Q2 2022 World Acceptance Corp Earnings Call

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Good morning, and welcome to the World acceptance fiscal 2022 second quarter earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Chad for Sharp President and Chief Executive Officer. Please go ahead.

Okay.

Good morning, and thank you for joining our fiscal second quarter 2022 earnings call.

Before we open up to questions. There are a few areas that I'd like to highlight.

First of all I am pleased to report that we experienced record originations growth and this most recent quarter.

The overall portfolio grew $170 million or 25, 7% year over year and.

In fact, it was the largest single quarter growth rate growth on record.

Further we experienced this broad growth across all customer types on the strength of a record number of customer applications for credit.

In particular, we saw a tremendous increases in new and returning customer loan volume when compared to last year or even pre pandemic levels with both customer types loan origination volumes, increasing by more than 40% when compared to the same quarter two years ago, which is the most recent pre pandemic comparison.

Refinance volumes returned to and slightly exceeded pre pandemic levels as well.

To help fund this growth we're proud to have completed the company's first 144, a bond issuance.

Providing additional $300 million and working capital.

This funding channel Diversifies, our capital structure and provide stability to the company moving forward.

In addition, we still expect to continue diversifying our capital structure further, especially as our larger loan lower interest portfolio continues to grow.

Delinquency remains low on a relative basis and within expectations.

With the change to PCL provisioning last year, we continue or we should expect to grow our provision in real time as our portfolio grows which temporarily temporarily depresses net income compared to a historical delinquency based provisioning model.

With respect to the quarter's provision for loan losses. It is critical Horton specific and naturally adapt based on customer credit and loss expectations.

The loan growth and earlier provisioning of diesel should positively impact revenue and income in future quarters.

Of note, our new customer portfolio increased by 54, 6% in the second quarter and 101% year over year.

This share of our customer base has the highest expected losses and corresponding impact on our provision.

We expect the cohort quality to remain relatively consistent in the near term based on several factors, including overall economic environment changes to our credit underwriting and new loan products to remain the most attractive option for our best customers.

We continue to expect to hit our long term incentive EPS targets before the end of fiscal year 2025.

On the customer access from a year ago.

Okay.

Sorry, excuse me.

As a result of some of these changes today over 40% of our portfolio is below 36% APR. This is a dramatic increase from 26% just three years ago.

Today, nearly two thirds of our portfolio's below 50% APR, an increase from 50% of the portfolio just three years ago.

At this time, John <unk>, our chief financial and strategy Officer, and I would like to open it up to questions about our second quarter fiscal 2022 earnings.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Vincent <unk> with Stephens. Please go ahead.

Thanks, Good morning, and thank you for taking my questions I guess.

A question on the credit.

Serves I know, we talk about the new additions to new customers, but if you could help us understand.

How to think about credit risk.

Provisioning going forward.

Kind of a big jump.

In the credit provisions as a percentage of the originations.

Wondering how to kind of split that out between.

The new customers versus existing customers, how much of that might have effect been an effect of the back book are they the existing book versus the originations, but any help you can provide with that because it was quite a big change there. Thank you.

Sure Yeah. Good morning, Vincent this is Chad.

I'll start and John if you have any anything else you want to add please jump in.

Yeah. So you know typically the way that we account for future losses under Cecil is.

We take into account, we expect day, one losses to be for that customers.

With us.

Typically speaking just in generalities, the new or the customer is the higher the expected loss rate. The overall credit risk is higher of newer customers and repeat.

Repeat customers and are those with more tenure with us.

So in periods like this where we have tremendous amount of growth, especially in new customers.

New customers being up.

I think it was.

54, 6%.

Within the quarter of 100% year over year, even our former customer base and these are customers who have paid off the loan in the past and come back that's up 55%.

Year over year with most of that growth being within this past quarter.

These customers are typically going to have a higher expected losses to the provision will be adjusted accordingly for that.

As those customers.

Stay with us into future quarters, especially if they were to refinance or leave and opened a new loan. It's it's very likely that theyre expected losses would come down.

At the individual customer level, and therefore, a provision would be lower so typically what happens is in periods of very rapid growth, especially on the new and former customer side will we should expect to experience a large growth in the provision.

