borrower is getting more challenging to find financing for?
Not necessarily hearing it from the dealers. I think we hear a lot of positive feedback about our program from the dealers that we're signing up. They're signing up for a reason, because they feel like we can help them. I think, again, the fact that we signed up so many dealers this quarter is a positive sign there. Again, it's a half contract a month, so the dealer doesn't necessarily see it as a major shift from where we were a year ago. I guess, obviously, this quarter, it'd be a positive shift, but certainly, they realize it's more competitive than it was three or four years ago. In terms of year-over-year or quarter-to-quarter, I just don't think they have precise enough information to give us any insight there.
Got it. On the newer originations this quarter, it looks like really the only potentially negative or just non-positive metrics seem to be the lengthening in average term versus a year ago. Any color you can provide on that? Looks like it went out to over 49 months. Maybe some context how that relates historically. Perhaps this is just a return to normalization for you.
No, I think it's a continuation of a trend that started many years ago. I think as I said last quarter, when I started with the company, the longest term we would write was 24 months. I think we'd probably prefer that if we could get away with that in the marketplace. The marketplace has changed. The customer expects to get a newer, nicer vehicle. In order to accommodate that, you have to be willing to write a longer term. Over the course of many years, we've gradually lengthened that term out, and the way we've done it has been, I think, very methodical. We went from 24 to 30 months, then we made sure we could price that. We felt comfortable we could forecast the collection rates, and we knew how that business would perform. Then we moved out to 36 months.
We've just continued that trend. In the latter part of last year, we extended the term out again. I think, again, all things being equal, if we could get away with writing a shorter term in the marketplace, we would. Ultimately, the way we make those decisions is what is going to provide the best combination of volume and profit per unit, and we're comfortable that we've made the decision on that basis.
Got it. Very helpful. I'll get back in line.
Thank you. Ladies and gentlemen, again, if you do have a question at this time, please press star then one on your touch-tone telephone. That is star then one. Our next question comes from Vincent Caintic of Macquarie. Your line is open.
Hi, good afternoon, guys. Thanks very much, and good quarter. It seems like as the power folks have alluded to, there's significant growth that's been a turnaround over the past 2 quarters, and yields are actually also excellent too, which I think is a turnaround this quarter. Just want to take 2 steps back, and not necessarily focus on competition. What is your view of what's changed, say, this quarter and the past quarter versus, say, a year ago, where dealer counts are growing, yields are also improving? How do you see this upcoming year playing out in terms of those same trends?
I guess, first of all, relative to the yield, I think the yield has actually continued to decline as it has gradually for several years now. Maybe you're calculating the yield differently than we are, but we have the yield calculation in our 10-Q, and it's continued to tick down. It was 25.9% for the quarter
27% for the first quarter last year and 26.3% for the fourth quarter last year. It's continued to tick down a touch.
In terms of the driver, what's changed since a year or two ago, again, I think it's a combination of the competitive environment and the work we do every day to try to get better at what we do. It's difficult to say how much we can take credit for and how much of it's just the external environment changing. Certainly, the volume per dealer, you could probably attribute that most likely to a change in the competitive environment. The success we've had in enrolling dealers and keeping dealers, perhaps you would weight that more as things we've done to affect positive change internally. Again, that's speculation. I think it's impossible to figure out how much of it's external and how much of it's internal. We continue to try to get better at what we do. We grew our sales force very quickly.
We had a period where we had to fill in, we had to go through a period of attrition and replacement and training, I feel like our sales force is performing at a high level today. Hopefully, there's continued room for improvement there.
Got it. That's good color. Changing gears here, capital management. The stock has done very well, and you've committed to buyback stock. Just wondering how we should think about, say, the pace of that going forward and how you think about capital management with your stock at these levels. Actually, on a side note, I just noticed that the cash on your balance sheet is elevated relative to what it usually is historically and just if there's any driver to that'd be great. Thank you.
I mean, our first priority in managing our capital is always to make sure whether we have the capital that we need to fund anticipated levels of originations. What that means is, all things equal, the higher the growth rate, the less amount of stock we're going to buy back and vice versa. We bought back a lot of stock last year. We increased our funded debt-to-equity from 1.8 at the end of 2013 to about 2.5 at the end of 2014. It continues to be in the 2.5 range at year-end. Given current origination levels, we're focusing intently on making sure we have the capital that we need to fund the business at this point. In terms of the cash sitting on the balance sheet, that's really just going to be timing for the most part.
