World Acceptance Corp (WRLD) Q2 2022 Earnings Call Transcript

Good morning, and welcome to the World Acceptance Fiscal 2022 Second Quarter Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Chad Prashad, President and Chief Executive Officer. Please go ahead.

Good morning, and thank you for joining our fiscal second quarter 2022 earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. First of all, I'm pleased to report that we experienced record originations growth in this most recent quarter. The overall portfolio grew $170 million or 25.7% year-over-year. In fact, it was the largest single quarter growth on record. Further, we experienced this broad growth across all customer types on the strength of a record number of customer applications for credit. In particular, we saw tremendous increases in new and returning customer loan volume when compared to last year or even pre-pandemic levels, with both customer types loan origination volumes increasing by more than 40% when compared to the same quarter two years ago, which is the most recent pre-pandemic comparison. Refinance volumes returned to and slightly exceeded pre-pandemic levels as well. To help fund this growth, we're proud to have completed the company's first 144A bond issuance, providing an additional $300 million in working capital. This funding channel diversifies our capital structure and provides stability to the company moving forward. In addition, we still expect to continue diversifying our capital structure further, especially as our larger loan, lower interest portfolio continues to grow. Delinquency remains low on a relative basis and within expectations. With the change to CECL provisioning last year, we should expect to grow our provision in real-time as our portfolio grows, which temporarily depresses net income as compared to our historical delinquency-based provisioning model. With respect to the quarter's provision for loan losses, it is credit cohort specific and naturally adapts based on customer credit and loss expectations. The loan growth and the earlier provisioning of CECL should positively impact revenue and income in future quarters. Of note, our new customer portfolio increased by 54.6% in the second quarter and 101% year-over-year. This share of our customer base has the highest expected losses and corresponding impact on our provision. We expect the cohort quality to remain relatively consistent in the near term based on several factors, including the overall economic environment, changes to our credit underwriting and new loan products, to remain the most attractive option for our best customers. We continue to expect to hit our long-term incentive EPS targets before the end of fiscal year 2025. On the customer access front, as a result of some of these changes, today, over 40% of our portfolio is below 36% APR. This is a dramatic increase from 26% just three years ago. Today, nearly two-thirds of our portfolio is below 50% APR, an increase from 50% of the portfolio just three years ago. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open it up to questions about our second quarter fiscal 2022 earnings.

The first question comes from Vincent Caintic with Stephens.

I guess a question on the credit reserves. I know you talked about the new additions to new customers. But if you could help us understand how to think about credit provisioning going forward. It was kind of a big jump in the credit provisions as a percent of the originations. Wondering how to kind of split that out between the new customers versus the existing customers? How much of that might have been an effect of the back book or the existing book versus the originations? Any help you can provide with that because it was quite a big change.

Sure. Good morning, Vincent, this is Chad. I'll start, and Johnny, feel free to add anything. Typically, when we account for future losses under CECL, we estimate that day one losses correspond to the time a customer spends with us. Generally, newer customers tend to have higher expected loss rates. There is a greater overall credit risk associated with new customers compared to repeat customers or those who have been with us longer. During periods of significant growth, particularly with new customers, which increased by approximately 54.6% in the last quarter and doubled year-over-year, we see an increase in expected losses. Our previously former customers, who have returned after paying off a loan, also grew by 55% year-over-year, most of that in this past quarter. These returning customers usually carry a higher expected loss, prompting adjustments in our provisions. As these customers continue with us into future quarters, especially if they refinance or take on new loans, their expected losses are likely to decrease at the individual level, resulting in a lower provision. Typically, in times of rapid growth, especially with new and returning customers, we should anticipate a significant rise in the provision. As these customers perform well, we either release that provision or it will be applied to actual losses. The expected losses and provisions for customers who remain with us in future quarters are likely to be reduced. Our business is generally seasonal, with significant growth typically occurring in our fiscal third quarter—October, November, December. In the fourth quarter—January, February, March—we usually see substantial paydowns due to seasonality. Under CECL, we expect more fluctuation in how provisions are accumulated and released due to the short-term nature of the loans. As we expand, particularly in the last second quarter and moving into the third quarter, we should see our provisions increase accordingly, reflecting day one expectations. Then, as those customers perform and/or settle their debts in the fourth quarter, we can expect to see larger releases, resulting in wider swings in either direction.

One thing I'll add is, when we look at our cohorts, right? So our customer base by tenure buckets, the expected loss rates are still performing very well relative to historical levels, right? But I think some people don't appreciate how steep that curve is, right? The expected loss curve. So when you move from the 0- to 5-month bucket of tenure to the 6- to 18-month bucket, that expected loss rate is 60% higher or almost 60% higher on that 0- to 5-month bucket versus the 6- to 18-month bucket, right? So as we add these new customers, which is really a positive thing, right? But we're glad to see the new customers return, it does have a pretty significant impact on the provisioning in those periods.

Thank you for that information. I wanted to expand on your comments. It seems that this quarter, the growth in new customers is continuing to accelerate. Therefore, all else being equal, the provisions as a percentage of the originations will likely increase. Following the holiday season in the next quarter, would you expect that ratio to decrease? Is my understanding correct?

