Douglas Busk - Senior Vice President and Treasurer Brett Roberts - Chief Executive Officer Kenneth Booth - Chief Financial Officer

John Hecht - Jefferies David Scharf - JMP Securities Vincent Caintic - Macquarie David Henle - DLH Capital Daniel Smith - Peyton Capital

Thank you, Vince. Good afternoon and welcome to the Credit Acceptance Corporation first quarter 2015 earnings call.

As you read our news release posted on the Investor Relations section of our website at creditacceptance.com, and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of Federal Securities law. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, and which could cause actual results to differ materially from such statements.

These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information included in the news release. Consider all forward-looking statements in light of those and other risks and uncertainties.

Additionally, I should mention that to comply with the SEC's Regulation G, please refer to the adjusted 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.

The first question, just because I want to hear the update to your generic discussion on competition and what’s going on out there.

Really a continuation of the trend we saw last quarter, obviously unit volume growth was solid 28%, volume per dealer was up again for the second consecutive quarter after many quarters of decline. So that was nice to see.

Active dealers grew at 18% which generated the nice result for the quarter. In terms of the competitive environment, we’ll probably echo the same thing we said last time.

I think the best measure of that is the volume per dealer and the fact that it grew for the second objective quarter and actually grew a little bit faster than last quarter, certainly a good sign and it’s very likely an indicator that the competitive environment is a bit easier than it was a year ago but there's – we don’t have a lot of anecdotal evidence to back that up. If you look at the numbers the volume per dealer is up about half a contract a month.

So it’s not the kind of thing that a dealer or a salesperson would really notice but in the aggregate numbers it certainly generates a positive result.

Is it as simple as some of the indirect lenders are pulling back and you’re recapturing market share, or is it more complicated or dynamic than that?

It’s still a very competitive marketplace. There’s still lots of lenders out there that are writing loans and are part of the market.

So nothing dramatic has happened but again in the absence of another explanation, we look at the volume per dealer number as a good indicator of where the competitive environment sits.

So marginal changes like you have contract a month just kind of adds up is kind of what I am hearing?

Correct.

Looking at it, it looks like your advance rate went down which is obviously a good thing but then your expected collections went down. Is that related to the duration of loans you’re buying or some other commentary around that?

Primarily the duration but also the mix of business. So the forecasted collection percentage, the absolute amount doesn’t matter so much as is whether or not we hit that forecast is the important thing that will drive our returns.

68.7% is what we are forecasting for the business we have written so far in 2015, if we hit 68.7% and that will be a good number.

So it’s a mix and duration. And then last question before I get back in the queue is that your both volumes were strong I guess across the board this quarter but your purchase volume – it’s almost doubled year-over-year and I'm wondering is that a strategic -- shift in the strategic focus or is that just kind of the volume you’re getting from your dealers, number one?

And number two, to the extent it is a strategic shift how will this impact your P&L, I guess, predominantly in the provision line going forward?

We've seen the level of purchase business vary dramatically over the years. Typically when the market gets more competitive we write a little bit more purchase business and then when the market gets less competitive, we end up writing the more traditional business.

It has been increasing, it’s still fairly modest percentage of the total, particularly relative to where it’s been historically. We really view it as a different channel for us.

We’ve come to the realization that there are some dealers out there who just don't have an interest in writing our portfolio of business for one reason or another and we don’t want to exclude those dealers from our markets. So we have begun to pursue those dealers that aren’t interested in the traditional business and we’re happy to write purchase business with those dealers.

Actually maybe reiterate on the competitive front some of the questions just asked. I mean you guys have been doing this for decades, trying to still get a sense – this is a 30% or so unusually large year-over-year increase in volumes, as well as a double-digit percentage increase in average volume per dealer.

Do you get a sense that it's primarily certain key indirect lenders who were pulling back from the market that have been opening up some opportunity or is this more perhaps just the maturation of all the salespeople you’ve added in the last few years, trying to get a sense if this is more competitive or more kind of internally driven?

I think it’s difficult to say. If you look at the list of lenders and auto count and how much volume people are doing, certainly there are some lenders that have pulled back but there is many others that seem to have done the opposite.

So it’s tough to get a read on it from our perspective. I’d like to think our salesforce is maturing and getting more productive.

Certainly the number of dealers that we enrolled, the new actives during the quarter was a sign of that. We can’t enrol a new active without a salesperson out in the field having some success.

