Good day, everyone, and welcome to the Credit Acceptance Corporation Third 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 third 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 John Rowan from Janney. Your line is now open..

Was there any discernible impact in the quarter from the hurricanes whether it be on the volume number which is a little bit weaker versus last quarter or anything else you'd like to call out?.

No not really, we don't do enough business in those areas to really impact the overall numbers..

You didn't see anything in Texas because that's what about like 7% of your portfolio?.

It's small. And the affected areas, we looked at it. There may be a small impact, but again not big enough to affect the overall numbers..

And just looking at some of the metrics for the third quarter here, it looks like duration is up a little bad, your average loan size surpassed 20,000 which I would assume is for the first time ever. Be at the forecasted collection rate is only down about 20 basis points where it was versus the first half of the year.

I mean you guys comfortable that forecasted collection holds true given the ramp up in duration and loan size or is there any reservation now you kind of eclipse the $20,000 mark for the average loan..

I think what you're really asking is, do we think our forecast is going to be accurate.

I think the best way to assess that is to look at our historical track record either long-term which is disclosed or more recently in the clearest number to look at and the release if you want to get a sense for loan performance is just the net cash flow change, positive 5.5 million for the quarter which is in our view that is basically zero given the size of the cash flows we're attempting to forecast roughly about $6 billion in undiscounted cash flows and our estimate changed by 5.5 million.

So, that tells you the forecasts are stable currently and if you look at our longer-term track record, you'd see some bits of it, we're a little bit optimistic, sometimes the opposite, but overall our track record is pretty good there..

The change in the loan size and the term is just primarily a difference in mix. We've been writing shorter term, longer term loans for a long time. So, the change in the metrics that we see in '17 are more specifically in the third quarter is really just a function of mix..

And then just lastly, I think - correct me if I'm wrong, last quarter you said that your sales force is up 20% year-to-date, yet obviously you continue to comp negative as far as units go.

Can you give us an update if you continue to do any hiring in the sales force, where you are now year-to-date and whether or not all these new hires are actually are contributing and you're still losing unit volume..

Through third quarter we're up - Q3 over last year's Q3 we're up about 30% in terms of the number of sales people. So, as we talked about last time, it's a longer-term play for us to increase the sales force, we don't necessarily expect it to have any impact this year.

If you go back and look at our history, the last time we increased the size of our sales force took us about two years to roughly double the sales force and then approximately three years after that before productivity got back to where it was when we started the expansion. So, you're looking at kind of a five-year process from start to finish.

We're not trying to double it this time, but we are increasing its size significantly and we expect that more - something that will play out longer term..

By longer term you mean, I'm just trying to get an idea of what the curve is for your sales force to start bringing in productivity, I mean do we start to see improved productivity next year, I'm just trying to understand because you mentioned two to three years after you double the size of the sales force that you got back to where you were.

But I would assume that that - it doesn't take quite that how long from a sales force perspective for someone to get up and running and contributing..

I would just use the prior expansion as a guide, all those numbers have been disclosed, you can kind of look at where we were year one, year two. I'm just saying it was a five-year process from start to finish. So, at this point, you wouldn't expect to have a big impact from that sales force expansion..

Thank you. And our next question comes from Moshe Orenbuch from Credit Suisse. Your line is now open..

I guess as I'm looking in your release and the Q, you talk about the fact that the collection rates for the loans in '15 and '16 were consistent with expectation, the size at the start of the period. Although they started to decline I guess a little bit this year, right, I mean '15 has been down fairly consistently.

'16 was originally written up and then has been written down and then you're kind of writing '17 up even in the current quarter and I guess is there something different that you're doing in '17 that would make that outcome different than in '16 where you initially wrote them up and then wrote them down..

I think the best answer to that is again we're trying to forecast $6 billion in cash flows. And our total change in our estimate during the quarter was $5.5 million. So that - I think the takeaway from the release - a reasonable way is our collection forecast were very stable for the quarter..

I guess one of the questions that I've gotten from one or two investors which unfortunately I can't answer is you've got - you've had a mention of the CECL standard and that it would have a material impact on recording of your reserves. I guess I'm not really sure how to interpret how that would impact.

