World Acceptance Corp Q3 FY2020 Earnings Call

Good morning and welcome to the World Acceptance Corporation sponsored Third Quarter Press Release Conference Call. This call is being recorded. At this time, all participants have been placed on listen-only mode. Before we begin, the corporation has requested that I make the following announcement. The comments made during this conference call may contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that represent the corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Statements other than those of historical fact as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will, and should or any variation of the foregoing and similar expressions are forward-looking statements. Additional information regarding forward-looking statements and any factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements are included in the paragraph discussing forward-looking statements in today's earnings press release and in the Risk Factors section of the corporation's most recent Form 10-K for the fiscal year ended March 31st, 2019 and subsequent reports filed with or furnished to the SEC from time-to-time. The corporation does not undertake any obligation to update any forward-looking statements it makes. At this time, it is my pleasure to turn the floor over to your host Chad Prashad, President and Chief Executive Officer.

Good morning and welcome to our third quarter earnings call. I'm joined by John Calmes, our Chief Financial and Strategy Officer. I hope you've all had time to review the press release this morning. This quarter we continue to include additional information about our growth specifically to highlight the increase in our portfolio of new customers and the corresponding risk in this bucket over the last couple of years. We believe continuing to grow our new customer portfolio is a great investment for the company and we are really focused on the expected return over the long term. At this time, we'd like to open up the call for any questions that you may have.

Thank you. We will now take our first question from John Rowan with Janney. Please go ahead, your line is open.

Good morning, guys.

Good morning.

The 7.4 million shares outstanding, is that just down quarter-over-quarter because of averaging down from the prior quarter's repurchase or is that a number as a basic figure because of the GAAP loss in the quarter?

The shares outstanding—you mean the average shares outstanding? Yes, the quarter started at a lower amount than the previous quarter. So it's just the impact of that.

Right. I just wanted to make sure that it wasn't because there was a GAAP loss that you're using basic shares as opposed to diluted shares.

No. No, no.

Okay. And then again just—I know you made some changes to the debt covenants during the quarter. It looked like it changed with the fixed charge coverage ratio. I just want to be sure as we head into next year that you still don't have an exemption in your covenants, say for net worth, for any dilution to book value caused by CECL adoption?

So it's not in there yet but we've had those conversations with the banks and expect to be able to amend the agreement to adjust for any impact from CECL. We've come a little bit further with the implementation of CECL. We ran the model as of December 31st, 2019 and we expect the impact to be between $10 million and $20 million when we implement CECL. So, even without an amendment coming into effect—we still have the fourth quarter to build equity—even without an amendment, we thought we'd be okay. But at the same time, we ultimately expect to amend the agreement to adjust for that.

So you think that the allowance only goes up by $10 million to $20 million because you're at about $113 million, so even a little bit less than that. So you're saying the allowance only goes up $10 million to $20 million on 6/1/2020. Is that right?

Well, yeah, so we tend to go up $10 to $20 million as of December 31. If we applied the new methodology to December 31 that number could actually come down a little bit by March 31 or April 1, due to a change in the mix of our portfolio.

Okay. No, I mean that's just a much smaller build to the allowance than other lenders have been guiding to.

Right. But it's part of a difference—we have to factor in the difference between where we're starting and where they're starting. Our current allowance methodology adjusts pretty quickly for the impact of new customers and losses flow through the allowance fairly quickly under our current methodology. So we wouldn't expect it to have a significant change.

Okay. And then just given the fact that we're kind of tied—well, I guess this also goes back to the question on what's excluded from the covenants because you proposed a settlement with the DOJ and SEC for $8 million. I assume that that was just your proposal; they haven't countered. I don't know if you're going to tell me whether they countered or not. But let's say that number is actually drastically higher and you have a loss next quarter—would that delta in book value also be excluded? Because again, we're sitting here a little bit over—well, actually a little over your covenant net worth trigger. I'm just trying to understand when you can step back into the market and buy back stock, right? Because you've got CECL coming due, you're still trading above book value, CECL's going to consume some capital probably less than people are thinking of $10 million to $20 million and the allowance which still gets tax-affected. Do you have to wait until the Mexico settlement is settled before you get comfortable putting your foot back in the water to buy back stock? Because all of these things, if there's a much bigger settlement in Mexico or CECL is actually—and CECL, but they're all consumptive of book value.

Right. So we feel like we can't elaborate too much on the accrual from Mexico, but we feel like it's a reasonable estimate for the ultimate settlement. As you noted, historically our largest earning quarter is the fourth quarter. So we expect to add equity quite a bit during the fourth quarter.

Okay. Great. Thanks.

And now we take our next question from Vincent Caintic from Stephens. Please go ahead. Your line is open.

Hey. Thank you and good morning. Just—I'll take a step back in a bigger picture question. So appreciate you highlighted your long-term fiscal 2025 guidance on the press release. I guess from this point getting there, if you could just discuss how you envision that five-year framework working. And from where we're seeing it today where you have EPS declines year-over-year how does it—when and how does it inflect? And how do you get from here to that long-term guidance?

