Q3 2022 Elevate Credit Inc Earnings Call
Okay.
Welcome to the elevate credit third quarter 2022 earnings conference call. At this time, all participants have a listen only mode. Later, we will conduct a question and answer session. I will now turn the call over your host Daniel Rhea Chief Communications Officer, Mr. React you may begin.
Good afternoon, and thanks for joining us on elevated third quarter 2022 earnings conference call earlier today, we issued a press release with our third quarter results a copy of the release is available on our website at investors elevate dot com today's call is being webcast is accompanied by a slide presentation, which is also available on our website. Please refer now.
Slide two of that presentation.
Our remarks and answers will include forward looking statements within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward. Looking statements. These risks include among others matters that we have described in our press release issued today along with.
Our annual report.
On Form 10-K other filings, we make with the SEC. These include impacts related to the current economic environment, including high inflation interest rates and COVID-19. Please note that all forward looking statements speak only as of the date of this call and we disclaim any obligation to update these forward looking statements during our call today, we will make reference to non-GAAP.
Financial measures for a complete reconciliation of historical non-GAAP to GAAP financial measures. Please refer to our press release issued today and our slide presentation, both of which have been furnished to the SEC and available on our website at investors that elevate dot com joining me on the call today are president and Chief Executive Officer, Jason Harvison, and Chief Financial Officer, Steve vessel.
I'll now turn the call over to Jason.
Thank you Daniel I hope everyone's doing well.
Similar to last quarter I'll begin the call with our updated view of the current environment and our strategic response I will then give a brief overview of our results and in my remarks, we're elevate is moving in the future.
To recap of last year, our team started in late 'twenty, one with a clear plan to temper growth and bring margins back into focus for 2022.
We anticipated at that time, a normalization of credit while we did not anticipate was the magnitude of inflation and are quickly shifting macro environment, particularly as it's trading non prime Americans.
This summer we pivoted our plan to slow originations. Further. Additionally, we took proactive steps to lower operating expenses.
On the underwriting side, we are implementing new affordability assessments and income verification tools to not only help with future growth, but can also help with ongoing account management.
I'd like to highlight three areas of emphasis first on costs, we have made the difficult, but appropriate decision to aggressively right size our expense base for the current environment by implementing furloughs and additional expense reductions beyond personnel.
Second on credit in addition to the new underwriting enhancements I just mentioned.
Working diligently to review risk factors in our current portfolio, but also what we're seeing in specific cost of living and affordability categories.
For example, we are working proactively with higher risk customers to assist where possible to help customers whether the current environment.
Lastly on revenue, while we mentioned slower growth. We're also actively pursuing opportunities to improve pricing leverage and segmentation based on both on product mix and what we're seeing in a lack of available credit from traditional bank lenders.
It is clear that 2022, and 23 will be more challenging than we originally expected but was firmly believe we are positioning the company well to see the growing opportunity to serve more near prime consumers with economic visibility increases.
If we start on slide four I'll reiterate that this is a difficult market for both consumers and lenders volatility always makes decision, making difficult, but when paired with persistently high inflation and a rising probability of recession strategy need to pivot.
Our elevate I'm proud of the company and our teams continue to be nimble in the current market and we continue to position the company to best serve both the borrowers that need us and our shareholders.
Feature of our strategy Holistically, let's organize across demand credit and what we're doing operationally and today's shifting market.
First on demand and growth as you've seen from the banks that have reported results. So far credit availability is shrinking and this makes our large addressable market that much larger.
Elevate is also highly focused on driving the best returns for our shareholders and we believe that it is best achieved in this market through measured in selected growth utilizing new and improved tool to assist with income verification and affordability assessments in real time.
You can see our shrink.
<unk>, 3% growth in originations over the last quarter to be clear the demand for our products significantly exceeds the originations pace, but we believe it is prudent to make loans to borrowers where we have the highest degree of confidence and the best line of sight to strong returns.
The natural question of course is when do we expect a turn and can accelerate growth.
Ultimately, we believe the stabilization in inflation and interest rates will be the first step on.
