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Edited Transcript of CACC earnings conference call or presentation 27-May-20 9:00pm GMT

Q1 2020 Credit Acceptance Corp Earnings Call

SOUTHFIELD Jun 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Credit Acceptance Corp earnings conference call or presentation Wednesday, May 27, 2020 at 9:00:00pm 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

* David Michael Scharf

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Giuliano Jude Anderes-Bologna

BTIG, LLC, Research Division - Director & Financials Analyst

* Harold Levy;MCA Realty

* John Hecht

Jefferies LLC, Research Division - MD & Equity Analyst

* John J. Rowan

Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance

* Mark William Hammond

BofA Merrill Lynch, Research Division - Associate

* Moshe Ari Orenbuch

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

* Randall M. Heck

Goodnow Investments - Partner

* Robert Henry Wildhack

Autonomous Research LLP - Analyst of Payments and Financial Technology

* Sanjay Sen

BloombergSen Inc. - President, CIO & Director

* Thomas Shen;Golden Tree Asset Management

* 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 First Quarter 2020 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 First Quarter 2020 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 the 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) Our first question comes from Moshe Orenbuch with 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. Can you hear me okay?

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

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We can.

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

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Okay. I guess for starters, there's a bunch of new disclosure here, and I'm looking on Page 23 of the 10-Q. And you've got your delinquency numbers, I guess, how should we be taking those into account as we think about your provisioning practices in subsequent quarters?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [5]

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I mean I think the best thing to do in terms of understanding our provisioning is to look at our forecast of future cash flows and our forecasted collection rate. We think that, that information is the most useful relative to assessing credit quality and relative to understanding changes in future cash flows.

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

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Right. Although it's not really helpful in forecasting that loan loss provision, right? It's certainly not the only factor that's involved in that.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [7]

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I think if we have any shareholders that are still focused on the provision, they need to go back and do some homework. The adjusted results are really what we look at to run the business, and that's what shareholders should be looking at when they're trying to make an investment decision and there's no provision in the adjusted results.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [8]

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Got you. Okay. And in terms of the issue, the -- your forecasted cash flows, I mean, you talked about kind of reducing your expectations by about 2% or in the neighborhood of $200 million. Can you talk about what you've assumed there? In other words, what's going on with respect to your borrowers who are currently receiving stimulus? What you've assumed about what happens when that is no longer in place? Like how should we think about that part of the process?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [9]

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Right. So as we described in the release is really 2 components to the net cash flow change in the quarter. It's about $44 million, which is just the mechanical forecasting model responding to what happened so far in Q1. And then there's a -- the remainder, about $162 million is a subjective adjustment made on top of that to consider the ongoing impact of the COVID pandemic. If you look at the release, we provided some numbers on front end collections and total collections, did year-over-year change. That's probably really the best place to look in the release for what's actually happened so far. There's 2 tables there. One is just the way the calendar falls, and the other one we adjust for different -- we adjust for the calendar to make it more comparable. If you look at the second table, what you'd see is we saw pretty sharp falloff in front-end collections in March, the last 2 weeks of March, came back a little bit in April, particularly in the last half of April and May so far has been pretty good.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [10]

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How do we adjust that for the size of the portfolio? I assume that we should think about that as a percentage of loans, right? Not as an absolute amount.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [11]

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In terms of the forecast change?

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [12]

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Well, no, no. That's just a rate of change in the dollars collected, right? Year-over-year, that's not relative to your expectations. That's just what it -- what was it in 2019 and what is it in 2020, right?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [13]

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Yes. Just a simple way to look at it. A reasonable assumption would be if the -- if you didn't see a change in the collections then probably no forecast adjustment would be necessary. Since we did see a change in collections in March and April, the March change in collections caused that first part of the forecast I talked about the $44 million. And then because we're in the early stages of a pandemic, we expect there'll be an ongoing impact. So we made a subjective adjustment on top of that.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [14]

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Right. I guess then I'll ask the question I asked before about those May numbers. I mean you basically collected 8.5% more on the front end and 4.9% in total, but that is with -- that has helped, as you point out in the -- correctly point out in here, but that's helped by the current situation. Like can you talk about -- does your write down of 2%, does that assume that, that doesn't deteriorate at all? I guess is that -- that's what I'm asking.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [15]

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No. The $44 million is based on what happened so far, the $162 million assumes that there'll be some continuing impact in the future.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [16]

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And can you talk about how much, like how you came at -- came about that forecast?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [17]