So it’s nice to see that number, and the other thing that’s nice to see is we’re not losing as many dealers, and that’s not necessarily obvious from the release but if you look at this sequential increase in our active dealers and you compare that with the historical quarters you’d see it was a strong quarter from a dealer retention standpoint and we're happy to see that as well. But difficult to separate how much we can take credit for and how much of it’s just the market.

And maybe shifting to just curious some kind of anecdotal feedback from dealers. I mean for a new dealer to sign up to your program, it takes more of a commitment and the number of levels than for a traditional and direct program.

As your salespeople are signing up so many more active dealers, are you hearing any anecdotal evidence from some of the newer dealers that the deepest of subprime borrower is getting more challenging to find financing for it?

Not necessarily hearing it from the dealers. I think we hear a lot of positive feedback about our program from the dealers that we’re signing up.

They are signing up for a reason because they feel like we can help them, so that I think again the fact that we signed up so many dealers this quarter is a positive sign there and again the dealer doesn’t – it’s a half contract a month, so the dealer doesn’t necessarily see it as a major shift from where we were a year ago. I guess this quarter would be a positive shift but certainly they realize it’s more competitive than it was three or four years ago but in terms of year-over-year, or quarter to quarter I just don’t think they have precise enough information to give us any insight there.

And on the newer originations this quarter, it looks like really the only potentially negative versus positive metrics seem to be the lengthening in average term versus a year ago, and any color you can provide on that? Looks like it went out to over 49 months and maybe some context how that relates historically, perhaps this is just a return to normalization.

No, I think it’s a continuation of a trend that started many many years ago, I think as I said last quarter when I started with the company the longest term we would write is 24 months and I think we probably prefer that if we could get away with that in the marketplace but the marketplace has changed. The customer expects to get a newer nicer vehicle.

In order to accommodate that you have to be willing to write a longer-term. So over the course of many many years we've gradually lengthened that term out and the way we’ve done has been I think very methodical, we lengthened 24 to 30 months and we made sure we could price that, we felt comfortable we could forecast the collection rates and we knew how that business would perform and then we moved up to 36 months.

So we just continued that trend. In the latter part of last year we extended the term out again, I think again all things being equal if we could get away with writing a short-term in the marketplace we would but ultimately the way we make those decisions is what is going to provide the best combination of volume and profit per unit and we are comfortable that we made decision on that basis.

Good afternoon guys. Thanks so very much and a good quarter.

It seems like as the prior calls you’ve alluded to the significant growth that has been a turnaround over the past two quarters and yields direct sales ex 1, 2 [ph] which I think is a turnaround this quarter. And just want to take a couple of steps back and not necessarily focused on competition, but what is your view of what's changed say this quarter and the past quarter versus a year ago where dealer counts are growing, yields are also improving and how do you see this upcoming year playing out in terms of those same trends?

I guess first of all, relative to the yield, I mean the yield has actually continued to decline as it has gradually for several years now. So maybe you’re calculate the yield differently than we are but we have the yield calculation in our 10-Q and it’s continued to tick down.

It was 25.9% for the quarter, 27% for the first quarter last year and 26.3% for the fourth quarter last year. So it’s continued to tick down a touch.

In terms of the driver what's changed since a year or two ago, again I think it’s a combination of the competitive environment and the work we do every day to try to get better at what we do. It’s difficult to say how much we get a credit for and how much it’s just the external environment changing.

Certainly the volume per dealer, you could probably attribute that most likely to a change in the competitive environment. The success we've had in enrolling dealers and keeping dealers perhaps that's – you would wait more as things we've done to effect positive change internally but again that’s speculation, I think it's impossible to figure out how much of it’s extraordinary, how much of it’s internal.

We continue to try to get better at what we do and we’ve had certainly – we grew our sales force very quickly and then we had a period where we had to fill in and we had to go through a period of attrition and replacement and training and I feel like our sale force is performing at a high level today. But hopefully there's continued room for improvement there.

And then changing gears here. Capital management, stock has done very well and you’ve continued to buy back stock.

Just wondering how we should think about say the pace of that going forward and how you think about capital management with your stock at these levels? And actually on the side note I just notice that the cash on your balance sheet is elevated relative to what it usually is historically and just if there's any driver to that, that’d be great?

