Doug Busk - Senior Vice President and Treasurer Brett Roberts - Chief Executive Officer Ken Booth - Chief Financial Officer.

Kyle Joseph - Jefferies David Scharf - JMP Securities Robert Dodd - Raymond James Lucy Webster - Compass Point Christopher Crum - Aylstone Company Randy Heck - Goodnow Investment David Henle - DLH Capital John Rowan - Janney Sanjay Sen - BloombergSen Moshe Orenbuch - Credit Suisse.

Good day, everyone and welcome to the Credit Acceptance Corporation Fourth 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, Doug Busk..

Thank you, Teresa. Good afternoon and welcome to the Credit Acceptance Corporation’s fourth 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..

[Operator Instructions] And our first question comes from the line of Kyle Joseph with Jefferies. Your line is now open..

Afternoon, guys. Congratulations on a good quarter and thanks for taking my questions.

I just want to get your thoughts just on competition given broader macroeconomic volatility, have you seen any pullback in competition and what’s kind of your outlook for 2016?.

I think the best way to get a sense for the competitive environment for us is to look at volume per dealer and the volume per dealer for the quarter increased by 3.8%.

That’s less of an increase than we saw in prior quarters of the year, although we did have a tougher comparison as the fourth quarter of the prior year was – we started to grow the business. Beyond that, I think as long as there is capital available to the market, we will continue to see lots of competition. It is very competitive right now.

It has been for sometime. But in terms of an outlook, it’s really hard to say wouldn’t look for much of a change until capital dries up for the industry..

Got it. Thanks. That’s helpful.

And then in terms of your collections forecast, it looks like the forecasted corrections came down couple of basis points for some of the vintages, is that primarily driven by the term extension or is there anything going on in terms of frequency or severity you guys would want to highlight?.

I think at a high level, we provide our initial forecast for each of the last 10 years. We update that forecast every quarter. For 8 of last 10 years, we have had a positive variance against our initial forecast.

The only 2 years where the variance was negative, where ’06 and ‘07 that were affected by the financial crisis and those are probably noteworthy just because the variance even though was negative was very small given the change in the environment that we experience.

Recently, we saw a few basis point moves for a few of the years, a positive move for ‘15, but in total, the total cash really didn’t changed by much versus our forecast..

Alright, thanks.

And then just lastly, can you talk to us about what you are seeing from the ABS markets in terms of sort of new issue spreads you guys are seeing and your outlook for your cost of funds?.

The conditions in the ABS market aren’t dramatically different than we saw in the later part of 2015. Investors are being selective. There is definitely some tiering going on in terms of public versus 144A, prime versus sub-prime, and then tiering based on the financial strength of the sponsor.

We did our last deal in August of 2015, had an all-in rate including issuances of about 3%. It’s a little difficult to tell, but if we were to access the 144A market today and do a similarly structured fixed rate deal, we think we would be right in the 3.5% range. So, little more challenging environment, but things are still getting done.

The 3.5% issuance since it would likely be a small portion of our overall debt and it’s a less than our overall weighted average cost to funds would have a minimal impact on our overall cost of funds..

Okay. Thanks very much for answering my questions..

Thank you. And our next question comes from the line of David Scharf with JMP Securities. Your line is now open..

Hi, thanks for taking my questions as well. The first one relates to the dealer count and I guess, it’s a follow-up to the question on competition. It’s still a very strong year-over-year growth in active dealers.

Should we be viewing this as largely a function of just the maturation of all the salespeople you have added over the last few years or are you finding there are a lot of new dealers who are coming on to your system, because they can’t get deep sub-prime borrowers financed?.

So, a combination of the two, we have very small market share currently. There is a lot of dealers out there that could use our program and benefit from it. They don’t have it currently. We would like to think that we have lots of room to continue to grow our active dealer count. We made some progress on that this quarter..

Is the year-over-year growth rate you have been delivering in calendar 2015 level that you think is sustainable this year?.

I think it’s difficult to predict short-term growth rates either in dealers or even in volumes. If you look at our long-term track record, when we have had capital, we have been able to grow the business pretty nicely and we hope that, that will continue, but again, it’s hard to predict the future..

Got it. Got it.

Shifting to the revenue side and pricing might not have caught it, is there an average yield for this quarter?.