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I don't really want to get into the components. I mean I think you're looking at a highly complex situation. I think we say in the release that given the number of variables, it's hard to have a great degree of confidence in any number that you would put forth. We took our best shot at it. The $162 million is our best estimate. We do say it's subjective. We'll just have to see how this pandemic transpires, how the economy transpires, how vehicle values respond. There's obviously a lot of variables to try to get your arms around.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [18]

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Got you. All right. Guess I was hoping to get some understanding of what they were. And the last question from me and that is, if you were -- the customers who are now -- the customers took your underwriting today, are they people with employment? Or are they people who are receiving stimulus checks in unemployment check -- not stimulus checks, but unemployment checks? So would you underwrite the borrower is being paid by the government essentially?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [19]

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The vast majority of the borrowers are employed at the time the loan is made.

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Operator [20]

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And our next question comes from John Rowan with Janney.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [21]

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So I just want to understand with the reduction in repossessions is that a function of forbearance? Or is that a function of social distancing and various state restrictions?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [22]

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There's a few states that have restrictions, and we're obviously following all those restrictions, but that was a decision that we made to stop repossessions early on in the crisis.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [23]

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Okay. So the vast majority of that would be, actually, you guys giving out forbearance to the consumers?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [24]

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Well, we made a decision not to repossess.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [25]

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Okay. Do you still have a 6-month net income covenant -- positive net income covenant? I believe it might have been on the revolver at some point.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [26]

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Yes, we still have that covenant.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [27]

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Okay. So that would mean that next quarter you would need to post an earnings larger than or equal to the net loss this quarter not to break that covenant, correct?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [28]

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Yes. You need to make some adjustments to the first quarter loss for items that aren't counted there. But yes, the idea is right. You'd have to have net income adjusted for certain items in Q2 that was greater than the net loss in Q1 adjusted for certain items.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [29]

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Okay. Just looking at the 10-Q, I just want to make sure I'm counting it correct. It seems like there are 3 new issues as far as legal disclosures. A New York subpoena, it seems like you've gone back and forth with a new CID from the CFPB and then also something in Maryland. Am I reading that correct? Or are those older issues that you're just updating?

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

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The -- certainly, Maryland and the CFPB are newer issues. New York, I think, existed prior to this quarter.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [31]

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Okay. And then just lastly, we've heard from some lenders that when they set their loss expectations and their provision and allowance, they were using the March 31 economic forecasts. A lot of people have said, we're using Moody's forecast of 9% unemployment. I just want to see, I mean, are you -- were you guys had a hard cut off at March 31? Or are you treating the post quarter-end issue is the subsequent event and also including that in your loss estimate around, in your provision expense here for the quarter?

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

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We're basically including everything we know up until we released and filed the Q.

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Operator [33]

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And our next question comes from Vincent Caintic with Stephens.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [34]

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So first one, and I think something that I've gotten questions from a lot of investors is just when I think about your funding and some of the covenants to the funding. Just wondering if you could talk about if there's any issues there because there's been some discussion about that maybe with forecasted collections coming down that could drive some triggers to your securitizations. Any thoughts there? Any concerns there?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [35]

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We have 2 sets of covenants in our securitization. One relates to early amortization events. So our securitizations revolve for 24 months, after which they amortize. There are early amortization events that would cause that revolving period to cease and the amortization period to commence early. So that's one set of considerations. And then the other is termination events when basically the whole deal would be in default. The early amortization events are set at a higher level than the termination event. So in other words, more degradation would have to occur for a termination event to occur as opposed to an early amortization event. The most relevant early amortization event currently is one which would cause the revolving period to cease if cumulative actual collections are less than 90% of cumulative forecasted collections, and that's based on a cash flow stream delivered at closing, if it were less than 90% for 3 consecutive months. At this point, we've accumulated a nice cumulative cushion on all of our securitizations. So don't -- we don't anticipate any near-term difficulties avoiding an early amortization event. That obviously could change in the future depending on the severity and duration of the pandemic crisis.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [36]

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Okay. That's very helpful. And is that 10% comparable to the -- so your forecasting collection rate was only down 2.3%, which I think is pretty impressive. Is that the best comp against the 10% that you mentioned on the early amortization event?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [37]

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I mean you got to consider both the amount and timing, it's -- directionally goes the same way, but it's not exact.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [38]

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Okay. That's very helpful. Next question on the competitive environment. So understanding that your volumes are down -- unit volumes seem to be down more than dollar volumes. I'm just wondering if you're seeing in this environment maybe some -- if some of the loans you're placing in April and May are higher quality than you would have gotten in the past. Because if I remember correctly, back in 2011, your spreads were good and the loan quality was good coming off with the last recession. So just trying to understand what maybe you're seeing now that maybe the bottom of this has been reached.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [39]

