Q2 2023 World Acceptance Corp Earnings Call

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

Today. 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 did I make the following 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 1934 that represent the corporation's expectations and beliefs concerning future events.

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 will and should.

Yeah.

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 <unk>.

Fitments in todays 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, 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.

Mr.

Chad part shot you May proceed sir.

Good morning.

Thank you for joining our fiscal 2023 second quarter earnings call.

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

As we discussed on our first quarter earnings call, we began making underwriting adjustments at the end of our last fiscal year to protect our $1 6 billion of our portfolio that we have built.

Heading into economic uncertainty this.

This was mainly with the perspective of the impact of inflationary pressures on our customers' cash flow and delinquency normalization coming off the stimulus payments.

But also with the growing concern of the older the likelihood of a recession in the next year.

Pleased to have continued to execute on this preemptive plan for fiscal year 2023 by reducing our exposure to our highest risk customers and making progress to increase our gross yield.

First you'll notice the substantial decrease in new customer originations in the second quarter.

It's more in line with the origination volume of fiscal year 2021, then.

High growth year like last year fiscal year 2022.

However, one major difference is the $41 million of new origination volume in the second quarter of fiscal year 2021 with in a low demand environment.

In contrast, this most recent quarters originations are in high demand environment, where we're much more selective with the book to look ratio that's nearly half of the prior two years roughly 20%.

This is the third consecutive quarter of improving credit performance of our new customer vintages.

First pay default rates have been decreasing with each vintage throughout the calendar year and new customers originating in the most recent quarter have lowest first pay default rates since we rolled out our credit creating system. In late 2019. This includes surpassing the low first pay default rates on vintages positively impacted by stimulus.

As well.

In addition to increasing credit quality. We are also focused on growing our gross yield.

For new customer originations the gross yield has increased substantially throughout the second quarter and we expect it to remain elevated throughout the remainder of the year.

Similar adjustments have also been made for returning and refinance customers as well with an emphasis on increasing credit performance minimizing our exposure to a higher risk customers maintaining high customer retention as well as increase in the gross yield.

Applicable.

At this point gross yields on origination in the most recent quarter have stabilized and even increased in the September month, and this is for all originations.

With this emphasis on credit quality yields retention and deemphasizing risk as well as growth as we look towards the next six to 12 months of an uncertain economy and pending cash flow risk to our customers. We do expect a muted growth season. This year in comparison to prior years, while we continue to invest in the highest credit quality new.

<unk> former in refinish customers, we expect a reduced book to look rate to continue into the third and fourth quarters for new customers, especially as well as tighter underwriting and exposure to refinances.

Finally, our world Finance team is outstanding and I am incredibly proud of our leaders at every level in the company and the work that they've done to adjust and build a strong and nuance infrastructure that create the levers for our operational leaders, who need them to effectively and quickly and manage our portfolio.

Further they do it with positivity fun and Grace and over half of our branches are in states or cities that have won top workplaces Award again. This year. In addition to our overall company being secondly is the only company to be a top workplaces winner for two consecutive years. We also recently won a national Culture Excellence Award for professional development, which truly reflects.

Our incredible team of strong homegrown leaders.

At this time, John <unk>, our chief financial and strategy Officer, and I would like to open up to any questions.

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

Please remember to pick up your handset.

To put on your handset before pressing the keys.

I will now pause momentarily to assemble our roster.

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

Good morning.

So.

I want to talk about the waiver you got from your lenders.

How long does it cover.

Are there any requirements for you to get back in compliance with the fixed charge coverage in the CPI indicator.

Just give me an idea of how functionally that waiver works.

For you guys.

Sure Yeah, so the waiver.

It applies to the September month end right. So.

We're currently in the process of amending the debt agreement to discuss more cushion going forward.

And that's still in process.

Assess.

So youre, so youre amending the agreements I leave more room under those two covenants and if your remaining the agreement is there.

I mean.

Are there any.

Last time, you guys amended an agreement when you were.

Close to covenant violations.

There was a big fee for it. So I was just curious are you paying for the amendment.

Nothing that would be.

And customary.

Okay.

Hi.

When I look at the charge off rate here for the quarter, 23% you were at 22, 3% last quarter when I tried to estimate the CPI.

8%.

Bankruptcies would indicate that you were actually at quarter end, because I don't see the monthly numbers that you were actually under the 24% threshold for the CPI.

What month did you violate and are you now in compliance with it or is it just the calculation is off a little bit because I don't have the monthly <unk>.

Yes, I think you're it sounds like your calculations off of it. So yeah, we missed it as of September .

It was close.

We did we did miss it okay. Yeah, I know obviously you are.

The agreements calculated on a monthly basis, but we only see the quarterly information. So I know that my estimation is not a perfect number. It's just it's just the way you have to round about trying to get to it yes.

Okay and then.

Are you still accruing for.

You're at 100% of your 25 40, EPS goal and if you don't hit that.

Is it all or nothing right if you reverse out all of it.

Is the partial relative to certain thresholds and if you do reverse out of it is there any benefit to some of these.

