Q1 2023 World Acceptance Corp Earnings Call

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

Today this call is being recorded.

At this time all participants have been placed in a listen only mode. Following management's remarks, there will be an opportunity to ask questions.

Before we begin the corporation has requested that I make the following announcement.

The comments made during the conference call today may contain certain forward looking statements within the meaning of section 21 E of the Securities Exchange Act of 1934 that represent the corporation's expectations and beliefs concerning future events such forward looking.

<unk> 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 will and should or any variation of the foregoing and similar expressions are.

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 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 2022.

Subject and subsequent reports filed 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 <unk>, President and Chief Executive Officer.

Good morning, and thank you for joining our fiscal 2023 first quarter earnings call.

Before we open up to questions. There are a few areas that are like the highlight.

Okay.

For the fourth consecutive quarter, we've experienced record growth in origination volumes during the fourth quarter gross originations increased by approximately $175 million more than the prior year first quarter.

And over 930 million surpassed our prior strongest first quarter originations of 762 million back in fiscal year 2020.

We continue to see elevated demand across all customer types. In addition to internal improvements and marketing customer service loan products and customer access channels demand for credit has increased across the entire industry and the inflationary and cost pressures are top of mind for many customers.

As a result of tightening credit and underwriting several times since the third quarter of last year. This first quarter. Our book to look declined by 28% to 31% for new customers when compared to the first quarter periods. Prior to the pandemic and continues to decline further throughout the current month July of our fiscal second quarter.

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In particular, the number of new customers increased 7% year over year.

During the first quarter, but actually declined 27% to 30% when compared to pre pandemic levels in the first quarter of 2019 and 2020.

This significant decline in booking rate as a result of the increased activity during the last several quarters of credit normalization as well as consumer economic challenges.

Regarding credit performance charge offs have increased as prior delinquencies have age through this past quarter today.

Today delinquencies continue to normalize following the prior two years of unusual economic activity and our elevated compared to the prior two years.

For our customer base inflationary pressures on groceries and everyday living expenses have an impact both on our delinquencies as well as demand for new originations.

Due to credit underwriting changes as well as ongoing operational adjustments new originations remain within our long term.

VA expectations.

It is important to note the potential significant growth and release in our provision under the new seasonal accounting standards and in this quarter, we experienced a significant 14, 5% increase in the provision as a result of a seasonal credit adjustment.

As exogenous and unrelated to new originations. Our recent actual performance. This adjustment is greatest during the first quarter of each year and reverses throughout the remainder of the year.

Finally, following a year of growth as we rebounded out of the pandemic in fiscal 2022, we are poised to protect what we built for the future of this year.

With the increasing earnings power of our portfolio and control expenses, we continue to expect to hit our long term incentive earnings per share target of $25 40.

Before the end of fiscal year, 2025, and accrue accordingly.

At this time, Johnny Calmes, our chief financial and strategy Officer, and I would like to open it up to any questions about our first quarter 2023 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 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.

Today's first question comes from John Rowan with Janney. Please proceed good.

Morning, guys.

John So, let's just talk about the trajectory of charge offs and delinquencies.

Your.

First of all is is the CPI.

And your debt covenants still at 24%.

Yes.

Yes.

So I would say no the calculation on the charge off rate.

Is it eight months period, but I'm calculating.

You are currently at roughly 21% or 27%.

By grossing down by netting down debt.

Average charge off by a third to account for that.

If if we continue to see charge offs go up and delinquencies go up I mean, there's not a lot of wiggle room between where you stand now and the 24% CPI Amit maybe address that.

Im with kind of the trajectory and what you expect going forward for charge offs and delinquencies.

Yeah sure so.

Yes, I said said a lot of the charge offs that happened in this quarter are a result of where delinquencies were at the end of March right. So we've seen.

Let me say that the 90 day delinquencies as come down since March.

And we.

We say that to come down to level off and we expect charge offs as our decreasing going forward from here.

Mostly due to the result of.

Tied to that underwriting and a reduction in.

Newborn growth right. So.

Yes.

Increase recently, but.