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I think in terms of volume, what you saw in the first quarter is we were flat through February. March was down 20-plus percent as the pandemic started to impact our dealerships. April was down about the same. Although the last part of April was a lot stronger than the first part. And then so far in May, we're up 20-plus percent. In terms of the quality, I think it's too early to say. What happened at the end of the financial crisis, kind of 2008, 2009, was the loans performed better than you would have expected had you just looked at what we knew at loan origination. Couple of reasons for that. One would be kind of reversed adverse selection in a highly competitive environment. We know the loans don't perform as well. That's because there's a lot of lenders competing for those loans and so we get adversely selected. As competition thins out, you see the opposite impact. I think that's one reason why the '08 and '09 vintages performed so well. The second reason is that when competition thins out, it's very hard for borrowers in our market to get a loan. And they know that. They value the loan. We give them more than they would in a more competitive period, and so they're more likely to pay for it. And they probably realize that getting another loan, if they don't pay for this one, would be difficult. So whether we'll see those 2 things play out this time or not, it's just too early to say.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [40]

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Okay. Very helpful. And then last question from me. So there are some concerns about the auctions being closed. Does that have much of an impact to your forecasted collections going forward?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [41]

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I'm sorry, what? I didn't catch the question. Doug, did you hear him?

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [42]

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Just -- sorry, just about the auctions...

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [43]

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It's about the auctions.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [44]

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Yes, the auction is being closed. Does that have a material impact on your collections, your overall collections?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [45]

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Well, right now, we're not repossessing cars. We had an inventory that was at the auction when the crisis started, but a lot of the auctions are actually open. They're selling -- they're doing virtual sales. So we are able to liquidate some of the inventory that we had at the start of the crisis. We aren't adding to it now. So it really isn't an issue. But you'll see a timing difference. You can see that in the tables that we put in the release. Because we don't -- we're not repossessing cars, and we're not seeing those auction proceeds at their usual level, total collections have fallen more than front-end collections, but we provided all those numbers. When we start repossessing vehicles, again, you'll see some of that flip around. I mean the other issue you have there is the values that you're getting at auction aren't what they were before the crisis. So one of the big variables that will determine what the actual collections are is, how long will it take for those values to rebound and to what extent will that occur.

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Operator [46]

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Our next question comes from Randy Heck with Goodnow Investment.

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Randall M. Heck, Goodnow Investments - Partner [47]

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Brett, first -- and Brett and the team. First of all, I want to say this -- the quarter was pretty damn good relative to what I would have expected or probably anyone would have expected in terms of both collections, most importantly, collections, but also origination. So first question is the May -- the new chart you have in there for the percent (inaudible). So what does that reflect, not to mention the back end of May, the back-end collections were up 7.3%. Does that mean that you're now repossessing cars? Or is it something else?

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

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I didn't hear all of that, Randy, but I think I heard enough of it to give you an answer.

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Randall M. Heck, Goodnow Investments - Partner [49]

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Yes. I mean why are the collections better in May than they were in January and February?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [50]

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I think a couple of things. People got behind in March and April. And then I think you have to assume that the stimulus money that people received, possibly in addition to the enhanced unemployment benefits, gave people enough cash flow to be able to make their payments. Having said that, I think if you'd ask me in the third week of March, whether I'd take -- whether I think May collections would be growing faster than they were in January and February, I would have said, no, that's not -- that could never happen. So I do think you're right that so far what's transpired is far from a worst-case scenario.

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Randall M. Heck, Goodnow Investments - Partner [51]

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Okay. And then the volumes, I thought January, February flattish against -- well, that reflected the old competitive environment that May being up 22%, does that reflect any changes in your pricing whether it's you've loosened pricing? Or did you do the opposite?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [52]

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I prefer not to get into pricing discussions, but the -- as we said in the release that the 2 reasons why we believe that May volumes are better than the prior months, one, as you started to see dealers open back up again. Now that's not going to lead, obviously, to a year-over-year increase because they were open last year. I do think the stimulus money that's out there had an effect on our market. And it's certainly possible, we don't know this at this point, but the competitive environment has improved.

