Q4 2022 World Acceptance Corp Earnings Call
[music].
Good morning, and welcome to the World Acceptance Corporation sponsored fourth quarter Press release conference call.
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 announcement.
These comments made during the conference call may contain certain forward looking statements within the meaning of the section 21 E 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 well and should and any variation.
Of the foregoing similar expressions are forward looking statements.
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 and today's program in today's earnings press release and in the risk factors.
That section of the corporate.
Most recent Form 10-K for the fiscal year, ending March 31st 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's my pleasure to turn the floor over to your host.
I prefer a shot president.
And Chief Executive Officer.
Yeah.
Good morning, and thank you for joining our fiscal 2022 fourth quarter and year end earnings call.
Before we open up to questions. There are a few areas that I'd like to highlight.
First for the third consecutive quarter, we've experienced record growth in origination volumes.
During the fourth quarter gross originations grew by approximately $220 million more than the prior year fourth quarter and at over 700 million surpassed our prior strongest fourth quarter originations by approximately 40%.
We attribute this record growth positive customer experiences increased marketing intelligence and larger loan offerings all of them that are tighter credit underwriting for new customers that we began in the third quarter.
Further we experienced was broad expansion across all customer types and continued to see tremendous increases in new and returning customer loan volumes when compared to last year or even pre pandemic levels.
In particular, new customer originations in the fourth quarter increased from approximately $25 million to over $60 million as new loan applications increased significantly by 64% versus the fourth quarter of fiscal 'twenty, one and 41% versus the fourth quarter of fiscal 'twenty.
In all we experienced an exceptional 37, 8% year over year portfolio growth we.
We are confident that this extraordinary growth is profitable growth, but recognize that growth at this rate is likely unsustainable.
Therefore, we believe our continued and additional credit tightening a bit.
We recently began in April will also result in further reduce credit risk and higher profitability as we slow growth and reduced the credit provision in the new year.
Another contributing factor was a significantly lower paydowns and lower runoff in the most recent fourth quarter.
Traditionally we see runoff, averaging approximately 12 to 12, 2% approximately $200 million for our beginning portfolio size.
This quarter's run off was just over 5% or only $80 million largely resulting from our move to higher balance loans, which are less subject to lump sum payoff through tax refunds.
In other words that approximate 7% difference equates to around $150 million of higher performing lender going into the new fiscal year.
Regarding credit performance, we expect the origination cohort performance remained relatively consistent in the near term based on several factors, including including overall economic environment changes to our credit underwriting and increase of larger loans to retain our most to remain the most attractive options for our best customers.
We continue to expect to hit our long term incentive EPS targets of $25 40 per share before the end of fiscal year 2025, and we are accruing accordingly.
Further delinquencies remain within expectations and when confidence the long term EBITDA expectations. It's important to note that with the change that people provisioning last year, we expect to grow our provision in real time as our portfolio grows and reduce our provision that in real time with any seasonal runoff.
Which is traditionally during tax season.
Periods of rapid growth this temporarily depressed net income as compared to a historical delinquency based provisioning model.
The loan growth and day, one provisioning of seasonal should positively impact revenue.
And income in future quarters, especially in quarters, when we began to decelerate our growth rates.
For the entire year, we originated approximately $800 million more than in the prior year with over $200 million of that being unseasonal.
During the most recent recent fourth quarter.
With this growth.
As mentioned before we've also significantly increased our loan loss reserves under seasonal accounting.
I'd also like to point out that over the last five years, we've achieved over 10% compounded annual growth rate in the portfolio, including the dramatic reduction that we experienced throughout the pandemic.
Finally, aside from our continued record growth, we have must be thankful for and excited about our world.
Our branch team and those who support them have done a tremendous job of navigating the last few years in putting our customers needs and safety first.
Second we continue to win top workplace awards across the country with over half of our branches being in winning states or regions. This year. In addition to the overall company being the only company to be a top workplaces USA winter for two consecutive years.
Reflecting the incredible culture that our work that our world family has created and continues to foster I couldn't be prouder of them.
At this time, Johnny Calmes, our chief financial and strategy Officer, and I would like to open up to questions about our fourth quarter and fiscal year 2022 earnings.