You can observe the ratio decline, but you'll also notice a drop in the portfolio. We've consistently experienced a lot of volatility in the provision, including seasonal changes as the portfolio expands and then contracts. With CECL, this effect is even more pronounced. Therefore, you can expect to see significant provisions in the second and third quarters, but smaller provisions in the fourth quarter as both the ratio and the portfolio decrease.

That's right. One thing I want to highlight as you consider this in relation to the provision is that we view it as a very positive sign for our overall portfolio and its health that we’re experiencing growth across all types of customers. We're not solely relying on existing customers or focusing heavily on acquiring new ones. We're witnessing significant growth in our repeat business, former customers, and new customers alike. So, to Johnny's point, those new customers represent a valuable investment that supports our returning customer base. We believe that ensuring growth across all three customer types is crucial for maintaining the overall health of the portfolio.

That's helpful. Can you clarify the expected losses for a new portfolio compared to the existing one? Has this changed over the past couple of quarters, or has it remained fairly consistent?

It's been fairly consistent across the tenure categories. Our new customers will initially fall into the 0- to 5-month category and then transition into longer tenure categories the longer they remain with us. The performance of these tenure categories has been very consistent, and in many instances, even better than historical levels. Much of this information is available in the earnings release. We categorize customers by less than 2 years and more than 2 years, and while the CECL model is more detailed, you can see how the expected loss rates differ based on the earnings release information. The trend is quite steep; as our other customers move from the early tenure buckets, the expected loss rate decreases significantly.

Okay, I have one final question before I join the queue. Considering the portfolio and the yields, I believe the yields have been decreasing as well. How does this relate to the current situation, and what should we anticipate for yields in the future?

Yes. So yes, as we've moved into the larger loans, yields have come in as expected. And a lot of that lower yield is on that back book, right? So those longer-tenured customers, that's where we're growing the large loans is the lower risk longer-tenured customers. So as far as an investment, we're happy with that as well.

The next question comes from John Rowan of Janney.

It's been a long time since you've been in a normal credit environment. And a lot of the commentary we hear from these calls that we're getting back to a normal credit environment. I wonder if you'd venture to guess what your normalized credit losses are. I'm not sure, historically speaking, if we can rely as much on them given the shift in the company. So I'm just curious what the kind of top-down picture is in the model for World of what the actual loss rates are?

Sure. We won't provide a specific expected loss rate, but generally, we anticipate our delinquencies and loss rates to increase from their current levels, especially as we bring in new customers. However, we don't expect them to reach the levels seen in fiscal '19 and '20, which was a significant growth period for new customers. The difference now is that we are also incorporating many former and current borrowers into our portfolio, so the shift in mix is not as significant as it was back then. Therefore, we expect the loss rates to be somewhere between where they are now and not as high as in fiscal '19 and '20.

John, to add some context, one significant change from fiscal '19 and '20 to today involves our underwriting practices. During the pandemic last fiscal year, we took the opportunity to tighten our underwriting standards across the board, particularly for new customers. This approach is now well integrated into our operations. In the most recent quarter, we received a record number of new customer applications, even surpassing pre-pandemic levels, while still being more selective. We believe this indicates an improvement in credit quality, as we are making more informed decisions upfront. Additionally, we have introduced new products for larger loans at lower rates to stay attractive and competitive, which should help enhance customer retention over the long term. Overall, we expect loss rates to increase due to the current macroeconomic environment, but we don't anticipate them reaching pre-pandemic levels.

So I guess you're not going to tell me what the expected lifetime losses are that you're reporting under CECL? I'm essentially asking the same question in a different way.

That's right. Yes. We won't get to that specific of it.

Okay. There has been a lot of discussion about the provision expense each quarter. I understand that CECL introduces significant volatility in that figure, especially given World’s highly seasonal loan portfolio. The allowance ratio increased slightly compared to the previous quarter, suggesting that you have set aside a bit more. I assume this increase is due to higher delinquencies. What can we anticipate for the next quarter? Should we expect the ratio to remain stable compared to this quarter, or should we anticipate another increase? That's all from me.

I believe we usually see an increase in delinquency as we enter the third quarter. Therefore, it is reasonable to anticipate that the allowance ratio might be slightly higher in Q3. This pattern was evident even before CECL. Additionally, if we manage to attract more new customers in Q3, that could also influence the allowance ratio. Historically, this trend tends to reverse in Q4, and we expect to see the ratio decrease at that time.

Excuse me. There is some information that I failed to read at the top of the call. I apologize. So I'd like to read that now before I turn the call back over to Mr. Prashad. And that is 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 31, 2021, 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. And at this time, I'd like to turn the call back over to Chad Prashad for any closing remarks.

Thank you. Just a few closing remarks. I just want to thank our branch teams and those who have done a tremendous job in navigating the last one and a half years and really putting our customers and their needs and their safety first. We also continue to win top workplaces awards across the country, which really reflects the incredible work family that our team has created. And I really couldn't be prouder of them. Thank you for joining us today. This concludes our fiscal year 2022 second quarter earnings call. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.