Q3 2022 World Acceptance Corp Earnings Call

Yeah.

Good morning, and welcome to the World Acceptance Corporation sponsored third quarter Press release Conference call. This call is being recorded at this time all participants have been placed on a listen only mode.

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.

Before we begin the corporation has requested that make the following announcements.

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

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.

Nate intend plan expect believe may will and should or any variation of the foregoing and similar expressions are forward looking statements and.

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 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 at this time. It is my pleasure to turn the floor over to your host Chad Bouchard, President and Chief Executive Officer. Please go ahead.

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

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

First of all I'm pleased to report that we experienced record portfolio growth for the second consecutive quarter.

The overall portfolio grew $211 million or 15, 1% during the quarter and $340 million or 27% year over year.

This is the largest single growth quarter on record, surpassing last quarters $170 million in growth in our prior largest third quarter growth.

Which was $157 million in fiscal year 2021.

Further we experienced this broad expansion the portfolio across all customer types and continue to see tremendous increases in new and returning customer loan volume when compared to last year and even pre pandemic levels.

Delinquency remained low on a relative basis and within our expectations.

It's important to note that with the change that diesel provisioning last year, we expect to grow our provision in real time as our portfolio grows and reducer provision in real time with seasonal runoff during tax season.

During periods of this rapid growth this temporarily depressed net income as compared to our historical delinquency based provisioning model.

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

We expect the origination cohort performance to remain relatively consistent in the near term based on several factors, including overall economic environment changes to our credit underwriting over the last year and increases of an increase of larger loans to retain 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.

As a result of these changes today over 43% of our portfolio is below 36% APR and 56% of our portfolio is below 50% APR demonstrating our ability to offer attractive loan terms to increase retention of our best customers.

Finally.

As we close out this calendar year 2021, we have must be thankful for at World first our branch team and those who support them have done tremendous job of navigating the last two years during the Covid pandemic.

Our customers and their needs and their safety first we continue to win top workplace awards across the country, including most recently Oklahoma.

And Tennessee, and New Mexico. This year in addition to being second lines only top workplace USA winter in 2021 truly reflecting the incredible work family that our team is creating and I couldn't be prouder of them.

At this time, Johnny Calmes, our chief financial and strategy Officer.

We would like to open it up to questions about our third quarter fiscal 2022 earnings.

Thank you we will now begin our question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre 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.

And the first question will be from John Rowan from Janney. Please go ahead.

Good morning, guys.

Following Chad I, just want to juxtapose too.

Comments that you just made.

Joe you talked a lot about.

The upfront provisioning for growth and how origination volume is going to.

You know.

We are strong as it was recently or going forward, we're going to have similar origination trends, but then you also talked about.

No theyre being a benefit somewhere down the line to net income presumably when all of this provisioning from growth.

Abates, a little bad right.

I'm just trying to figure out.

Those two those two comments about that benefit and the net net income from what I presume is growth abating. It doesn't seem like those who are wind up.

Correctly in time, if were going forward right. So I'm just trying to get a sense of when we see this provisioning from growth start to ease up and that benefit that you alluded to come back into.

On the P&L.

Yeah, It's a great question.

I think theres a number of things at play here first and foremost we snap back in terms of demand over this fiscal year pretty rapidly compared to last year.

In calendar year 2020 during the pandemic demand.

Demand was greatly depressed for 12.

<unk> to 14 months and then during the spring of 2021, and we really began to see demand.

Come back pretty rapidly once the last round of stimulus abated.

Coming into fall and into winter, we've seen tremendous growth as well. So I think you know.

One thing to think about going forward is.

We experienced rapid growth in the portfolio due to you know.

Stepping back from the depressed demand from the year prior.

So that's one thing to think about and the other is we typically have a fair amount of runoff in the portfolio during our fiscal fourth quarter, which as you know.

The quarter that we're currently in now during tax season.

So you put those two things together, we experiencing a kind of an unprecedented.

Precedent or ramp up in the portfolio.

During the last two quarters, especially this past quarter and so along with that we've also had to increase the provision accordingly.

And then we're getting ready to enter into our.

Our fourth quarter, which is typically when we have that run off.

One thing to think about going forward is we don't we're not forecasting.

Casting what we think our demand would be and what our portfolio of growth would be.

Bye.

To the question about when does this provision build.