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Randall M. Heck, Goodnow Investments - Partner [53]

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Okay. The last thing I had was the estimated negative cash flow impact from the quarter. Normally, when you have negative (inaudible) in pools, you estimate that number -- the number of -- sorry, the negative cash flow effect for the balance of the -- your best estimate that point in time for the life of the loan -- the remaining life of the loan. And so that's the $44 million that you noted. The $130 million, just so I understand that, that's over and above what you would normally be suggesting is going to be the hit over the life of the loan for the entire portfolio for the balance of the life of the portfolio, is that correct?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [54]

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Yes. But I'd say a little bit differently. So the $44.3 million, that's the model responding to what occurred in March. So we had obviously lower collections in March. Second half of March, in particular, people weren't making their payments. So the model looks at that and says, okay, the customer missed their payment. So I'm going to look at all the historical data that looks like that customer that missed their payment, and it's going to reduce the estimated cash flows for that -- for the life of that loan. So it's just a model responding to what happened already in March. But the model doesn't necessarily know about COVID-19. It doesn't look out and say, well, not only did that customer miss that payment in March, but they're going to have continued difficulty in the future because of the uncertain economic environment. So that's where we have to go in, and we have to make an adjustment on top of the model because we know the model doesn't consider the ongoing effect of the pandemic. So that's what the $162 million is.

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

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If you look back in 2008, we made a similar series of adjustments. I think, one in the second quarter of '08 and one in the fourth quarter of '08, about the same magnitude. If you add the 2 numbers together in the low 2%. Those adjustments we made in 2008 turned out to be appropriate. They weren't -- they were -- if you look back on it, they were pretty accurate. Not to say the one we made this quarter will be accurate. I think it's too early to tell, but we certainly -- we don't think it's 0 on top of the $44 million. We don't think the model incorporated everything bad that's going to happen in the future. But we'll -- there's just too many uncertainties to have a lot of confidence that the $162 million is the exact right number.

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Randall M. Heck, Goodnow Investments - Partner [56]

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Okay. So essentially, in terms of given the number, plus $44 million, we're talking $15 a share, more or less -- if it's the cost of the crisis, it's not an ongoing cost, but it's the cost of the crisis. And going forward, other things being equal, if history is any, if we can rely on the history, the competitive environment is going to be substantially better here on out for some period. And then just the last point I wanted to make was for that, once again, you wrote a beautiful letter to shareholders, not [to suggest to] anybody that (inaudible). Just [reading] and a lot of your questions that are being asked on the call will be answered.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [57]

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Thanks, Randy.

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Operator [58]

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Our next question comes from John Hecht with Jefferies.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [59]

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So I just want to make sure I understand the difference now between the GAAP and then adjusted earnings. I mean we've always been accustomed to the floating yield adjustment. But effectively or what you're doing now, we want to -- just to make sure I've got my kind of ducks in order, do I add back the entire provision, put that to the extent you're going to make adjustments in your cash flow collections that would affect yield on a going-forward basis? In effect, take yields down a little bit more going forward because of the loss of your expected cash flows. Or is that -- do your -- is that the right kind of formula to deploy to this?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [60]

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Yes. I mean that's the way that we look at it. As we run the business, we use the adjusted results. If we have a negative cash flow change that reduces the yield. I think we disclosed that in the second page of the release and the adjusted results section. That's how we look at it. I think if you're trying to use the GAAP results to understand the economics of the business, I think it's very, very challenging to try to do that.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [61]

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Okay. And that's helpful. And then did you guys disclose or do you have plans of when you're going to get back in the market for repossessions? And second is, how much of your overall cash flows are reliant upon repossession-like activity?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [62]

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Yes. We haven't made any announcement in terms of how we plan to pursue repossessions in the future. That in terms of percentage of our total cash flows, somewhere around 6%, 7% is repossession proceeds.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [63]

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Okay. And then I'm wondering, I mean, it's pretty impressive that you guys likely went from a largely intact call center focused collections to, I imagine, a large degree of work-at-home collections is -- do you -- I mean, were collections with productivity impact at all? Maybe if you could just give us some commentary about the adjustment to distant collections versus all-in-one center and how you guys adjusted so rapidly?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [64]

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Yes. I would say, overall, extremely pleased with that transition. The team was able to react to very early. It went very smooth. Not just in the collections area, but really in every area of the business. We've got a great culture. We got great people. They're adjusting to a different work environment really in an extraordinary way. I couldn't be happy with how all that went.

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Operator [65]

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Our next question comes from Arjun Tuteja with Jarislowsky, Fraser.

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Arjun Tuteja, Jarislowsky, Fraser Limited - Research Analyst [66]

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Brett, first of all, congratulations on getting featured on Lawrence Cunningham's book, Dear Shareholder, he talks about all the CEOs, which write good shareholder letters and you made it there. So I think it's well deserved, congrats on that.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [67]

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Thank you.

