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Edited Transcript of CACC earnings conference call or presentation 30-Jan-20 10:00pm GMT

Q4 2019 Credit Acceptance Corp Earnings Call

SOUTHFIELD Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Credit Acceptance Corp earnings conference call or presentation Thursday, January 30, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brett A. Roberts

Credit Acceptance Corporation - CEO & Director

* Douglas W. Busk

Credit Acceptance Corporation - Senior VP & Treasurer

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Conference Call Participants

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* Arjun Tuteja

Jarislowsky, Fraser Limited - Research Analyst

* Benjamin Weinger

3-Sigma Value Investment Management, LLC - Portfolio Manager

* Giuliano Jude Anderes-Bologna

BTIG, LLC, Research Division - Director & Financials Analyst

* John Hecht

Jefferies LLC, Research Division - MD & Equity Analyst

* Moshe Ari Orenbuch

Crédit Suisse AG, Research Division - MD and Equity Research Analyst

* Vincent Albert Caintic

Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Credit Acceptance Corporation Fourth Quarter 2019 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 Credit Acceptance Senior Vice President and Treasurer, Doug Busk.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [2]

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Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation Fourth Quarter 2019 Earnings Call. As you read our news release posted on the Investor Relations section of our website at ir.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.

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Questions and Answers

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Operator [1]

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(Operator Instructions). And our first question comes from the line of Moshe Orenbuch from Crédit Suisse.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [2]

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Great. I was hoping, Doug, you could talk a little bit about the market in the fourth quarter because it just feels like you had a pretty significant, again that deceleration, and I know you called out the October numbers last quarter, but that seems to have continued. The volume has kind of come down 25% to 30% over the last 18 months. And then it also just feels like the -- your estimates were kind of up through the 9 months of the year, but then kind of down in terms of cash flows in the fourth quarter for each of the last 3 years. So can you just talk about what's going on there that would drive that? And I've got a follow-up also.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [3]

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Yes. I think with respect to the cash flow forecast, down $17.7 million for the quarter, even also down quarter, it's still a pretty small number. We're up for the year, given the magnitude of the cash flows that we're trying to forecast, about $9 billion. $17 million is a pretty small number. So it's a negative data point, but a very small one and not one I'm too concerned about.

With respect to the volume, we're obviously trying to grow the business. So from that perspective didn't meet our objective during the quarter. But I think, if I break down the numbers in the quarter, volumes per dealer was down year-over-year, but sequentially, pretty close to what you might guess if you just looked at the history, probably the only number -- attrition, again, close to what you might expect, given the history. The only number that was maybe different than the trend line was the new dealer sign-ups.

Again, if you look at the history there, you'd probably expect new dealers to be somewhere in the 900 to 1,000 range, and it was less than that.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [4]

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Any thoughts about what that might mean? I mean 3 months ago, you did kind of liberalize some of the standards for taking new dealers?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [5]

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Yes, I don't know if we liberalize the standards. I mean we changed the enrollment fee. I think what we saw during the quarter is our field sales force gave us feedback that they have standards that they have to meet for a new dealer enrollments. They thought those standards were too harsh. They thought it was causing them to spend more time enrolling dealers when they would like more discretion to spend their time with existing dealers. So we relaxed those standards. We immediately saw a reduction in new dealer enrollments. And whether that change will pay off long term. We don't know at this stage.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [6]

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Got you. My follow-up question really is this -- the fourth quarter of the year, we don't get the 10-Q along with earnings. I mean are there disclosures that we would have gotten either as to CECL updates? And what you might be doing come first quarter in terms of the way you're going to report under CECL? Or any other relevant disclosures that we would have had from that filing?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [7]

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Again, we'll provide estimated financial impact us on our 10-K, which will be filed in fairly short order. As of now, we don't expect to make any material changes to the estimates that we provided in Q3.

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Operator [8]

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Our next question comes from the line of [Josh] (sic) John Hecht from Jefferies.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [9]

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Just going a little bit more into the dealership activity, you cited you've -- that there is the net loss, which was a little bit off trend line this quarter. Looking back, we've seen certain second quarters and [first] quarters there has been a net reduction. I'm wondering, is there anything seasonal with respect to kind of the selling process, and that we should be thinking about? And kind of just your color on the dealership channel, how you would kind of hit your potential target market share?

Is there still lot of opportunity for you to grow? And what are kind of trends in that environment?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [10]

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When you refer to net loss, what are you talking about?

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [11]

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Your net dealers.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [12]

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Or just the number of dealers in the quarter versus the front -- the sequential quarter?