On a daily basis, we're evaluating key internal and external indicators to give us the confidence needed to lean out.
Underwriting beyond 2022 already assumes a weakening economic environment with higher unemployment and inflation.
The challenge in the short term as well.
Pace, our timeline is to get to that point is important to be transparent about what we know and what we don't and given the unknowns for rog strategy has to be measured and selective with the loans we originate.
As a reminder, as volatility eases, we anticipate the ability to lend to a more credit worthy borrower that has been locked out of traditional options previously available.
On that point, let's talk about credit and what we have seen in our 'twenty, one and <unk> 2022 vintages.
Story here is also about volatility and how the rapid and persistent increase in cost of living is stressed borrowers beyond the initial underwriting scenarios.
Steve will speak in more detail about our vintages clearly 'twenty, one 'twenty two have been difficult and backdrop.
Backdrop helps inform our decisions on growth and targeting in the near term.
There is more we can do to insulate returns and profitability beyond our speed originations.
Elevate is made difficult decisions this year to proactively reduce our expense base.
Specifically during Q3, we furloughed approximately 25% of our workforce will begin seeing the full impact of that decision on our financials starting in the fourth quarter.
This action was part of a series of planned reductions to operational expenses that included decreases in executive compensation and elimination of many external vendors and a narrow corporate focus on existing brands.
Additionally, we continue to strengthen our credit decisioning by enhancing affordability assessments.
Many of these process improvement stemmed from the challenges we have faced in our 'twenty. One vintage we are beginning to see the benefit in our current underwriting and believe there will be long term value in the use of these tools in the 'twenty three vintages.
To complement these enhancements we are now evaluating if portfolio yields are properly aligned with consumer risk performance to bring that point home, we have consistently lowered yields year after year to reward borrowers. We are now evaluating if the risk portfolio adequate matches, the decreases and we anticipate making changes going forward.
Lastly, elevate and its board of directors are conducting a strategic review process with the intention of maximizing value for our shareholders.
As you know we have been active investors in our own company through our share repurchase over the past three years and continue to see high highly compelling value in our stock.
With that let's flip to slide five and I can give some additional detail on our current financial health of borrowers and how elevate innovates to best help us population when more and more financial institutions are turning away.
First as I mentioned the number of use cases for all of these products is riding and expanding quickly.
The average cost of living has greatly outstripped wage growth for our target consumers and is likely to continue in the near term.
Additionally specific factors for certain populations are also set to change rapidly.
<unk> approximately 48 million student loan borrowers will be set to resume payments in January of 'twenty. Three we will be doing so at a very stressful time.
The result, elevate is looking at ways to help non Prime Americans and let me detail two of those.
First payment flexibility features match Fei and sniff payment tools, where first utilizing self service tools online during the pandemic, we're expanding these enhancement handsets and more proactive ways and pushing out more directly to borrowers that are exhibiting signs of early stress.
These features are both good for us in protecting the book and good for consumers is no additional cost is incurred.
Thousands of consumers have utilized these features that we are battle tested the stages of Covid.
Second regarding student loans.
In light of the student loan deferral period, ending we are proactively begun to reach consumers with auction should they feel the impact of these resumed payments.
Estimate that approximately 20% of the portfolio has some form of student loan debt. However, we do not anticipate repayment. All these allow us to present a material drag on performance.
Elevate is proud to be the leader in customer friendly assistant tools and believe that it is more important than ever for both our current customers as well as a large and growing set of Americans looking for help.
Lastly, before I turn the call to Steve I'd like to clarify all of its funding position as it relates to both our originations growth as well as strategic review.
Elvis product debt facilities have capacity to originate business and excess the volumes we are producing today.
Steve will detail, our corporate debt shortly but we have added additional liquidity to position us through the current market environment. We are in full compliance with all financial covenants and remain in close contact and have strong working relationships with our lenders.
Really our decision to conduct a strategic review is a function of our mandate to maximize value for our shareholders.
