Credit Acceptance Corp (CACC) Q1 2019 Earnings Call Transcript

CACC earnings call for the period ending March 31, 2019.

Motley Fool Transcribers
Motley Fool Transcribers
Apr 29, 2019 at 11:34PM
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Credit Acceptance Corp  (NASDAQ:CACC)
Q1 2019 Earnings Call
April 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Douglas W. Busk -- Treasurer

Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation first quarter 2019 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 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.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Hugh Miller of Buckingham. Your line is open.

Hugh Miller -- Buckingham -- Analyst

Hi, thanks for taking my questions. So just had one on the tax rate and was wondering if you could provide some color on kind of what was driving it this quarter and how we should think about that on a go-forward basis?

Douglas W. Busk -- Treasurer

Sure. The tax rate was a little lower this quarter than it was in the fourth quarter of last year or the first quarter of last year. And the reason for that is that we get a tax deduction when restricted stock vest, so restricted stock units are converted into common shares, the amount of the deduction is based on the fair value of the shares. If that amount exceeds the fair value of the awards on the grant date, that's something called excess tax benefit and gets recorded as a reduction to our tax rate.

Hugh Miller -- Buckingham -- Analyst

Okay, great. And then just in terms of, as we think about assessing the collectability trends and also the spread trends, is it fair to compare that the 2019 vintage, relative to let's say the 2018 vintage on when -- where it was initially booked? Or is it a better assessment to kind of look at that where it's currently booked as a fair comparison to where you set initial expectations for 2019?

Douglas W. Busk -- Treasurer

I think both are relevant numbers. I think the 2019 business has a slightly higher initial forecast. It's too new to know where that's going to settle in. The 2018 vintage has been around a little while longer and it's settled in at a higher collection forecast than where it started. So we just -- we'll watch 2019 and see where it goes. I think it's little bit early to decide whether one vintage is better than the other.

Hugh Miller -- Buckingham -- Analyst

Okay. And last for me, just in terms of where we stand with CECL fair value decision, have you made any progress in terms of just how things are shaking out, where you might kind of see things for 2019 -- for 2020, I'm sorry?

Douglas W. Busk -- Treasurer

We've continued to assess our alternatives internally. I think we've made progress. As I said in prior quarters that when we do make a decision we'll update our disclosures appropriately and make an announcement at that time. So really nothing further to report today.

Hugh Miller -- Buckingham -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from John Rowan of Janney. Your line is open.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Is 24% still the correct tax rate going forward though?

Douglas W. Busk -- Treasurer

I think we estimate our long term tax rate to be 23%. Obviously that is a long-term number. So if you are going to -- that factors in things like that, that happened this quarter, which again isn't going to happen every quarter.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Okay. And then, I know, obviously people always ask about the competitive environment. You always -- often times cite the volume per active dealer partner. Are we supposed to draw similar conclusions this quarter versus prior quarters that the environment is probably a little bit tough, just given the decline in the active -- in the volume per active dealer partner?

Douglas W. Busk -- Treasurer

We don't have another reason for the decline. So in quarters where we don't have another reason for it, we usually attribute it to the competitive environment.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Okay. And then was there anything onetime in nature in the other income line? Or is there something seasonal in there? I'm trying to remember, it's a little higher than I was anticipating.

Douglas W. Busk -- Treasurer

I don't think there was anything one-time. We have a disclosure comparing the first quarter of this year to the first quarter of last year in the 10-Q and most of the increase was related to ancillary product profit sharing but we also had a larger amount of interest income and that was offset a bit by decreases in a couple of other line items.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Okay. And then just lastly, is there any information that you can give us? It seemed like you disclosed the new CID in the 10-Q. Is there any information that you can share with us regarding that?

Douglas W. Busk -- Treasurer

I mean real -- really anything other than what's disclosed in the Q. Obviously the regulatory environment's been much different for the last five, six, seven years. So I think this is just part of what we can expect in the environment we operate in.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from Vincent Caintic of Stephens. Your line is open.

Vincent Caintic -- Stephens, Inc. -- Analyst

Hey, thanks, good afternoon. A couple of questions. First couple focus on the purchased loan. So you've had some nice growth there over the past couple of quarters and it's becoming increasingly a bigger part of the business. Just kind of wondering -- so first you had your forecast for the spreads increase significantly, and historically it's exceeded your initial forecast. I'm kind of wondering how you initially anticipate the purchased loan spread forecasts and how they've been increasing over time.

And then when I look at the difference in spreads between the purchased loans versus the dealer loans, so the spreads are lower for purchased loans and I'm wondering if that's true after accounting for the dealer holdback. And if it is true, are purchased loans generally less risky than dealer loans, so you can have a lower spread on that? Or how do I think about the risk adjusted returns between the two products you offer?

