Q2 2020 Earnings Call

Yeah.

We're about to begin.

Good morning, and welcome to the World Acceptance Corporation sponsored second quarter Press release Conference call. This conference is being recorded.

This time, all participants had been placed on listen only mode. Before we begin the corporation has requested that didn't make the following announcement.

Comments made during this conference call may contain certain forward looking statements within the meaning of section 21.

Securities Exchange Act.

34 that represent the corporations expectations and beliefs concerning future events.

Such forward looking statements are about matters that are inherently subject to risks and uncertainties.

Other than those ethic store Colfax.

Well, let's suppose identified by the words anticipate estimate intend plan expect believe me well and should or any variation of before going and similar expressions are forward looking statements.

All information regarding forward looking statements and any factors that could cause actual results or performance to differ from expectations expressed or implied in such forward. Looking statements are included in the paragraphs discussing forward looking statements in today's earnings press release and in the risk factor section of the corporations. Most recent Form 10-K .

At this fiscal year ended March 31st 2019, and subsequent reports filed with or furnished to the FCC from time to time.

Corporation does not undertake any obligation to update any forward looking statements. It makes.

This time it is my pleasure to turn the floor over to your host tried for shot President and Chief Executive Officer.

Good morning, and welcome to our second quarter earnings call I'm joined by John Commies, Our Chief financial and strategy Officer.

I hope you've all had time to review the press release.

This quarter, we included additional information about our growth specifically to highlight the overall growth of the portfolio over the last two years as well as the tremendous increase in our portfolio newer customers.

Well the risk within those buckets has remained relatively consistent during the growth period.

We believe continuing to grow our new customer portfolio is a great investment for the company.

And are focused on the expected return over the long term.

At this time, we would like to open up the call any questions you may have.

And ladies and gentlemen, if he would like to ask a question. Please signal by pressing star one on your telephone keypad.

Are you thinking speakerphone. Please make sure your mute function is turned out to lag or signaling to reach our equipment.

Again that star one to ask a question.

We will pause for just a moment.

[noise] [noise] and our first question will come from John Rowan at Genie.

Morning, guys.

Hi, good morning.

So.

Obviously losses are up because of new customers want.

What gives you comfort that the new customer loss rates are going to mean river toward historically season customer loss rates or because it seems like where are all or nothing here right. I mean, if you don't get this mean reversion back to prior or loss levels.

We're stuck in a much lower run rate for earnings for the foreseeable future. So give me an idea of timing and how you mean reversion in loss rates going forward.

Yeah. That's a that's a good question the way that we look at our portfolio, we we break it down to several different tranches.

Based on customer tenure with the company and we haven't seen within those buckets.

You know barge deviations from historical norms in terms of performance or charge off rates and so the question of when did the whole portfolio revert back to the mean is really a question of when do we stop growing at this clip right and is something that we've mentioned in prior calls.

To the extent that if we continue growing at the tremendous rates that we have especially with.

Opportunistic large acquisitions will continue to see growth and.

The more risky sections of our portfolio that being the new customers.

Over time and your we're beginning to see that now where acquisitions from a year ago on large growth from 12 to 18 months ago is beginning to age into less risky sections the portfolio and some of those sections are actually outperforming what they have in the past, but by and large they're all very consistent.

So it's really a question that when the portfolio begins to.

Be re weighted back to what it was four or five years ago, you know that being said our focus is on long term growth of the portfolio and then long term growth of.

Revenue as well right so for.

For us it's it's always a smart investment if we have the opportunity to grow quickly.

And flesh it out over time versus growing really slowly overtime.

Right.

Just to add to that so it's kinda. So said another way John I think we could very quickly.

Right right I mean, just by stopping new customer growth right.

So that's that's one way to do it the other way to do it is to increase the growth in the longer tenured customers right.

So obviously, our preference is to focus on increasing the growth in the longer tenured customer versus stopping new customer growth because after the has negative long term impacts.

Okay.

Are they use or any thoughts on Cecil Im trying to understand capital heading into <unk> heading into next year. Obviously, there was a big decline in book value per share as you bought back for quite a number of shares well above book value in the quarter.

Is your lending group, Okay with that do we think that there's the possibility of another re up for kind of a onetime slowed what do you have here for the 200 million in the quarter, just give me an idea of where the tolerance levels largely as far as being able to diluted book value per share within you know and still have liquidity coming from you on the group.