There isn’t one disclosed. We typically disclosed that in the 10-Q. Our GAAP revenue for the quarter was about 25.5%. Our adjusted yield was about 24.7%..

Okay.

And just, Doug, so I am clear, is the 24.7% comparable to the 25.8% last quarter?.

The GAAP number, you are referencing 25.7%, which was the GAAP yield in the third quarter last year. The 25.6% GAAP yield is comparable to that number..

Okay, got it. Got it.

And it looks like the advance rate came down sequentially, noticeably, effectively raising pricing, is that anticipation of kind of a lower collection multiple going forward? I mean, is that – should we be viewing that as effectively an effort to maintain the existing effective yield in unit economics or should we be viewing that as an absolute price increase?.

No. We didn’t change prices during the quarter. So, the lower advance rate just reflects the lower forecasted collection percentage..

Okay. So, relatively flattish yield should be the outlook. And then the last question is on the operating leverage side, it looks like it’s another quarter in which G&A held pretty steady under $10 million.

Based on everything you know about initiatives internally for 2016, should we still be looking at $40 million or less on an annualized basis is a reasonable target?.

It’s a little difficult to say. I think it’s – obviously, we have benefited from operating leverage over time as the business has grown. If you look back at our historical results, you will see that, that operating leverage is lumpy. Some periods, we make a lot of progress, some periods, less.

So, we think there is still opportunity for operating leverage in the business going forward, but I think the timing of that is very difficult to predict..

Okay, fair enough.

And just last question, the provision expense on the GAAP basis comparable to last quarter, basically the underperformance of some pools for level yield accounting, were they concentrated in any particular vintage?.

I think the provision is not some we really focus on internally. We tend to focus on the adjusted results and that way we don’t worry about the provision expense. We don’t view it as a real expense. As we have talked about in the past, if your cash flow forecast overall doesn’t change at all, you can still record a provision.

The larger number you report, the more it’s going to flip around in future periods. So we just look at the adjusted numbers internally and we don’t pay a lot of attention to the provision..

Got it. Thank you..

Thank you. And our next question comes from the line of Christopher Crum with Aylstone Company. Your line is now open..

Yes.

On the buyback, how many shares you repurchased in the quarter?.

We bought back 464,000 shares at a cost of approximately $85.5 million..

And was the repurchase authorization unanimous from the Board?.

Yes..

Okay.

And then, I guess, the final question, I noticed that Donald Foss sold $100 million worth of stock, just kind of wondering why he would authorize a repurchase at the Board level and sell personally?.

I don’t know that he sold $100 million of stock..

He filed Form 144..

That’s the new information and maybe if he sold $100 million worth of stock. But regardless, I mean the decision of any individual to buy or sell stock can be very different and for the company. We would look at the share repurchases that we have done for a long time, it’s really a way to get to deploy excess capital similar to a dividend.

We do – I mean, our policy is to buyback only when the Board believes that it’s below intrinsic value, but that’s – the different criteria than what an individual might need cash for or diversification is the last reason why an individual might sell that wouldn’t necessarily reflect the Board’s decision..

And thank you..

Thank you. And our next question comes from the line of Robert Dodd with Raymond James. Your line is now open..

Hi guys. Thanks for taking the question. If I can look at the allocation spread between dealer loans and purchase loans, obviously I mean purchase loans ticked up a bit in the quarter positively on by forecast collections and spread dealer loans moved a little bit the other way.

The overall mix, obviously the spread ticked down a little bit 30 basis points in October versus in the fourth quarter versus where it was in the third quarter, is that a function of the mix that you are doing at the moment more purchase loans versus dealer loans in the fourth quarter and then does that it self have any connection to the increased term the average purchase loan, maybe has a longer term than a loan you guys would originate directly?.

We do a little bit more purchase business now. It’s still low relative to where it’s been historically. As we have talked about in prior calls, we just – we view that as a different channel for us.

We do prefer the portfolio program because of the alignment of interest it creates, because it’s significant piece of the dealers, profit is paid out over time based on the – on loan performance, it’s such a situation that’s unique in our market where the dealer, the customer and Credit Acceptance can also exceed together.