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Arjun Tuteja, Jarislowsky, Fraser Limited - Research Analyst [68]

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And so my question is about your latest shareholder letter, which came out earlier this month. When I compare it to your 2007 letter, which came out in March 2008, it seems you are a bit more cautious this time around. You talk about decreasing economic profit, and you didn't talk a lot about competitors pulling back. Though the last recession pointed out 2 different things, and I think you were optimistic in your 2008 letter. So can you help me in understanding the difference the way you are seeing it?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [69]

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Yes, I don't know. I'd have to go back and read the prior letter. I don't know if I'm more or less optimistic. But we have -- we're in the early innings of what is a very significant challenge. So far, I think you can be -- there's certainly room for optimism when you look through the results from the first quarter. But you have to remember, it's very, very early. This is something that is without precedent. We don't know how it's going to unfold. And I think if it came through in my letter that I'm cautious that's -- that [probably] is an accurate reflection of how I feel.

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Arjun Tuteja, Jarislowsky, Fraser Limited - Research Analyst [70]

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Okay. Okay. But do you see, say, unemployment going up one thing. Unemployment went up in 2008 as well. Would this jump make you more cautious than last time just because the number is higher as it is right now?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [71]

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Yes, I think so. I think with that, that crisis played out over a longer period of time. You had more time to react to what you were seeing. This crisis is much different, not only is the magnitude much greater, but the time period has been greatly compressed. So again, it's not -- I don't think there's a historical period you can look at and say, yes, it's going to play out exactly like that historical period. The financial crisis is close as you get, but I don't think it's comparable enough to make me feel like caution isn't warranted.

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Operator [72]

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Our next question comes from Sanjay Sen with Bloomberg.

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Sanjay Sen, BloombergSen Inc. - President, CIO & Director [73]

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Guys just a couple of questions here. Brett, I know you said you didn't want to talk about pricing, for you in specific. But if you could say anything at all about what you're seeing in the marketplace regarding pricing, that'd be interesting. And then I have a bit of a housekeeping question for Doug there on the question on covenants and the revolver and net income. And I just wanted to know, I think a couple of quarters ago, you mentioned how lenders were using your adjusted net income numbers. And I think Doug alluded that there. So does -- won't we see the positive adjusted net income this quarter? Is that really what they're going to use and therefore, your well on site if any covenant issues with the revolvers?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [74]

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Yes. Go ahead, Doug.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [75]

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No, you go ahead.

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [76]

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I mean I don't really have any insight into how others are approaching their business from a pricing perspective. It's just -- it's too early. There's a lot going on. Customers have money because of the stimulus. We had a period where the dealerships were closed, so you might have some pent-up demand. You have dealers that were gradually opening during the latter part of April and May. And then you have the competitive environment and breaking out all those factors at this point, I just don't have enough information to be able to give you much color on that.

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Sanjay Sen, BloombergSen Inc. - President, CIO & Director [77]

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Sure. Okay.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [78]

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Relative to the adjusted numbers, the adjusted numbers are used to determine the value of the loan asset for our borrowing basis on our revolving credit facilities. They are not the basis for the covenant that John Rowan required about earlier, the $1 of minimum net income for 2 consecutive quarters. So that's not the way that, that covenant is calculated.

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Operator [79]

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Our next question comes from Robert Wildhack with Autonomous Research.

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Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [80]

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Question on borrower health and unemployment specifically. When we've gone through previous downturns, you've got borrowers who could find work, just maybe not the ideal level or at lower levels. But this time, you have a different situation, not only is unemployment significantly higher, but you're going to have people who are reluctant to turn to -- return to work for safety reasons, you're going to have industries totally changing the way they operate. How do you think about those things in this new environment and factor that in when you're forecasting collections?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [81]

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Yes, I think your description of what's going to happen in the future is certainly one opinion. You say it with a lot more certainty than any opinion I would have on that. I don't really know how the economy is going to unfold. I don't even know how the health aspect of this crisis is going to unfold. So I think it's very difficult to pick a specific scenario and, say, what do you think of that scenario? It's just you're in a period as much as everyone would like to see first quarter results, where we say, here is the number. This is the impact of the crisis. We got that all figured out. It's just not possible at this point. It's just one of those situations where we're going to have to see how this unfolds over time. And as the impact evolves, our forecast will get more precise, and we'll be able to look back on it and say, this is the impact. But I think it's just too early to say that at this point.

