Doug Busk - SVP and Treasurer Brett Roberts - CEO Ken Booth - CFO.

David Scharf - JMP Securities John Rowan - Janney Moshe Orenbuch - Credit Suisse John Hecht - Jefferies Leslie Vandegrift - Raymond James Clifford Sosin - CAS Investment Partners Brian Gustavson - 1060 Capital.

Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth Quarter 2016 Earnings Conference 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, Brian. Good afternoon and welcome to the Credit Acceptance Corporation's fourth quarter 2016 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..

[Operator Instructions] Our first question will come from the line of David Scharf with JMP Securities. Please proceed..

Hi, good afternoon, thanks for taking my questions. Wondering if we could start just addressing volumes and demand to close out the year, as we think about the dealership count holding steady from the third quarter? Setting aside the usual seasonal drop off in Q4, it looks like average volume per dealer declined a little more.

Just wondering, as we think about some of the volume metrics, are the biggest factors affecting it competitive terms from other lenders? Or are they independent dealers perhaps losing shared franchise dealers? Or is it, thirdly, more consumer-related? Any sense that we are starting to see peaking of consumer demand?.

I think the first factor I would look at is a competitive environment that certainly makes things challenging. We’re not getting any improvement there but I don’t think you got any worse either.

So I think what you saw on the fourth quarter as it just talks about the prior calls, our strategy wins the environment competitive is to focus on growing a number of active dealers difficult to grow volume per dealer what is very competitive.

But I think we alluded to several quarters ago as the base of dealers gets bigger, it become more difficult to grow that in a fast enough rate in order to offset the decline in volume per dealer and to a lesser extent attrition.

So that’s what we are seeing right now is – we're having difficult signing up enough dealers to offset, those are the two factors. And I think in the fourth quarter the other thing that came into play is we addressed some of the negative variances that we have seen in recent originations.

When we do that that causes our collection forecast - our initial collection forecast declined which means the advance dealers left less money, so they have several one-time impact on volume per dealer and also on nutrition..

Got it.

And Brett, your comment about - is this is the size of your dealer count gets larger as it's harder to grow that base, should we be thinking about call it the 7500 active dealer figure, are we bumping up against the ceiling or is that just the reflection of the competitive environment and end of competition where the ease and dealers had to your funding options is the still lot of upside to that 7500 numbers?.

I think it's too early to call that ceiling, it's definitely a point of resistance that the competitor environment obviously the changes that will change everything, but we assume that the current state continues for the foreseeable future. I would look at this point the point of resistance in this ceiling..

Got it, got it. Just a couple more. Just curios switching to the provision side, look like the allowance picked up a bit to close out the year, I think it was 7.6% and you already noted some of the collection patterns.

As we think about modeling 2017, I know you don’t give explicit guidance but is that kind of high 7% allowance rate reasonable target for us?.

I think you probably know from prior calls, we tend to look at the adjusted numbers internally.

The best number in the release if you want to sort of get your arms around, the economic impact of forecast changes is that, on the second page of release, we have a net cash flow number declined $14 million for the quarter, that's kind of base of $5 billion or so and undiscounted cash flows.

So very modest decline in the quarter, $40 million that's really the economic impact and then as you know that's the way the GAAP handles that from provision standpoint, I think makes it difficult to see the economies of the adjusted numbers we provided I think we do the best job of sorting that out and giving you numbers that you can focus at..

Got it. And one last one and I'll get back in queue. It looks like your spreads actually picked up a bit sequentially.

Obviously, your pricing, your advance levels in accordance with maybe revised thinking about collection patterns, is it 21% to 22% spread generally based on your internal models and your target returns, should we be thinking about that is fact of floor at which you wouldn't underwrite if the spread was below that.

I mean we never have access to obviously all your loan-by-loan return targets, but it's a good day way of thinking about a floor in terms of spread over the advance rate?.

No, I don’t really have the guidance on that number.

As we talked about in prior calls the way we price as we try to maximize this whole economic profit we generated so unit volume times, economic profit per unit and we make adjustment all the time based on the model that we run at times that means we get a little bit more aggressive and advance it little bit more.