Well, we will now begin the question and answer session.
Asked 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.
The first question comes from Vincent.
<unk> of Stephens. Please go ahead.
Thanks, Good morning, Thanks for taking my questions.
First question just on the charge off rates. So it looks like this past quarter, yet 19% charge offs.
Which I think would imply you had a really strong loan growth rate. This quarter. So it would imply that with a normal with a slower loan growth rate you'd have charge offs in excess of 20%. So just sort of wondering what's a normalized annual charge off rate, we should be expecting.
That should be over time, thank you.
Sure Yes.
It was a little under 20% this quarter and I'll say the magic as it.
Growth has been lower than it might be a little bit higher but it's still relative to if you go back to fiscal 2020, right, which is the last period of year, we had with substantial growth that we've had.
In the past three quarters, yeah, it's in line with that as well as as well as delinquencies in line with that so yeah. We still we feel good about where that where that is relative to.
Or our growth in the especially the new bar or growth that we've had.
Yeah, it's difficult to.
Hum to give a projection of what that's going to be going forward because so much of it is determined by the mix of the portfolio right. So.
You know as as we see the portfolio age.
Yeah. It will it will that should drive the the loss rates down after there is a lag right. So yeah, it'll take a quarter and maybe too for the.
All all the MB growth that happened in Q3, and Q2, and Q3 and Q4 to kind of work its way through but then.
Yeah. It should you should start to see those loss rates come down fairly.
Barely significantly.
Okay.
That's.
That's helpful. So it seems like maybe this is a.
I mean, it's hard to say of course to your point, but.
That's the target losses that Youre looking for.
Assuming your mix.
That you are targeting.
Would be below the current range or is it or is this a comfortable.
A comfortable sort of NCO level for you or for your underwriting.
Relative to the growth we were comfortable where we are right, but yeah.
Yeah, that's Chad pointed out right as we move forward.
We don't expect to maintain the same level of growth that we've seen over the last nine months right. So we plan to be a lot more selective, especially around new borrowers going forward right. So we could see that mix shift.
In the next couple of quarters.
Okay. Yeah, that's right. This is.
This is Chad just provide a little more clarity around that.
The net charge off rate really is dependent as John had mentioned on the portfolio mix. So.
As that portfolio mix changes and ages.
The the NCO rate to come down as well.
And further to go to Johnny has pointed out.
Tightening credit underwriting as we slow down our growth.
From these extremely high levels are we've already begun.
Reducing our approval rates, especially for new customers and.
They were much lower in the fourth quarter and they'll continue to go down throughout the first quarter of this fiscal year.
Okay, and just a little more color about where we are today to the absolutely we're through April now right.
The delinquency.
Is trending down from March.
Would expect right so.
Charge offs, we'll follow delinquencies right. So.
Delinquency continues to decrease as we expect it to the charge offs will decrease as well.
Yeah.
Okay. That's very helpful detailed feedback thank you.
And just a second just a follow up questions question, along those lines. So the the underwriting changes you made to <unk>.
And in April if you could describe maybe what what those are.
In more detail and.
Is there any.
Any particular surprises we've seen the maybe the payment rates.
Slowing down or anything else that was unusual that cause tightening or.
Maybe if you could just describe what the kind.
The variables on the tightening thank you.
Yeah, Yeah, Great question, So we began tightening underwriting.
The third quarter, mostly due to just a tremendous amount of of application flow.
Wanted to maintain and improve credit quality and user such a really good opportunity.
To do that the second is absolutely moved into larger land, it's really important for us to make sure they're new customers have the credit risk profile to allow them to move into larger loans as well.
Can we make that initial investment into the customer we want to make sure that we can retain them.
For as long as possible and that means making sure they would qualify for higher credit quality lines in the future.
Debate fit that profile so to your question around what does that credit underwriting look like tiny look like.
So we made additional changes in April .
To give you some perspective before we made those changes.
Overall.
Booking rate of new customers fell by 17% compared to the same fourth quarter of 2020.
So prior to the pandemic really impacted anything there.
And we have tremendous increases in overall application flows in the fourth quarter.