Wireless or the conclusions of our review, we believe elevate is positioned both strategically and financially to grow and drive value for shareholders. We are making decisions in real time to unlock greater value for our platform. We are very much anticipating a return to profitability in 2003.
Let me turn the call over to Steve for a review of our financial results.
Thanks, Jason and good afternoon, everyone building off of Jason's comments on portfolio trends I'll spend a few minutes detailing out impacts on our financials and actions we have taken.
Turning over to slide seven I will start by discussing the loan portfolio.
Combined principal loans receivable totaled $546 million as of September 32022, up 6% from $513 million, a year ago and up 3% sequentially from where we ended the second quarter.
In light of the challenging macroeconomic environment and uncertain impact of inflation on our customers. We continue to take a cautionary stance on growth investments for new customers and implemented incremental tightening of underwriting and eligibility.
Relative to the same quarter last year, our growth levels of new customers were lower by approximately 60%.
As a reminder, the second half of last year represented a turning point in our growth trajectory post COVID-19 as we significantly ramped up growth investments loan growth from existing and former customers also decreased by 7% in the quarter.
Eitan eligibility and overall lower level of new customer growth in prior quarters.
Staying on this slide revenue for the third quarter was up 11% from the third quarter a year ago due to an increase in the average outstanding loan balance, resulting from second half growth experienced in 2021, and the first half of 'twenty two while individual product <unk> were modestly lower.
<unk> between the periods.
The overall portfolio ACR was down five points driven by two key factors. The first is a lower quarterly EPR and rise hugely a reduced mix of new loans and the rise portfolio and the second by a higher mix of the today card, which has the lowest APR and now comprises approximately 10%.
Of the combined loan portfolio.
As Jason mentioned, we are currently evaluating the risk based pricing structure and other yield enhancing opportunities across product lines to ensure these remain in line with target margins.
Looking at the bottom of this slide adjusted EBITDA was $14 6 million for the third quarter of 2002 as compared to $3 million for the third quarter of 2021.
On a pro forma basis, which assumes the adoption of fair value loan accounting at the beginning of 2021 adjusted EBITDA for the third quarter of 'twenty. One we would have been approximately $14 million higher with pro forma adjusted EBITDA of $17 million.
Relative to Q2 'twenty to adjusted EBITDA in the quarter improved by $2 million.
Looking at the bottom right earnings with a net loss of $15 million for the third quarter of 'twenty, two with a net loss of $11 million reported for the third quarter of 2021.
Third quarter 2022 results included a one time deferred tax asset valuation allowance impacting net loss by $9 9 million.
Incorporating this onetime item adjusted net loss would have been $5 million.
On a pro forma basis, which assumes the adoption of fair value loan accounting at the beginning of 2021 pro forma net income of approximately $2 million or 200000 would have been reported for the third quarter of 2021.
An increase of approximately $11 million from the reported results.
Relative to Q2 2022, adjusted net income improved by approximately $2 million.
Consistent with our comments last quarter, we are taking a cautionary stance on growth in the.
Appropriate actions to mitigate risk enhance product performance and improve profitability.
Many of these actions have resulted in tightened eligibility lower line assignments and lower new vault new loan volumes were.
We are simply from our prior guidance of flat to low single digit year over year loan growth to a contraction of 8% to 12% versus year end 'twenty one levels.
Based on this lower level of loan growth revenue growth is estimated to be above 21 levels by approximately 15% to 20%.
Our more seasoned vintages are exhibiting softer credit trends in the back half of 2022, we will be monitoring near term delinquency trends and are working diligently with customers to provide best in market service and assistance, but consistent with our comments from the prior quarter the range of potential.
Trajectories make guidance on any other earnings component challenging.
As it relates to fair value in the quarter.
Fair value premium decreased approximately 50 basis points to nine 6% at the end of the third quarter of 'twenty. Two from Q2 levels of 10, 1% due to a modestly higher credit performance and higher discount rates, partially offset by continued shifts in portfolio mix.
On a pro forma basis, the overall premium as of September 32021 was approximately nine 3%.