It's really a function of the fact that we issued a $300 million securitization and a $250 million senior notes offering in the first quarter. The sum of those two things was more than the outstandings we have in our revolving credit facilities. We're in a temporary situation where we have cash on the balance sheet.
Got it. Thanks very much, guys. Appreciate it.
Thank you. Our next question comes from David Henle of DLH Capital. Your line is open.
Yeah, could you just spend a second and remind us what the size of the sales force is and what your plans are over the next 12 to 18 months to either grow that sales force or not grow it? Maybe just spend a second talking about the evolution of that sales force, retention or turnover within the sales force itself, and whatever challenges or difficulties that presents.
Yeah, we had about 265 people in the sales area, 235 of which were salespeople, actual, what we call Market Area Managers. Those levels haven't changed significantly over the last couple of years. As Brett mentioned, we increased the sales force pretty dramatically back in 2011 and 2012. Not planning for any significant expansion of that sort in the near term. We'll perhaps opportunistically increase it a little bit, but nothing of the magnitude that we saw several years ago. In terms of turnover, it's something we're focused on, something that we attempt to obviously minimize. We're continuing to make sure we have the right compensation plans in place, provide the salespeople with the right tools to make them more effective. I'd say at this point, it's just kind of one of those things you're focused on and trying to build a healthy organization.
Mm-hmm. I'm just curious, once a salesperson brings in a dealer, does he or she in any way stay involved in that relationship, or do they simply turn it over to more of a relationship manager that then manages that relationship with that dealer?
The Market Area Manager stays with that dealer. They manage a territory, and they're responsible for both enrolling new dealers and servicing active dealers.
Okay. When you talk about your retention getting better, does some of that relate to you doing a better job with your sales force in terms of them staying connected to dealers? Is there a connection there?
I think, first of all, I would say that as we roughly doubled the sales force, we did it in a very rapid period of time. That created a turnover problem. We didn't necessarily anticipate that was going to happen. Perhaps we could have. We spent the last six to eight quarters trying to fill in where we've had attrition and also trying to address sort of the root causes of why salespeople were choosing to leave, whether we were hiring the wrong people or we had the wrong incentives in place. We've addressed some of those things. I think it's too early to say whether what we've done so far will prove to be successful. I think the faster we grow volume, the more likely it is that a salesperson will stay because they're successful and they're making money.
Mid last year, when we weren't growing quite as fast, it was a bigger challenge. We're only through now almost four months of the year, and I think we need to see a few more months play out before we say we have the attrition problem corrected.
Okay. Thank you.
Thank you. Our next question comes from Daniel Smith of [Teddon Capital]. Your line is open.
Hi, guys. Great quarter. I think one thing you've said in the past, and this may not be true, so don't let me put words in your mouth, is that profit per loan is more important to you than spread. If that's true, and you guys are compensated basically on return on capital, so if that's true, why is that better for your compensation than for stockholder returns?
First, I think the way that we're compensated is aligned with shareholder returns.
Right.
It's not just profit per unit. It's profit per unit, including the cost for our equity capital. It's profit per unit times the number of units that we write. We're trying to maximize that equation. What that means is that at certain level of return or profit per unit, you're willing to make a trade for less margin and more volume. The opposite is true as your margins get skinnier. I think what that's done over a long period of time is it's focused us on the right things. I think it causes our return generally to be a lot higher than what you would see in the rest of the industry, which I think has been a positive thing for shareholders.
It just gives us a consistent way to price and think about the business, whether it's a tough competitive environment or an easy competitive environment, we always price the exact same way.
When you move out the duration, does the longer duration loan tend to have a higher spread or a lower spread, or is there any difference?
The way it's presented in the table, the longer term loan will generally have, for the exact same customer, a lower collection rate. Everything else on the deal consistent, if you move the term out, the collection rate's going to drop, and that's reflected in our forecast. If the collection rate drops, typically the lower the collection rate, the lower the spread. Again, because of the way the table's presented, it's one minus the other.
Right
Not necessarily one divided by the other. You get a little bit different look at it if you take the forecasted collection rate divided by the advance. The way it's presented, the spread would typically shrink on a longer-term loan for the same customer.
I guess that's kind of the root of my question is, if the spread goes out and just factually your duration is lengthening. As the spread declines and the turnover rate of the loans declines, does that mean that the portfolio, all else equal, is sort of going to a lower return on capital because of the lengthening duration, ignoring all other factors?
