World Acceptance Corp Q3 FY2025 Earnings Call

Good morning, and welcome to World Acceptance Corporation's Third Quarter 2025 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 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, 2024, 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 thank you for joining our fiscal 2025 Third Quarter earnings call. Before we open up to questions, there are a few areas I'd like to highlight. We're excited about the results we're seeing throughout the portfolio after a few years of rightsizing and de-risking. Notably, yields have improved by over 200 basis points year-over-year, portfolio growth in the third quarter returned to pre-pandemic norms, the loan portfolio itself continues to perform well as first pay default rates remain low, even as we've increased our growth over the last several quarters. And finally, our portfolios returned to essentially the same size year-over-year after shrinking 10% year-over-year at the end of the third quarter last year, as well as, shrinking three of the last four years year to date. Our customer base has actually increased by 4% year-over-year compared to shrinking 2.2% for the 12 months ending December of 2024, and shrinking 14% for the same period of fiscal '23. All of these results show a stabilized portfolio with both higher credit quality and higher yields as we're poised to steadily grow in fiscal '26. During the third quarter of '25, we grew the portfolio by 6.6% compared to 1.5% during the third quarter of fiscal '24, and shrinking 2.8% in fiscal '23. For the customer base, we experienced 7% growth in our customer base during the third quarter which compares to 3% during the third quarter of the prior year, as well as an average of 6.3% customer base growth, pre-pandemic. We worked diligently to regrow our customer base with higher credit quality customers while decreasing our overall average balance to ensure the right risk-reward profile across our customer base, and to improve our yields and long-term customer profitability. Year-over-year, our average balance has decreased by almost 5.1% from December 31st, 2023, and by 12.6% from December 31st, 2022. Our yields have improved notably for the entire portfolio, driven by an improvement in yields for both our non-refinance customers as well as now including our refinance customers. Our non-refinance volume has rebounded during the third quarter with over 18% more loans made during the third quarter compared to fiscal '24 and 53% more compared to fiscal '23. All this growth comes with marked improvement in yield as well as stable early performance indicators for credit quality. For new customers, marketing and acquisition channel adjustments continue to show increased quality in applications. Our approval rates for new customers have improved dramatically. The third quarter approval rates increased by 47% compared to the same period of fiscal '24, and by 80% compared to the same period of fiscal '23, all again, while maintaining low first payment default rates and improving our gross yields. With these shifts in the portfolio makeup and the waiting continuing into this current calendar year, we expect to see yields and delinquency trends continue to convert into the same revenue and income trends that we've already seen so far this year as well as into fiscal '26. We continue to see an opportunity to improve our delinquency and charge-off rates, especially related to a large loan portfolio, part of which stems from our outsized investments into large loans made during fiscal years '21 and '22. Finally, in closing, we have an absolutely amazing team, and I'm very grateful for their commitment to our customers and to each other. They are helping our customers every day to establish credit, rebuild credit, as well as meeting an immediate financial need. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have.

We will now begin the question-and-answer session. The first question will come from Kyle Joseph with Stephens. Please go ahead.

Hey, good morning. Thanks for taking my questions. Just thinking about growth versus credit quality in the macro-environment, obviously, inflation is lingering, and there's still good loan demand, but it really sounds like a lot of your return to growth has been driven by new customers. Is that fair? And then, going forward, is this kind of the type of environment where you can see sustaining portfolio quality while also growing the portfolio?

Yes. Good morning, Kyle. So, a lot of our growth has been from non-refinance customers, so that includes our former customer base as well. While we have increased our approval rates and overall booking rates of our new customers, they still remain, I would say, within the normal range from a historic perspective. Over time, over the last year or two, we've really focused on attracting former customers to return to us as well as increasing the retention of our current customers. So, to that point, from a risk perspective in the current macro-environment, we're not any more weighted towards new customers now than we have been in the past, pre-pandemic especially. We're certainly less weighted towards new customers today than we were from 2018 on through like 2021 or so. In terms of credit quality, in the macroeconomic environment, we've moved and shifted towards smaller loans over the last two to three years than we were doing in fiscal '21 and fiscal '22, which allows us a little more flexibility, and how we're underwriting and the type of loan products that we are fitting our customers with to make sure that we can recognize the product matches the risk of the customers, especially with new customers. So, in this environment, I don't anticipate unemployment to move up dramatically or even on the inflation side to see any real additional demands on our customers' pocketbooks that would have any significant change in the way that we expect them to be able to repay their loans. So, I don't really anticipate anything in the short term to have any significant impacts negatively.