Douglas W. Busk -- Treasurer

Well, as we've said, like before, we prefer the portfolio program because it aligns our interests. It also shares the risk on the consumer loan with the dealer. So if we collect a dollar less than what we expect on the portfolio program, 80% of that is borne by the dealer in the form of a reduction in dealer holdback.

On the purchased loan program, if we miss our forecast by a dollar, all of that comes out of our pocket. So we would characterize for that reason, the portfolio program as being less risky than the purchased program. Having said all that, the purchased loan business has performed very well. It's actually generated a larger positive variance on average than has the portfolio program over the last 10 years. So we think that writing those purchased loans with a big margin of safety is a good use of our capital.

Vincent Caintic -- Stephens, Inc. -- Analyst

Okay. That's helpful. Thank you. Is there -- and I guess looking from 2018 versus 2019, so spreads versus your initial estimates are better in 2018. Is 2019 at sort of the right spread that you're targeting, if that's kind of your initial estimate? And if so, is there room, because you're seeing such a good performance with the purchased loans, is there room for more volume that you could capture there?

Douglas W. Busk -- Treasurer

I mean we try to price our business to maximize economic profit, which is just economic profit per loan times the number of loans originated. With the benefit of hindsight, you could argue that the way we've priced the purchased loans historically has been too conservative. Those loans performed nicely better than expected and knowing what we know now, we could have priced those loans a bit more aggressively.

But we do try to put our best number forward and we try to -- like I said, maximize that equation and try to be accurate with our forecast.

Vincent Caintic -- Stephens, Inc. -- Analyst

Okay, great. Very helpful. And last one for me, and completely separate, but the nice increase in the new dealers, or I guess the dealers not active in both periods, just wondering if there was any particular driver there? I know people will say competition maybe goes away or if there's anything -- if there is anything else there that might shed light on that, it would be appreciated. Thank you.

Douglas W. Busk -- Treasurer

I think the first quarter is usually a good quarter for us for enrolling new dealers. We got a larger sales than we had a year ago. So there's probably a couple of regions why new dealer enrollments were pretty good. Attrition was also pretty good. The number that hurt us this quarter the same as last quarter was volume per dealer.

Vincent Caintic -- Stephens, Inc. -- Analyst

Very helpful. Thank you.

Operator

Thank you. Our next question comes from Moshe Orenbuch of Credit Suisse. Your line is open.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. I did notice that for 2016 and 2017, the reductions were small, but you started to see some reductions in your forecasts. Anything that's going on that would be driving that?

Douglas W. Busk -- Treasurer

I think when you look at the forecast, the best number to start with is the one on the second page of the release where we show you the increase in forecasted net cash flows, positive number this quarter, $16.7 million. It's nice to have a positive number there. That's a very small number relative to the amount of cash flows that we're trying to forecast. But I think that tells the story better than looking at a 10-basis point change for any individual vintage. Overall, forecast was generally in line with what we expected, a little bit better than that. I think that's probably a fair conclusion.

Moshe Orenbuch -- Credit Suisse -- Analyst

Okay. And then on the CECL idea (ph), I know that you don't have any further info but could you talk a little bit about how fair value would work and how variability in kind of estimates and revenue and provision recognition would work under that construct?

Douglas W. Busk -- Treasurer

I mean, fair value, conceptually would be like, well just be marking our portfolio to market each period. So the value of the portfolio would represent not only the expected cash flows from the portfolio, the expenses a third-party would need to incur to service the portfolio and the third parties require greater return. So the -- as we've pointed out, one of the drawbacks to fair value is the value of the portfolio and thus our financial performance in any period can be impacted by things that have nothing to do with the underlying performance of the portfolio, like changes in interest rate or changes in market base or rates of return. But at a high level that's how it would work.

Moshe Orenbuch -- Credit Suisse -- Analyst

Right. I guess I mean the question is I mean from a perspective of variability, how would you -- and is there a way to compare it to the current construct?

Douglas W. Busk -- Treasurer

I would say it has the potential to be more volatile. The current earnings that we have today could be volatile but that volatility would directly have to do with the performance of the underlying loans. With fair value you could have some variability associated with the performance of the loans but you could also have variability associated with things that have nothing to do with the loans.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Thanks so much.

Operator

Thank you. Our next question comes from Dominick Gabriele of Oppenheimer. Your line is open.

Dominick Gabriele -- Oppenheimer -- Analyst

Hi, thanks so much for taking my questions. Can we just talk about how much of the book is moving toward younger cars as we make a portfolio mix change to more purchased loans? Can you just talk about the impact there between the average car age versus in the dealer portfolio loans versus the purchased loans and how that could be affecting your interest rates that you collect over the average life of the loan and are the interest income rather --? That would be great. Thanks.