You kind of pay off in terms of reconciling those two statements.

It's really a matter of win new growth continues to be substantial but it isn't necessarily continue to accelerate at the same rate and what we've seen the last two quarters, especially as you know a pretty substantial acceleration in growth.

Precedent and we've actually.

He just mentioned, we we said the second quarter in a row of historical growth for the company.

No.

When that begins to slow them, then we'll begin to pull back on that provision.

So is it fair to say that maybe once you start anniversarying. The last two quarters of substantial growth, but kind of the the optics of keeping that historic growth record on track is obviously just mechanically a lot more difficult.

Would that be kind of the targeted range of when we see this heavy provisioning start to ease up.

Yes, it's certainly whenever that growth begins to decelerate rate and still be substantial yet decelerate will begin to see that.

So there's you know there's.

The annualized.

You know view of that so when we begin to lap the last few quarters, but you know again, there is that fourth quarter, where typically we have substantial run off in the portfolio and that's also I think where you would begin to see it pretty rapidly.

Then turning to credit obviously, you know our charge offs were up.

Can all look back at the pre COVID-19 numbers and see that.

Charge offs really not.

Symmetric relative to pre Covid, but there was a different portfolio composition between large and small loans prior prior to COVID-19 .

Where you expect to be on charge offs.

With this portfolio composition, and then just I guess.

So real simple question.

Now on a comparably.

You know mature pool, our charge offs higher or lower on large loans small loans charge off rate not dollars. Thank you.

Yeah. So let me answer that first the last question first.

So.

From the way that we provision from a seasonal perspective, we look at it.

Each individual loan how it's made compare to a cohort of that theme.

Credit quality slashed tenure of customer in the past and.

Yeah, typically youre going to see your larger loans have a lower charge off rate and provisioning rate than your smaller lines.

More importantly, you're going to see your higher credit quality customers have the same thing with lower provisioning and expect the charge off rate than your.

Tomorrow loan customers and lower credit quality customers.

And those two things are typically very highly correlated right.

In terms of.

What the portfolio looks like today.

We have experienced record growth again in the whole portfolio, but in terms of new customers.

New customers are up substantially year over year, even within the quarter. We grew roughly a third in terms of new customer balance.

And again each of those is provisioned accordingly, so what does this look like.

Going forward and what does the mix look like and also the corresponding provision a lot of it depends on what the.

The opportunity is and demand is in the market right. So to the extent that we continue to see good opportunity with new customers. We will continue to extend credit to them and to the extent that we can continue to retain our best customers with more attractive rates.

And products then we will continue to do that as well so it's.

It's tough to say what this looks like in the future in terms of product mix, it's more opportunistic than anything else.

Okay and just last question.

Why was the tax rate so low in the quarter and what is the correct tax rate going forward.

Yes.

With that John .

So the we saw a lot of windfall tax benefits during the quarter as we had some.

Richard share vesting.

And stock option exercises that exercise that share price is much higher than that.

Great Day fair value was so that was that was driving that a lot of that.

You know we were still under normal circumstances, we'd still think of that 21% to 20%.

But the reality is if we if the share price stays elevated.

Because we had the one large drawing it three years ago.

Do you still expect to see those some of those windfall tax benefits in the future as well right. So.

They're just not.

It's not very predictable, what that's going to be.

Okay.

Thank you very much.

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

The next question will be from Vincent <unk> from Stephens. Please go ahead.

Hey, Thanks, Good morning, Thanks for taking my question.

And the comments you reiterated your expectation to meet the.

The fiscal 2025, EPS performance target and I was wondering if you could help us maybe just understand your.

Medium term view, how do you get there in terms of the loan growth.

And I guess you had.

The credit and so forth if you could just help us walk through to that thank you.

Sure I'll start and John if you want to.

China and please please do as well sure.

Yeah.

Yes. So in terms of overall portfolio growth you know, we certainly expect to continue to grow.

Whether or not we can continue to grow this rate is still being determined.

As I mentioned before for John Rowe and a lot of it's opportunistic in terms of how.

How we grow the portfolio and customer base and then also on the customer retention side, we've done a number of things in the past couple of years to dramatically reduce our servicing cost.

And enable us to continue to grow and move more towards a fixed cost model in terms of servicing versus a marginal cost model.

Meaning that you know a lot of our branches the way that they are structured today can can growth.

