World Acceptance Corp (WRLD) Q3 2024 Earnings Call Transcript

Good morning, and welcome to the World Acceptance Corporation's Third Quarter 2024 Earnings Conference Call. This call is being recorded. At this time, all participants have been placed in a 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 forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that represent 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 historically factual, as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will, and should or any variation of these 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 these 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 ending March 31st of 2023 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 statement it makes. And at this time, it is my pleasure to turn the floor over to your host, Mr. Chad Prashad, President and Chief Executive Officer. Please go ahead, sir.

Good morning, and thank you for joining our Fiscal 2024 Third Quarter Earnings Call. Before we open up to questions, there are a few areas I'd like to highlight. Earlier this year, we signaled a tightening of credit and a slower portfolio growth pace for this year. Our new customer loan volume increased about 22% sequentially this quarter from the prior quarter and about 56% compared to last year's third quarter. However, the percentage of new customers relative to our customer base was around 30% lower than the prior normal third quarters, especially pre-COVID. Our credit quality performance continues to improve and remains near historical norms or even higher. While our approval and booking rates have improved significantly from our low in August of this year, through the end of this calendar year, our first pay defaults remain at or below historical norms. New loan application volume increased around 30% this quarter when compared to last year's third quarter. The earlier stat I mentioned regarding the loan comparison was a 56% increase in new customer loan volume for the same quarter. New applications increased only 1% sequentially over the prior quarter, second quarter compared to the third quarter, as we shifted marketing and underwriting strategies that resulted in higher approval and booking rates, which I previously shared is a 22% increase in booked new customer lines sequentially. And those new customers continue to perform well with first pay default rates that are significantly better than fiscal year 2022 and in line with last year and our pre-COVID comparisons. Further, our overall new customer application volume has increased back to within 1% of our pre-COVID application volumes after increasing over 30% in the third quarter compared to last year's third quarter. We believe we have successfully increased our approval rates without sacrificing credit quality or yields and are focused on continually improving both our underwriting and marketing strategies. The return of former customers increased around 6% sequentially in the third quarter compared to the second quarter and 17% compared to last year's third quarter. The percentage of former customers relative to the customer base continues to be higher than the prior normal comparable periods, especially pre-COVID. For new customers and the whole portfolio, our yields continue to improve. This is a result of improved gross yields and reduced delinquency. While we are pleased with our current progress in delinquency improvement and the trending of the underlying portfolio, we believe there is still room for improvement in the current and upcoming quarters. With the expectations of economic stability increasing and the decreasing likelihood of major unemployment impacts, management continues to accrue for the long-term incentive plan with vesting tiers of $16.35 and $20.45 earnings per share due to the much-improved credit quality, yields, and operating conditions. Finally, I'd like to thank all of our wonderful team members who have helped many customers from our communities during the calendar year of 2023, helping to establish and rebuild credit as well as meeting immediate financial needs. We have an absolutely amazing team and I'm very grateful for their commitment to their customers and to each other. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have. Thank you.

We will now start the question-and-answer session. The first question will come from John Rowan with Janney. Please proceed.

Good morning, guys.

Good morning.

So I just want to understand what change in assumptions drove the $10 million provision release. Obviously, you talked about lower loss assumptions going forward, but what is the loss assumption that's included in that $10 million reserve release? And what economic factor change drove that assumption?

Yeah. So you kind of broke up there, right? So the biggest piece that's driving the reduction in that for the quarter is that December is, seasonally, our lowest risk quarter of the year, right? So just due to the fact that obviously our customer base will sort of have windfall cash receipts in the fourth quarter. This historically drives down both delinquency and charge-offs in the fourth quarter. This is something we seasonally see every year. So there is a seasonal adjustment that happens in the fiscal third quarter. The opposite adjustment happened in the fiscal first quarter, right? So there was a substantial increase in the expected loss rates for seasonality that happened in Q1. So this is just sort of the release of that because, again, our customer base and portfolio is its least risky in December.

But I mean, I guess I just don't understand, maybe I'm just wrong, but I mean, wouldn't lifetime loss accounting kind of negate seasonal trends in the reserve level?

No, there's still a seasonality factor that goes into the CECL, right? So at a point in time, right? So you're trying to assess the expected losses at a point in time still. So those point-in-time expected losses will change based on seasonality.