Douglas W. Busk -- Treasurer

We have seen a shift of the mix of business that we've originated over the last four or five years. Not only are we originating a larger percentage of purchased loans but we are financing on newer, more expensive vehicles than we were three four or five years ago. Those phenomena have resulted in an increase in the average amount of the retail installment contract, principal plus interest and therefore an average -- increase in the average advance. That phenomenon has contributed to dollar growth being greater than unit volume growth in recent periods.

Dominick Gabriele -- Oppenheimer -- Analyst

Great. Thanks. And then when you -- as you think about what gets a dealer to provide more applications over time and become a stronger -- have a stronger relationship with Credit Acceptance, what are some of those attributes and what's the timeframe would you say that it takes for a brand new relationship for you to get five applications a month to 10 to 20, whatever it may be? What's the strategy there and the time frame it takes typically, would you say?

Douglas W. Busk -- Treasurer

How much business a dealer sends us, how many applications, how many contracts you book really reflects everything we do as a company because the dealers on the portfolio program at least get 80% of whatever we collect, even our loan servicing function affects how satisfied the dealer is with our product.

So it's really all encompassing. It's everything we do. The better product we offer the dealer, the more business they're going to write. In general, if you take a particular month's vintage of new dealers, the amount of business they do increases over time but also dealers in that vintage will drop out. So there's two effects there that offset each other. But I don't know if there's a typical timeframe that someone ramps up, that's going to be useful to you in terms of trying to forecast future loan volume.

Dominick Gabriele -- Oppenheimer -- Analyst

Great. Thanks. And then just one more if I could. When you think about the strategy among targeting franchise dealers, let's say, and non franchise dealers. What are some of the big differences there and what makes maybe one -- they were like -- one better than the other or not even better but perhaps just the differences in trying to obtain those long term relationships. Thanks.

Douglas W. Busk -- Treasurer

In general, our program works very well at a small independent dealer, it works very well at a larger franchise dealer. Sometimes the selling process can be different. The larger organizations, typically there's more people that need to sign off on a new lender. So it can be a little bit more complex and then when you get into stores that have multiple locations and maybe a corporate office there's another selling process that occurs there. But other than that the program works in all kinds of environments.

Dominick Gabriele -- Oppenheimer -- Analyst

Thanks for taking my questions.

Operator

Our next question comes from Nick Nigeban (ph) at Drive-in (ph) Financial. Your line is open.

Nick Nigeban -- Drive-in Financial -- Analyst

Hi, have kind of a broad question. I was hoping you guys could help me understand how you think about the amount of leverage that you employ from kind of a downside risk perspective? I guess just I'd like -- the overall amount but then also how you structure it, secure it versus unsecured?

Douglas W. Busk -- Treasurer

Yeah, the way that we determine how much leverage to employ is we run series of financial projections looking at different leverage -- different funding mix -- different maturity management strategies, and what we're trying to do is utilize a funding strategy that produces a cost effective result when the capital markets are open and readily available but also produces an acceptable result when the capital markets are closed for an extended period of time. So we do that analysis. We look at different funding strategies, different leverage etc., and pick the approach that works well in both good and bad capital market environments.

Nick Nigeban -- Drive-in Financial -- Analyst

Okay. And then, I don't know, this won't be easy to answer, knowing that the Alt-A ABS structures you have are probably a little different. But are there any kind of major covenants across the board on your ABS' that in kind of a worst case scenario you would think could get close to getting triggered or anything like that?

Douglas W. Busk -- Treasurer

We obviously have performance triggers in our ABS like any issuer does. None of them are particularly concerning.

Dominick Gabriele -- Oppenheimer -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from John Hecht of Jefferies. Your line is open.

John Hecht -- Jefferies -- Analyst

Thanks, guys. I understand that in the grand scheme of things, the increase in expected cash flows in the purchased loans isn't a huge number, but I'm wondering can you characterize what changed over the quarter, was it something tied to frequency or severity in terms of the increase there?

Douglas W. Busk -- Treasurer

I really can't break it down any further than what's in the release. I mean it's a pretty small number. It's nice to have a positive variance but we don't have a breakdown for you.

John Hecht -- Jefferies -- Analyst

Okay. And similar to other first quarters you guys had a big increase in the new dealers -- new dealerships. I'm wondering, is there any geographical kind of trend there, or anything you could -- and then can you tell us how many those are franchised versus independents and so forth, any characteristics of the new dealerships?

Douglas W. Busk -- Treasurer

The franchised versus independently hasn't changed a lot. We've been having better success in recent years signing up sort of larger franchise stores on the purchased program and that's where the growth is coming from. In terms of -- I forgot the other part of your question.

John Hecht -- Jefferies -- Analyst

Geography.