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [13]

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Correct.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [14]

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Yes. I think the -- now the 2 big components there are attrition and new dealer sign-ups. I think attrition was in line with -- if you look at the history of fourth quarters, the attrition we reported was pretty much in the range of what you've seen historically, maybe a little better than what you might expect. The number that was off was the new dealer enrollments, which I just talked about.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [15]

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And do you -- is there any thoughts on what -- how big the market is? And how much you've penetrated in that regard?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [16]

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I mean those are -- awful lot of dealers out there would be around 60,000, 80,000 dealers, depending on what database you use. Just like there is turnover in our dealer base, there's turnover in that dealer base generally as dealers are bought, sold, hand it down to kids, new GM, et cetera.

So it's really tough to say what the total addressable market is. So it's -- I mean, we think there's a lot of room. But obviously, the recent trend line isn't very encouraging.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [17]

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Okay. And then, last question is, just looking at the spread trends, obviously, over the course of the last 8 or 9 years, it's certainly been a changing competitive market deeper than the economic cycle. But I'm wondering, is part of the [spreadage] -- the spread contraction tied to duration or anything? And maybe can you give us any color on what would change in the market to why you do see an increasing spread?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [18]

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It's a very competitive market. No question about that. We've said that in prior quarters. That continued to be the case in this quarter. We've also referred in prior quarters that we [don't] price by spread. I think if you look at the 10-K or even the last 10-Q, there's some pretty good information in there on the economics of the loans that were originating, so I would probably just refer you to that.

And the spread table, with the sum we've had in there for many years, our lenders like to see it. So we've continued to include it, but I think really the more relevant information is in the Q and the K.

From that perspective, I think we're pretty happy with the economics of the business we're writing. We'd just like to write a little bit more of it.

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Operator [19]

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Our next question comes from the line of Vincent Caintic from Stephens.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [20]

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Just kind of a follow-up for the same, similar topic. But -- so looking at the unit volume and the dollar volume that trajectory downward, just when you're thinking about 2020, do you expect more of the same? Are there changes? Or maybe this month, you've seen an inflection to the upside? And maybe is this trend a -- so is it just competition? Is this cyclical thing? Or is it a secular thing, a cyclical event or maybe late stage? Or is there something else to it?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [21]

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I mean we've been in a very, very competitive period for a long time, really since late 2011, 2012. It appears that the competitive environment has gotten more intense recently.

In terms of 2020, we don't have the ability to forecast what the competitive environment is going to be any better than anyone else. So I really can't provide you with an answer to your question on what we see.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [22]

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Okay, got it. I guess maybe compared to what you've seen in the past in intense competitive cycles, but maybe in an environment where I don't know if car sales are slowing, if used car prices are declining, what have you -- any historical takeaways that you could point to?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [23]

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Typically, the market turns when there's some interruption in the supply of capital. But we haven't been through -- we've been through a few cycles, but the cycles take a long time to play out. So we don't have a tremendous number of data points to look at. But historically, that's been the case where the capital supply gets interrupted, and that's what changes the market dynamics. So we'll see if that's the same thing this time.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [24]

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Okay. Got you. So if that's the case, I guess, is the applications, I guess, the applications of the funnel is coming in, but you're kind of not seeing the economics of those applications compared to whoever else is winning the deal. It's just the economics are being eroded? Or is it that the applications are declining or a mix of both?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [25]

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No. I think we're -- as we said a minute ago, we're pretty happy with the economics of the profit per unit part of the equation. We just like to figure out how to grow the business a little bit better than we have been.

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Operator [26]

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Our next question comes from the line of Arjun Tuteja from Jarislowsky, Fraser.

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Arjun Tuteja, Jarislowsky, Fraser Limited - Research Analyst [27]

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I have a high-level question on work culture. So Credit Acceptance is featured as top 100 companies to work for pretty regularly.

So going back in history, can you talk a little bit about the steps you had to take to get there? I'm curious because a lot of your employees are likely dealing with consumers and financial stress. So I'm curious, how do you create a positive work environment in such circumstances.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [28]

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You asked a good question. It took us a long time. We started to focus on it many, many years ago. I think it's -- we spent a lot of time communicating, do Town Hall meetings every quarter.

I meet with every team member, every quarter. They can ask me a question online, I'll answer it in writing and post it for everyone to see. We do -- I do lots of roundtables, where I sit with team members and we discuss the business. Other leaders do that as well. We do quarterly surveys. So we put a lot of emphasis on the communication process.

I think hiring is a big part of it. You got to bring the right people into your organization, consistent with our core values that we've articulated. And those are some of the big things. You got to have the right people. It's not one thing. But it's better journey over a long period of time.

And I would -- I think the framework, that the great place to work, organization uses a pretty good one that talks about trust, pride, camaraderie, and so I would encourage you if you're looking to move in that direction to just embrace that framework and do all the things that they tell you to do.