Yeah, I see I do the quarter, we ended around 395 and network and a under the current facility. We can we can go down to 370, Bob Obviously, we'll we'll continue to add to.

The 395 going going forward, both from net income but also.

Yeah. The share based compensation also adds that network. In addition, net income so yeah that'll give us some runway in order to divide issuing shares back we havent had a discussion at this time with the banks about doing a large incremental buyback similar to the 200 million.

That's that's always possibility they have we'd have the ability under the facility to do that.

But you would have to you would conceivably have to renegotiate the net worth covenant, though given where your shareholder that where you stand today.

The covenant that's right yep, Okay, because obviously the diluted book value per share book value more similar to what you did this quarter you'd be in breach.

Right and Cecil his seat or are you guys adopting Cecil are you going to defer it what's the outlook for next year.

No. So it will adopt on April 1st I'm. So yeah, we've been running our new model parallel to yeah, our existing models and yeah, there there could be.

Well material impact, but it did seem to track fairly closely to our existing model.

What's the lifetime loss assumption that you're using.

For the allowance under Cecil.

Oh.

At this point.

Well I mean, I'm just looking at I mean, the charge off rate here, you know is sorry, 16% I've never seen a lender that has a lifetime loss south of their net charge off rate, especially in a growth model I mean, I mean, just back of the envelope here I mean, it looks like there's no real increase in the allowance.

No because they said that the new model will be based on the expected loss rates.

Nucor's current bars, and former bars right and the historical forms of those those classes the bars right.

Where today our model is based on roll rates within so a migration analysis right. So how how our customers migrate through delinquency.

Because of our the way our long perform they they migrate through that migration analysis pretty quickly. So there's not a huge difference but that it takes a model will do a better job we're projecting.

What those expected losses or.

Well, so there'll be less of a lag.

Say.

Okay right you have today that there's not a huge lag right because if you as we as we can see.

When we have new bars, I don't before they migrate very quickly through through our delinquency.

Well, I mean, where we're seeing or some companies as you know seasonal charters are going to take another bite out of book value or your debt covenants do your debt covenants exclude the impact from Cecil I mean, we're not there's not a lot of daylight between your current net worth and the covenant threshold and I'm just from a you know without knowing what the sees what do you still is going to do to Cheryl.

Equity I want to know that there's you know at least.

Solution.

Yes, so we're not we're not worried about the impact to Cecil.

Threatening our minimum network.

Well, you're you're is it in there is it in the covenant that its excluded or is this just based on no. It's I thought it's not excluded but we're not just knowing what the size of the impact is.

We don't expect it to be an issue.

Okay.

And then obviously as we go into next year I mean.

You know there was a big increase in the allowance ratio this quarter and historically, we've seen that number bump around a little bit and sometimes they used to be you know prior to all the accounting issues that you guys had with the prior management you used to be a flat numbers I wasn't easy in the model now it's moving around as you've had a change and I think loss emergence period or should we look at the allowance ratio here like.

What's.

With the dynamic of the customers are coming on or are we looking at a flat allowance. We're looking at number that's gonna be seasonal because at the higher number it gets more volatile in the earnings stream when you make adjustments up and down and then obviously you're going to next year and lifetime losses should flatten out as well as sue.

Right, it's going to to chat for an earlier right and it's going to follow the proportion of new customer right. So as long as we maintain a higher proportion of new customers that's percentage of overall the overall portfolio.

We will expect.

Delinquencies to be hired which will impact the current model right. So that lead to higher allowance on the car model. The similarly on are under Cecil when we're well project loss rates based on the customer glass, if we have more new customers and yes. It was like a higher loss rate unless new customers that also lead to a higher.

Allowance percentage right if it that portfolio mix changes then you could see that allows didn't go up or down in relation to that.

And just last question can you give us that you did a last quarter can you give us what the forward numbers are in the next two quarters for 'em stock based comp expense that you that you're projecting currently.

Right Yeah. So it's the same as as we gave the last quarter not the hasn't changed simply there.

All right. Thank you very much.

Thank you.

And once again, ladies and gentlemen that star one for questions. We'll take our next question from the Kyle Joseph of Jefferies.

Hey, good morning, guys. Thanks for answering my questions I I just wanted to touch base on on a gross obviously, it's been very strong and I just wanted to get a sense of what's driving that growth. Obviously some of it is acquisition driven but even on a same store basis. It looks like you're going in the double digits.

Is that advertising is that price changes or you just how you're how your growth is really outpacing the market.

