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

Moshe Orenbuch - Credit Suisse John Hecht - Jefferies Jack Micenko - SIG John Rowan - Janney Robert Dodd - Raymond James David Scharf - JMP Securities.

Good day, everyone, and welcome to the Credit Acceptance Corporation Second Quarter 2017 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 the Credit Acceptance' Senior Vice President and Treasurer, Doug Busk..

Thank you. Good afternoon and welcome to the Credit Acceptance Corporation's second 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 comes from Moshe Orenbuch..

So I guess the first question is, I see that somewhat similar to the first quarter you had somewhat weaker results relative to earlier periods in the 2015 and in this quarter I guess relative to three months ago on 2016 and yet kind of able to make that up on the '17 vintage.

And I guess - maybe talk a little bit about the process that allows for that given the short period of time that you've got to '17 vintage on the books..

I think the clearest number to start with if you're trying to understand loan performance is the net cash flow change for the quarter that's disclosed. So the total net cash flow change was $8.8 million. It’s a positive number but it's obviously a very small one to total.

Undiscounted cash flows that we’re attempting to forecast are somewhere around $5.8 billion. But when you have an $8.8 million move that's basically flat..

And I guess more than all of that is coming from the purchase loans, which have been consistently better than your expectations.

When you think about that is there a risk that over time that those show trends that are somewhat less favorable?.

Again I think the main takeaway is if you look at $5.8 billion in cash flows you're trying to forecast, if you look at the results for this quarter or really over the last six quarters or even longer than that. The cash flow has been remarkably stable so I think that's a good thing and that's really the main thing..

So last thing I've got is, the 10-Q says that you're informed during June that the CFPB was looking at Equal Credit Opportunity Act and Reg B possible violations.

Can you talk a little bit about what the issues that they're looking at are?.

We don’t like to answer what's in the Q. CFPB is fairly sensitive regarding disclosures of ongoing matters so we try carefully to walk the line between our obligations to the SEC and to shareholders and the sensitivities of the CFPB. So I won't try to improve upon what we put in the Q..

Our next question comes from John Hecht of Jefferies..

I guess the spreads in the '17, collection curves look a little better than '16.

Also you've written up '17, I’m wondering if there is just a commentary having a competitive markets given the recent market activity?.

Not a whole lot of change there, volume per dealer is the first thing we look at, that was down roughly 5% for the quarter.

I think the loan economics may have improved slightly but given the negative change in volume per dealer, I don’t think we’ll point to a large shift in the competitive environment, continues to very difficult, continues to be very challenging..

Focusing a little bit on expenses, your salaries - the salary line and the G&A have dropped recently little bit but been pretty consistent the last couple of quarters.

Are those pretty good base numbers to kind of forecast from or is there anything we should think about from a seasonality perspective there?.

There is a seasonal drop from Q1 to Q2 and I think you’d see if you look back at our numbers over time but the longer term trend is long as we can grow - [indiscernible] grow the business we would expect expense as a percentage of capital or percentage of the book to decline over time..

And then final question just, is that commentary on the sales and marketing side. I know there's been a little bit of renewed push to go set up some more new dealerships.

Do you think that will persist into the second half of the year? Do you guys have an objective in terms of new dealership targets and what might that mean to the sales and marketing line?.

We have increased the sales force roughly 20% year-over-year. We expect to increase a little bit more. During the quarter we signed - new dealer sign ups were okay, they were better than last year's second quarter but sequentially we had a decline in active dealer. So I guess the goal obviously is to sign up more dealers than we are losing.

We didn't do that in Q2 but we hope to do that in the future..

Our next question comes from Jack Micenko of SIG..

Prior caller has answered most of my questions but I guess when I think about competition and a few others this quarter have talked about maybe competition easing it sounds like you're not seeing to that extent.

Do you typically see it more in the number of dealers or an acceleration of dealer growth or do you tend to see it more in the dealer - in the volume per dealer when historically competition either ebbs or flows, is there a blue of thumb that you seen historically?.

Yes, from my perspective volume per dealer is probably the clearest measure. Dealer attrition also tends to follow the competitive environment. I think we historically have been pretty successful signing-up new dealers whether it's competitive or not..

And then you said you added I think about 20% to the sales force in the past year. Is there a lag effect from when maybe a salesperson is on-boarded to when we can see that more meaningful numbers, I think your dealer [indiscernible] about 5% on a 20% sales force increase.

Is there [indiscernible] down the road that number would elevate to a comparable level or is it I am looking at the wrong way..

I think there is a significant lag, I think if you look at the last time we increased the sales force it took us about two years to roughly double the sales force and took another really almost three years before productivity got to where it was before we started the expansion. So, overall about five-year process that doubled the sales force.

We’re not trying to double at this time and hopefully we've learned a little bit from the first time but it still I think - it's more long-term driver than a short-term driver..

Our next question comes from John Rowan of Janney..

I just want to kind of go back to the issue of the dealer partners falling off between 2Q and 1Q.

