Credit Acceptance Corp Q1 FY2021 Earnings Call

Good day, everyone, and welcome to the Credit Acceptance Corporation First Quarter 2021 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 the Credit Acceptance Corporation First Quarter 2021 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.

Thanks, Doug. Today, we announced my retirement. I'm retiring for personal reasons and I'm leaving with a tremendous sense of gratitude for the opportunity I had and for all the people who helped me along the way. The Board has decided that Ken Booth will replace me as CEO. Ken is a great choice. He's talented, has high integrity, and he's well-respected inside the company. If anyone is worried about my retirement creating a void, I think you should understand that this has never been a one-man band. We've run the company in a very collaborative manner for at least the last 15 years. The leadership team meets on a weekly basis, and every decision, every challenge, every opportunity has been discussed and decisions have been made in a collaborative manner. We have an unusually experienced team. Charlie Pearce and Daniel Ulatowski have been with the company for more than 25 years; Arth Smith and Doug Busk more than 24 years; Jon Lum, our Chief Operating Officer, more than 19 years; and Ken has worked for me for the last 17 years. So I leave behind a talented and experienced team, and I'm confident they will do a great job. I would like to use this opportunity to thank all the people that have supported me over the years. We have an amazing board. We have great leaders throughout the company. We have what I think is a unique culture filled with an unusual amount of trust and goodwill, and I'm proud of what we accomplished together over the last 29.5 years. With that, I will say goodbye and turn it over to Doug and Ken to answer your questions about the quarter.

Your first question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is open.

Great. Thanks. Ken, I understand that the agreement with the Commonwealth of Massachusetts is an agreement in principle. But the press release mentions a contingent loss. Are there any other elements of that that you could tell us about in terms of anything that you're going to have to do that's different as you go forward?

No, I can't really discuss the agreement in principle that we have with the Commonwealth of Massachusetts beyond what's disclosed in the press release and in the 10-Q.

Okay. The 10-Q mentions also an additional CID from the CFPB that was in March and you had kind of back and forth over the back half of last year. Is there any kind of update that you can give us there?

Can't really provide any commentary beyond what we've disclosed in the 10-Q.

Okay. In terms of the collection percentages, you said that in the quarter your expectations for 2018 through 2020 actually improved during the first part of 2021. But the collection expectations for the first quarter of the year actually deteriorated. Is there any way to explain how that happens? What would cause the most recent expectations to deteriorate while the slightly older ones improve?

For the first quarter, it's down a tenth of a percent, which is pretty much flat. So it doesn't surprise me; it'd be flat with our expectations. If you're referring to the fact that it's lower than previous quarters, our initial expectation really just depends on what kind of business we're pricing. That initial expectation is not really relevant except for how we do compared to it.

Right. I'm sorry.

One thing that I'd like to point out is, if you look in the footnote, you'll note that we say that forecasted collection rates are negatively impacted by canceled consumer loans because we don't take the contractual amount out from the denominator for purposes of computing forecasted collection rates. So I think you'll generally see in the first quarter following originations that collection results are either down a little bit or up a little bit. But in any event they're depressed by the impact of canceled loans.

Got it. Thanks, Doug. I actually didn't know that. Similar sort of thing: as you discussed the spread between your forecasted collection rates, I think Ken was referring that the forecasted collection rates are a bit lower in 2021 and the advance is a bit higher. In the explanation you say that's because of the better collections. Does that mean that the better collections you've experienced have caused that? I didn't quite understand, so is there a way to help us understand that?

Initially we have an expectation of what we're going to collect. As we gather more information month-to-month, our forecast goes up or down generally based upon what we learn. What we're talking about there is our past business has performed a little better than we initially thought, which has made the spread seem a little bit bigger.

Okay. Got it. Thank you.

Your next question comes from the line of Randy Heck from Goodnow Investment. Your line is open.

Well, first I just want to congratulate Brett for a tremendous run and a tremendous job creating value for shareholders. It's been a real pleasure being a shareholder for the last 23 years. Secondly, it was noted in the press release that collections were much better in the month of March and they're up about 25% in the month of April. You said that because of the way the accounting works, the earnings didn't get the full benefit in the P&L because the collections were backloaded in the quarter and skewed. Can you give us a general idea of what adjusted earnings would have been roughly in the first quarter if we take into account the stronger collections in March if the accounting was different?

Randy, that's a hard question to answer. We really can't calculate or quantify that. Clearly, if the collections had come in higher ratably through the quarter, we would have done better. But collections continue to improve and that will help us next quarter.

Okay. And then finally, the press release noted that unit volume and originations were up 25% in the month of April through, I guess, yesterday. And that's against a negative 7% comp. What would you attribute that strength to?

A lot of that really has to do with the comparable we have to last year. The first part of April last year was a pretty easy comparable basically due to stimulus. So while it was a good run for the first 28 days, it's really an easier comparable. That's why we included the comparable to 2019 in the release.

Yes. Okay.

If you go back and look, I think that unit volume was down approximately 20% last year in both March and April and then up quite a bit in May and June.

Okay. All right. Well, thank you very much.

Thanks.

Thanks, Randy.

Your next question comes from the line of Rob Wildhack from Autonomous Research. Your line is open.

Hi, everyone. You've mentioned in the past that stimulus programs have helped originations and active dealers in a given quarter. Can you give any color as to the degree that the most recent stimulus package helped this quarter's results? And I'm wondering if you're also still feeling a benefit from that stimulus package through April?

It's hard to quantify the impact of that. But it's very likely that stimulus is having a positive impact on both collections and originations. If you look at our experience over the last 13 months, we've done better when there's stimulus and not as well when there isn't. So we don't have a quantification of that though.

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.