Got it. So, it's a good segue to yes, on the portfolio yield, you highlighted a 200 basis point improvement. Is that a function of mix? Is that a function of credit quality? And, kind of, give us a sense for you know, do you see that being stable going forward at the new base level?

Yes, I'll take that. It's mainly about the mix. You can see that our large loan portfolio has decreased as a percentage of the total mix, dropping to 48.2% from 55.2% last year. Year-over-year, our large loans have declined by almost 14%, while small loans have increased by nearly 14%. That's the primary factor. However, credit quality will also play a role. We are not accruing interest on our non-performing loans, which contributes positively as well.

Very helpful. Thanks. And then one last one from me, just given where we are in the quarter. Any insight you guys have on tax refunds, how you're thinking about this season in terms of timing and magnitude versus last year?

Yes, I believe it’s still a bit early to determine outcomes. We’re having a promising tax season so far. Over the past few years, we’ve implemented several operational changes that have really taken effect in our branches nationwide. Our operators deserve recognition for their excellent work. The marketing efforts have also been effective, and we’re noticing either stable or increased customer interest in our products. However, it’s still early, and we have not yet reached our peak filing weeks, which typically occur this week and into the first couple of weeks of February. So, I would say it’s too soon to make a definitive assessment, but we are cautiously optimistic.

Great. Thank you very much for answering my questions.

Thanks, Kyle.

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

Good morning, guys.

Good morning, John.

It seems that you are revisiting the small loan portfolio, which has historical significance for the company. I'm interested in whether you are targeting customers that may have been set aside during the expansion of the large loan portfolio. Are you reaching out to previous customers? What approach are you taking with them? Are you offering the same financial terms that the company has traditionally provided, including yields, marketing periods for refinancing, and typical refinancing rates that have been consistent over the last 20 years? Are you essentially reintroducing the same small loan product to customers who may have moved away during the growth of the large portfolio?

Yes, good morning, John. That’s a great question. The answer is somewhat mixed. We are returning to our smaller loan customers, but they are not quite as small as they were before 2020. For context, before 2020, our average new or non-refinanced customer was seeking a loan of around $650, while today it’s closer to $800 to $850. This is still down significantly from the $1,100 to $1,150 we were lending in 2022 and earlier in 2021. Although we’ve seen a decrease, it's not as low as it used to be. Economically, we’ve worked to bring our yields closer to previous levels. However, because the loans aren’t as small as they once were, the gross yields aren't as high as in the past. Regarding refinancing, I don’t believe we’ll return to the extremely high refinance rates seen before 2010, or even back to those before 2015, partly due to changes in our product. Our average loan term is longer now. New customers typically face about a 12-month term, while most of our loans are closer to an average of 18 months. As a result, we’re unlikely to see customers refinancing more than once or twice a year given the length of these loans. We've moved on to a different product from that standpoint. Overall, we're still very focused on growing our small loan customer base, both new and former customers, and we're actively marketing to those former customers who left us over the last couple of years for smaller dollar loans. On the larger loan side, we are dedicated to ensuring that our large loan portfolio is well underwritten and secured.

Okay. Can I just confirm my understanding of one of the answers? Specifically regarding the duration, for a small loan today, what is the stated contractual length when the loan is underwritten? And when do you begin marketing a refinance? What is the difference between the contractual life and the actual average life of the portfolio?

Yes. So, the typical new loan will be, let's say, around 12 months with roughly 45% of our customers choosing to refinance in the first year. It's probably the best way to articulate that.

Yes. I think the expected life is probably more around seven to eight months, while the contractual life is likely 12 to 13 months for the portfolio.

Okay, yes, that's what I needed to know. Thank you very much.

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

Thank you guys for taking the time to join us today, and this concludes our third quarter earnings call for World Acceptance Corporation.

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