World Acceptance Corp (WRLD) Q3 2023 Earnings Call Transcript

Good morning, and welcome to the World Acceptance Corporation Third Quarter 2023 Earnings Conference Call. This call is being recorded. 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 represents 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, planned, expect, believe, may, will and should or any variations 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, 2022 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's my pleasure to turn the floor over to your host, Mr. Chad Prashad, President and Chief Executive Officer.

Good morning, and thank you for joining our fiscal 2023 third quarter earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. We are pleased with the trends that are emerging from recent policy changes. As we discussed during our most recent quarterly earnings call, we began adjusting our underwriting toward the end of our last fiscal year as the economic uncertainty was increasing. This was primarily due to three drivers: inflationary pressures on our customers' cash flow, delinquency normalization after a period of extraordinary portfolio growth and stimulus, and growing macroeconomic and recessionary concerns. The first trend, delinquency is showing positive trending. Our early-stage delinquency continues to decline month after month, while later stage will continue to result in elevated charge-offs into next quarter. Earlier in fiscal year 2023, we quickly reduced our exposure to our highest risk customers and successfully avoided the temptation to lend into the economic uncertainty. Now we are fortunate to be in a position of credit performance improvement during the fiscal year, especially with our new customers. Second, we are now beginning to carefully renormalize credit. The third quarter's book-to-look ratio increased slightly to around 25%, which is up from a low of around 20% during the second quarter. This compares to approximately 35% during the third quarter of fiscal years 2021 and 2022. The book-to-look reduction has been focused on our most risky applicants and has also resulted in significant reductions in recent first-pay default rates, which is a strong indicator of future credit performance. For example, new customer originations in the first quarter had a 16% lower first-pay default rate year-over-year when compared to the first quarter of the prior year. Second quarter new customer originations first-pay default rates were 38% lower year-over-year. While still early, our most recent third quarter first-pay default rates show a 30%-plus reduction compared to the third quarter of fiscal year 2022. To underscore how strong recent credit performance has been, the most recent two quarters have some of the lowest vintage first-pay default rates including pre-pandemic comparisons as well as the low first-pay default rates of vintages positively impacted by COVID stimulus. We're especially proud of the accomplishment considering the reports of increasing default and delinquency rates across several credit industries during the second half of calendar 2022. In addition to early indications of dramatic improvements in performance for these vintages, we continue to steadily improve the gross yields. New customer originations in our second quarter of 2023 had gross yields over 7% higher year-over-year when compared to the second quarter of fiscal year 2022, while the third quarter gross yields are over 25% higher, again at the same time at a 30%-plus reduction in first-pay default rates. Similar adjustments have been made for returning and refinance customers as well. These performance outcomes are a result of incredibly hard work from our branch team members as well as their supporting leaders and trainers as well as corporate operations support, IT, analytics, HR and marketing teams. As mentioned, our increasing confidence in the early indications of performance, low delinquency and high gross yields allowed us to begin increasing marketing to new customers, our approval rates and our loan volume towards the end of the third quarter. For reference, new customer originations were 31% of the originations in the third quarter of 2022 and 45% in the third quarter of fiscal years 2019 and 2020. This quarter, new customer originations increased with each subsequent month to 55% of comparable December volumes in fiscal year 2019 and 2020 and 45% of the prior year's December. We expect to continue increasing our investments in marketing and new customer acquisition during the fourth quarter and into the next fiscal year. Finally, our world finance team is outstanding. I'm incredibly proud of our leaders at every level in the company and not just the great accomplishments that I mentioned earlier, but that they embrace opportunities with positivity, fun and grace. At this time, John Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have.

Thank you. We will now begin the question-and-answer session. First question comes from John Rowan of Janney. Please go ahead.

Good morning, guys.

Good morning.

The $7 million of incentive change mentioned in the press release, is that a reversal? If so, which line item is it? I assume it would be in personnel. Is that correct?

Yes, that is in the personnel expense. That's correct. And there were two things going on there. One portion is a reversal related to some officers who left the company during the quarter. And the other is a shift from the branch level of compensation from bonus to base pay.

I'm trying to understand what the ongoing run rate will be for that figure moving forward. Clearly, the reversal won't be present next quarter. Can you clarify how much of the $6.9 million is due to a reversal versus a change in compensation?

I don't have that number in front of me right now, but I believe it's around $3 million, but I can check that.

Is it safe to assume that the $40.7 million will become $45 million next quarter since it will exclude the approximately $3 million reversal?

Yes. That's fair, yes.

I appreciate the non-GAAP numbers you've provided, but your portfolio did see a decrease. I think taking the provision now and accounting for the charge-offs might be exaggerating the impact of credit. Your allowance ratio has decreased sequentially, and I'm trying to understand why that happened. Was it due to a change in the seasonal factors you're using, or what caused the drop? I noticed it went from 13.5% last quarter to 12.9%.