Times it means do the opposite but that's how we price, we only price based on that spread..

Right, got it. Okay, thank you..

You are correct there was a favorable change in Q4 with respect to….

Yes, I know, we are obviously just looking for shortcuts in terms of how do model it using it as a proxy for yield but understood. Thank you very much..

Thank you. Our next question will come from the line of John Rowan with Janney. Please proceed..

Good afternoon, guys. So going back to that commentary on volume, so unit volume was down 6% year-over-year, dollar volume was up because the average loan is bumping up near $20,000 which is considerably higher over the last couple of years.

If we are getting to a point where there is a resistance in this current environment at the current dealer partner number.

At what point do we start to see the loan portfolio actually contracting? So I was thinking unless we continue to see very big increases in duration and average loan size for consumer with unit volume coming down we are going to have to start seeing some contraction in the loan portfolio at some point in the near future..

It just depends on your assumptions for unit volume going forward and obviously the loan portfolio was growing pretty rapidly right now. And the dollar volume increased in Q4, so I think you are always away from contraction, but just depends on what assumptions you make regarding unifying going forward..

But is that increase in loan growth mostly a function of the loan portfolio being up.

I mean you have it in the press release here the almost $19,000 average loan per consumer which is upfront $16,000 in 2015 that really was driving a lot of the dollar volumes gains on a per dealer basis as opposed to the increase in dealer partner numbers?.

I think you are right, unit volume declined 5.6% for the quarter, so to the extent there was a negative in dollar volume that was all related to exchange in the every size of the transaction..

Okay.

What was the increased legal fees as you guys noted in the press release?.

I mean nothing specific there. We just have bunch of issues ongoing that are consuming increase in also legal resources..

Okay.

And then the 11.7% return on capital that you noted, can you - I mean just historically speaking I only have few years, but is that the lowest you guys are seeing in a while, maybe if there was another point in time where that number had been that low trying to compare where we were and competitive cycle versus then?.

For memory our returns were in the 11% range back in 2007 or 2008 I believe. On an annual basis we were lower 11 in 2008 was the lowest it's been. Obviously 2001, 2002 and 2003 were single digit, but since 2004 this is the 11% range in 2008 and then again this year. .

Okay And then just to go back to the dealer, partners, you guys give some numbers on the new dealer partner participation? Consumer loan volumes from new dealer partners, new active dealers and those are all pretty solidly negative.

Again is that just a point of this was just a follow-up you are talking about in the dealer partner program in the current environment just given that you just not offsetting any nutrients in all those numbers are down pretty solidly..

I think the volume per dealer I would attribute that mostly to the changes we made to address the negative variances we are seeing in the recent originations..

So the decrease in the new dealer partner volume, consumer loan volumes from new dealer partners are down 30% year-over-year, is that because their pricing changes in the fourth quarter or is that because we are heading resistance level in the dealer partner base..

But there are two things if you just focus on new dealers is the changes we made that I just talked about related to variance and we signed up fewer new active dealers this quarter than we did second period to last year..

But there have been no changes in the sales force?.

No..

Okay. And then just one of the things I noticed, the last few years we have seen that shifting of volume out of the portfolio program and into the purchase program. It looks like this quarter we actually starting to see that turnaround a little bit. Maybe give us any indication why we try to see more volume go back in the portfolio program..

When the change was pretty modest, it was 23.8% in unit term last quarter and it was 21.4% in the fourth quarter, so couple of percentage points not a real big change..

Okay. Thanks for answering my questions..

Thank you. Our next question will come from the line of Moshe Orenbuch with Credit Suisse. Please proceed..

Great, thanks.

Can you talk a little bit about the changes that you made in the forecasting process like what new variables or data do you have and I guess it’s interesting I mean because the earlier periods I mean, two of those three years you had substantial portions that are already been paid back, so I guess how is that - does that have a noticeable impact can you just talk a little bit about those changes?.

Yes, we periodically refresh the model, so it is based on all the information we collect both at loan origination as the loan goes through the servicing process. So it’s really just mostly an update on the data, a refresh there and then also we do the actual score card and relate the variables based on what seems to be most predictive.