<unk> been at these levels before.

And so that we can we can manage to and then expect again expect charge offs.

To start to come down as we move forward.

Okay. So we were to calculate the kind of the CPI this would be.

Is this the peak quarter or next quarter, the peak quarter, because youre going to have that 22% charge off number.

Alright, just sticking into that calculation for at least two months it will be on the backend next quarter right yes.

Yes definitely.

It's close to it okay.

Okay.

It looks like <unk> changed the lifetime loss assumption, which drove a $16 million increase in the provision can you talk about what the Delta was there.

I mean, I know last quarter, we talked about kind of the longer term I thought it was like.

Low double digit type loss rate I mean are we still looking towards that I mean, what was the delta in that lifetime loss assumption change.

Right.

Well, we sort of lay that out in the in our earnings release right at the table.

Included in there right so.

Yes, as expected loss rate change.

Over time, they get applied to the entire portfolio alright.

It's not just the originations in that quarter right. So.

You can see that.

That resulted in just the change in the expected loss rates alone.

They had a $68 million impact too.

To the provision during the quarter.

Oh, sorry to the allowance and the provision during the quarter right. Okay, and then another $2 5 million was related just.

Growth Yep.

So in that within that $16 8 million, we go into some detail about what's impacting that so some of that increase is due to.

Actual loss increases right, which is expected to the credit normalization or things like that right.

So as I would expect the actual credit losses go up it's impacting expected losses going forward.

If we apply to the entire portfolio.

But the.

The seasonality factor.

Pretty significant impact on that during this quarter right. So we have a table in there and you can see that the.

The seasonality factor increased 14, 5%.

Which is $13 $4 million of that $16 eight.

Million increase right.

Okay. So would you.

I understand.

I appreciate the detail, but as far as a percentage of loss I mean is it a 100 basis points I mean, your allowance ratio was up about 100 basis points is that a.

Sequentially I mean is that a barometer for how much the lifetime loss assumption that you're you are baking in went up.

Again, it's at a.

Point in time right. So the seasonality factor plays a large part of that right. So as that starts to reverse over the next two quarters.

Youll take a lot.

With that back through alright that makes sense. So does the allowance ratio decline in the balance of the year.

It could but it depends on what else happens right and that the big things impacting that right will be.

What continues to happen with.

Actual losses, and how they impact but also a large part of that is the mix of the portfolio right. So yes.

<unk> each.

10 year bucket by must have an expected loss rate and as the mix in the portfolio.

Yes that will also impact that overall.

The loss rate.

So what it sounds like to me is that your you are going to slow growth, which seems prudent.

Given the fact that your book.

Your book to look went down.

Which then would move more loans to more season bucket and then could at that point necessitate a reserve release does that sound right, yes, correct as as the tenure mix skews older that will lead to a reduction in the overall.

Portfolio loss expected loss rate.

And then the seasonality factor will start to start to move down.

And that will have the impact of reducing that overall portfolio wide the expected loss rate.

But yet you also have to factor or so.

What happens with.

Actual loss rates and what they do to the expected loss rates rise. So there's a lot of moving pieces there right.

Yes, you would expect those to.

Sort of moved out Okay, and then yeah.

Yes.

Yes.

One thing to underline here is one of the reasons that we really call that less than two year bucket.

Really just are our most recent.

Originations in terms of.

New customers is that.

For your prior question around the trajectory of charge offs and I think into this question as well I think it's important to note that historically roughly 30% to 40% of our charge offs come from those riskiest customers who are originated in the last six months.

Or less than six months old and we originate them right. So these are the newest customers and they account for the vast majority of.

The provision build.

They also account for 30% to 40% of the charge offs. So in terms of trajectory of what's within the pipeline.

As we are prudent and we are slowing down the originations for new customers, specifically, it will certainly impact charge offs faster.

In terms of the question around the 100 basis points of roughly 100 basis point build in and provision.

A large part of that is due to seasonality or another part of that is due to the makeup and portfolio mix.

But to John's point, the portfolio mix were to remain the same and everything else in the economy remain the same and.