I mean, have you guys done any work? Could you give us some guidance as to how that would impact you?.

As we've talked about in prior calls we've begun our assessment on that. The guidance is extensive and it's complicated and it's not effective until 2020. Having said that we're making good progress, we're working with our auditors on it.

So, when do we know more, we'll talk about it, but at this point we haven't finished quantifying the impact the new guidance will have on our financial statements..

But any sense of how it would work like what you would be, you know, which I believe I understand how you're doing it now in terms of forecasting the cash flows.

How would it differ under that standard?.

I mean the cash flows are what the cash flows are in terms of how we account for the loans. I'd really prefer not to comment until we've got that all sorted out..

Thank you. And our next question comes from Kyle Joseph of Jefferies. Your line is now open..

Some of these have been kind of asked, but digging down a little bit more into the competitive environment, just wanted to get your thoughts on loan volume trends. We've been hearing a lot about big banks pulling back from the auto finance market.

I'm recognizing your market maybe a little bit more insulated, but how long does it take for you guys to see the impact of the big guys pulling back before we eventually see in it in your market..

If there was a pullback I think we'd see immediately. Our sense is that the competitive environment hasn't changed that much. You have some players who are pulling back, you have some that are doing the opposite. Our volume per active dealer was down for the quarter versus last year and there were some other factors that play into that.

But I don't think there's any evidence at least in our numbers that the competitive environment got a lot easier..

Well I was kind of looking at your spreads that actually appeared to kind of bottom out in 2015. I was wondering if that was a sign of that or is that just some tweaks on your underwriting..

Yeah, like I said, there is a few other things going on, I mean obviously the one big factor is the changes we made to our initial forecasting a year ago. So late last year in Q3 we to address the negative variances that you see on the '15 and '16 business we lowered our initial forecast for go-forward business. So that's had an impact on loan volume.

And the economics of the loans are I think on balance a little bit better than they were a year ago. So that's going to, you know, that's a positive as well. But you have a fairly significant change in volume per dealer. I think when you take all of that into consideration; I think it's difficult to say the competitive environment got a lot easier.

But to answer your question if it gets easier we'd see it almost immediately..

So, in the context of that, can you update us on your capital allocation strategy from here in terms of new originations versus share buybacks?.

We continue to continue to think about it the same way we always have. The first priority is to make sure we have the capital that we need to fund the business. And the answer to that question is that we do and we can buy the stock back for a price that is - that we're happy with and it's less than we think the intrinsic value is, then we do that.

So, historically, we bought back a lot of stock over time, but the pattern of those repurchases has been pretty lumpy..

Thank you. And our next question comes from David Scharf of JMP Securities..

Most have been asked, but Brett, I was wondering, maybe a bigger picture longer term question, with a 30% increase in sales headcount and I guess that's on top of the big expansion you had, coming out of the last recession, is there a goal you have in mind for how big you want the footprint to be in terms of dealer count for this company..

Not a stated goal. I mean, we're trying to grow economic profit as fast as we can. We do that by expanding - typically our expansion has come by adding dealers, so that's what we're trying to do.

There's historically a strong correlation between how many sales people we have in the field and how many dealers we're able to add and so we're just trying to capitalize on that..

Okay.

I was trying to get a sense for really that dealer count, when we look at 77, 100 now in the context of, however, many 14,000, 15,000 franchise and obviously more independents, I mean, do you have a sort of a top down view of the dealerships in terms of either regionally or performance wise which ones you don't have an interest in and what's left in terms of an ultimate target, just trying to get a sense for whether you view CACC as a 10,000 dealer footprint long term or 15,000 or 25,000 because it's a big ramp in sales force obviously..

Yeah. I understand the question. I mean, we're reluctant to sort of give you a stated goal long term as to how big we're going to get. I mean we're obviously trying to get as big as we're capable of getting and we think adding the sales force helps us do that..

And in terms of the origination mix, which has been trending more towards purchase loans, are all the purchase loans from franchise dealers or is it - or do you have equal representation among independents and I am trying to figure out kind of who you might be doing more business with as that mix shift continues?.

Yeah. The largest share of those are franchise dealers, what we call, national accounts, which are kind of largest dealer groups in the country. We allow independents to write purchase loans if they've closed a pool of 100 loans on our portfolio program.

