World Acceptance Corp Q4 FY2023 Earnings Call

Good morning, and welcome to World Acceptance Corporation's Fourth Quarter 2023 Earnings Conference Call. This call is being recorded. And at this time, all participants have been placed on listen-only mode. Before we begin, the company 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 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 such 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 thank you for joining our fiscal 2023 year-end and fourth quarter earnings call. Before we take questions, I want to highlight a few points. We made several changes early in fiscal 2023 that we believe will significantly impact our business, and we are very pleased with the outcomes. We tightened our underwriting policies about 18 months ago due to increasing economic uncertainty. Concerns about inflation, a normalization of delinquencies after a period of exceptional portfolio growth, and rising recession fears were primary factors driving these strategic adjustments. Instead of lending amidst economic uncertainty, we substantially reduced our exposure to our highest risk customers. While new customer loan volume grew by 5% year-over-year in the first quarter, it sharply declined by 35% to 45% during the fiscal second, third, and fourth quarters as we aimed to enhance credit quality. During this period, our book-to-look ratio fell to a low of 20% in the second quarter, gradually improving to 25% in the third quarter and 30% in the fourth quarter. Compared to pre-pandemic periods, new customer originations are currently around 90% to 100% of the loan volume in similar fourth quarters, excluding the extraordinary growth we saw in fiscal 2022. Delinquency rates have shown significant improvement, even as our book-to-look ratio increased from 20% to 30% over the year. Early-stage delinquency declined in the fiscal third quarter, and late-stage delinquency dropped notably in the fiscal fourth quarter, which we anticipate will lead to fewer charge-offs in the upcoming quarter. Our first pay default rates have remained low throughout the year, despite increases in approval and loan booking rates. New customer originations in the first quarter had a 16% lower first pay default rate year-over-year. The second quarter saw a 37% reduction in first pay default rates year-over-year. The third and fourth quarter rates are approximately 25% lower year-over-year. We expect the positive credit quality and low first-pay default rates observed in fiscal year 2023 to persist into 2024. To emphasize the strength of our recent credit performance, the first pay default rates for the last three quarters match or are lower than pre-pandemic levels and are comparable to those in vintages positively influenced by COVID stimulus. We are also focused on improving both sides of profitability by reducing losses and increasing gross yields. Alongside our favorable credit performance, we have consistently improved gross yields on the same vintages. New customer originations in the second quarter had gross yields that were 7% higher year-over-year, and both the third and fourth quarter new customer vintages achieved gross yields about 25% higher year-over-year, all while first pay default rates were reduced. As we normalize former customer loan volume, similar adjustments have been made for returning and refinanced customers, emphasizing enhanced credit quality and overall portfolio yield. These achievements reflect great teamwork, especially given the reports of rising default and delinquency rates across various credit sectors throughout 2022, including personal installment loans. Even though economic uncertainty persists this year, management is preparing for the long-term incentive plan with vesting tiers of $16.35, $20.45, and $25.30 per share due to improved credit quality, yields, and operating conditions. We expect to reach the first tier of vesting by the end of this fiscal year, assuming stability in credit quality and performance alongside low unemployment levels. We began this fiscal year determined to manage the portfolio to endure the pressures of economic decline, and this quarter's results show we are poised to do that while also seizing opportunities for growth. I am immensely proud of the hard work put in by our branch team members and their supporting leaders, trainers, and corporate operations, IT, analytics, human resources, marketing, and customer success teams. We are effectively navigating a challenging environment and are entering fiscal year 2024 from a position of portfolio and capital strength. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open the floor for any questions.

We will now begin the question-and-answer session. Our first question will come from Vincent Caintic with Stephens. Please go ahead with your questions.

Thank you. Good morning. I appreciate the opportunity to ask a question. My first question is regarding your comments on the portfolio and the tightening of underwriting. Can you provide insight into where the portfolio is contracting and where you expect it to stabilize? Additionally, do you anticipate further tightening, and what factors are included in your current underwriting costs considering the macroeconomic conditions? Thank you.

Hi. Good morning. Great question. So I think from this point forward, I think, we've experienced the maximum tightening that we will experience going forward. So we've already begun loosening our underwriting, especially, into the third quarter and fourth quarter of this past year. Even into the first quarter of the current year we've also begun loosening up a little bit on our new customers as well. So we don't anticipate the portfolio to shrink this year. We do expect to have somewhat tamed growth compared to prior years likely in the 0% to 5% range is what we would expect. Our focus now is on higher credit quality and profitability over portfolio growth in general.

Yes. Just to clarify so we've loosened underwriting relative to last fall sort of that August, September, October, November time frame but it's still tighter than it was 1.5 year, 2 years ago. So we're still cautious just given the macro environment.

Thank you for your insights. It's encouraging to see the yield or price associated with these loans increasing. Where do you anticipate that will go from here? When discussing underwriting, are you indicating that there's potential for some loosening? What are your expectations for yields moving forward? Thank you.