Covenant issues that Youre, having.

From that reversal or is that excluded.

So the there are three different targets right. So and we are still accruing forum.

The plan runs through <unk>.

2025, right. So we have through March 'twenty 'twenty, Bob to hit it.

Three different targets.

And they are cliff right. So it's not a proportional.

All right. So if in the end, we we don't have a targeted only we could hit a target.

It would reverse.

Because its share based comp and noncash share based comp it doesn't impact those those covenants.

Okay.

That's it for me thank you.

Yes.

Our.

Question comes from Vincent.

With Stephens. Please proceed sir.

Hey, good morning, Thanks for taking my questions first.

First on the charge offs and credit. So you were talking about on the prepared remarks that first payment defaults.

Our improving and maybe were the best since 2019.

The charge offs are at the highest level and so I'm kind of wondering if you could help us understand.

How thats going to trend at the first payment defaults are down now should we expect I would say.

In a quarter or two that things that charge offs would have normalized and then on the press release I saw that that seasonality table and if you could help us understand how to interpret that thank you.

Sure Alright.

Alright, so first off on the credit quality and lower first pay default rates that we're experiencing.

So we've made a number of underwriting changes going back too.

Our fiscal third quarter last year.

During the.

October through December quarter of last year.

Continuing through the winter and spring, we made escalating changes to underwriting so.

Really for us the.

The highest first pay default vintages.

Were originated last October to December .

And coming forward each subsequent vintage has performed.

Yes, better.

And so in terms of how we will see how long it takes for that to run into lower charge offs.

Typically when we look at accounts that have.

Vintage that high first pay default rates, we'll see those charge offs occur anywhere from six to eight months afterwards.

But.

There is impact to the overall portfolio as well and so in reality I would think during the third quarter and fourth quarter will begin to see.

Some reduction in charge offs from those vintages and especially from the most recent vintages that have had the most dramatic increase or improvement in credit quality.

Now with that being said it is important to note.

I want to make sure it's very clear that our new customer vintages.

The most recent ones, especially these are much lower and investment dollars to the origination volumes are much lower.

So going forward.

While these vintages are performing better they will have a smaller impact to the overall portfolio. The underwriting changes, we've made especially on the refinance side.

In the first and especially in the second quarter of this fiscal year, we will begin to see changes or impacts to the charge off rates more than likely in the fourth quarter of this fiscal year from those changes and those impact a much larger percent of the overall portfolio.

Okay, Great. That's super helpful. Thank you and then switching to the the yield side. So it seems that the.

The yield has been compressing Andrew you've explained it as.

Moving further up market in March of <unk>.

Has that mix stabilized at this point essentially.

I'm wondering if the if the yield of this past quarter is what we should expect going forward or is there continued to be a mix shift where we should expect that to come lower because you are targeting higher yields and better credits.

Thank you.

So I think there's sort of two competing things happening there right. So.

Yes.

Yes.

The large loan mix increases.

That does reduce the overall yields.

And right now its estimates that were growing that large loan portfolio as much as it is.

Because.

The new loan originations new organizations are so much lower.

The <unk>.

Small loan portfolio is not growing as fast that makes sense.

So now that we're growing largely faster. It's just we're growing the small loans slower right. So that is kind of having that shift in mix.

But the loans, we are originating are happening at higher yeah.

Yields right, so that should should offset some of that.

There's also some accounting nuances that are happening there.

Or have happened over the last 12 months that we would expect to start to reverse over the next six months right. So.

Yes, I think ultimately the net effect should be.

Certainly at least the stabilization in yields but.

You potentially an increase in yields.

Okay perfect that's helpful.

That phenomenon.

So the large loan portfolio.

It sounds like the mix changing but the small loan portfolio isn't growing as quickly you bet.

That to continue.

In the near term or is that sort of stabilized at this point.

I would expect us to have certainly lower small loan portfolio growth than we did last year.

More in line, what we experienced in the most recent quarter.

The ballpark and going forward, it's probably the same the same percentage.

<unk>.

Second quarter of the prior year that's right.

Okay. Okay got you very helpful. Thank you.

Yes.

As a reminder, if you do have a question. Please press Star then one on your telephone and wait for your name to be announced.

Our next question is a follow up from John Rowan with Janney. Please proceed.

Yes, just thought of one more so.

You're obviously renegotiating your credit facility I asked if there'd be a big fee what I, probably should have asked are there any other changes that could happen as a result of.

The covenant breach.

Great change <unk> change and commitment level from the lenders that you would anticipate.

We don't expect anything significant.

Okay alright, thank you.

At this time, we're showing no further questioners in the queue and this ends our question and answer session.

I'd now like to turn the call back over to Mr. <unk> for any closing remarks.

Thank you.

Closing, we are pleased with the changes that we've made to our portfolio and believe we will continue to generate significant cash flow in the coming operating environment.

Thank you for taking the time to join US today and this concludes the second quarter earnings call for Wood acceptance Corporation.

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

Okay.

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Okay.

Yes.