Actual loss rates were to remain the same going into the next two or three quarters, we would release pretty much everything that we just added for the seasonality build now we know all of those things are not going to remain the same. So that's why it gets complicated in terms of.

<unk> forecasting what we think will happen going to the future okay.

One last.

Keeping item.

So the diluted share count was the same in both the GAAP loss and the adjusted.

Positive earnings figure.

I just want to make sure that you have.

That's the correct diluted count because there would be anti dilutive issues going into the GAAP loss I just want to I don't know what the correct.

What is that the correct diluted share count.

For positive earnings at the end of.

Why don't you.

Yes.

We're trying to keep it consistent.

But yes, we do we use the basically for the GAAP earnings right. So that's correct.

The anti dilutive right so.

Correct, but that basic number is still in isn't the adjusted figure.

Shouldnt the.

<unk>.

I mean.

Looking at a positive earnings figure for the quarter would enter diluted B, a higher share count you have taken.

What is the higher share count just so I know going forward.

Hum.

Got it.

Unless it's in the.

I can't remember exactly what it is off my head I'll give it to you later alright, thanks, Sean.

The next question comes from Vincent <unk> with Stephens. Please proceed.

Hey, good morning, Thanks for taking my questions.

Two of them. So first a quick one.

The $3 $3 1 million bargain purchase gain.

Quick if you could explain what that is.

For the bargain purchase gain thank you sure yes. So.

During the quarter.

We acquired a portfolio.

And that's essentially the discount to the net assets that we that we paid.

Okay.

The portfolio had a pretty a pretty significant discount.

Okay, great. Thank you do you see.

Do you see a lot of opportunities our pipeline for <unk>.

Opportunities to buy portfolios.

There are a few out there yes.

Okay great.

That's helpful Second question and this might be.

Maybe a little bit too.

The detailed but.

So the.

$16 8 million.

Allowance change due to the.

<unk> loss rate on performing loans.

The discussion on the seasonality factor a bit in <unk>.

Italy, I don't think I understand how the seasonality plays out or what we should be expecting going forward.

My.

Understanding of Stifel is that when a loan is originated.

The full lifetime loss expectation.

Preserved upfront. So there is adjustments that go forward as a result on us.

Growth factors.

Factors change or assumptions change, but if you could maybe describe how seasonality works and what we should be.

Spectrum going forward. Thank you.

Sure Yes.

The theory with the seasonality factors is.

The loans in the portfolio as of June 30th.

Our inherently riskier than the loans in the portfolio at December 31, right.

The reason for that being that at December 31.

Is there a month or two months away from.

The tax refund season, right, which.

Would it improve.

The quality of the overall portfolio.

So thats a factor that would apply not just to loans originated in that quarter, but through the entire portfolio right. So that's why it impacts the entire portfolio.

Okay, and I guess, when you make a let's say.

So our loan originated.

Now would be maybe riskier than December .

Is that already in so is that in the credit provision that you're building for that loan.

Or should I be.

Okay Associate, but then for the seasonality should I mean, assuming that there's going to be if it makes it to December that theres, a relief is that sort of how it works or not.

Yes.

Yeah Okay.

We included the actual factors in there so you can.

You can calculate what that impact would be.

Okay, but I guess, there's not a so.

I guess I'm trying to understand maybe the difference between the lifetime loss expectation.

Versus.

Loan.

Okay, I guess, if so if the loan gets to December and you have a change youre seeing more loans.

So the loans in the past December had made at the June so the quality gets worse. So you have to make that $15 million adjustment.

Brian or Mike.

Okay, that's right yes.

Okay.

Mike I might ask for more detail there but.

Okay I appreciate that that's all I had thank you.

Thank you.

As a reminder, if you do have a question. Please press Star then one on your Touchtone phone.

The next question comes from Jordan Hymowitz with Philadelphia Financial Please proceed.

Hey, guys. Thanks for taking my question I was wondering what percent of your loans originated or in some way secured by autos.

Yes.

We have in front of us.

But we can certainly pull that.

