Doug Busk - SVP, Treasurer Brett Roberts - CEO.

Moshe Orenbuch - Credit Suisse Vincent Caintic - Macquarie Robert Dodd - Raymond James Randy Heck - Goodnow Investment Group Daniel Smith - Peyton Capital.

Good day, everyone, and welcome to the Credit Acceptance Corporation First Quarter 2016 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 Web site.

At this time, I would like to turn the call over to Credit Acceptance's Senior Vice President and Treasurer, Doug Busk..

Thank you, crystal. Good afternoon and welcome to the Credit Acceptance Corporation first quarter 2016 earnings call.

As you read our news release posted on the Investor Relations section of our Web site, 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 us 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 Moshe Orenbuch from Credit Suisse. Your line is now open..

Great. Thanks. Doug, Brett, Ken, I was wondering if you could kind of just give us a sense as to your view on the competitive environment. As I look at the release, there is a number of different factors that kind of seem to be going in different directions.

You're doing more volume, although some of it coming from the purchased loans, longer loan terms.

I mean, maybe can you just gives us a sense as to how you see the current environment?.

Yes. The environment continues to be difficult. I think the most relevant number in the release to look at is volume per dealer, which was down 3% year-over-year, so we look at that as an indicator where we stand from a competitive environment perspective.

We feel pretty good about our ability to continue to sign up new dealers even when the environment is difficult, so the strong unit volume growth we had for the quarter was really more a function of that than it was any kind of easing in the competitive environment..

All right.

And how do we relate to the fact that for 2015 the variance relative to your forecast is negative at this point?.

A couple of points on that. If you look at the table we present, it does a pretty good job of laying out the trends. I think there's a clear trend that I think we talked about in the past. We had a very large positive variance in 2009 and the competitive environment was pretty favorable in 2009.

Since then you've seen each year that positive variance narrow until 2015. We now have a negative number. The other thing to point out in the table is just the trend quarter-to-quarter. Last quarter we had a little bit of a soft quarter from a variance perspective. It is negative changes although they're very small.

We have negative changes this quarter as well, but they're a bit larger. The thing the table doesn't do a good job of is kind of putting it all into perspective from a materiality perspective. So we added some disclosure to this release some numbers that used to be in the Qs and Ks. We pulled them forward to the release to highlight them.

That's just the change in the future net cash flows, which is really the number that is most relevant. Although the collection variances all went down this quarter for 2013, 2014, 2015. The total impact to our net cash flow forecast was $6.7 million.

That's the number that if you look at the adjusted earnings the after-tax amount of $4.2 million is the amount that will be the impact to future earnings, adjusted earnings of that forecast variance decline in the quarter..

Thank you..

So pretty modest number..

Thanks..

Thank you. Our next question comes from Vincent Caintic from Macquarie. Your line is now open..

Hi. Good afternoon, guys. Actually have a question on the regulatory environment. I noticed in the 10-Q that there was a Maryland CIB. And was wondering if there's any consistency with the past CIDs and any update on the status there.

And then also, see if you could put out some rules on debt collections and I was wondering if there's any impact to Credit Acceptance from that debt collection rule. Thanks..

In terms of the Maryland matter, as we disclosed, the subpoena's focused on our repossession and sale policies and procedures in the State of Maryland. Not unusually in these type of matters, we don't really have any insight into why we received the subpoena. We're in the process of providing responsive information to the AG in the State of Maryland.

Don't think there's any commonality relative to this and other subpoenas or regulatory actions. I think it's just more evidence of a very heightened regulatory environment out there. In terms of the collection practices, we've been focused, being in business as long as we have, we've been focused on doing things right from a regulatory perspective.

So we assess the CFPB's position on that and really anything else and make changes to our business if we think it's necessary to meet their expectations..

Okay. Got it. Thank you. And just one more from me. The floating yield adjustment was pretty large this quarter and could you remind us how that functions and what that adjustment designed to adjust? Thanks..

So on a GAAP basis, we account for changes in forecasted collections by dealer loan pool. If it's a positive change for any individual pool that's taken over time to revenue. If it's an unfavorable change, we record it as a provision expense. So there's kind of an asymmetrical treatment between positive and negative changes there.

So for adjusted earnings we take both positive and negative changes and take those over time.