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Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [82]

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Okay. And maybe to just try to hit on the same theme in a different way. Is there any more color you can give us on how we can connect what you're seeing today, quantitatively, qualitatively in the economy and in your borrowing base that can translate to the adjustments you've made to your collections?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [83]

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Yes. You'll have to ask that a different way. I didn't quite follow.

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Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [84]

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Okay. We can call up offline.

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Operator [85]

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Our next question comes from Benjamin Weinger with 3-Sigma Value.

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Benjamin Weinger, 3-Sigma Value Investment Management, LLC - Portfolio Manager [86]

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I'm looking at your Board of Directors on your website and it's comprised of 4 members. I see, Brett, the CEO, 2 guys affiliated with Prescott General Partners, which is your largest and longest-standing investor for over 20 years, and Glenda, who's been with you since 2004. I guess my question is that as a NASDAQ-listed company, what are the requirements for the independence of the Board of Directors? And specifically for an Audit Committee?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [87]

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See, you'd have to look that up on the NASDAQ website. I don't know what that is off the top of my head. I'm sure that we comply.

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Benjamin Weinger, 3-Sigma Value Investment Management, LLC - Portfolio Manager [88]

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You're sure that you comply? How about do you have anything else on the line here who can confirm what the requirements are for independences?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [89]

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No, that's not. I mean call your lawyer.

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Benjamin Weinger, 3-Sigma Value Investment Management, LLC - Portfolio Manager [90]

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Is your lawyer on there? Nobody knows?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [91]

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You're asking me a legal opinion. I mean go look it up. I'm sure we comply.

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Operator [92]

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Our next question comes from Giuliano Bologna with BTIG.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [93]

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I guess, starting off, one of the things that I think would be interesting to get some perspective on. One of the other tests into your bond indentures is your fixed charge coverage ratio, which has impacted more so on a cumulative basis looking back on a 12-month basis. But it really is measured with an EBITDA metric that's on a -- really on a GAAP basis. So if you saw another revision similar to the '08 scenario, you would probably trigger that, which would dramatically restrict your ability to take on any debt. Is there any kind of way to think about that covenant and how you could navigate around it?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [94]

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Are you referring to our senior notes?

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [95]

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That's correct, yes.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [96]

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Yes. I mean the covenants in the senior notes are based on -- are based on the accounting that was in effect at the time of issuance for the first one -- well, for both of them. So the operative gap there is the gap that we are operating under last year.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [97]

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That makes sense. And I guess one of the other things would be interesting to add a little bit of perspective on when we look at the securitization transactions, one of the levers that you do have is you have the ability to over collateralize certain transactions and effectively push more assets into certain transactions. Do you -- have you started doing that in any of the transactions at this point?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [98]

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We've done that on a limited basis.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [99]

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That makes sense. Then the -- then, I guess, on a slightly different -- on another different point. The -- you have that table that Moshe was referring to around your collection rates. One of the things that I'm trying to get a little bit of perspective on there. It looks like your average loan balance, if I kind of run more of an average balance, is up 11% to 12% in the first quarter of this year versus the first quarter of last year. And then you have that kind of adjustment that is, I guess, levelizes it, but it doesn't seem to kind of fit directly with the 12% number. And I'm assuming that's more so related to kind of strong originations in the May time frame. But if we think about those numbers, with that in mind, it looks like 4.9% up is net -- it may not -- may be down if your loan size is up 12% or so in that ballpark. And then kind of as a second point, if I then look at a lot of the unemployment collections and the stimulus checks, most of that came in, in April, and you had some very large catch-up payments for a lot of the deferred and delayed unemployment checks. Do you think that had more of an impact in terms of getting delinquent borrowers to temporarily reperform? Or was it more of a -- or is it -- or is the impact different in terms of your ability to get better credit performance?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [100]

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Yes. I think it's very difficult to say. I mean we had -- you had both of those occurring at the same time. You had customers that had missed their payments. You had the additional cash flow from the stimulus and potentially enhanced unemployment. And as a result of all those factors, we saw a rebound in collections in the last half of April and in May.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [101]

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That makes sense. Then the only other thing is thinking about originations. Is there any perspective on where -- how you want to manage your originations going forward? And the main reason why I ask that is that if you continue up 20% versus last year, just the allowances alone could significantly impair your earnings stream and kind of get you closer to that fixed charges covenant in my model, at least, obviously, not your numbers. But I'd be interested in kind of seeing how you think about those types of impacts and would you go out and try and do some sort of consent to change any of the covenants?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [102]

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I think...

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [103]

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Doug, do you want to…

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [104]

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Yes, we don't want to have the accounting dictate how we run the business. We want to run the business, looking at the economics of the business. So if running the business the right way would cause us to potentially encounter a covenant issue in our revolving credit facilities, then we prefer to run the business the right way and have a conversation with our lenders explaining why that's the prudent thing to do.