And in that regard this as a percentage have you noticed any change in those particular loans as residual values have started to fall a little bit in other words could that be one of the reasons for the increased charge offs just a recovery.

And those costs have started to change or is that not a major bank.

Yes, typically that's not a major factor for us speaking historically as well through the last recession.

We.

Historically, we have not repossessed a lot of vehicles or.

Otherwise put a lot of leans on them so.

It's not a huge part of our collection process and Hasnt really played a large role into the residual values haven't play a large role into our collection efforts now certainly the overall economic.

Environment that is contributing to declining residual values, but also increased pressure on consumers' pocketbooks.

Is having an effect on overall collection across the entire industry and delinquency rates and that certainly is impacting us as well.

And have you noticed anything at all about the tightening of auto credit standards at all and as a result people may be using their vehicles more for borrowings incrementally or youre not quite sure on that.

Yeah.

I don't think we have.

Seen much of that are largest loans.

Historically are going to be in the $3 to $5000 range and.

So we don't do a lot of learning from that perspective.

But today I don't think we've seen enough of that.

Really move the needle.

Okay. Thank you very much for taking my question.

Yes.

The next question comes from Guy Riegel with Ingalls <unk> Snyder. Please proceed.

Hey, guys. Thanks for taking the question or questions.

I was curious.

I think what new Mexico is going to a 36% rate cap by the end of the year.

Have you pivoted too.

Larger loans, there and do you see any other states.

Contemplating a 36% rate cap and then I've got one more question.

Sure.

Morning, Thanks for the question so.

Illinois move to a 36% rate cap last January and February and we were able to pivot very quickly there been a matter of weeks with the lead time, we have this year in Mexico.

We have completed.

A fairly large acquisition it is it's pretty ripe environment for future acquisitions as well.

And what that enables us to do is to grow the customer base, but also to move into larger loans by.

Absorbing other loans that customers may have with other lenders.

Basically moving them into for lack of better term a debt consolidation loans.

At a lower interest rate at a larger amount and so that's.

Been a good strategy in terms of preparing for a rate cap.

And Fortunately with the Mexico, we have enough lead time.

Another six months or so too.

To fully migrate everybody.

In terms of other states. There are always other states that are considering changes to their rate structures and product.

So we keep abreast of those I'm not aware of anything that appears to be pressing or as urgent as.

Certainly, Illinois did last year, Okay and then.

One other question.

I may have been imagining things, but.

Looking at the.

Reading the 10-Q.

10-K did.

Did you guys referenced.

Or are contemplating.

Securitizing.

In selling any of your loans in the marketplace.

That is something that is a process that we're going through at the moment right.

Yes, it's an investment right, there's a lot of infrastructure thats the built out in order to do those but.

We are in the process of doing that.

Okay.

And so what you had to hire an investment bank and they would help you in.

Would these.

These loans that you would securitize.

Would they be short term in nature.

Likely initially it would be some of the longer term loans.

<unk>.

Really loans that with.

Less than 36% interest rate.

Just more of a.

Of a market there for those those loans than the ones.

36%.

So yes, it would likely start with.

Longer term loans.

And given the.

Your history of making smaller loans I mean.

Do you have enough data.

Collected from a historical basis too.

To understand.

Yeah.

The credit.

Matrix of Av.

The larger longer.

Our longer term loans.

Yes, we believe so.

We've made larger lower rate loans for.

Over a decade at this point right.

It's a pretty substantial amount right.

So yes, I think we do have quite a bit of data around those loans great. Okay. Thanks. Thanks for guys. Thanks for taking my question.

Scott Yes.

At this time there are no further questioners in the queue and this concludes our question and answer session I would now like to turn the conference back over to Mr. Chad <unk> with any closing remarks.

In closing we are pleased with the many improvements in our operations and culture.

With really deep thanks to our incredible team here at World for how they've executed over the last couple of years.

Following a year of growth as we rebound out of the pandemic. This year, we are poised to make sure we're able to protect what we built for the future.

Thank you again for taking the time to join US today and this concludes the first quarter earnings call for World Acceptance Corporation.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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