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

David Scharf - JMP Securities John Hecht - Jefferies John Rowan - Janney Robert Dodd - Raymond James Ben Langer - Three Sigma Value Daniel Smith - Tech Capital Luther Fostein - Gas Investment.

Good day, everyone, and welcome to the Credit Acceptance Corporation First Quarter 2017 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 first quarter 2017 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 [Jack Minsko with DIG]. Please proceed..

Hi. Thanks for taking the question.

Looking to the order volume it continues to grow and I'm wondering is that a function simply of the longer term and maybe some of the purchase program mix shift or are you doing something strategically where you maybe looking at maybe a new collateral or something along those lines around the average loan size that sort of thing?.

It's all of those. It's just a mix shift. So we've written those loans before. We are just writing more larger longer-term loans than we had previously. .

Okay. And then the increase in services expense.

Is that portfolio growth driven? Is that compliance driven? Or is that sort of a follow on to sort of tightening some standards last quarter?.

No. It's strictly related to the growth of the portfolio. The servicing expenses grew slower than the portfolio grew..

Thank you. Our next question will come from David Scharf with JMP Securities. Please proceed..

Hi, good afternoon. Thanks for taking my questions. Just curious thinking about the environment you encountered year-to-date. I think last quarter you made the comment that competition was the biggest hindrance to volumes not demand.

Is that still the case? Would you still rank competition as a bigger headwind if you will than overall consumer demand or are we seeing any changes in the latter?.

No. I think it's hard to separate a factor that I think in my mind the two biggest factors are competition and then the changes we made to address the loan performance issues. .

Okay.

On the competitive side, can you give us maybe some qualitative feedback on whether or not there are any signs that we maybe at a peak that might start to ease, Doug, I know when we talk you have your hand on the pulse of the ABS markets all the time, is there anything on the funding side that lead you to believe on the margin that, maybe by the second half of the year some of these smaller lenders may have a little more difficult time, trying to gauge whether or not or sort of in your mind sort of the peak of competitive forces and that maybe things are set to turnaround later in the year?.

Well, speaking relative to conditions in the capital markets, certainly nothing that we are seeing at this point that would indicate that the ABS [indiscernible] less available to the industry than it has been. Spreads were very attractive in Q1, they have widened a bit since then but are still at relatively attractive level.

So certainly nothing on the funding side. .

Okay.

So there is nothing just so I understand -- there is nothing there that indicates some competitors may have a more difficult time accessing capital near term?.

Nothing significant from a capital market perspective that I am seeing at this point. .

Okay, got it. Couple just quantitative questions.

The tax rate, was there anything any kind of one time benefits state refunds or anything that brought that down this quarter and how we should think about that for the full year?.

Yes. There was a change in the first quarter this year relative to adapting a new accounting standard.

Historically, the difference between the tax deduction we get when our restricted stock vest or restricted stock units converts to common stock, the difference between that and amount of the GAAP expense we recorded has historically just been recorded in as a direct entry to equity.

Beginning in the first quarter of this year, those excess tax benefits flow through the tax line and that's what accounted for the difference in the effective rates..

Got it.

Should we be back for -- was that true-up? Should we be thinking about roughly 37%-38% going forward?.

It wasn't a true-up, it related to the activity that occurred in the quarter. And I think you can go back and there is some seasonality or that activity tends to occur most often in the first quarter of each year.

But other than that pending anything that comes out of Washington, I think we are still thinking about our effective tax rate the same way 35% for federal, a couple points for state and then whatever adjustments like this you might have. .

Got it, got it. And then lastly just on the collection front. Looks like the forecast revisions in the quarter the 2015 vintage came down again but 2016 was revised up slightly.

I am not sure what in the first quarter got revised but I'm wondering, can you give us a sense in order to interpret this as hey maybe we sort of pass through the toughest period like as we think about forecasted collections during this calendar year what percentage of those collections will be accounted for by the 2016 and 2017 vintages or maybe alternatively how much of less of factor in this year's collection are the 2014 and 2015 vintages?.

That's one way to look at it. I think the simplest way to look at it [indiscernible] on page 2 of the release, we just quantified the dollar amount of the change in the net cash flow forecast. It was a positive $8.1 million this quarter, negative $6.7 million same quarter last year. And $8.1 million is on a $5.5 billion of undiscounted net cash flow.

So a very small move this quarter and a very small move same quarter of last year. So you can break it out by year-over-year, we are talking about a very small change in total..

Got it. And it looks like the ending allowance rate was unchanged as well by and large. Okay, very helpful, thank you. .

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

Yes, thanks very much.

Yes, I'm wondering if you can tell us I mean you can tell us either actual I guess the actual metrics and maybe talk about the changes you had over the past two three quarters on the loan to value and duration in both the dealer loans and the purchase loan pools?.

I mean the loan term as disclosed you can see got a bit little bit longer this quarter.

We don't disclose loan to value but as we've got [indiscernible] with the term, it is mix issue, we write terms from 24 months out to 72 months; for about 80% of the loans we write we have a full amortization period behind us so we got a full history on how those loans will perform. And the 66 months and 72 months loans, we don't have a full history.

I think we are about 75% of the way through the 66 months, so we got 48-50 months of history there. And on the 72 we have about between 24 and 30 months of history on those so we feel like for most loans we write we've got good data to back it up. For the 72 months loans we've to do a little bit of estimations so a little bit more risk there.

But because we got lot of 60s and lot of 66 months loans on which to base it we don't think it’s a stress to be able to forecast those with a high degree of accuracy. .

Okay.

And then lot of discussion and focus now on the changing used car values, residual value and so forth, I am wondering just if you give us your opinions on kind of where you see the pace of that trajectory of used car values and then how that impacts your business overall?.