I mean our first priority in managing our capital is always to make sure we have the capital that we need, to fund anticipated levels of originations. So what that means is all things equal, the higher the growth rate the less amount of stock we’re going to buy back and vice versa.

So we bought back a lot of stock last year. We increased our funded debt to equity from 1.8 at the end of ’13 to about 2.5 at the end of 2014.

It continues to be in the 2.5 range at year end. So given current origination levels we are focusing intently on making sure we have the capital that we need to fund the business at this point.

In terms of the cash sitting on the balance sheet, that’s really just going to be timing for the most part. It's really a function of the fact that we issued a $300 million securitization and a $250 million senior notes offering in the first quarter.

The sum of those two things was more than the outstandings we have in our revolving credit facilities. So we have a temporary situation where we have cash on the balance sheet.

Could you just spend a second and remind us what the size of the sales force is and what your plans are over the next 12 to 18 months to either grow that sales force or not grow it? And maybe just spend a second talking about the evolution of that sales force retention and turnover within the sales force itself and whatever challenges or difficulties that presents?

We had about 265 people in the sales area, 235 of which were sales people, actually what we call market area managers. Those levels haven't changed significantly over the last couple years.

As Brett mentioned, we increased the sales force pretty dramatically back in 2011 and 2012, not planning for any significant expansion of that sort in the near term. We will perhaps opportunistically increase it a little bit but nothing of the magnitude that we saw several years ago.

In terms of turnover, it’s something we are focused on, something that we attempt to obviously minimize so we’re continuing to make sure we have the right compensation plans in place, provide the sales people the right tools to make them more effective. So I would say at this point it’s just one of those things we’re focused on, in trying to build a healthy organization.

And I am just curious once a salesperson brings in a dealer, does he or she in any way stay involved in that relationship or do they simply turn it over to more of a relationship manager that then manages that relationship with that dealer?

The market area managers stays with that dealer. They manage the territory and they are responsible for both enrolling the dealers and servicing active dealers.

So when you talk about your retention getting better, does some of that relate to you doing a better job with your sales force in terms of them staying connected to dealers? Is there a social connection there?

I think first of all, I would say as we roughly doubled sales force we did it in a very rapid of period of time. That created a turnover problem.

We didn’t, that’s why, anticipate that was going to have and perhaps we could have, so we spent the last 6 to 8 quarters trying to fill in where we had attrition and also trying to address the root causes of why salespeople were choosing to leave, whether we were hiring the wrong people or we had the wrong incentives in place. And so we’ve addressed some of those things.

I think it’s too early to say whether what we've done so far will prove to be successful. I think the faster we grow volume the more likely it is that a salesperson will stay because they are successful and they are making money.

Mid-last year when we weren’t growing quite as fast, it was a bigger challenge but we’re only through now almost 4 months of the year and I think we need to see a few more months to play out before we think – before we say we have attrition problem corrected.

I think one thing you said in the past and this may not be true, so let me put words in your mouth is that profit per loan is more important to you than like spread? And if that's true why – and you guys are compensated basically on return on capital, so if that's true why is that better for your compensation and for stockholder returns?

First, I think the way that we are compensated is aligned with shareholder returns. It’s not just profit per unit, it’s profit per unit and including the cost for our equity capital and it’s profit per unit times the number of units that we write.

So we’re trying to maximize that equation and so you what that means is that at certain level of return or profit per unit you’re willing to make a trade for less margin and more volume. And the opposite is true as your margins get skinnier.

So I think what that's done over a long period of time is it’s focused us on the right things. I think it causes our return generally to be a lot higher than what you'd see in the rest of the industry which I think has been a positive thing for shareholders.

And it just gives us a consistent way to price and think about the business whether it's a tough competitive environment or an easy competitive environment, we always price the exact same way.

So when you moved up the duration – does the longer duration loan tend to have a higher spread or lower spread or is there any difference?

The way it's presented in the table the longer-term loan will generally have for the exact same customer a lower collection rate. So everything else on the deal consistent if you move the term out, the collection rate is going to drop.

And that’s reflected in our forecast. So if the collection rate drops, typically the lower the collection rate, lower the spread, again because of the way the table is presented, it’s one minus the other, not necessarily the one divided by the other, you get a little bit different look at it if you take the forecasted collection divided by the advance.

But the way it’s presented the spread, it would typically shrink on a longer term loan.