So we do prefer that program. Having said that, there are dealers that for one reason or other aren’t interested in our traditional portfolio program. And so in recent periods, we have began to view that as a separate channel that we want to take advantage of and that channel has been growing..

Okay, thank you..

Thank you. And our next question comes from the line of Lucy Webster with Compass Point. Your line is now open..

Hey, good afternoon guys.

My first question, can you talk about maybe the sort of average age of the vehicle behind your managed portfolio or just do you have exposure to a certain age within the sort of aggregate used vehicle car parts that you can talk about?.

We don’t disclose the average age of our vehicles. What we try to do is boil every aspect of the loan structure, consumer bureau application and vehicle information down into one number and that’s the forecast. The collection rate on each loan and we publish that when we book the loan in every quarter thereafter.

So we try to just take it up a level and give you the most important number..

Okay.

And then my other question was about so just sort of 3,400 in new dealers that you added over the course of this year, I am just wondering can you talk about or give us any color on what’s in that new active dealer number, it just seems like if you have over 9,000 active dealers at the end of the year, what do you guys think about sort of your total addressable market in terms of potential new dealers going forward given there is obviously the finite amount of used car dealers in the U.S.?.

I mean there are about 60,000 used car dealers out there. We did business with a little less than 7,000 of them last quarter. So obviously, we have whether you look at our market share in terms of percent of sub-prime or deep prime consumers that finance a vehicle or in terms of dealers we have a very small share in the market.

At some point, we will – that will start to be a concern, but I think we are a very long way from that being an issue for us. The other thing I would point out is, neither our active dealer number, nor the number of dealers in the United States is a static number. There is lots of turnover in both of those numbers.

So we think we have room to grow our dealer base and grow our business for the foreseeable future..

Great, that’s all for me. Thank you, guys..

Thank you. And our next question comes from the line of Randy Heck with Goodnow Investment. Your line is now open..

Hi Brett, Doug really terrific quarter and thanks for taking my call or my questions. I am guessing that people are going to again wonder whether the declining spread in the business is something to worry about.

And I was hoping you could just talk about what that means in terms of the absolute spread between your advance rate and your estimated collections, how that’s less important than the estimated return on a capital employed with a given advance rate and is that – well, I think this spread in the most recent period is probably as low as it’s been since 2007.

And you had in 2000 – in the fourth quarter of 2007 I believe you earned something like $0.40, this quarter you earned $4, so how did we get from $0.40 to $4 when the spread is the same? And then I have a couple of follow-up questions..

I think you raised a good point. I mean, in the spread, as it’s presented in the table, just a forecast the collection rate minus the advance rate is lower than it had been. The way it’s presented it’s about where it was in 2006 and slightly higher than 2007.

Taking one minus, the other works pretty well if their forecasted collection rate is about the same number, it doesn’t work quite as well if the forecasted collection rate declines.

So if you just want to look at that table a slightly different way and take the forecasted collection rate divided by the advance, you get a slightly different trend where you would see as 2014 and 2015 have a more favorable relationship between those two numbers than ’06 and ’07 but still the point that people seem focused on is it’s declined over time and you have to remember that some of the periods, we are comparing it to 2009, 2010, 2011, we had very limited levels of competition during those periods following the financial crisis.

So it’s kind of an unusual period to compare it to. And I think you also have to keep in mind that during those same periods, the after-tax returns that we are reporting were unsustainably high. I think in 2010, our after-tax un-leverage return was 17%, almost 18%.

So, the spreads have come down, the return has come down as well and we weren’t expecting 18% un-levered after-tax returns to continue forever. But we made a decision like we do every period to price, to create the best combination of volume and profit per unit, that’s the same way that we have priced historically.

And so what you saw this year is that the spreads came down a little bit, but the volume was very, very strong and the blended result is one that we are very happy with, particularly given where environment we are in the competitive environment. We do expect at some point in the future that competitive environment will change.

We may have an opportunity to price more conservatively at that time, but we will continue to price based on what the market gives us and the results up through this quarter, I think speak for themselves..

Okay. Yes, I noticed your return on invested capital actually ticked up this quarter versus the third quarter, which I think that’s been a while. Okay, my….

I got the other thing to point out there and this was probably obvious is the other thing that’s changed if you look at the period covered by that table from 2006 till today is our expenses are obviously a lot lower.