So it's no secret that the vehicles are depreciating faster than they have going back to probably 2008 is last time we saw an environment like this. So it's no surprise to anyone and some it has been predicted. It is definitely coming true. So vehicle depreciation is much steeper now than it was -- than it has been since 2008.

As we talked about in the past it doesn't have a huge impact on our business. And to think about things like this long term, so we'll be in periods where vehicle values are helping in terms of -- the depreciation curve, we'll go through periods where it is more severe like it is today all even out over time.

The difference for us between kind of the worst end of the spectrum over the last 10 years and the best end of the spectrum is about 300 basis points in terms of the collection rate. That's not insignificant 300 basis point but in the scheme of things when you look at the high and low over a 10 years period. It's not really that significant.

What we try to do instead of trying to put a perfect forecast on where vehicle values will be in the future, is we try to originate business within expected return well above our cost to capital. So that even if collection rates come in a little bit lower than we anticipated, the business we are writing is still very profitable. .

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

Good afternoon, guys. Doug, just going back to your prior comment that ABS spread is wide now post 1Q, obviously one of your competitors in the market couple weeks ago and they had a pretty -- they had a pretty widening spread in the bottom tranches.

Do you think that's kind of one off situation with the placement of that deal or do you think that it is a trend that we might actually see investors place lower demand on bottom tranches of ABS deals?.

It's a good question and it's a little bit tough to say because there hasn't been a lot of subprime auto issuance real deep in the capital stack over the last few weeks. Certainly spreads have widened out in general a little bit but the widening has been much more extreme on the BB and BBB tranches than it has of the higher rated tranches.

So I think at this point it's little bit pre mature to conclude on that point. We'll just have to watch subsequent issuance and see what happens. .

Okay. And then last quarter call you guys talked about hitting a point of resistance to growing dealer partners. Obviously, you grew them this quarter.

Would you kind of characterize -- would you label the same kind of characterization this quarter or are you getting more bullish messages from your sales staff, I just want to kind of gauge any incremental shift in that opinion?.

I think the numbers speak for themselves. And we did grow the dealers but we didn't grow very rapidly. The growth rate was slower than last quarter. So I think the numbers probably are -- I think the numbers capture how we feel about it. We'd like to be growing a little bit faster than we are.

But in last two quarters that the best we have been able to do..

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

Hi, guys. This is actually Robert Dodd.

Just looking at the return on capital that you disclosed in that, if we look year-over-year obviously the adjusted interest income plus and et cetera at 110.2 versus [indiscernible] I mean we can do the ratios but when you look at the adjusted return on capital it is compressed to 100 basis points year-over-year and that's the average across as we think.

Looking at the incremental versus last year, it looks like it's maybe around 7% which is obviously compressing especially as your cost to capital is rising and we saw buyback- and you just mentioned in response to the previous question, you'd like to be growing faster.

I mean the question is that this incremental return on capital which is the finish we've seen in some time for you guys what's your calculus on originating loans versus buying back stock versus holding back on some of the origination activity given that the incremental returns you are seeing. .

I am sorry, didn't really follow you.

You said [indiscernible] to 7% at one point but I didn't understand what you are referring to?.

If I look -- that's a simple - the adjusted net income year-over-year grew 13.4%, the capital base 783.9, the ratio there is 7%. So that's basically the incremental return on incremental capital. Looks like --.

I can tell you we don't expect to make -- well, we expect to make a much higher return than 7% on the business that we are writing. So there is something wrong with your math there but in terms of how we price is the same thing I think every call we always price the same way and that's to maximize unit volume time, economic profit per unit.

And so whether the competitive environment is favorable or whether it's difficult, we always price the same way and our plan is continue to do that. And if we can't invest all of our capital in the business then we look to send it back to shareholders either through repurchasing shares or through a dividend. .

Thank you. .

The cap position, the capital changes to obviously I mean some of the business that was in the book as of the end of the first quarter 2016 has run off. So I think that's the reason why doing the math you are suggesting doesn't produce the right answer. .

Thank you. Our next question will come from the line of Ben Langer with Three Sigma Value. Please proceed. .

Hi.

Is the dealer drops out of the program before closing of 100 loan pool? What happens to those loans? Are they moved to the purchase program?.

Yes. That's their first pool and they have failed to complete a pool of 100. They would forfeit their right to the dealer hold back and those loans will be transferred to purchase loans. .

Thank you. Our next question will come from the line of Daniel Smith with Tech Capital. Please proceed.

Hi, guys. Some of your competitors have talked about dialing back loan growth.

And so I guess my question is one, have you seen that? Two, have you been able to adjust your borrower profile at all like credit score, debt service ratio anything as a result?.

We doubt made any significant changes to our loan policies. It's a very big market if one or two people say they maybe dialing back we'll see but through the first quarter we certainly didn't see that in a numbers. .

Thank you. Our next question will come from the line of David Scharf with JMP Securities. Please proceed. .

Hi. My questions have all been answered. Thank you. .

Our next question will come from line of [Luther Fostein] with Gas Investment. Please proceed. .

Hi. My question pertains to the increased expenditure in the sales force. The release refers to some increased expenditure and increasing headcount in the sales force.

Can you maybe spend a few moments describing your initiative there?.

Yes. We are in the process of expanding the numbers of sales people that we have. The number at the end of Q1 was higher than the start of Q1 but a lot of those sales people are new. So we didn't see much of an impact yet in terms of the unit volume numbers. But hopefully as they become more seasoned we'll see a positive impact from them. Thank you.

With no further questions in the queue. I'd like to turn the conference back over to Mr. Busk for any additional comments or 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..