So the floating yield adjustments -- difference between the two accounting treatment, over time it's a timing difference, obviously, so over a long period of time, GAAP earnings and adjusted earnings be exactly the same, but when we have larger provision expenses than adjusted earnings gets ahead of GAAP earnings, and then GAAP happens when that provision flips around..

Okay. Got it. So the floating yield adjustment is designed to smooth the provisions over the life of the loans rather than taking upfront immediately.

Would that be fair?.

Yes. Smooth and maybe more importantly just treat positive and negative changes consistently. I think the example we've given in the past is from an economic perspective, if I have one dealer pool, the forecasted cash flows go up by 1,000 and another dealer pool the forecasted cash flows go down by 1,000.

I think most people would agree that there's been no change in our economic position.

For our GAAP statement, the 1,000 negative changes recorded for the current period expense, whereas the 1,000 positive change is recorded over time, so this is an asymmetrical treatment there, so the floating yield adjustment just treats both positive and negative changes in the same manner..

Okay. Got it. Thanks very much, guys..

Thank you. [Operator Instructions] And our next question comes from Robert Dodd from Raymond James. Your line is now open..

Hi, guys. Looking at the long-term, obviously in 2016 up to 51, three months, during 2015 or over the last couple years that's been expanding modestly, but then driving significantly faster, typically volume per dealer, same-store sales, whichever way we want to look at it, turned slightly negative this quarter, probably competitive.

But are we reaching the point of diminishing returns in terms of expanding the loan term that you're offering through your dealers at this point in..

I think the way we talked about that in the past is, when I joined the company in 1991 the longest loan term we would do is 24 months. And as we got comfortable with our ability to forecast and to price and to track loan performance over time, we decided to experiment with longer term and so we went from a max term of 24 months out to 30 months.

And when we did that, we didn't have any 30 month loans in our portfolio so we had to make an educated guess about how a 30 month loan might perform relative to 24. We weren't 100% confident in that guess. So what we did is, just we piloted to a small group of dealers. We began to accumulate some data.

As we became comfortable that we could forecast loan performance for a 30- month loan then we begin to roll that out as part of our standard program. So since 1991, we've continued to do that. We're now out to a max loan term of 72 months.

We moved from 66 to 72 beginning in sort of mid-2014 and on a pilot basis, and then, rolled that out to all of our dealers in mid-2015, so we approached it the same way as we did back in 1991. We rolled it out to a small group of dealers. We had to guess to some extent because we didn't have any 72 month loans in our portfolio.

So we made an educated guess. We're now accumulating the data. We write a very small percentage of our total loans at 72 months. But, as we continue to accumulate more data we'll get more comfortable to write more of that business. So the average term might continue to creep up depending on how comfortable we are with that 72- month loan term.

We don't have any plans at this point to go out to a longer term than 72 months, so that might mitigate some of the increase going forward..

Got it. Thank you.

Just on the variance, and you already explained that, but are you seeing any -- geographically, are there any hot spots or soft spots so-to-speak geographically that you see?.

Not really. I mean we look at it that way. We look at our loan portfolio really segmented every way you can think of and look for places where that variance is worse than others and we make adjustments on a regular basis. But, I don't think we've made any adjustments related to geography at this point..

Okay. Got it. Thank you..

Thank you. Our next question comes from Randy Heck from Goodnow Investment Group. Your line is now open..

Thanks. Brett, I just wanted to follow up on your point about the added numbers you put in this release, the impact on forecasted changes on net future expected cash flows of negative $6.7 million after-tax, $4.2 million.

So that's, the negative adjustment on the -- this year's volume or origination, excuse me, as well as 2015, 2014 and 2013, all in aggregate amounts to $4.2 million going forward over the life of the loan portfolio?.

That's correct..

As opposed to on impact on this quarter. And so that's over, what, I guess on average two and-a-half, three years, so that's $0.20 a share from those adjustments, roughly..

That's right..

Okay. And then secondly, some of the expense items, the G&A I think was up a couple of million bucks.

Is there anything one-timish in those numbers?.

Expenses are higher seasonally in Q1 and we try to describe that in the release. From a seasonal perspective you can think of it as maybe $3 million to $4 million of expenses higher than the first quarter than you might see going forward excluding any unusual items that we might see going forward.

I don't like to -- there's no real one-time expenses every quarter you have things that are a little higher than you might have planned for that you might expect but those tend to even out over time..