Yeah. Good morning, Vincent. A lot of the way that we view this—the last couple of quarters—is this is an investment into future growth both for the company and for EPS. In the last two years, we've grown our portfolio by a little over 20%. We've also instituted a number of acquisitions that increased the rate at which we gained new customers, increased our retention of former customers and current customers, and reduced the risk of the portfolio in the back end. It's our firm belief that this initial investment in gaining new customers and increasing market share—as long as we continue to retain customers and treat them fairly so they stay with us over the next couple of years and we grow them into a less-risky portfolio long term—will pay dividends. So this initial lump that we're taking is really an investment to expedite our overall long-term growth objectives. One thing worth pointing out is a lot of this growth—roughly half of it in the last few years—has come from acquisitions that were opportunistic. They are fairly large acquisitions. When the price makes sense we are happy to take them as long as we believe they are accretive to the long-term objectives of the company. At the same time, we put a lot of work into growing organically. This quarter we tried to highlight some of our organic growth without the acquisitions to have a more apples-to-apples comparison. This year, we grew 23% year-to-date excluding acquisitions, which is roughly the same as last year but head and shoulders above what it has been in years past. We believe that the combination of rapid growth of new customers as well as the retention that we're seeing in current and older customers will help us not only jump-start the growth of the portfolio but begin to right-size it quickly. I think we're beginning to see that happen and we'll probably see that happen within this quarter, the fourth quarter for us. That's one side of the equation. The other side for hitting these long-term EPS targets is reducing the number of shares outstanding. We went out earlier this year and began a fairly aggressive repurchase program. We'll probably try to continue that within the next couple of quarters. A lot of that depends on the equity that's available and what the share price is. Over the long term, it's really as simple as two things coupled with controlling our cost to service. All of our models show that we're on target to hit this in the next five years.

Okay, got you. And from your models I guess, so this year we've seen the EPS—you made those investments. When do you—when should we expect to see the harvesting of that growth, say more like a fiscal 2023 type event? And then I guess when you have your charts, which are really helpful about your new customers versus your tenured customers, it seems like two years is the dividing point. This past year is your first year of accumulating these new customers. So once we get to the two-year mark will you start to see that inflection? I'm just trying to understand when we see the harvesting—the EPS growth.

That's a great question. From the chart in the press release, it's broken out into customers less than two years and customers more than two years. It looks like a fairly substantial gap, but it's actually more subtle than that. With the new CECL methodology going forward, we have fairly granular buckets for the types of customers and the associated loss rates. We'll begin to see it more rapidly, I would say within the next couple of quarters, especially as CECL comes into play. We'll begin to see the reserves come down, granted we don't make any large acquisitions that dramatically change the distribution within the portfolio. As those customers age in six-month, nine-month, 12-month buckets we'll begin to see it rather rapidly.

Okay, got you. Thanks so much.

Yes. Thank you.

And we'll now take our next question. Our next question is from Kyle Joseph with Jefferies. Please go ahead. Your line is open.

Hey, good morning and thanks for taking my questions. First, I wanted to talk about the competitive environment. Obviously you guys have found pockets of growth and have been going very strong, but just talk about the competitive environment both from other storefronts as well as online.

Over the last couple of years, one of the biggest changes we've seen in the industry is growth in not only awareness but adoption of installment loans. Over the last five to seven years, industry growth has been tremendous. A lot of that recognition of the product itself has to do with online lenders and more credit reporting related to this industry in general. Customers see installment loans more as an alternative product to payday and title loans, and that has raised awareness overall. We've done a lot in the past year specifically to target customers who are looking for installment loans and looking to improve credit. We've rebranded ourselves to more accurately reflect what differentiates us in the marketplace. We have seen customers who are interested in rebuilding their credit histories view us as a viable option, and we've seen a lot of success with customers in that area. We've continued to benefit from customer recognition of the product and from improvements we've made in soliciting those customers and bringing them into the marketing funnel.

Got it. That's very helpful. And then just factoring in CECL and as your book matures, can you walk us through sort of day-one impact in CECL and day-two? I know you touched on it earlier and you highlighted the potential to equity so that would be a tax-adjusted number of what your reserve increase would be. But more along the lines of how you're thinking about day-two impacts.

I think the new model could create more volatility within the year but it should be fairly neutral over the course of the year. We're anticipating using customer tenure and the associated loss rates to project what the losses will be. In periods of large growth like the third quarter where we add a lot of new customers and they are typically shorter-tenure customers, that could drive the allowance up. But we see in the fourth quarter typically those lower-tenured customers will pay off or charge off during the fourth quarter. Because of that, you could see swings throughout the year due to seasonality. Over the course of the year, it should be fairly neutral as far as an impact on the provision, or we believe it will be.

To highlight a couple of things related to potential acquisitions: earlier in Q1 and Q2 we had some fairly significant acquisitions and we began to see those show up in our provision and our loss rates in Q2 and Q3 and potentially in Q4 as those portfolios age. One of the differences with CECL is if we were to take on a large acquisition you would see the reserve increase dramatically in that quarter. So there could be the case where we take on a large acquisition and it has a dramatic impact to EPS within that quarter versus having that spread out over time. That's something we have to keep in mind and consider as far as what we think is the best potential long-term investment for the company.

That's very helpful. Thanks very much for answering the questions.

Thank you.

We have no further questions at this time. Mr. Prashad, I'd like to turn the conference back to you for any additional or closing remarks.

All right. If there's no other questions, I appreciate all of you being able to join us today for the third quarter earnings call. We look forward to speaking to you in the spring for the fourth quarter earnings call. Thank you.

Thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference. You may now disconnect.