So I guess that’s kind of the root to my question is if the spread goes out and just factually your duration is lengthening, so as the spread declines and the turnover rate of the loan declines, does that mean that the portfolio, all else equal sort of going to a lower return on capital because of the lengthening duration ignoring all other factors?

I think if you look at the trend in our income statement, you would see that the revenue yield or financier deal, whichever you want to look at has been declining over time and the business we’re writing today, assuming there's no positive forecast variance going forward has a lower yield than the businesses on the books already.

Is that solely because of competitive forces or is that something -- is there some element of conscious effort that you’re doing that because – you are into that?

Well, it’s a combination of both. I mean certainly if there were no competition our returns and our yields would be a lot higher.

So clearly we have to price with an eye toward – given the market that we are in, we have to take that into consideration. Clearly our pricing is a function of the competitive market.

It’s also a function of trying to maximize that equation that I talked about.

So just to focus on that part, the conscious maximization – I was trying to – based on what you’ve said so far, I am just trying to understand your perspective why you think that it can be good to lengthen duration and to –

I think the criteria we use to decide whether it's good or not is the one I described, where we are trying to maximize the equation of volume and profit per unit. So typically a longer-term loan will be a larger loan which is an advantage.

If you have the same return in a larger loan, your profits are higher, you’ve deployed more capital at the same return. It will typically have a lower return however.

So that works in the opposite direction and so you need to decide whether the volume that you’re generating is enough to make up for the lower return and the combination f the lower return and the larger contract size. It’s just -- we work through the math of that, we do it very carefully, we make sure that any changes we make are positive ones and we feel comfortable that in this case it’s very likely that the lengthening term is a good thing for shareholders.

So I mean essentially your bonus or your option vesting is based on return on capital. Now there is a cost of capital but when you say you make a larger loan that isn't necessarily good for return on capital, right?

No, again, it’s not – if I am not being clear, it’s not a return on capital incentive plan or return on capital focus, it’s what we call economic profit which certainly a return on capital is an important component of that but it’s not the only thing. Economic profit is the return we make over our cost of capital multiplied by the capital we have invested in the business.

So is it better to have a billion-dollar business at a 15% return or a $3 million business at a 14% return? It takes into consideration the size of the business and how much capital you’re employing along with the returns that you are employing it with.

So basically you are just saying as long as you have available capital, it makes sense to deploy as long as it’s economically profitable?

That's certainly true. But the way we think about it is at what price do we generate the best combination of volume and profit per unit and what policy generates the best combination of volume and profit per unit, and by policy -- term policy is one of those.

Obviously sales -- productivity by the sales force improved on year-over-year in the last few quarters. Can you discuss the distribution of that improvement amongst your salespeople?

In other words, was it fairly evenly distributed, that is similar to the salespeople size, similar increase in performance or did you see perhaps an improvement in maybe the bottom in two quartiles of the sales force which might be made an indication of either a learning curve or cycling through the better people driving the salesperson productivity?

I mean I think the best to answer that is the performances of the salesperson varies dramatically. Your top salesperson grows much faster than your average or your bottom.

So it’s a wide disparity, it always has been. So it's not as if everyone is performing at about the same level and they all went up by 28%.

With 235 salespeople, the difference between number one and number 235 is a vast difference. And in general we’ve been successful in our better markets.

I know that the markets we’re most successful and grew faster than the markets where we’ve had less success. What I take from that is I think there is a little bit of momentum that develops in a market.

Sometimes the first dealer that you sign up is the toughest in the market because nobody knows who you are and you can’t the dealers in the area they’ve had success on your program. But then you get a critical mass in a market and you have a lot of dealers using your program and enjoying success it’s sometimes easier to grow it from there.

So I think the performance by salesperson probably reflects that dynamic as well as the skill and experience and ability of the individual salespeople which obviously varies as well.

And then secondarily you had a tremendous amount of success obviously with this slightly longer term loans. One, obviously the risk with longer-term loans is that to the extent they underperform your expectations, the magnitude of underperformance can be bigger given the term.

Do you factor that into your cost of equity considerations when you are considering the economic -- the marginal economic profit of a loan? In other words, how do you factor in the probably greater amount of risk in a longer-term loan into the cost of equity that you use when calculating the economic a profit for such a loan?

The term of a loan doesn’t affect our cost of equity is the simple answer. End of Q&A

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 [email protected].

We look forward to talking to you again next quarter. Thank you.