So it’s only do periodically I think a routine update and really the numbers more or less no different from what we have before..

Got it.

And you had mentioned that your newer loans have a lower advance rate - I guess, can you talk a little bit about how that has had, I should say, if that has had an impact kind of as you, kind of go-to-market to dealers, how should we think about that and is that something that’s likely to continue, does it level-off, does it turnaround?.

Very difficult to say, I mean we were absolutely seeing so far, we saw some negative variances that you see in the table that we provide and we obviously look at those as well and we have to react to those, if we don’t want to see negative variances continue. So as we make changes to adjust for that - that have the negative impact on loan line..

Okay, all right.

And then just is there any impact on from the perspective of the way you think about the cash flows with respect to dealer holdback when a dealer attrites, if the dealer leaves and has kind of earn some of that?.

Our contractual arrangement with the dealers is, if they become inactive prior to doing 100 loans with us then they forfeit their rights with that dealer holdback.

Other than that the work is exactly the same, we continue to collect and payback the advance and remit the holdback to the dealer in the normal course or so whether they are active or not we could still continue to service the loan and pay them their holdback that they are entitle to..

Right.

And I am just trying to get my head around if there are any other impacts from dealer attrition rising and I guess that was one that kind of jumped out that could happen, are there others that we should be aware of?.

No, other than the obvious, - they obviously impacted on our loan volume, obviously we prefer to see attrition lower, somewhere focused down we like to see dealers continue with the program as long as possible, but I think the primary impact is just on loan volume..

And how should - and at what point I mean, looks like you bought back a modest amount of stock in the quarter, is there any kind of thought just to how that - how we should be thinking about the interaction between the capital you are generating and how do you deploy it?.

We bought back about 450,000 preferred stocks during the quarter, total cost about 80 million now. I don’t think we really have any change in the way we are thinking about that, we talked about how we approach that decision in the past and our thinking hasn’t really changed there..

Got it. Thank you..

Thank you. Our next question will come from the line of John Hecht with Jefferies. Please proceed..

Actually, I got my prepared questions already answered, but the couple of, that came to mind, you guys gave us the - if I recall, you gave us the October volume, how it was trending when you last reported, maybe can you tell us like November, December and January, just to give a sense for more recent volume trajectories?.

Sure in the unit terms as you mentioned October was down 8%, November down 5%, December down 2%, January is not complete, so we are not going to comment on that, but that gives you the trajectory during the quarter..

Thanks very much.

And then maybe just because there has been a lot of I guess increasing investor focus on residual values and used car price trend and so forth? You've given your buying substantially different than others doing and you're buying at a big discount rate, can you maybe just give us a sense how to think about sensitivity to declining residual values or is your sensitivity more that - I guess this is a more frequency or severity and to the extent you are exposed or you are sensitive to declining used car prices, can you quantify that is it material, is it meaningful, is that's something you’re really careful when you're are buying a loan..

I think we talked about this last quarter. The way we look at is we financed the used vehicle, but that's depreciating asset, so we just focus on and track the depreciation and book values overtime.

And we have a metric to look every month on that as many people have written about that vehicles are depreciating faster this year than they have, I think faster than anytime back to 2008 and 2008 was little bit worse than 2016 but not much.

So in terms of vehicle depreciation where that unfavorable end of the spectrum compared to where we've done in the last 12 years, the fourth quarter was worse than the full year. If we depreciate it faster in Q4 then it is in Q1, Q2 and Q3 but the magnitude isn’t something that we really worry about that much.

The difference between I think there was one year out of last 12 were vehicle how we depreciated all I think it was 2011 if you kind of look at on trailing 24 months basis.

So, what that means is the contracts you own in 2009 those vehicles but finally got under selling and to the extent we repossess them, they were at the bottom as much as they were when we got the loans, which is unusual. Today you are in a much different position to that over 24 months the vehicle is depreciated quite a bit.

There has been difference in terms of highs and lows about 300 basis points in terms of collection rate. So it's significant but that's between over the last 12 years and absolute best market we got and then the absolute worst market we have been and it's about 300 basis point change.