Applications were up 46% versus pre pandemic levels, 68% year over year.
The vast majority of that is being digitally sourced so using it really as an opportunity since we have done a great job in terms of <unk>.
Marketing intelligence and.
Really changing the brand and culture within our branches and the excitement there.
We have.
A large increase in overall application flow. So we can use this as an opportunity to tighten underwriting at the same time.
Okay got you and last one from me I think from the last earnings call when you talked about.
Leaving your EPS targets the $25 by fiscal 2025, you outlined.
The growth trajectory I think it was kind of high single digits, plus your capital return and your underwriting I guess just.
Maybe if you could talk about that still.
In mind, you are still on that path.
To get there, but those are with those three variables.
Variables.
Yeah, So I'll start I'll, let Johnny.
Chime in.
As well.
With the amount of growth you've had this year and the overall ledger it really does come down to that how rapidly we decelerate.
Overall growth rate.
There's two pieces to that the first is every new customer that we bring in is significantly more risky than existing customers and.
And we see some provisioning we have to provision for that upfront. So as you can see in this quarter, we had rapid growth.
Not just in terms of customer retention, but also record originations and with that comes a pretty substantial piece of provisioning.
As we slow that down yes, we are still accruing towards $25 40, we believe that.
Portfolio of the size that we are today could certainly put off that no cash and I think you can you can see that in the press release as well it really comes down to making sure that we.
We are prudent for the long term.
Investments for new customers for the company.
So we are still looking at the long term EBITDA of every applicant to make sure that those are good investments and we're still very opportunistic so as we see those we will continue to make them. So it's really difficult to say that we're aiming at a specific percent growth rate.
We keep our eye towards the overall economy and.
Any influences there that may impact demand, but also influences, we think may impact repayment rates in the future. So all that to say we aimed to be opportunistic.
We really arent setting a set or certain percent growth rate in order to hit those targets.
But we think that the portfolio size. We have today is certainly allows us to do so in.
In a decelerating growth environment.
Okay, great very helpful. Thank you.
Again, if you have a question. Please press star one. The next question comes from John Rowan of Janney. Please go ahead.
Good morning, guys.
Morning, John .
John I appreciate you not wanting to give a NCO rate that you're underwriting to kind of in a steady state environment, but you're obviously, giving you targeted for significant earnings growth based off of this run rate to get to your accrual target.
In fiscal 2025, now when I look back historically your loss rates have been.
Anywhere from the low single digits to the mid teens to near 20% maybe.
Maybe if you could help us narrow it down to one of those three buckets.
To have an outlook on it have assumptions how has the confidence that youre going to get to that earnings figure.
Maybe not necessarily give us an exact number but give us a ballpark figure as to what loss rate you're currently underwriting too.
So we have.
I feel like rubbish.
Okay.
Yes, if I can kind of give you a.
A range right.
Where we are right now right.
Is that.
First of all we've been saying right and becoming more selective going forward with new customers.
This should be near the top right so as the portfolio ages.
We expect that the loss rate to come back down.
Long term do I think it could settle in the in the high single digits.
Yeah, I think that's fair long term.
But yeah so.
As far as the timing and when exactly that's going to happen, it's hard to say.
But yes, so best.
I can say as far as.
The mix is.
Right now.
It's probably skewed more to <unk> than it will be in the future right. So that says that the loss rate should start to trend down right.
So we don't we don't want to get a position, where we completely cut off and be part of new bar growth right. So there's always some risk in the portfolio.
Higher than just that.
Our existing customer executive Australia.
Yes, so certainly from where we are and high single digits.
Trending towards the high single digits over time, but it's just it's hard to give.
Exact timing on that right.
Because it you.
No that's fair enough I mean listen I've covered the stock for a while and you you look back in time and high single digit is a lower number than what I remember ever seeing even pre financial crisis. It was there something kind of just fundamentally different than the credits that you are underwriting that type of you know.
Embedded loss rate relative to the history of world.
No it was just.
As the shift to these these larger loans right. So as the mix of the portfolio.
With the shift to the larger loans, we should retain our best customers longer right.
So as that mix starts to rightsize and as the portfolio ages.