Our expense as a percentage of capital were over 15% in 2006 and they were under 7% this past quarter and right around 7% for the year..

Okay. Yes, that’s very helpful.

Just a follow-up, the other questions that I hear are generally well, what’s happening to credit quality, what about this big provision and what about the 10 basis points here or 20 basis points there? Can you discuss how the cross-collateralization of loans by each dealer diminishes or deludes the impact of changes in collections, no to mention changes in things like repositioned values of cars and it deludes or diminishes the impact to your bottom line number?.

Right. The advance to our model is if we have had a pretty good history of having positive variances against our initial forecast, but if there are negative variances those are shared with the dealer 80-20. So, if we miss our collection forecast by $1 million, $800,000 of that goes to dealer holdback and the impact to us is only $200,000.

So, as we saw during the financial crisis, when we had some negative variances, they really had very little impact on our profitability, because of that 80-20 split and that share – that risk-sharing arrangement we have with the dealer.

The other thing to keep in mind is that when you look at the forecasted collection percentages, you got to ask yourself what’s the material number? And I would argue that all the numbers on the page with the exception of maybe 2009 when we had a 750 basis point positive variance, they are all immaterial.

I mean, we would like to have a positive variance here. It’s a nice surprise to see some extra income coming through from a positive change in your forecast, but that’s not really a big driver of our overall financial results. I think as an example for the quarter, we had some negative numbers in the table.

I think the total change in our forecast really is just the collection line forgetting about the 80-20 split in the holdback with just a little bit over $6 million, is that a big number? The total forecast is almost $5 billion. So, it’s about a 13 basis point change and 80% of that was borne by the dealer.

So, none of the numbers in the table are really that considering. They are all very small. We would love to have a 750 basis point positive variance every year, but obviously, our forecast wouldn’t be very accurate if we continue to have that kind of performance. So, we are positive for the last 8 years.

We are happy with that and we don’t really see much concern there..

Okay. Well, again, great year and good luck this year..

Thanks..

Thank you. And our next question comes from the line of David Henle with DLH Capital. Your line is now open..

Good evening. Could you guys just spend a minute on the sales force and obviously relative to dealer growth that was – that’s been great in this quarter in the prior quarters.

I am just curious have you been tweaking the commission rates and do you continue to do that, are you still fine tuning that and can you spend a little bit of time on how you feel about the sales force and retention of the sales force?.

I think we made good progress there as we have talked about in prior calls. We grew that sales force very rapidly. And we experienced some growing pains with that. We had turnover that was higher than we would have liked. We had new hires than we would have liked that didn’t perform up to our expectations, but that’s gotten a lot better now.

We have done a lot of fill in. We have gotten better hiring the right people. We haven’t changed the incentives since fourth quarter of 2014. We changed the base salaries, but the incentive piece has remained the same for quite a while..

Have you ever disclosed the retention rate for the sales force or not?.

No..

Yes, okay.

And then last question, was there any change in the stated length of loan in fourth quarter versus third quarter?.

It was very, very modest. In the press release, we compared the term of the loan in the fourth quarter of 50.4 months to 49.7 months for loans assigned in the first 9 months of ‘15. So, that doesn’t directly answer your question about the third quarter, but it will get you in the ballpark..

Okay, thank you. That’s it for me..

Thank you. And our next question comes from the line of John Rowan with Janney. Your line is now open..

Good afternoon, guys.

Just wanted to go back quickly to the conversation of holdback and negative variance and how any type of negative variance affects the dealer? I am just curious with a couple of negative remarks during the last couple of quarters, I mean, are your dealers bearing any type of real brunt to their holdback and when do you foresee that you may get some type of pushback from the dealers who are getting smaller and smaller holdback checks?.

I think if you look at the table, eight straight years, we have had a positive variance there. So, I don’t think there is any negative ramifications could be concerned about with the dealers..

Okay.

And then are you aware of any platforms out there that are ready to go kind of waiting to be operational now that your cap system has lost its patent? I don’t believe the royalties that you receive on that are material, but I just wanted to know kind of competitive, what – which one of your competitors are – have platforms up and running and which ones do you think will try to get something up and running?.