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Operator [105]

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And our next question comes from Thomas Shen with GoldenTree.

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Thomas Shen;Golden Tree Asset Management, [106]

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In terms of repossessions, I guess, what are the kinds of things that you're looking for before you're going to feel comfortable going forward with that?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [107]

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Well certainly, I mean, one thing is in the several states that do have restrictions, you obviously want to make sure that those restrictions are lifted. I think the rest of that decision is a judgment call that we'll make internally. And we'll look at the degree to which the economy is open and people are employed in specific areas and try to make a subjective decision that is both right for ourselves and right for the borrowers. There's no scientific formula that would tell you precisely when you ought to start repossessing. And I don't think one approach works for everywhere.

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Thomas Shen;Golden Tree Asset Management, [108]

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Would -- and would you go state by state?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [109]

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I think it's really -- it's a customer-by-customer decision. I mean it's -- in a lot of ways, it's not much -- it's not really different than what we have done historically. You're trying to work out an arrangement with the customer if you can that keeps them in the vehicle. That's always the best case for the customer and for us. If there comes a point where the customer is just unable to pay for the vehicle at a certain point in time, you have to make the decision to repossess. The state by state certainly comes in if there is specific orders in a given state, we obviously would follow those orders.

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Operator [110]

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Our next question comes from David Scharf with JMP Securities.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [111]

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Most have been answered. I was wondering if there was any color you could provide on the May volumes, obviously, there is likely to be some pent-up demand included in that increase. But Brett, I'm wondering, do you get feedback from your dealers about, for lack of a better term, something the equivalent of a take rate. Obviously, you're on a different origination kind of platform. But you had mentioned it may be a little too early to make any comments or conclusions about whether the competitive environment may be easing up. But do you get a sense whether or not in the May volumes your dealers were finding kind of fewer alternative financing options and that competition may be easing?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [112]

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I mean you have an anecdotal sense, but reluctant to comment on the competitive environment until you have data that you can look at. You have pent-up demand. You have stimulus money. You have dealerships reopening. And potentially, you have a change in the competitive environment, but it's just too early to try to say how much of each impacted the May volumes. I guess even if you concluded the competitive environment had gotten easier in May, you still wouldn't know how long that would last. So I'm not sure it would do you a lot of good.

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David Michael Scharf, JMP Securities LLC, Research Division - MD and Senior Research Analyst [113]

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Got it. Got it. Yes. No, obviously, we're all kind of grasping for early indicators. And I guess it's just a follow-up, similar topic. Is there any anecdotal information to share on, I guess, the overall health of the dealer network, particularly the independents, maybe the roughly 2/3 of the base that are independents? Are you aware of any attrition thus far among independent dealers through the crisis? Or is it still early and most are hanging on?

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Brett A. Roberts, Credit Acceptance Corporation - CEO & Director [114]

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Yes. I think it's still too early to say there. I'm sure that like every business, there or like most businesses, I should say, they're under a lot of stress because of the environment that we're in.

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Operator [115]

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Our next question comes from Vincent Caintic with Stephens.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [116]

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Two questions. First for that 6-month net income covenant. Could you let us know what are the exclusions or what are the takeouts from net income to come to that covenant?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [117]

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I mean, basically, the biggest one would be nonrecurring gains or losses. So you've got a $7 million pretax number this quarter. There is couple of other things that are less significant. But at the end of the day, it's not based on the current quarter's results, those adjustments aren't real material.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [118]

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Okay. That's helpful. Second follow-up. So I understand that forecasts are difficult. And the collections forecast is based at the end of March and CECL makes things even more volatile. But March volumes and payment collections were deteriorating, when I think about your -- the disclosures you gave with May, it's getting a lot better. And so I'm wondering if we're using the data that we're seeing in May, could you actually see some of these numbers go in the positive direction? So meaning your forecasted collections being better than that 2.3% here, you're forecasting currently? And then from a CECL basis, maybe going the other direction with a release.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [119]

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I mean conceivably, I think that -- again, it's just too early to tell a lot of variables out there. So as Brett said, I think it's really early. We'll just have to see how it goes. Certainly, results in the latter part of April and in May have been encouraging, but there are a lot of variables out there. So we'll just have to see how that plays out.

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Operator [120]

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Our next question comes from Harold Levy with MCA Realty.