As those customers perform well either released that or it will go towards actual losses.

For the customers who remain on the books in future quarters, it's very likely that those expected losses and provisions are.

Our lowered.

Typically our business is very seasonal we typically grow a fair amount in our fiscal third quarter, which is October.

October November December.

And then typically in the fourth quarter January February and March we typically have a fair amount of paydowns.

Just due to seasonality.

Hum.

Under seasonal we should expect to see.

Just.

More variation and and how the provision is is grown and released just due to the short term nature of the loans.

So as we grow, especially in this past second quarter and into the third quarter, we should expect to see provision will grow accordingly, because again it's.

Day, one and then as those customers perform and or pay off in the fourth quarter, we should expect to see larger releases.

So it just makes things a little good they swing a little more in each direction.

Oh, well, there I'll add as well.

When we look at our cohorts right. So.

Our customer base by 10 year buckets.

The expected loss rates are still performing very well.

Yeah relative to historical levels right.

Well I think some people don't appreciate how steep that curve is right that you expect the loss curve. So when you move from the zero to five month bucket above 10 year to the six to 18 18 month bucket.

That that expected loss rate is 60% higher or almost 6% higher on that zero to five months bucket versus the six to 18 months bucket right. So.

You know as we add these new customers, which is really a positive thing right. We're glad to see the new customers return.

It does have a pretty significant impact on all of the provisioning.

In those periods.

Okay.

That's helpful I guess.

Maybe just building on that commentary so.

The I guess, what you may be seeing so far this quarter's growth continues to accelerate and new customers. So.

All else equal the <unk>.

Provisions as a percent of the originations will likely go higher here and then.

The quarter after that after.

After the holiday season.

That ratio would drop.

Am I thinking about that right.

Right. So you can see that the ratio drop which you can also see youll see the portfolio drop right. So.

It's we've always had a lot of volatility in the provision.

Like seasonal volatility within our provision.

As the portfolio grows and decreases with Cecil.

<unk> 95 is that right so.

You'll see larger divisions in Q2, and Q3, but even smaller provisions in Q4 as both the ratio and portfolio drops.

And Vincent one thing I'd like to point out.

Youre thinking through this in relation to the provision.

We think it's very it's.

It's a very positive thing for our overall portfolio and the health of the portfolio.

That our growth is.

Is occurring throughout all of our different customer types right.

We're not in a situation, where we are is growing existing customers or in COVID-19 customers, but we're seeing.

Yeah.

Very substantial growth in our repeat business, our former customers and our new customers as well right to Johnny's point that those new customers are a good investment.

They feed the rest of it.

The returning customer base.

And Don.

As we've seen this as a good investment.

The overall health of the portfolio.

From our perspective is and making sure that all three of those conversations continue to grow.

Sure.

And relative to each other.

Okay. That's helpful. Maybe just maybe just to put a fine point on it so.

If there's any help you can give them like what is the expected losses for like a new portfolio versus the existing portfolio and has that changed.

Or is this kind of over the past couple of quarters or has that been fairly consistent.

It's been it's been very consistent within within.

10 year bucket. So I, it's obviously, our new customers are going to fall in that zero to five month bucket.

And then migrate into the longer tenure buckets, although always stay with us.

So yes, so the corner buckets are performing very consistently with.

And even better in a lot of cases than historical levels.

So a lot of this information to then.

As in the the Orange release.

We have the lesson to year to year, obviously, the CECO model is much more granular than that.

But you can kind of get an idea of how that would.

Different things like the loss rates are.

From the information in the earnings release, but again.

The curve is very steep right. So yeah.

As as they migrate all of our customers migrate from those those early.

And your buckets the expected loss rate.

Dropped pretty dramatically.

Okay.

Sorry last one for me and I'll bring into the queue, but.

When you think about the portfolio and.

The yields so I think that the yields have also been compressing how does that kind of interplay with this and what should we expect for yields going forward.

Yeah, so yeah.

Yes, as we've moved into the larger loans yields yields have come in as expected.

And a lot of that lower yield is is all of that back book right. So those those longer tenured customers.

That's where we're growing the large loans is lower risk.