I don’t think we have good visibility into that question. I mean, there is thousands of lenders that are willing to write a sub-prime loan. I don’t think we have visibility into how many of those thousands have systems that are out there or have systems that are planned. We just don’t have that good of visibility..

Okay, thank you..

Thank you. And our next question comes from the line of Sanjay Sen with BloombergSen. Your line is now open..

Hi, Doug. Congratulations on a great year. I had a question I wanted to ask you on the purchase versus dealer loans programs. But before that, I looked through the filings, I follow them all the time, I haven’t seen any $100 million sale of stock by Don Foss, that’s just incorrect.

But if you can talk a bit more, Brett, because we have been wondering about this issue of obviously the purchase loans don’t have the same alignment.

So, how do you think of those loans and mitigating risk while taking the opportunity there?.

That’s a good question. I think we have been doing it for a long time. So, I think we are comfortable with our procedures there. You have to be a little bit more careful about the dealer that you do business with. You have to be a little bit more conservative about your collection forecast.

You have to have some different risk management procedures in place, but we have been doing it for a long time. We have had positive results. As I said, we like the portfolio program better. But the purchase business is still good business. It’s priced to achieve a very high return and we are happy to do more of it..

Got it.

So, there is no sort of limit in your mind as to how big it would be or is there – how do you think of that?.

There would be a limit there, but again, by the portfolio program is the more profitable program by a large margin. So, that’s not something that we spent a lot of time thinking about just because – it’s something we will address if it ever becomes a concern in terms of its size..

Got it. Right. And then historically, you have talked about, I think in the last little bit like a leverage ratio of 2 to 2.5, obviously, you have been willing increase a little bit here because of the stock on the buyback.

And so anything you can add to that in terms of how you think of the leverage ratio in light of what stock is right now? Would you want to be at the higher end, because you think the stock is cheaper or you are just going to play it by year?.

Yes. We don’t really look at the debt to equity ratio as a strict limit. The way we do it is we just run financial projections where we assume that the capital markets closed for a period of time.

And we look at what that the impact would be to our originations and we select a scenario where we are happy with the worst case scenario, where if the worst happens and there is no capital available that we can still live with those results. So, that’s more how we do it. I think you are right we have been kind of between 2 and 2.5 to 1 over time.

We are currently kind of right in the middle of that range. So, we are comfortable where we are. In terms of share buybacks, we will continue to apply the same thought process we have in the past. First priority is capital that could be used in the business. And when we have excess capital, we think about buying back shares if the price is attractive..

Got it. Thanks. Great work..

Thank you. [Operator Instructions] Our next question comes from the line of Moshe Orenbuch with Credit Suisse. Your line is now open..

Great, thanks for taking my question. Kind of a follow-up on the competitive dynamic. Couple of the large players this quarter talked about slowing down in the sub-prime. Cap One said that they have been flattish for a long time and kind of went down and then sent under consumer also.

You referenced a kind of a reversal, something that would cause like a retreat of capital.

I think what sort of thing could cause that and I mean do you think it’s starting? Could you just maybe amplify on that whole discussion a little bit?.

Yes, I think it’s hard to say it’s been different each time. I think in the mid-90s, capital moved away from the industry because of industry-specific concerns, which in retrospect turned out to be right. At other times, it’s been more macro issues that have caused capital to leave the industry. So, I think it’s really hard to say.

Each time, it’s been a little bit different. But eventually, I think if companies don’t perform and if loan performance and profitability is not there for the industry, then that would certainly be one reason why capital might decide to pull out, but there could be other macro reasons as well..

But you are not feeling that you are at that point yet here?.

No, I don’t think that’s happened yet..

Thanks so much..

Thank you. And our next question comes from the line of Lucy Webster with Compass Point. Your line is now open..

Hey, guys. Sorry if I missed this.

Have you ever talked about what percentage of dealers you are working with today are eligible for holdback payments?.

It will be all the portfolio dealers..

Yes..

Now they....

Where they have to – you have to complete at least 100 bonds?.

There is. They have to – on the portfolio program, they have to complete 100 loans before they are eligible for dealer holdback. The problem with answering your question is for those dealers sort of around 40, 50, 70 you can’t say definitively that they won’t be eligible for dealer holdback at some point..

Okay, understood. Thank you..

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