Credit Acceptance Corp Q4 FY2020 Earnings Call

Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth 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's website. At this time, I would like to turn the call over to Credit Acceptance's Chief Treasury Officer, Doug Busk.

Thank you. Good afternoon, and welcome to Credit Acceptance's fourth quarter 2020 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.

Your first question is from David Scharf with JMP Securities.

I'm just curious. Can you remind us what the rough mix is among your dealer base in terms of independent versus franchised?

Roughly 60% independent, 40% franchised.

And I'm wondering, 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 is a certain comfort level I just kind of emotionally had being in what I viewed as kind of a large established business in all the processes, health-wise and screening that they put in place. 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, or a different magnitude of pressure falloff in foot traffic at independents versus franchised?

Yes, I think there is definitely a difference there. We saw softer volume from independents in both Q3 and Q4. Franchises still declined year-over-year in Q4, but by a lesser magnitude than the independents.

And going forward, as you think about your product, the value proposition to dealers, do you view this observation that phenomenon is just a direct result of how consumers are viewing franchises versus maybe independent dealers in business during the pandemic, or are you rethinking sort of the mix that you might want as you direct salespeople to call in dealerships?

I think historically we've had a product that appealed to independent dealers, and some franchise dealers, but not all, when we developed the purchase product that had more appeals to 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.

Right, right. I would agree. And then maybe just one follow-up. I know fourth quarter 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 the latest stimulus checks that went out?

We provided January volumes in the release. So I think certainly the stimulus checks and the impact of that are probably captured pretty well by the January figures we provided.

Your next question is from Moshe Orenbuch with Credit Suisse.

Maybe following up, the average size of the loan or the advance has grown and was bigger in Q4. You'd said three months ago that part of the issue—and I think it was repeated in the release now—part of the issue is that wholesale prices were up. Maybe just give us an update where that stands, and is that still having an impact being offset by the stimulus? How do we think about those trends?

It's still elevated. The numbers that we track internally have moderated to some extent over the last few months, but wholesale values were still higher than they were a year ago.

And looking at the 8-K that you filed, I guess I'm struggling with trying to understand the verbiage on the CFPB. It says that on December 23rd, 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? How should we read that? I'm not sure I understand. It's new to me.

So that continues to be active. I guess 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 mean it continues to be active.

Then my last question was, the company set up, I guess, an options program in December for a number of executives. Have you talked about how that was arrived at, and the value of those 330,000 options?

I don't follow the question.

Well, I guess the question is, is that part of a plan or a program that that's part of? Obviously, we saw the Form 4s and the grants, but is there any part of the comp plan? Does it relate to the company performance in a particular period or anything like that?

Yes, we're just coming on. We have a compensation plan for our senior executives, where the last plan was a four-year plan. 2020 was the fourth year of that. So what we've historically done is we had three- or four-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 plan, and the options were part of that plan.

Your next question is from John Rowan with Janney.

When you look at the reduction in dealer partner productivity, 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 you might also have relationships with at those dealers?

So said another way, is it our share of the market, or is it the size of the market? 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 and November, not the full quarter. But I think the trends we saw both in Q3, and October and November, is the overall market used vehicle volume, used vehicle financed volume is pretty stable, even growing a little bit. So we're obviously down. That would mean we lost share of the market defined as total used vehicles financed. What you also see in that data is that the lower tiers of the credit spectrum are actually down year-over-year, in some cases significantly the further you get down. Our wheelhouse is independent dealers and the lower credit tier customers, and those are the segments of the market that had been negatively impacted the most. Having said that, I do think it's probably fair to say that we lost share in Q4 year-over-year. And I think we lost it to others who maybe see the market differently than we do at this point, or are more aggressive than what we're willing to do. Obviously on the incremental customer, we did a lot of business. We have value in those dealers who we did business with. There's still a niche there for us. It just gets a little bit smaller as some external factors come into play including competition.

Well, just to get back to the last point on competition, it doesn't seem like you were necessarily giving up, right? The advance rate was up— from what I can see it was up in December. So it still seems like you're actively pursuing volume. The loan term has plateaued here at 60 months and loans are now over $25,000. So it seems as if you were still trying to get volume by incentivizing dealer partners. I'm just wondering, if we are to this point now where loans are just too big for your typical customers and you're getting competition that's putting you between a rock and a hard place—where you can't increase advance anymore, or you don't want to increase advance anymore, loan term is already 60 months, and now your loan portfolio actually just started to decline a little bit sequentially this quarter—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 these statements 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. If you go back and look, maybe 2016 or the year before, 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 to grow our market from here or to grow our book from here, barring some change in the competitive environment.' We were able to grow from there; we did better than I expected. But it went up. Pre-pandemic, fourth quarter 2019, we had year-over-year decline in unit volume in Q4 2019. We got off to a decent start in January and February pre-pandemic. The pandemic hit and then the results were what they were for the rest of 2020. So overall my view hasn't changed. We have a very healthy business, a profitable business. We were able to add considerable value in our niche. But going back three, four, maybe five years, I think it was clear at that point that there is a point where it's going to be difficult to grow, barring a change in the competitive environment or some other way for us to add value, and that's been tough to come by. The pandemic, wholesale values, and the things we've already talked about or disclosed, I think that explains where we are today.

Your next question is from John Hecht with Jefferies.

The 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 in 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.

Going to make sure I see that. And then, maybe can you guys talk about ongoing effects of the pandemic on operations? Is collection still fairly done from home? Are 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. 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.

Can you give us a sense of where that activity is relative to normalized level? Are we halfway there, are we approaching normalized levels, or how do we think about that?

We're not back to normal at this point. We're giving the customers a lot of room. We know it's a difficult environment for many of them, and so we're giving them extra time to make their payments, and repossessions aren't yet back to where they normally would be.

Last question is more of your opinion. It's been an extraordinary market in terms of residual values relative to historical averages. What do you think it's going to need—what kind of catalysts would need to occur where there could be a bigger shakeout in the market, which would allow you to reestablish market share?

Historically, you just have to look at the supply of capital for the industry. Capital is available and very cheap, and as long as that continues, you're looking at a very competitive environment. What would cause the capital to dry up? There is a variety of things. One would be loan performance within the industry or some sort of external event. Had the government response to the pandemic been different, then perhaps the pandemic would have been that reason, but because the stimulus offset loan performance issues for most of the industry, that didn't play out that way.

Your next question is from Rob Wildhack with Autonomous Research.

I just wanted to follow up on the January volume trends. How long do you think the tailwind from that December stimulus check will last? Does a $600 check in December help sales through February and March, or has the impact sort of already played out?

It's probably pretty hard to say. You can look at what happens in May, June, July. Last time we had January and February flat, March and April down sharply, then May and June strong growth, and July was a transition month. The same pattern may play out this time, but last time some of that was a rebound from very soft months, so you might not see the same rebound. You have tax season coming up and possibly another stimulus. It will be a unique environment and it's hard to predict how it will play out in terms of loan volumes or collections.

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 2.5 million shares under our existing authorization. We continue to think about buybacks the same way we have for a very, very long time, and we're employing the same criteria.

With no further questions in the queue, I would like to turn the conference back 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.