Yes, so it's a combination of several different things one we've had tremendous change in our marketing over the past couple of years at the same time.

We've had changes and our.

Incentive plans.

Across the company.

We've had also changes in technology that allow folks or potential customers to apply online and teams and processes here centrally that you feel those applications and also get them to the folks they need to get to as quickly as possible. So you basically in a nutshell, where casting a wider net the customers.

We're trying to real him in a fast began.

And so forth in through in order to make the best efficiency began on the pricing side, we havent seen any changes in the pricing across the board and so it's not that we are taking on riskier customers and.

Or lowering our pricing in order to attract more customers I.

I think one thing you see across the entire industry for installment lending last couple of years has just increased demand for installment loans I'm also increased customer awareness that installment loans exist.

So that's why we've also seen increased demand from that.

And with that being said, obviously acquisitions have played.

Pretty large role in our growth over the past two years and those are the result of more opportunistic.

Purchases that just come out and.

It makes sense long term.

Got it and then just a dumb it down can you give us sort of that a balance between organic growth and acquired growth.

Yes, so organic growth last quarter.

Was up Uh huh.

[noise] I wanted to say it was go ahead, John Yeah. So you know a border so growth during the quarter. Yeah. The acquisition growth was similar to the same quarter last year.

Good growth in and balance was actually down this quarter, that's largely being driven by the harder the higher charge offs right. When you when you look at.

Growth in.

Actually new customers Mpvs and ER, so current customers a former customers.

They were they were up relative to last year, yeah organic customers in terms of number of customers in the quarter is that I believe four and a half the 5% year over year.

As Johnny mentioned prior acquisitions, you know kind of working their way through.

Reduce the the ledger during the quarter.

Got it and then just on the acquired loans can you give us a sense for sort of the multiple you're paying on knows a any accounting as well as it looks like a lot of the increase in the delinquency was the result of.

Acquisitions in you know I typically if this.

Some of the lender acquires another though kind of do that good bank bad bank sort of allocation and pay a discount for those that are delinquent.

Just give a sense or what's going on there.

Sure so as far as.

Well again, we'd only going too much detail about how we how we price acquisitions, but yeah. We I will say we approach it from a unique customer cost perspective versus paying a multiple for the company we don't.

We don't typically by whole companies.

We're buying the assets.

And so some of the small acquisitions, we do we don't always have I'm very reliable find whatever information so we.

We take a customer approach so it's as you pointed out that.

Acquisitions, we certainly adjustable we're paying as well for delinquent customers rights, if they're not they're not performing.

There are certain extent, we will pay anything right, but it'll be discounted for.

Just one delinquency.

[noise]. So so I'd point out that the acquisitions, we had we've had so far in Apache your had a pretty significant impact on the allowance at September Thirtyth.

If you if you stripped out the delinquency from acquisitions.

As a.

September Thirtyth it would have impact of 6.1 million 6.2 million right. So.

Within the.

Provision is a.

Qualitative adjustment to the vision, so we increased the allowance $5 million and on top so our normal.

Allowance.

And that was it does that probably dollars wouldn't be necessary. If it weren't for the acquired accounts that were still within the portfolio at September Thirtyth.

Got it and then last question for me I think you guys are going through a I'll, let someone else and industry you referred to as as growth Mac.

And it sounds like you know demand is still very strong, but just sort of sort of any sense. So when a ultimately we should see some of the headwinds from this growth math start to wane in terms of the impact on the provision.

Yes, so it really depends on.

When we stopped growing at the same clip right. So organically I think we <unk>, we continue to grow at similar rates that we have in the past two years.

A lot of it comes down to the opportunistic opportunities out there from an acquisition perspective.

So.

We're getting ready to enter the third quarter right now it last year, we took down a fairly large acquisition in third quarter.

So we may begin to see lapping that this quarter and less large another large acquisition comes up and we close it within the quarter.

Got it that's very helpful. Thank you guys very much for answering my questions.

Yep.

And with no further questions I will turn the call back over to Mr. for Sean for any closing remarks.

Just get a question I'm, sorry, and they went away.

[laughter].

I will give more minutes just in case.

And if they want to ask anything.

And as a reminder that is star one.

All right there's no other questions.

Appreciate it guys joining us for the second quarter earnings call and so this concludes earnings call looking forward to speak with you guys in January .

Thank you.

Ladies and gentlemen, thank you for your participation. This concludes the World acceptance Corporation quarterly teleconference. You may now disconnect.

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