The loss rates will move back towards that right, so, but again I'm not saying, we will definitely get there, but there's a lot of it will be determined by our our appetite for risk on the new new customers right. So.
That's what makes it difficult to give an exact number right because we can we can change our appetite for that that new <unk> customer in the future right.
That will change with that loss rate would be hey, John if it if it's helpful.
And hopefully I don't repeat exactly what Johnny said and just different words, but.
We don't really have an NCO rate, we targeted a portfolio level right. So we target in theory at the individual customer level relative to the cost of acquisition.
What we expect our EBITDA to be over the lifetime et cetera. So there's a lot of pieces that go into that.
That math at the new customer acquisition level once that customer has been with us over time.
The risk is dramatically lower and there's a number of factors that go into the overall portfolio.
Sorry.
First and foremost as Johnny is talking about you have your new customers. So.
Depending on what the appetite is what the market looks like when we think the return will be.
We'll make those investments accordingly, which certainly will impact and bring the overall NCO rate up with more new customer investments, we make with the other part of that to whats. Johnny was just talking about is on the large loan side Theres. Two pieces. One is as we are underwriting new customers that we believe will be long term bar.
Loan customers, we're certainly looking for a higher credit risk profile.
So that has two negative impacts to the NCO rate and bringing them down.
First and foremost.
New customers will have a lower credit risk is the expectation and as they stay with us longer.
That will continue as well.
The second is as we've moved into larger loans, we are retaining our customers longer whereas in the past we may have lost them to your competitors at lower interest rates.
And larger loans, as we're retaining them longer and they're our best customers. They naturally do have a lower NCL rate. So.
I'll, let say as the portfolio ages, that's really the most important part of this conversation because that is a large percent of the portfolio.
We will see those MTO rates come down and they certainly could hit into the single digits because the portfolio today is setting up to be much different than it has been in the past and already is quite different with the portfolio mix, we have but the customer base is certainly on the rate of being significantly different than it has been in the past does that helpful.
No. It is and I kind of wanted to tack the topic of the you know.
The vesting hurdles in 2025 with two different methods right. So first as a top down look at.
Growth in the provision.
Via charge offs, but in the past world has.
Under prior management teams use the vesting hurdle.
Issue to lever up the balance sheet.
So we try to buy back stock to meet those hurdles.
So maybe if we look at it from the bottom up is there any appetite to.
Do such a.
Our strategy to meet the vesting hurdle in 2025.
So I appreciate the question I think it's really insightful.
Well I'll speak first and Tony if you want to chime in please do.
So when we first put out the long term incentive plan the goal for us as a management team from the board is versus think is long term as possible.
As part of that we also removed short term incentives, including bonuses for our executive team and so we don't have any annual bonuses were not looking to hit certain quarterly targets or even annual targets. Our goal is to build the <unk>.
The most valuable asset we can for our shareholders long term.
No.
As the leader of the executive team I'm really not interested in monkeying with things as we get closer to the vest and cliff to make sure we hit it.
Certainly not at the expense of the long term.
Value of the asset that we've created here.
And so that.
That's certainly the perspective that I have going into this.
We have bought back a fair amount of the float over the last couple of years.
As long as we believe that the stock prices is a good investment accretive for our investors, we will continue to repurchase.
And again were very opportunistic, but thats not something that we're looking forward to it.
Into the future in terms of.
Trying to let's say necessarily hit a certain target to make any decisions that might be short term at the expense of long term value of the company.
Okay I appreciate it I mean last time, there was kind of a stated.
Intent to move leverage to a significantly higher level right.
And so it was a little bit more obvious I mean, I don't have obviously share repurchases are a good thing.
I was really more commenting on whether or not there was just a could be in overall.
Complete departure from what you know what types of leverage rates, we're seeing now so I appreciate the insight. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. <unk> for closing remarks.
In closing we are pleased with the many improvements in our operations and culture that have helped to result in a record growth. This year and believe our portfolio will continue to generate significant cash flow in the coming quarters and years.
Thank you for taking the time to join US today. This concludes the fiscal year 2022 earnings calls, we'll acceptance Corporation.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.