Longer tenured customers so.

As far as the robust, we're happy with with that as well.

Okay got you I'll get back into queue. Thank you.

Okay.

Again, if you have a question. Please press Star then one.

The next question comes from John Rowan of Janney. Please go ahead.

Good morning, guys good morning.

It's been a long time since you've been in a normal credit environment.

Lot of the commentary we heard from these calls that were getting back to a normal credit environment.

Oh well.

I Wonder if you would venture to guess what your normalized credit losses are I'm not sure. Historically speaking we can rely as much on them given the shift in the company. So I'm just curious what the kind of top down picture is in the model for a world of what the actual loss rates are.

Sure.

I'm going to give.

The unexpected loss rate right, but it just kind of generally speaking right, we would expect our delinquencies and loss rates.

To move upward from where they are and where they have been more recently again as we add new customers right.

So we don't we don't really expect we'd go back to where they were.

In fiscal 19 and 20.

Well again.

Very large.

Growth period for premium customers right, but the difference through that period in this period.

Is is that we're also adding a lot more for bars and.

And Curt bars to the portfolio right so that the shift in mix.

Is it as dramatic as it was we don't expect it to be Astro matic as it was back then right. So.

Kind of as a range.

It looks like the loss rates are somewhere between where we are now but now it's not as high as we were in fiscal <unk> and 'twenty.

That's helpful.

John a little more color around that.

One of their major change between fiscal 19, and 20 and today is.

There are two changes related underwriting one as we took advantage during the pandemic last fiscal year or two.

Tightened our underwriting at costs across the board, especially with new customers.

And then second is.

That process is really well integrated integrate ingrained into our operations.

So 10 year today in this this past quarter, we had a record number of new customer applications, even exceeding what we had pre pandemic yes.

We're being more selective right. So we believe credit quality is improving we're making.

Smart decisions on the front end, but were also another major changes we have new products from the backend for larger loans with lower rates remain attractive and competitive.

And in order to increase customer retention for the long term right.

All of that to be said.

We would expect.

Loss rates to move up due to the overall macroeconomic environment from where we are today, but certainly not reach pre pandemic levels as a whole.

So I guess Youre not you won't tell me what the what the expected lifetime losses that you are writing to under six auctions basically just asking the same question a different way.

That's right yes.

We won't give that specific of it okay.

And then there's obviously a lot of talk about what happens with the provision expense.

Per quarter and I appreciate that.

So creates a lot of excess volatility in that number, especially with the very seasonal loan portfolio like world has.

The allowance was up the allowance ratio was up a little bit quarter over quarter. So it looks like you added a little bit more I'm, assuming that's because delinquencies are up.

What can we expect next quarter should we assume that the ratio is flat versus this quarter or what do we look for another increase and that's it for me. Thank you.

Yeah.

Yes, so I think seasonally we typically.

Even prior to see so.

We typically see an increase in delinquency.

As we move into the third quarter and.

I think it is fair to expect that the loss.

The allowance ratio could be a little bit higher in Q3.

Yes.

Again that was true prior to Stifel.

And as we add hopefully add more new borrowers in Q3 that will also impact the.

The allowance ratio.

And in Q3, but again.

Typically and historically that reverses in Q4.

We will move that dial.

Alright, thank you.

Excuse me there is some information that I failed to read at the top of the call I apologize so I'd like to read that now before I turn the call back over to Mr. Schott and that is the comments made during this conference call may contain certain forward looking statements within the meaning of section 20 <unk>.

One E of the Securities Exchange Act of $19 34 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 way.

<unk> 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 pro.

Formats 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.

2021, 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.

And at this time I'd like to turn the call back over to Chad for Chard for any closing remarks.

Thank you.

Just a few closing remarks.

Wanted to thank our branch team and the sourcing prevention. This job in navigating the last year, and a half and really putting our customers and their needs and their safety first.

We also continue to win top workplaces awards across the country, which really reflects the incredible work family that our team has created and I really couldn't be prouder of them.

Thank you for joining US today. This concludes our fiscal year 2022 second quarter earnings call. Thank you.

Thank you the conference has now concluded.

Thank you for attending today's presentation you may now disconnect your line.

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