Q2 2021 World Acceptance Corp Earnings Call

[laughter].

Good morning, and welcome to the World Acceptance Corporation sponsored second quarter Press release Conference call.

This call is being recorded at this time all participants have been placed on listen only mode. Before we begin the corporation has requested that I make the following an announcement.

The comments made during this conference call may contain certain forward looking statements within the meaning of section 21 E of the Securities Exchange Act of 934 that represents the corporation's expectations and beliefs concerning future events such.

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 believes 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 paragraphs discussing forward looking statements in todays earnings press release and in the risk factors section of the corporations. Most recent form 10-K for the fiscal year ended March 30, Onest 2020.

And subsequent reports filed with or furnished to the FCC 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 per shot President and Chief Executive Officer.

Good morning, this is Jennifer shot.

Our chief financial and strategy Officer, John Caminis is with me this morning as well.

I Trust, you've all had time to review our release. This morning. So this time I'd like to go ahead and open up for any questions that you may have thank you.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

The first question will be from Kyle Joseph of Jefferies.

Hey, good morning, guys. Thanks, very much I mean on and taking my questions. First question is on on loan growth.

I know the books still down year over year, but you saw nice.

Sequential uptick in volumes each can you give us a sense for how demand trended through the quarter, a and the outlook for volumes going forward.

Yeah sure. So overall I'm, we're definitely seeing an uptick in and a continued increase in demand over the quarter.

To give you a sense where you.

Well from a customer returned somewhere around 2% sequentially in the quarter.

It was a steady increase.

From July through August through September September ending about 19% higher than last year.

Yeah on the new customer side, Yeah, there's a couple of things going on there one you win the pandemic began we intentionally.

Made some changes to our underwriting too just adjust for any unforeseen risk that maybe out there.

But also there's there's quite a bit.

Lower demand in general and application going from from the customers. We have seen application volume increase throughout Q1 as well throughout each month in Q2, and who were beginning to those returned closer to normal levels.

You customers were down around 47% sequentially or year over year.

And.

Yeah that was closer to around 50% in July.

Whereas is only down closer to a third in September so we're beginning to see volume uptick.

And new customers demand as well on the refinance side overall the volume is is rather steady from a percent of the book perspective, or a percent of customers who are eligible to refinance.

The overall book is down around 20% and sort of refinances. So given that what we see in the future you know a lot of it has to do with future stimulus that may or may not come overall unemployment. So yes that remains to be seen.

On the new customer side I will go ahead and point out that you know throughout the summer we did throttle back a good bit on our marketing efforts just due to overall demand being down.

Being down into you know as we see the cost of acquisition has risen yeah, we'll continue to be very prudent with their marketing dollars and make sure that we're allocating those investments wisely.

So I wouldn't expect to see it.

Return to overall, new customer volume that we saw in the past until the cost of acquisition returns back to what it was prior to <unk>.

Got it that's helpful and then kind of on the on the opposite side of that are obviously, you're seeing get crowded in terms of delinquencies and net charge offs, but kinda.

Obviously, a lot of that likely stimulus you haven't given where unemployment is but can you give us your sense for.

Yeah based on where delinquencies today Kinda you know if there's no more additional stimulus kind of when you would expect net charge offs to kinda. It reflects what the actual macroeconomic backdrop is right now.

Yes, I'll chime in first and if Johnny has anything you want to say you can you can chime in as well you said overall.

The portfolio has shifted quite a bit from where you were last year. So last year you we'd come off.

Six to eight quarters of pretty aggressive.

Acquisitions portfolio acquisitions, as well as new customer growth and as a company is growing fairly rapidly you. The portfolios. We were pointing out you know that the risk associated with new customers well Hussein the overall risk increased within the portfolio due to the increased weighting of new customers.

We're on the backside of that here right. So throughout the early stages.

The early stages of Q1.

Most of the payoffs we saw were on the new customer side more on the new customer side, then on the existing customers line and so we've really seen a complete shift and the weighting of our portfolio towards more tenured and certainly lower risk customers. So you know going forward in turn.

So what we expect to see some you know how the portfolio performs.

Yeah overall as long as the risk is completed the way. It is today it would probably be fairly similar to what we're seeing today as.

As we continue to grow and put more emphasis on new customers and returned back to levels, we were right last year.

Last year in the year before you the expectation should be that the risk of the whole portfolio increases just due to more new customers who are risky. So that's something that you know we've been we've been doing fairly well I think for the last eight to 10 quarters, we have a pretty good grasp on what those expectations should be.

And then from a loss perspective, you know Johnny can talk about the seasonal impacts here if he wants but.

From a loss perspective going forward you know there's a lot of things that are there are unforeseen. So we have increased the provision.

Just just for those unforeseen things.