Yes. So when I talk about loosening it's more of opening up the tickets slightly for new originations. It's really not loosening in terms of pricing. As I mentioned the yields have increased pretty dramatically in the past couple of quarters. We continue to expect those yields to stay very high, especially, for our new customers coming into the portfolio. In terms of yields both gross and net yields into next year our focus is on growing the overall portfolio's gross yields. And as we maintain credit quality we expect those net yields to grow as well.

And I can add to that a little bit right? So there's also some accounting impacts to yields last year. Obviously, we don't accrue interest on loans that are more than 60 days contractually past due. And when those loans roll to today's contractually past due, we reverse the three months of interest that have been accrued to that point on those loans. So, obviously, last year with higher 60-day contractually past due loans and a large number of loans rolling to today's contractual past due now the headwind to yields. And now obviously, that has reversed and that should be a tailwind to the yields this year. So, we would expect to see yields on the overall portfolio creep up a little bit during the year.

Okay. Great. That's super helpful. And the last one for me. Just if you could talk about your just conversations with your funding partners and banks broadly. The industry has been in difficulty over the past month. And there's been talk about some of them maybe tightening the lines that they're providing to people. So if you could maybe kind of update us on kind of your conversations with your lenders and any sense if you need to update us if you have any funding needs. Thank you.

Sure. Yes, obviously, we've paid down a substantial amount of debt on our credit facility over the last six months, and we've actually repurchased some bonds during the fourth quarter as well. So, we're really in a good place as far as funding at this point. There hasn't been any indications of tightening from the credit group, but if that were to be the case, we'd be in pretty good shape just getting the low levels of outstanding debt we have at the moment.

Okay. Great. Very helpful. Thanks so much.

Our next question will come from John Rowan with Janney. Please go ahead with your question.

Good morning guys.

Good morning.

I want to follow-up Vincent's question a little bit here. Obviously, this is the time of year where we typically get an announcement from you guys regarding a renewal and renegotiation of your credit facility. I'm wondering where those discussions stand, whether or not we should expect a change in the base rate or the spread to the base rate. Obviously, you didn't really address whether or not, I think the prior question whether or not there potentially be a change in liquidity. But just wondering if we could maybe address the rate question, if there's any information you can provide at this time.

Yes. Those discussions have not begun yet, and they typically start about a year before our bank meeting, which will be in June. We will really begin those discussions this summer.

You usually renew it about a year prior; you don’t let it go current.

That's right.

We should expect an announcement regarding any changes to that facility in June or this summer.

Around there, yes. That's right.

Okay. Can you please repeat what you said about your expectations for the accruals related to your compensation agreement?

Yes. Sorry. Yes. So we have three vesting tiers within our long-term incentive plan. They vest at $16.35 for the first year $20.45 for the second tier and $25.30 per share for the last year. And we continue to accrue for those and we anticipate the first year of vesting as early as the end of this fiscal year. Again, that assumes that credit quality and performance remains stable and unemployment remains low. So we feel like we have the portfolio at a place where the yields can put off enough revenue to achieve those targets, and we've controlled G&A as well as delinquency enough to hit those targets coming up as early as the end of this fiscal year.

Okay. Thank you.

And just add to that yes, so obviously we're coming into this fiscal year with substantially lower delinquency both on the front end and the back end. And our zero to five-month, 10-year customer is substantially lower than it has been. So it's a – that's our most risky customer, right? So it was at 5.9% at the end of March, compared to 13.1% a year ago, right? So we've taken a substantive amount of risk out of the portfolio. And just given where delinquency is we'd expect substantially lower charge-offs going forward obviously barring any sort of macro event but it's certainly in the near term.

Yes. And I add a little more clarity to what Johnny is saying. So it's not just that our lower 10-year customer base is lower in the portfolio relative to last year. It's also the – those lower-tenured customers today are actually much less risky as well. So this isn't a matter of shrinking our investment in new customers in order to rightsize the portfolio on its own. It's a combination of both being more selective which does result in a much lower investment in new customers. But also with being more targeted we're seeing much higher credit quality and much lower expected loss rates within that bucket as well.

Okay. And then how many – how much bonds did you buy?

We repurchased $9 million in face value in Q4 and at around a 20% discount. And then...

20% discount to par correct?

Correct. Yes.

Did you book a gain – was there a gain booked in this quarter for...

Yes. So that – the gain will show up in interest expense.

That's included in the interest expense number. How much is that gain in interest expense for the quarter?

It was around – a little less than $2 million.

It's roughly $2 million. Is there – did you have a discussion with the rating agencies prior to buying bonds at a 20% discount to par regarding their assessment of its technical default?

Well, there wouldn't be a technical default. There's nothing in the bond agreement that prevent us from buying shares back at a discount. So they have a concept called a selective default but we're buying these bonds in the open market anonymously, right? We're not in any way pressuring bondholders into selling their bonds, right? So – and obviously we're in a pretty healthy spot in terms of our balance sheet. So we're not distressed – we're not distressed bonds pressuring bondholders into selling, right? So we feel comfortable it doesn't fall into that bucket.

Okay. All right. Thank you.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Prashad for any closing remarks.

Thank you all for taking the time to join us today. This concludes our 2023 year-end earnings call for World Acceptance Corporation. Thank you.

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