Okay. You mentioned that you're still accruing for $16.35 and $20.45, correct? What fiscal year do those two figures belong to?

That's by the end of fiscal year 2025.

So both figures are for fiscal 2024. You're indicating that you expect to reach $20.45 by fiscal 2025, is that right? Clearly, if you're accruing for $16.45, then you're also accruing for $20.45 and $16.35?

Correct.

That's right.

Okay. All right. Thank you.

Our next question will come from Vincent Caintic with Stephens. Please go ahead.

Good morning. Thank you for answering my questions. I’d like to follow up on the topic of seasonality. Do you have different expectations regarding the tax refund season this year compared to last year? I've heard various opinions about whether consumers should anticipate more or fewer tax refunds this year than they did last year. Thank you.

Yeah. Good morning, Vincent. For us right now, while we've started filing taxes, it's still too early for us to tell what the impact is going to be for our average customer base, if it's going to be a higher or lower return from that perspective. From a runoff perspective, so typically in the fourth quarter, as our customers receive tax refunds, they tend to pay down their loans. It kind of remains to be seen what that may look like this year. Our portfolio is substantially different this year entering the fourth quarter than it has been in prior fourth quarters. We have substantially more tenured customers with us and fewer new customers with us. So that may have an impact on the runoff rate. But in terms of how the tax season is itself for our customer base, it's still too early to tell.

Thank you for the helpful remarks regarding the evolving tightening credit and the resulting improving metrics. I'm curious if the metrics from this quarter can be considered a good benchmark for the future. In other words, once the entire portfolio reflects your current underwriting metrics, what will that mean for the yields you’re charging and the net charge-offs you’re aiming for? I'm trying to get a clearer picture of what the loan metrics for fiscal 2025 might look like.

Vincent, so on our end, it sounds like you cut out in the middle of your question there, but from what I heard, you're asking about what the credit quality and performance of the new customers look like and what the impact of the overall yields would be?

Yes, please. Yes, thank you.

Great question. So for the last 1.5 years or so, we've been tightening credit a fair amount pretty aggressively to begin with, and our loan volumes certainly suffered because of that. Over that time period, a couple of things have happened. One, as those new customers have aged into a portfolio, it's had an impact on the overall portfolio. Two, some of those underwriting strategies for new customers have also been applied to the rest of the portfolio book as well. So that has a greater impact on the overall portfolio. And then three, we've increased confidence in how we've been underwriting. We've increased our approval rates pretty substantially over the last two or three quarters especially, and we haven't seen any reduction in credit quality there. So all that to say, going forward, I wouldn't treat this as a high point in terms of credit quality. I would treat this as sort of the norm going forward. And in terms of the overall portfolio, we mentioned this about two years ago. It would take a lot of time for these changes to impact the overall portfolio. And you're beginning to really see that in terms of the portfolio gross yields this quarter increasing pretty substantially year-over-year, and we'll continue to see that for some time as well.

Thank you. I have one last question. We've been hearing about potential macro improvements and a possible soft landing. You've mentioned increasing approval rates and that you're becoming more comfortable with your underwriting, without seeing any decline in credit quality. Is there a specific macro trend that you're considering, or does it just take some time before you feel confident enough to invest more heavily and we observe substantial growth in the portfolio? I'm curious about your perspective on what needs to happen before we see significant portfolio growth. Thank you.

Yeah, I would say we're very conservative in how we look at the macroeconomic picture. We began tightening in April 2021. Personally, I expected a rather tight and quick change to the economy, which obviously didn't come for another year, year and a half, and it was much slower than I expected. So in terms of loosening up, we have loosened up where we have seen prudent over the last couple of quarters. Again, our approval rates are up pretty substantially. But in terms of loosening up for growth, we're not in a position at all where we are considering loosening up and reducing credit quality or in any way sacrificing credit quality for growth. The opposite is actually pretty true, where we have spent a lot of time making sure, from a marketing perspective and an underwriting perspective, we can drive applications and approve applications that are within the acceptable credit box. So going forward, that will continue to be one of our main focuses is to grow the business, kind of move out of this wait-and-see and be very conservative growth approach into a more aggressive approach from a growth perspective, but still very prudent and conservative on the credit side.

Okay. Very helpful. Thanks very much.

Thanks, Vincent.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Prashad for any closing remarks. Please go ahead.

Thank you all for taking the time to join us today. And 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.