Douglas W. Busk -- Treasurer

Geography, yeah. In general, we've been doing better in areas where we're strong and we're struggling in areas where we've historically struggled. So in some of our -- if you look at our SEC filings, you'll see the states where we have the biggest concentrations we continue to do well in those states and we continue to struggle in the states where we've had -- we have lower penetrations.

John Hecht -- Jefferies -- Analyst

Okay. And then similar to last year, should -- is there something seasonally we should think about in terms of net attrition in the dealerships in Q2 or is that just something that happened over the last couple of years and it's not necessarily a seasonal thing?

Douglas W. Busk -- Treasurer

So there's a seasonal component there. A lot of dealers will come on during tax season, write business and then fall off in the second quarter. So if you look at that seasonal pattern that's probably a good place to start.

John Hecht -- Jefferies -- Analyst

Okay. Thanks guys very much.

Operator

Thank you. (Operator Instructions) Our next question comes from Giuliano Bologna. Your line is open.

Giuliano Bologna -- BTIG -- Analyst

So I guess, starting of with one question on the dealer loan side, looks like there was a decrease in the unit volume versus the prior year and purchase volume really made up the balance. Have should we kind of think about the dynamic there and we continue -- should we expect that to continue going forward?

Douglas W. Busk -- Treasurer

I have a forecast there, but that's been the trend in over the last several quarters. We've been growing the purchased loan program and the dealer loan program has been less successful.

Giuliano Bologna -- BTIG -- Analyst

That makes sense. And thinking about kind of a little bit different question. Obviously the 2018 vintage had positive revisions on the foresight forecasting collection? Is there any way of framing where those increases came from, because there are a couple of different theories out there around repossessions being higher with newer vehicles or wage garnishments (ph) being higher, potentially with lower payroll taxes. Is there any one driver that kind of had an outsized impact in the year?

Douglas W. Busk -- Treasurer

No, I don't think so. It's -- we're talking about small changes here. I think the prior question was essentially the same one. So no, we don't have a breakdown for you. It's a small variance. We're happy to see it but we don't have any further detail for you.

Giuliano Bologna -- BTIG -- Analyst

And just one other quick one. One of things I noticed was the increase in restricted cash. Looks like restricted cash went up sort of $140 million. Is that tied to any specific transaction?

Douglas W. Busk -- Treasurer

I mean the bulk of the reason for that is we have restricted stock that -- or restricted cash rather that relates to collections on securitizations that is in the collection account and is used to reduce debt on the subsequent distribution date. The increase in the amount of securitization debt together with the higher than normal collections that occurred during the first quarter of the year account for that increase there.

Giuliano Bologna -- BTIG -- Analyst

That makes sense. Thank you. Thank you for taking my questions.

Operator

Thank you. Our next question comes from Dominick Gabriele of Oppenheimer. Your line is open.

Dominick Gabriele -- Oppenheimer -- Analyst

Thanks. Sorry about that. Just if I could follow up on one more. Did you guys had a forecast for the year on interest expense up 50 basis points in the previous quarter for 2019? Given the new Fed rate path, do you think that's still the same there? And then also do you think that the $20 million in the first quarter of other income is that a good run rate going forward or is that kind of a little higher in the first quarter and we expect that to come back down toward that $15 million, $16 million, $17 million level? Thanks.

Douglas W. Busk -- Treasurer

I mean, relative to the interest expense, I think when I offered that last quarter I had a qualifier about constant mix of debt based on the shape of the forward LIBOR curve. A couple of pretty big assumptions there. I still think that we see rates increasing going forward but there's probably more uncertainty relative to the magnitude of those increases today than there was 90 days ago. So I think a lot of it just depends on just what happens with base rates. If base rates go up over time, our cost of debt is going to go up and base rates stay more flat, the same will happen to us.

In terms of other income, I don't really have any guidance to share there. We -- there hasn't been a huge amount of seasonality in other income historically. And you can kind of take a look at the quarterly numbers and see the trend line.

Giuliano Bologna -- BTIG -- Analyst

Perfect, thanks so much.

Operator

Thank you. With no further questions in queue, I'd like to turn the conference back over to Mr. Busk for any additional or closing remarks.

Douglas W. Busk -- Treasurer

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.

Operator

Once again this does conclude today's conference. We thank you for your participation.

Duration: 28 minutes

Call participants:

Douglas W. Busk -- Treasurer

Hugh Miller -- Buckingham -- Analyst

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Vincent Caintic -- Stephens, Inc. -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Dominick Gabriele -- Oppenheimer -- Analyst

Nick Nigeban -- Drive-in Financial -- Analyst

John Hecht -- Jefferies -- Analyst

Giuliano Bologna -- BTIG -- Analyst

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