So, once we have some experience with an independent, if that's positive, we'll allow them to access the other program and then there's a limited number of independents that are allowed to write purchase loans from the beginning.

Those are independents that we view as kind of quasi-franchised dealers, working to distinguish them from the traditional independents and we've allowed them to write purchase loans as well, but most of it is franchise dealers in the larger national accounts..

And then lastly, on the credit side, just curious about any observations you have on consumer health. Obviously, we're still at arguably peak employment.

But in terms of any early indicators you look at such as percentage of missed payments within the first couple of months, things like that, any noticeable change in payment patterns versus a quarter ago..

Anything we know, and we can capture or see is in our collection forecast. So, I'd just point that number as being sort of the - our overall metric that includes the consumer and their payment patterns and what we see at origination and what we see as the loan moves through the collection process. Typically, we're a little bit countercyclical there.

If you look at our historical numbers, if the economy gets a little bit choppy, our collection numbers tend to go up. You'd say, well, how can that be. Well, it's because competition usually eases, and we get our - on the originations side.

So, this is probably the toughest environment that we can be in that we'll face, which is one it's very, very competitive that gives us a segment of the population that typically other lenders aren't willing to do and when things get easier, then we get a little bit different mix..

[Operator Instructions] Our next question comes from Leslie Vandegrift from Raymond James..

Most of my questions have been answered, but I know you didn't want to give guidance exactly yet on the ASC changes to, I guess it was the CECL method on expected losses. Do you have a timeline for when you guys are going to know what those accounting changes are 6 months, 9 months, a year before we'll kind of have an idea of where that's going..

Probably sometime in '18..

Okay. And obviously the standard is moving into more expected losses being taken into account, rather than just incurred, do you believe that this is going to be considered a major change for your accounting or have you already been doing some of that before..

I think we said in our 10-Q that it's going to have a material impact on our - on the way our financials are presented, but precisely, what that means it's impossible to say..

Thank you. And our next question comes from Jack Micenko from SIG..

Just one quick follow up. The story has been on the positive development, the purchase loans have been trending it seems a bit better than expected certainly this quarter and I think in the prior quarter or two as well, is that - just curious as to what you're attributing that to.

I know you would, I guess it would seem like you maybe were a little more conservative on the view and as you look back, what's driving that better performance you think..

Yeah. I guess the thing I haven't been able to convey is, you just have to look at that net cash flow number. It's a very small number. So, I don't think there's any other way to view the numbers other than the collection forecast has been very stable since we made the changes a year ago.

So, taking that small number and trying to parse it even further I think is not a productive conversation to have. The numbers are stable at this point. The dealer loans decreased a little bit. Purchase loans increased a little bit, but on $6 billion of cash flow, this is not a whole lot of movement to try to explain..

Thank you. And our last question in queue comes from Randy Heck from Goodnow Investment..

Brett, I just wanted to go back to your comment earlier that, you noted that the pricing changes that took place, I think, it was September of '16 where you reduced advance rates. So, this quarter just reported, your dollar loan volume is basically flat, staying half a percent.

You said that because of the adjustments and also the collection, the collection performance so far this year, you've written, I think you said you've written better business. Can you quantify how much more profitable the business you did this quarter, the September '17 quarter versus the September '16 quarter.

Is that something that is quantifiable? I mean obviously, earnings are up 20% year-over-year, so that has something to do with the prior couple of years of production, but if we can just isolate the third quarter this year versus last year. Thanks..

Yeah. All those numbers are in the Q. So, there's a real good disclosure that shows the average advance, the expected cash flows, the accretable yield as what we call it in the Q per contract. I know we were up Q3 versus same year last year in terms of the total accretable yield that we generated. I want to say it's somewhere between 0 and 5%.

I don't have the number written down, but it's all in the Q. So, we had modest growth in terms of the expected future revenue and again anytime you look at those numbers, you want to be cautious that those are, assuming we hit our initial forecast exactly. Obviously, any of those numbers will change to the extent that we have variances going forward..

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

Ladies and gentlemen, this does conclude your conference. We thank you for your participation..