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Arjun Tuteja, Jarislowsky, Fraser Limited - Research Analyst [29]

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And when you talk about communication, are you seeing that employees feel more valued when they're listened to? Is that what you're trying to say there?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [30]

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Yes.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [31]

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Yes, no question.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [32]

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And I think in addition to listening, maybe this is obvious, but we get a tremendous amount of feedback from team members from a variety of channels. I think the important thing is we respond to that feedback. So we ask them, we tell them we need more information, we state what our position is or we take action. And then you report out what we've done. So I think that makes employees feel like they're listened to. And makes employees feel like they're empowered.

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Arjun Tuteja, Jarislowsky, Fraser Limited - Research Analyst [33]

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Okay, okay. And I have one more on your sales team. So you've hired quite a lot of salespeople over the last 3 years, so have they all ramped up to what you would call a steady state productivity? Or do you still see some improvement in per person productivity there?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [34]

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Yes. It's a work in process. I think at this point we ramped it up pretty quickly. I think the market, in my opinion, has gotten more difficult, which makes it a little bit tougher to see whether you're on track.

My [opinion is] we still have some work to do to get to productivity where we'd like it to be.

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Operator [35]

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Our next question comes from the line of Benjamin Weinger from 3-Sigma Value.

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Benjamin Weinger, 3-Sigma Value Investment Management, LLC - Portfolio Manager [36]

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Just -- you said on the last call that there's going to be -- there's no change to the economics of the business because of CECL. But you're grossing up the value of your loans. So there'll be more assets. So you'll have a bigger balance sheet, generating the same level of cash flows. So your return on assets will decline. Is that not correct?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [37]

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No. Your net asset will be unchanged. And for the existing book, your net asset will be unchanged until that portfolio runs off, for the new loans, your assets will actually be lower.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [38]

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The larger point as you check, you don't change the economics of the business by accounting for it differently. The economics...

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Benjamin Weinger, 3-Sigma Value Investment Management, LLC - Portfolio Manager [39]

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No. What I'm saying is that your balance sheet is larger now.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [40]

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You're wrong about that.

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Benjamin Weinger, 3-Sigma Value Investment Management, LLC - Portfolio Manager [41]

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There's more of the assets on your balance sheet?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [42]

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No.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [43]

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You're wrong about that.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [44]

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A second thing you're wrong about which is that accounting doesn't drive economics. So you're wrong on both points.

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Benjamin Weinger, 3-Sigma Value Investment Management, LLC - Portfolio Manager [45]

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So you're not going to have a larger balance sheet because of CECL?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [46]

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Correct.

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Benjamin Weinger, 3-Sigma Value Investment Management, LLC - Portfolio Manager [47]

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Okay. And also just confirm that there'll be no decrease in your book value upon CECL adoption?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [48]

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Correct.

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Operator [49]

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(Operator Instructions) Our next question comes from the line of Giuliano Bologna from BTIG.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [50]

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I guess jumping into kind of a little more of a high-level question. But since you've taken out the enrollment fee from the business, have you seen any real change in dealer sign-ups or the pace of dealer sign-ups since then?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [51]

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I think the numbers for the quarter sort of answer that question. New dealer sign-ups were -- as I mentioned, were lower than the trend line. We had 753 new active dealers this quarter, 951 a quarter before, over 1,000 in the second quarter. So if you look at trend line, there was a fall off in Q4, and I went through what I thought the reasons for that were.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [52]

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Then on a slightly different question. It looks like there was a couple of revisions to the forecasted cash flows. It looks like the '18 vintage came down about 30 bps. And then the '19 vintage came down 20 bps. And it seems like it's the first time since, call it, the first quarter of '18, the dealer loan portfolio had an negative revision? Or the purchase loan, I should say? Is there anything specific driving that? Is it collections? Is it recoveries on repossessions or anything specific driving those numbers?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [53]

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The revisions, again, as Brett mentioned earlier, are very small in the context of the $9 billion in net cash flows we're trying to forecast and there wasn't any one factor that accounted for the majority of the change.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [54]

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That sounds good. And the only other thing to look at is when we look at your expenses, obviously, you had a ramp-up on the sales force side in terms of increasing your expense base, is there anything that would continue to drive the expense base higher at the same rate? Or should we expect expense base to taper off as originations come down?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [55]

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I mean you think it -- part of it is just dependent on the level of growth from the business and part of it's just dependent on the investments that we think we need to make in the business that aren't directly correlated with immediate growth. So tough to -- like I said earlier, tough to predict the growth rate. And the investments in the business have historically been lumpy, and I would expect that they'd continue to be in the future.

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Operator [56]

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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.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [57]

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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.

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Operator [58]

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Once again, this does conclude today's conference. We thank you for your participation.