And in terms of the customer base and certainly in terms of the portfolio.

Without having to add significant amount of cost there.

We've also introduced a number of things.

In terms of customer service and the channels that our customers can access their accounts.

An increase of self service options that helps us towards that goal.

So even in the future.

Kind of math that we're seeing here at a high level is to reduce cost reduce our servicing cost while continuing to grow the portfolio.

And then from a credit perspective, we've done a number of things over the last year or two.

Proactively monitoring and seek the highest credit quality customers, we can especially on the new customer side continuing to do that so that we.

Keep keep close tabs on what our expected losses are and our corresponding provision.

And to that over time.

Especially with the amount of repurchases we've made on the stock.

Repurchase plan over the last two or three years.

We firmly believe that we can hit those targets by the end of 2025.

Okay, great Yeah that covers it right.

Yep.

Okay, great. Thank you and I guess, a follow up to John Rowan's question just.

And I understand there is seasonality with the credit provisions in the next quarter.

We get.

Lower the lowest credit provisions that was a year I guess when you when you look at delinquencies and charge offs are climbing.

I guess, it's hard but kind of wondering if we should continue to expect that especially is that it seems like you have.

You're growing quickly and I guess, maybe.

Medium term.

Have a lot of new customers, but it's kind of the medium term view that eventually those.

New customers become existing customers and so you go from that index.

Charge off rate of I think it's one five times.

Your.

You are returning customer rate of.

80% of the index so.

I guess medium term are you expecting your NCL rates drop significantly once here.

With the business.

Yes.

Go ahead go ahead John .

Oh, Yes, I think long term that is true right, but in the.

The short medium term.

There still needs to be just normalization right. So we said the earnings release that that zero to five months customer right.

<unk> has grown substantially since last year it grew from.

Eight 6% for the portfolio to 13.8, right. So you see that having already having an impact on delinquency.

And charge offs will follow that right and normalize over the short term.

But yeah, but as those those customers are mature and we continue to grow that that back book longer tenured customers.

Long term I would expect that the charge off rate and delinquencies to ease back down.

Lower than historical levels.

Sure.

Okay, great. Thank you and last one for me and I'll get into queue.

Notice that the.

So in the script you mentioned the funding costs.

Client and 200 basis points I was wondering if you could talk about kind of.

Funding in more detail what drove that higher.

What levels, we should expect going forward. Thank you.

Yes sure.

So if you recall, we issued some bonds in the second quarter right at the very end of second quarter on September 27th I believe it was.

So we've actually swaps.

Four 5% variable rate debt for 7% fixed rate debt.

Right at the end of the quarter. So that's.

So the combination of that driving the rate up.

As well as just the growth and buybacks during the quarter driving the outstandings up.

That's what drove the interest expense up.

Yeah with the we haven't seen an increase in the rate on the variable rate debt yet so.

We're still at the floor on that it's priced a one month LIBOR right, which is.

Literally below the 1% floor so.

Yes.

<unk> be several.

Interest rate hikes before we.

Are you starting to see the impact on that on that portion of the debt.

Okay, great. Thank you.

And once again, if you'd like to ask a question. Please press Star then one.

And we have a follow up again from Vincent <unk> from Stephens. Please go ahead.

Okay.

Yes, thank you for that.

So just last one for me.

So your share repurchase activity has been pretty strong.

Your debt to equity leverage is already at one eight times. So I'm wondering if you could talk about.

What youre thinking in terms of your ability to continue the elevated levels of share repurchases and what your target is thank you.

Yeah sure so yeah.

Historically, we've always said you know we have a target of.

Two to one debt to equity.

And you know that our leverage ratio is always the highest at that December quarter, just because of funding all of the growth that happens in Q3. So we would expect to see some some natural deleveraging in the fiscal fourth quarter.

As the portfolio runs off.

But yes, we have.

As we said in the earnings release.

We have.

$84 million available under the debt agreements.

To repurchase shares.

That will only continue to build.

As we continue to add.

Net income over the future periods.

So yes, I think we'll we will continue to repurchase shares in line with that.

Okay, Great. That's all I had thanks so much.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Chad for Shaw for any closing remarks.

Thank you.

Thank you guys for joining us today and this concludes our third quarter earnings call, we look forward to chatting.

Next quarter. Thank you.

Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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