Okay. All right. Great quarter and speak to you soon..

Thank you. Our next question comes from Daniel Smith with Peyton Capital. Your line is now open..

Hi, guys.

Is there anything that you guys have been able to identify that causes variances versus your model or is it more random or cyclical?.

Let me speak to that. Everything that we know impacts loan performance that we capture and data we use in our forecast. So what's left really is changes in the external market. This quarter as you probably heard in other conference calls, vehicle values have declined. That contributed to some extent.

And I think just the pattern that tends to follow the competitive cycle is the other thing I would point to. I talked about that earlier. 2009 we didn't have much competition. Your score card tends to perform better when there is limited competition.

2009, we had a large positive variance as competition has returned to the market over the last six years you've seen that variance start to decrease. So it's following that trend that we pointed out many times over the years. So it's those two things would be the factors I would point to..

Okay.

So how does -- like all else equal, same model car and stuff like that, how does that affect the ultimate collection on a loan? Is it adverse selection or what do you think causes that?.

I think it's probably adverse selection. It's hard to say for sure. I think there's potentially another factor at play which is -- in 2009 I think the consumer -- if we gave that consumer a loan, they probably had a pretty good sense that if they didn't pay for this vehicle that they probably weren't going to get another loan.

When it gets more competitive I think maybe there's a sense that the customer has other options and maybe if they don't pay for this vehicle there will be somebody else that might give them a loan.

It's hard to know is adverse selection, how much is that the fact I just described but we have seen this play out in other competitive cycles where when competition gets difficult it becomes a little bit tougher to outperform your forecast..

Okay.

So should we expect over most cycles that the variance will be positive when unemployment is high and the variance will be negative when unemployment is low? Is that sort of -- do you think that's kind of a -- just sort of a given?.

You're talking about unemployment now?.

Well, I'm just using that as a proxy for a good economy..

Right. I think what we're trying to do with the variance is we're trying to -- we want our initial forecast to be accurate. And the reason for that is if you look at a year where we have, say, a strong positive variance, that's the same number we use to price the loans.

So what that means is we probably left volume on the table that year and we ended up making more per loan than our models would have shown. The opposite is true in years where you have a negative variance, it means you probably wrote a little too much volume and your profit per unit was a little bit lower than what you are model has been telling.

So we're shooting for zero. And if you look at our history, I think we got now 17 years of historical forecasts that we've published. I think we've only achieved zero one time in 2004.

So we're always going to be wrong, but we always approach it the same way where we take all the available information and we try to put the best number we can because that's what gives us the best chance to produce the most profitability in a given year.

I think the other thing to point out is, if you look at those last 17 years, we look at those very closely, feel we can learn from that, I think what you learn is it's very difficult to forecast loan performance perfectly. And so keeping that in mind, it's driven a lot of decisions that we've made here because we're cognizant of that.

One is, we shoot for a higher return on capital than what you would see in the rest of the industry. What that means is, if we do have a year or two where you have a negative variance, it still means the loans are very likely to be very profitable.

The other thing that's an advantage for us is the reason that the impact to our net cash flows was only $6.7 million is a portion of our forecast decline is offset by reductions in dealer holdback. So the way our basic model works, it provides a cushion against years when you may have a negative forecast variance.

And then finally, the other thing we do with that in mind is, we keep our balance sheet conservative and we keep lots of available capacity on our revolvers. So when we have a period where loan performance is a little bit tougher than in other periods, we have, again, a large margin of safety.

So it isn't a surprise what we're seeing today, something we prepared ourselves for and something that we've considered as we put together our business model..

So do you think that it's a fair statement to say that as long as capital is readily available in an industry that the variances will be more likely negative against your model? If the model is kept constant and that during the next recession the variances are more likely to be positive?.

It depends on what we do to the model. Obviously, we see all the same numbers you do. We are looking at the trends very carefully. We take into consideration how the loans have performed historically and also how they're performing today. So part of what will drive that variance is just how good a job we do predicting the future..

I'm saying keeping the model constant..

Yes. If you don't change the model I think the competitive cycle has a lot to do with the variance. I think the macro factors like the unemployment rate would have a lot to do with that variance and I think vehicle values would have an impact as well..

Okay. All right. Thank you for your time..

With no further questions in the queue, I would like to turn the conference back over to Mr. Busk for any closing or additional 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..