Now unfortunately can we predict what's going to be over next 24 months, so everyone it would be difficult to build that into our model.

As we talked about in the past the way we address that is - and we show for our return that means if the loans underperform our forecast is still mean as a business we are always very, very - we prefer to address that way than trying to be predicting these kind of value over the next 24 months..

Great. I really appreciate the color. Thanks..

Thank you. Our next question will come from the line of Robert Dodd with Raymond James. Please proceed..

Hi, this is actually Leslie Vandegrift. Good afternoon. Quick question on the forecast change for fourth quarter 2016 and the press release you guys put it out for the first three quarters and then the fourth quarter. And the initial forecast for fourth quarter vintage was 63.7%, so an increase up to 65% by the end of the quarter.

Can you talk with me about how is that significant change in that three months period?.

I'd rather have a positive note and negative number but early in the long life I think there is some variation there. So I wouldn't get too excited about that number until we another quarter or two under our belt..

So it's a more of what's coming in rather than actually changes to what you are first thinking about it or?.

I think just early in the loan's life when we have an initial forecast when we pay the DoD advance and then one month we adjust that forecast based on whatever happened in the first month, mostly they make the payment or not or any change in the value of the vehicle, but there is a quite a bit about.

There is more volatility of that question forecast at the start and then it starts to level off and be a little bit more stable. So given those loans are only at the most three months old, at least one month old I wouldn’t put a lot of emphasis on that number..

Okay, all right. Thank you.

And then on the Chairman Foss's retirement and I know and the original press release there wasn’t announcement of someone replacing him, do you guys have - is there a plan for that to occur to that position to refill?.

No, there is no plan at this point to that. We have a Chairman, we have a lead Director. But we don’t need a Chairman and we have no plans for replacement..

And then do you have an estimate for the amount of shares that where use, beneficiary for you, for that you sold back in 2016, I know there is the 500,000 that were registered but we can’t see when those sales comes there?.

That would file Form 4s when he sold share. So those Form 4s would be out there. From memory I don’t believe he sold up any material shares of stacks during 2016..

All right. That’s all from me. Thank you..

[Operator Instructions] Our next question will come from the line of Clifford Sosin with CAS Investment Partners. Please proceed..

Hi, guys, thank you.

Can you characterize attrition among your more senior - more seasoned dealers, dealers who’ve done at least the 100 loans or dealers who have - they’ve been around for some period of time however you want to define the cut-off, but not just the level of attrition but the trend has there meaningful step-up in attrition amongst your more tenured dealers?.

I don’t have anything to add there. I think our attritions up, I am assuming it's steadily up for both, but there is nothing that’s called my attention that would give you any more color on that..

Okay. Thank you..

Thank you. Our next question will come from the line of Brian Gustavson with 1060 Capital. Please proceed..

Hi, there. I am just looking at the initial loan term, it’s gone from 47 to 53 in the last three or four years, I am wondering what your thoughts on that, there is about keep on taking up or do you see that coming down and may be and do you think that might be a reason that collections have ticked down more recently? Thank you..

When we right terms all across the spectrum from six months to 72 months, so the average term is the function of the mix. We don’t have any current plans to increase the maximum term beyond 72.

So the average is just be a function of our pricing strategies and where we see the most opportunities, I don’t have the forecast there but as we have talked about in the prior calls we have - over a long period of time, when I first started we only right at 24 months loans and we accumulated data - extended up 30 and accumulated more data we walked our way out to 72 months over a period of last 25 years.

So we have been careful about it and we are comfortable with the terms that we offer now. For a given loan if you don’t change anything else and you increase the term, the collections rate is going to be lower. But we build that into our forecast.

So that is the necessary reason why you saw the variances that you did in 2015 and 2016 origination, if anything that was related to term, more related to period overall market adverse collection, the decline in used car values that we talked about..

Got you. Thank you..

Thank you. And with no further questions in the queue, I would like to turn the conference back to Mr. Busk for any additional or closing or final remarks..

We would like to thank everyone for their support 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. Have a good day..