Is there anything seasonal in that number or is that just competition causing higher attrition?.

I think Q2 is a tougher quarter for attrition, you have dealers that come on during tax season and then fall off, so there is some seasonality in that..

And then there was a relatively big jump in the advance sequentially between 1Q and 2Q is up about 4%. It doesn’t look like duration is to blame for that, so I was wondering if there was any type of shift in cars but obviously car prices are still weak.

So what I'm trying to tee up here is whether or not you know competitive forces are letting you migrate up and down as far as the age and price of the vehicles or is that simply just the rotation out of the portfolio loans into the purchase loans?.

That’s certainly some of it. The purchase loans tend to be a little bit larger, have a little bit bigger advance also a little bit newer more expensive vehicle would be - the other part from Q1 to Q2..

So there has been a shift.

Is that because of the purchase loans or is that just your ability to migrate within competitive bands to get a customer who is buying more expensive car maybe a better FICO score or just give me an idea of what else is driving that higher advance?.

I think I the portfolio loans from memory got larger from Q1 to Q2. I think the purchase loans were pretty flat and then you had a small shift in the distribution towards the larger purchase loans from the smaller portfolio loans.

Now the average loan size is disclosed in the press release; you can see the advance one up but the loan size went up by a greater percentage of the overall advance percentages down 2017 versus 2016. So it’s just the mix issue. We've done those loans before.

We still have few more of them and we price where we see the opportunities and that shifts the mix around from time-to-time..

Our next question comes from Robert Dodd of Raymond James..

In the past you’ve given us an indication and we’ve kind of seen in the numbers so as the loan term stretches out a little bit collectability tends to drop just because there is longer period of something going wrong. That seems to have broken down a little bit.

Obviously in 2017 it did stretch a little bit from 2016 but expected collectability is up and the term is materially longer than 2015 but now expected collectability 2017 to 2015 is very similar.

So are you seeing kind of actual like-for-like improvements in collectability on same length loans or is there a driver that’s really improving that '17 number?.

Yes, I think you’re talking about pretty small movements there. I think what we’ve said is if you take the exact same loan and you stretch out the term our collection forecast and the results would show that the amount that you’re going to collect is going to be less.

But that typically isn't what happens if you do a longer term you typically get a different customer and vehicle mix and it all boils down to a collection rate which is the one we disclosed..

[Operator Instructions] Our next question comes from David Scharf of JMP Securities..

First I just wanted to make sure I heard correctly, regarding the sales force did you say the overall headcount is up 20% year-over-year?.

Yes..

Did I hear you say and you anticipate growing that again by 20% into 2018?.

No I didn’t forecast how much we’re going to grow, I just said we’re likely to grow it from here..

And along those lines as I think about readthrough, you had that big doubling I think you know maybe five plus years ago coming out of the recession. And you were seeing a very competitive market ahead of you and it sounded like the way to counteract decreases in loans per dealer was to grow the sales force.

It does seems like another big step function and adding to the sales force.

Should we infer anything about what your outlook is for competition easing at all just trying to get an understanding for strategically you know why this new big initiative clearly it’s paying off so far?.

Well I don’t know about that but I think our outlook is that we’re planning that the current difficult environment last for the foreseeable future and then if that turns out to be too pessimistic then that’s great but that’s what we’re planning for and so I guess we look at the numbers we feel like our chance are growing a lot better if we have a little bit larger sales force, so that’s what we’re working toward.

Two quarters of negative unit volume change in this quarter was up but it was only up a percent, I don't think that the additions for the sales force really added much to that at this point they’re very new, they’re still getting up to speed and I think again – increasing the sales force is something that will pay off next year or the year after probably not this year..

Brett, just at a real high level there are obviously so many metrics that come out each quarter and we tend to get into weeds in terms of the vintage analysis. I'm wondering just looking for example the last six plus quarters at the end of the day your net income, your EPS has increased sequentially every quarter.

And I'm wondering if you're at all willing to comment that given everything you know at this point in time your assessment of the credit environment would look like sequentially flat, allowance rate just a modest uptick in provision, investment in sales force, the competition taking everything together is it reasonable for us to assume that this trend should continue in terms of sequential earnings increases?.

Yes, I think that the big variables are how fast do we grow and what does loan performance look like. So we've had I think a couple of quarters where our loan performance has been pretty stable. As we move through the latter part of last year we had to make some adjustments to our forecast which had a negative impact on loan volume.

So if the forecast continues to be stable and you set the figure out what is our growth rate and your guess is probably as good as mine is at this point, we’ll certainly try to grow the business, we didn’t grow up very fast this quarter, but that’s the objective.

There's some built in growth in the balance sheet now because of prior quarters originations. It doesn’t take much to figure out that the balance sheet is still growing and will grow for a little while. So as long as everything else stays constant, if the balance sheet grows, earnings will grow as well.

But if you're looking out longer than that, it really just depends on your assumptions for unit volume growth..

Thank you. With no further questions in the 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 concludes today's conference. We thank you for your participation..