Got it very helpful and last one from me probably more for Johnny just Tony a 10-Q amendment in the quarter. It looks like it was on past due loans can you kind of give us a sense for what went on there and if there wasn't it doesn't look like there was any impact on the reserve or anything but just that the reason for that amendment.

Last quarter, you had [noise] yeah.

Yeah. It was just a.

The shift in how our internal reporting.

So the total delinquency was was correct. So we have some.

Yeah before month in reporting in aftermarket and reporting.

And just with all the changes around seasonal.

We picked up the before month end reporting versus the the after most then so as you said it it didnt change the.

The numbers are used for the provisioning. It was just the numbers that were you that we pulled for the disclosure.

So we've corrected that.

Okay understood and then actually sorry. This last one from me do you have contractual delinquencies for us or if not can you give us a sense to their performance kind of mirror the the recency basis decreased <unk>.

They did so on the 60 day pass due contractual delinquency. It was 6.2% that September versus 7.9% at June and 8% that September last year.

Got it very helpful. Thanks for answering my questions.

The problem.

The next question is from John Rowan with Janney.

Good morning, guys.

Good morning, John So just to be clear, though I mean, you said that you're providing your increased provisioning on new customers, but you must have release some reserves on.

Older accounts is that correct did you say in the release that you are that the each portfolio is performing better than you had anticipated.

Right. So when you look at the the whatever the portfolio right and why the provision is less than net charge offs. The the biggest thing driving that.

Is the fact that our 90 day delinquency decreased to 11.8 million during the quarter right. So.

So from from June the 90 day past due recency decreased 7.8 million. So obviously.

Because of that decrease we expect future charge offs to be positive.

If we lower therefore, decreasing the allowance right sorry, that's moved from 4% to 2.8% that's fine, but that's all on age stuff right, that's not new customers.

Right. So it wouldn't be wouldn't you look at the mix of the portfolio right. So the way we calculate the allowance is we break it into two buckets right. So the the zero to the six month customer junior bucket. After that's because we have much fewer.

Customers in that bucket today versus 12 months ago.

It's going to bring the allowance as a percent down as well.

But when you when you look at the overall picture right. So.

At June Thirtyth.

Yeah, we have we added an additional 12.9 million over the base model right.

At September Thirtyth, we still have an additional 11.9 million over the base Cecil model with that so it can go including.

For adjustments to our potential losses now so.

So we we still feel like we're in a pretty good place.

A conservative place from from the allowance standpoint, you know I'm not trying to suggest that you are under under reserved for I'm. Just you know it makes a difference if you're looking at run rate earnings because there's you know a push and pull through that provision. That's noncash. That's that's my only point there.

So just last question for me you know given the repurchases in the quarter the diluted share count didn't actually fall nearly as much as <unk> bought back. So I'm, let me maybe answer we essentially a question you know.

What was the timing of the share repurchases and door you know if the quarter were to end today, what would the dilutive share count is bad because it looks like even if you don't do share repurchases your share count will fall again into next quarter.

Right. So the repurchases were weighted towards the back end of the quarter.

But you are also impacting as you know the diluted share count will be the fact that since our share price is much higher now than it was back then it'll.

It will increase the number of diluted shares right and just through that that math. So that's that's impacting it as as well.

Yeah, the the outstanding shares at the I think in the quarter was were 6.3 million.

You know a typical estimate for the dilutive impact.

You could assume adding 200000 shares, but obviously that that will move up and down depending on the share price.

Okay, and then just one more what are they what are going to have the covenants that dictate how much you can repurchase and is that a good number to use whatever you tell us. So I think it's probably a percent of net income whatever that number is can you just tell us if that's a good gauge to use going forward. It doesn't mean, you do tend to get small, but freak Wayne authorizations from the.

Board and so I just want to make sure.

Make sure we reflect possibility of share repurchases through next year.

Yes, I mean I can tell you where we are we have available as of today.

So.

So this includes repurchases that we did in October so we reversed another 11.7 million.

In October so through today under the debt agreement, we have 26 million available that we can repurchase.

That will build.

To the extent of 50% of our consolidated income right. So Peterson of whatever we add in Q3 Q4 will be added to that that 26 million.

Okay.

Thank you very much.

Yep.

The next question comes from Vincent Caintic of Stephens.

Hey, Thanks. Good morning, Thanks for taking my questions just the first a follow up from Kyle's question, but.

So looking at the charge offs are great performance this quarter.

And Ah you know make shifts as well as good macro performance, but it's it's 14.5% the stat that.

The right number to be thinking.

Going forward for modeling absent the up here your plant to to be starts a new customer originations.

Right, that's where it gets tricky right. So all things if the portfolio mix stays the same.

Yes, I think that's a fair estimate right obviously, there's this impact second half.