Yeah, I think if you look at the trend in our income statement, you'd see that the revenue yield or the finance charge yield, whichever one you want to look at, has been declining over time. The business we're writing today, assuming there's no positive forecast variance going forward, has a lower yield than the business that's on the books already.
Is that-
Go ahead.
Is that solely because of competitive forces, or is there some element of conscious effort that you're doing that? Because, Well, I'll just let you answer that.
Well, it's a combination of both. I mean, certainly, if there were no competition, our returns and our yields would be a lot higher. Clearly, we have to price with an eye. In the market that we're in, we have to take that into consideration. Clearly, our pricing is a function of the competitive market. It's also a function of trying to maximize that equation that I talked about.
Right. Okay, just to focus on that part, the conscious maximization is based on what you said so far. I'm just trying to understand your perspective, why you think that it can be good to lengthen duration and to.
I think the criteria we use to decide whether it's good or not is the one I described, where we're trying to maximize the equation of volume and profit per unit. Typically, a longer-term loan will be a larger loan, which is an advantage. If you have the same return and a larger loan, your profits are higher. You've deployed more capital at the same return. It will typically have a lower return, however. That works in the opposite direction. You need to decide whether the volume that you're generating is enough to make up for the lower return and the combination of the lower return and the larger contract size. We work through the math of that. We do it very carefully.
We make sure that any changes we make are positive ones, and we feel comfortable that in this case, it's very likely that the lengthening term is a good thing for shareholders.
Okay. Essentially, your bonus or your Option vesting is based on return on capital. Now, there is a cost to capital, but when you say you make a larger loan, that isn't necessarily good for return on capital, right?
No, again, if I'm not being clear, it's not a return on capital incentive plan or return on capital focus. It's what we call economic profit, which certainly return on capital is an important component of that, but it's not the only thing. economic profit is the return we make over our cost of capital multiplied by the capital we have invested in the business. Is it better to have a $1 billion business at a 15% return or a $3 billion business at a 14% return? It takes into consideration the size of the business and how much capital you're employing, along with the returns that you're employing it with.
Basically, you're just saying as long as you have available capital, it makes sense to deploy it as long as it's economically profitable.
That's certainly true. The way we think about it is, at what price do we generate the best combination of volume and profit per unit? What policy generates the best combination of volume and profit per unit? By policy, the term policy is one of those.
Okay. All right. Thank you.
Thank you. Our next question comes from Clifford Sosin of CAS Investment Partners. Your line is open.
Hi, guys. Thank you for taking my question. Obviously, productivity by the sales force improved year-over-year in these last few quarters. Can you discuss the distribution of that improvement amongst your salespeople? In other words, was it fairly evenly distributed? That is to say, most salespeople saw a similar increase in performance? Did you see perhaps an improvement in maybe the bottom two quartiles of the sales force, which might be maybe an indication of either a learning curve or a cycling through to better people, driving salesperson productivity?
I think the best answer to that is the performance of a salesperson varies dramatically. Your top salesperson grows much faster than your average or your bottom. It's a wide disparity. It always has been. It's not as if everyone's performing at about the same level and they all went up by 28%. With 235 salespeople, the difference between number 1 and number 235 is a vast difference. In general, we've been successful in our better markets. I know that the markets we're most successful in grew faster than the markets where we've had less success. What I take from that is, I think there is a little bit of momentum that develops in a market.
Sometimes the first dealer that you sign up is the toughest in a market because nobody knows who you are, and you can't point to dealers in the area that have had success on your program. Once you get a critical mass in a market, and you have a lot of dealers using your program and enjoying success, it's sometimes easier to grow it from there. I think the performance by a salesperson probably reflects that dynamic, as well as the skill and experience and ability of the individual salespeople, which obviously varies as well.
That's very helpful. Secondarily, you had a tremendous amount of success, obviously, with these slightly longer-term loans. Obviously, the risk with longer-term loans is that to the extent they underperform your expectations, the magnitude of underperformance can be bigger given the term. Do you factor that into your cost of equity considerations when you are considering the marginal economic profit of a loan? In other words, maybe a better way to put it is how do you factor in the probably greater amount of risk in a longer-term loan into the cost of equity that you use when calculating the economic profit for such a loan?
The term of the loan doesn't affect our cost of equity, is the simple answer.
Okay. 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.