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Harold Levy;MCA Realty, [121]

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I just have one question on the financials. Looking at the cash flow statement, net cash from operating activities is pretty much equivalent to same time last year. So looking at the balance sheet, it looks like cash and cash equivalents have been drawn down significantly from $187 million to $25 million approximately. So I'm just trying to tie out those 2 things and what's caused the significant cash decrease in the quarter?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [122]

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I think the current quarter, if you look over a long period of time, is more reflective of how we've tended to run the business over time. We try to operate with less unrestricted cash as opposed to more because of the negative carry. And we rely on our revolving credit facilities as our primary source of liquidity. So I think the amount we were sitting on in cash and cash equivalents last year is unusually high just due to some financing activities that occurred in the latter part of last year.

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Harold Levy;MCA Realty, [123]

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Got it. That makes sense. And then on the cash flow statement, which just if I'm reading this incorrectly, that's fine. But the net cash isn't really impacted, but the cash equivalents have gone down so much in the quarter. So am I -- is that -- am I just missing something there? Or how does that tie with one another?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [124]

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I guess I don't really follow the question.

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Harold Levy;MCA Realty, [125]

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Okay. Yes. Just you guys -- it looks like you guys utilized a lot of cash in the quarter for what you just -- for deployment, which is great. And -- but the net cash slightly increased with the adjustment. Obviously, on an unadjusted basis, it would be a large negative number. But with the adjustment, at the same time last year, it's pretty much the same or slightly higher. So I'm just struggling to understand how so much cash has been used, utilized effectively, I'm sure, but the net cash has increased slightly.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [126]

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Well, we've -- there were a couple of unusual -- one unusual transaction that occurred during the quarter. And that's we repaid about $400 million in the long-term debt. We also bought back about $300 million in stock during the quarter.

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Operator [127]

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Our next question comes from Mark Hammond with Bank of America.

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Mark William Hammond, BofA Merrill Lynch, Research Division - Associate [128]

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Brett, Ken and Doug. I noticed there was an increase in the share of the mix rather towards more purchase originations. I was just wondering what the cause of that was for the first quarter.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [129]

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No specific reason. It could just be that franchise dealers got a little larger share of the consumer traffic during the pandemic. Franchise dealers, especially the larger franchise groups, tend to prefer the purchase program. So that may be the reason, although we don't know that, perhaps, absolute certain.

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Mark William Hammond, BofA Merrill Lynch, Research Division - Associate [130]

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Cool. Yes. That makes some sense. That's what happened. And then lastly, I know you mentioned stock repurchases. And since I am a high-yield analyst, I have to ask if you've ever considered repurchasing some high-yield bonds with both of them around 90 as of yesterday?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [131]

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Not really. Never say never, but I think our primary focus is investing in new loans and secondarily buying back stock, and we think that's the best use of shareholders' capital.

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Operator [132]

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(Operator Instructions) Our next question comes from John Rowan with Janney.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [133]

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Thanks for the follow-up. Just connecting a couple of things you said, Doug. Why contribute more collateral on as you said, on a limited basis to some facilities if you were in close to triggering an early amortization event? As far as I know, that is the cure for a shortfall in that 90% collection threshold.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [134]

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Well, you couldn't violate the early amortization test. So if cumulative actual collections were less than 90% of cumulative forecast, that would lead to an early amortization event. You couldn't cure that by contributing additional collateral. You would have to basically proactively contribute excess collateral to securitizations to avoid breaching that trigger in the first place.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [135]

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So is that why you contributed excess collateral to, as you said, a limited number of facilities during the quarter?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [136]

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Yes. We contributed to the more recently issued securitizations. The reason being is they've been outstanding for a shorter period of time and have had less time to build up a cumulative cushion versus the forecast.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [137]

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Okay. I mean does that create a liquidity event for you guys? I mean if we continue to have negative revisions to forecasted collections, will you continue to build in additional collateral? And then with the potential breach of a covenant on the revolver, where -- how does that end if you, in fact, need to lean back on your revolver for liquidity if you're losing advance out of the ABS facilities?

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [138]

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I mean we have over $1 billion in unused and unencumbered collateral at the current time. So we're in a very, very strong position in terms of excess collateral. All our securitizations are performing better than expected at this point. So the -- at this point, the securitizations aren't a near-term concern. Very happy with the performance there. As you suggested that minimum net income potentially may be a concern. And if it is, we'll have a conversation with the banks about it.

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Operator [139]

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With no further questions in the queue, I would like to turn the conference over to Mr. Busk for any additional or closing remarks.

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Douglas W. Busk, Credit Acceptance Corporation - Senior VP & Treasurer [140]

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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 [141]

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