From a macro level and from a portfolio mix level, but yeah. I think it's it's a good starting point then you can make assumptions from there.

Okay sounds good and then to build on that.

There's sort of a when you.

Originated a new customer or is there a kind of a net charge off rate you're you should be expecting so appreciate how we.

According to whatever your model is the mix can you give us a sense of like what a returning customer.

So so the existing portfolio is 14 after set a new customer would add how much.

Net charge offs.

Yes, it's a great question Vincent we don't typically disclose that obviously new customer there the net charge off rate would be much higher than than the average and certainly much higher than.

But you to I guess provide some clarity around that yeah.

About a year ago, we introduced a a a underwriting model.

For all new customers, specifically and you know throughout the pandemic, we've been able to throttle back on what we believe are the risk is customers and to begin to focus more on the the least risky customers who are coming.

Who are coming to us so.

So you know there there are some levers that we can pool and have been pulling yeah. So there is.

The optionality in the future. So as we began growing again and as things stabilize just in the overall economy.

They are certainly going to be an increase for risk on the appetite side.

Just in terms of.

In terms of the new customers, who are willing to take on and also in terms of the customers that we split the two but for now I think it's fairly safe to say that in absence of any other macroeconomic changes its probably fairly similar to what you see today.

But of course, we expect there to be changes in the future.

Okay that makes sense and then obviously you can get an idea of what that rate may be right that in our earnings release, we have the ratios of what that lesson to your customer loss rate is relative to the overall company goals.

Loss rate right.

Yeah, obviously it is.

It's not.

[music].

Linear or high so it it drops significantly as you move in from that one month old customer into the two year old customer right. So.

But you get an idea of what that impact might be.

Okay. Thank you.

On the a and in terms of the.

The the market out there youre your yield has been coming down.

Down a little bit.

Do you see is there pricing power analysis.

<unk> is there a lot of competition are you able to hold yield given us your your credit has been getting better.

So I can start that one yes, I mean, what's what's really driving the yield decreasing is.

Yeah. It's the same thing right, so are new customers or our riskiest customers and we adjust pricing for that right. So the pricing is obviously higher on those new customers. So as we brought in fewer new customers.

And is it the overall portfolio is shifted to a larger loan yield has decreased right. So the small loan portfolio, which is our loans that are under $2500 has decreased from 66%.

Remember last year to a little over 60% as September of this year right and that's not a lot of the disease.

It's not the decision we made to to move up market, it's simply a reserve.

Are result of bringing in fewer new customers.

Okay that makes sense.

And just last question from me so.

Yeah.

You bet, you had you been able to get financing and to maintain your portfolio.

Just wondering how the rest of the market seeing it particularly in the past you've been doing portfolio.

Full year acquisitions or is there a market out there for portfolio for more acquisitions.

And I guess, maybe other players smaller players who might be struggling and then you can take advantage of though.

Oh, the Mark there thanks.

Yeah I'll start this and.

Yes, absolutely, but that there is still a market there I think early on in Q1.

Yes, there there are some interesting players who were.

Potentially in the market.

Some of the smaller acquisitions weren't quite as prevalent as they had been in the past, but we're beginning to see more interest throughout this quarter.

We have closed a few acquisitions you know this summer.

But but the overall pipeline seems to be roughly the same.

Yeah, we do see the importance of portfolio acquisitions as part of our long term growth strategy and have a fair amount of emphasis.

Because there in order to continue those in future.

Okay, great. Thanks, very much yeah.

Yep.

Once again, if you have a question. Please press Star then one the next question will be from Jordan Hymowitz of Philadelphia financial.

Hi, Thanks, guys. I mean, you said about 60% of your loans are now small balance loans below 2500.

That's right.

And would I assume that all those 60% would be above the military lending act definition of 36%.

Not necessarily no but.

So we don't we don't have that breakdown in front of us.

Okay, well, how about generally than what percent of your originations were above the military lending act of 36%.

Yeah, it but right now, it's obviously lower right given that we're we're not originating a lot of launched into new customers, who are our riskiest customers.

But I don't I don't have information in front of us.

But it would probably be at least 60%, though you think given that's where most of your small loans or.

Not not what we do look at total originations that include refinances right. There's a lot of these refinances are on that that larger loan portfolio.

If you look at new originations.

The new bars, it would be a higher likely a higher interest rate.

Got it thank you.

And this concludes our question and answer session I would now like to turn the conference back over to Mr. per shot for any closing remarks.

Thanks again for joining us for the second quarter earnings call I'd also.

I'd also like to take time to thank all of our team members at world for tuning into care and serve our communities, so exceptionally especially throughout the spring and summer of this year.

I appreciate the questions and interest in world and before you're chatting next quarter.

Thank you for your participation. This concludes the World acceptance Corporation quarterly teleconference. You may now disconnect.

[music].