Yes, that's an important aspect. You can observe the seasonal factors in the earnings release, where the factor changes from 1.05 to 0.94. This certainly contributes to the situation. Our portfolio risk is lowest in December, just before tax refund season. Another significant factor is the shift towards lower tenured customers. The zero to five month category has a much higher expected loss rate compared to the longer tenured categories. As of December, the zero to five month group represents only 7.4% of the portfolio, down from 9.8% in September and 13.8% in the previous December. We have significantly reduced the risk in our portfolio by decreasing new customer originations.

I'm trying to understand how the increase in new customer originations affects the portfolio moving forward. What was your comment regarding the rise in originations? You mentioned in the press release about increased loan originations towards the end of the quarter.

That's right. So as we've been able to prove to ourselves that we could grow throughout this period at the same time is dramatically reducing the first-pay default rates within these vintages. We did begin to grow sequentially, November over October and December over November in terms of new customer investments. And we'll continue that into the fourth quarter and the next fiscal year as well. So to the earlier question, there's the seasonality factor. There's less of a risk in the overall portfolio as there's been less investment in new customers. But at the same time, the investments we're making in new customers over the last two quarters are much less risky than you would have historically seen. So that's also a factor into the overall reserve rate.

Okay, and then last question for me, where do you stand on your covenants, the waivers, and when would you potentially be refinancing your revolving credit facility? Thank you.

Sure, yes. So we amended the credit facility during the quarter, and we have plenty of room on all the covenants and there are no waivers as of the quarter end. And so we will look to extend that facility in this coming summer.

If I'm not mistaken, John, it was around June, you used to do it every year, correct?

That's right. Yes.

Okay, all right. That's it for me. Thank you.

Thank you.

Thank you. Next question comes from Vince Caintic with Stephens. Please go ahead.

Thank you for taking my question. Following up on John Rowan's inquiries, I find it encouraging that first-pay defaults are improving. I'm curious about how this might impact delinquencies and losses moving forward. Given that 25% is quite high, should we anticipate a return to historical levels, and what will the timeline look like for this? Thank you.

Sure. The front-end delinquency as of December is significantly lower than it was in September and aligns with historical December trends. This indicates that charge-offs are likely to decrease. While the 90-day delinquency bucket is still relatively high, it has dropped by approximately $4 million to $5 million since September. We anticipate this downward trend will continue through Q4. As of January, the 90-day delinquency has reduced by nearly $6 million compared to December, and we expect January charge-offs to be lower than those in December. Looking ahead, we believe that February's charge-offs should decrease compared to January, with March also expected to be lower than February. Overall, the trends are quite positive, and we anticipate that by March, the delinquency situation will improve significantly, leading to reduced charge-offs going forward. However, we do expect charge-offs in Q4 to be elevated compared to historical levels, but they should show improvement in growth compared to Q3.

Okay. That's very helpful. Thank you. And helpful January data, I really appreciate that. The ADQs that came down $6 million. And then I guess in terms of the credit reserves, is the level that we see today anticipating those declines? Or should we be expecting further reductions in credit reserve allowances?

No, we haven't explicitly factored in the declines that occurred in January in the allowance. Much of that will already be incorporated, but there are no additional reductions expected for what we're currently observing.

Okay. That's helpful. And last one for me, so I appreciate that the number of new customers or low-tenure customers has shrunk, and it had an impact. And now it seems like, okay, there's an opportunity to grow the business. You're going to be spending more in marketing. If you can maybe help us understand like now with the growth that you're anticipating going forward, going after new customers going forward, what's the difference in terms of the quality of new customers you're going after or maybe the learnings that you've had for what you're going after with new marketing going forward versus sort of the prior new customers that maybe had the generated some of the higher loss content recently?

Yes, sure. So during the last two quarters, we had fairly dramatic reductions in our overall marketing spend, especially for new customers. So one of the main reasons that loan origination volumes declined within those two quarters isn't just a factor about the reduction in our overall approval rate. It has as much to do with driving new applications as anything else as well. So we feel fairly confident that many of the changes we've been able to make very successfully from an operational perspective allow us to turn marketing back on and do it in a way that drives in applications that we know that we are very likely to approve and at the same time, be able to judge the risk accordingly and price them accordingly. So one of the factors in December's originations increasing has to do with turning that marketing back on, albeit to a much lower level than we've done historically. So that gives us confidence that as we turn or increase the marketing investment, we'll be able to drive those new customer applications and be able to approve them appropriately and as well as book them without having any dramatic reductions to first-pay success and without having any reductions to overall expected gross yields on those loans.

Okay, that's very helpful. Thanks so much.

Yeah.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Prashad for closing remarks.

In closing, we are pleased with the changes to our portfolio and believe it will generate significant cash flow in the coming operating environment, fiscal 2024 and the fourth quarter of fiscal 2023. Thank you for taking the time to join us today. This concludes the third quarter earnings call for World Acceptance Corporation.

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