As we ramped up our loan growth starting in the third quarter of 21, leading to a higher mix of new and therefore riskier customers in the loan portfolio, which carries a lower fair value premium.
Turning to credit on slide eight consistent with our expectations total credit losses increased on both a dollar basis as well as a percentage of revenues year over year, driven by the strong growth in loans in the second half of 'twenty, one and their associated seasoning as well as the continued inflationary.
Pressures on the portfolio.
Net charge offs increased by $35 million from Q3, 2021, and as a percentage of revenues from 35% to 59%.
Sequentially net charge offs increased $9 million from Q2, 'twenty, two and increased as a percentage of revenues from 55% to 59%.
Looking at the chart on the left the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting slowdown in new loan originations increased government stimulus and improved payment flexibility tools.
Given the macro and inflationary headwinds being faced we are pleased to see the 'twenty. One vintage is still performing slightly better than 2018 levels. As we stated on our last call. However, the strong growth in the loan portfolio. During the second half of 'twenty one continues to season.
Impact current year loss rates and earnings.
Despite incremental tightening implemented this year. The early 'twenty two vintages have also seen considerable seasoning and are currently performing worse than early loss targets in 'twenty, one vintage levels due to the inflationary headwinds.
As Jason and I have both mentioned we are implementing further credit tightening underwriting capabilities and revenue enhancements that are intended to help mitigate these trends going forward.
Our quarterly net principal charge offs as a percentage of our average combined principal loans receivable was 11% for the third quarter of 2002 and remains within our historical experience.
Past few principal balances totaled 10, 9% of the principal loan portfolio as of September 32022 up slightly from 10, 3% as of June 32022, and continue to remain within our historical range of 9% to 11%.
On this slide we also show the customer acquisition costs through the first nine months of 'twenty, two which is within our target range. We maintained customer acquisition targets that will allow us to achieve unit economics.
These targets are between 250 to $300 per rise and elastic products and sub $100 for the today card.
We continue to pursue diversity in our marketing mix between direct mail strategic partner and digital channels.
Expect to be within our target range for customer acquisition costs for the remainder of the year.
On a full year basis.
Shifting to slide nine.
Operating expenses in total for the third quarter were just above $35 million lower than the third quarter of 21 by $5 8 million or 14%.
Versus the second quarter of two two by $4 8 million or 12%.
The sequential decrease in expense was primarily driven by aggressive actions, we've taken to lower compensation and professional services expenses as we continue to strive towards an efficiency ratio of 20% to 22% and partially mitigate the impacts of higher credit losses.
The actions we have taken to date are expected to translate to a run rate reduction of 17% versus the first half of 'twenty two.
It is worth highlighting that expense management will continue to be a key performance lever that we focus on during this challenging economic environment.
Regarding our liquidity and funding we ended the quarter with a total cash balance of $76 million.
The company paid down its DPC debt facilities by approximately $25 million in the first quarter, while drawing down $80 million all of its debt facilities and term notes during 2022.
The company had an overall average cost of funds of nine 7% as of September $30 22 up from nine.
Nine 3% as of September 32021.
The majority of our debt has a fixed rate until maturity in January of 'twenty four.
On the DPC facility, new borrowings are priced at three month, LIBOR, plus 7% subject to a 1% LIBOR floor.
As noted in our quarterly disclosures in partnership with our primary lender victory Park capital, we amended several components of our loan agreement to accommodate impacts from higher credit losses on debt facility covenants and parent past levels through the end of the year.
Continue to have constructive relationships with all of our lenders as we manage through the impacts of this macroeconomic environment.
We have also added further liquidity buffers to ensure we are poised to weather. The current environment as Jason mentioned, we are in the midst of a strategic review to maximize value to shareholders.
That said, we remain optimistic on lean back into growth and improved profitability that's volatility in the market eases any overall products credit and risk enhancements boost the portfolio in 2023.
With that let me turn the call back over to the operator and open it up for Q&A.
I would like to ask a question. Please press star one on your telephone keypad now you replace interim akin artery themed please prepare to ask your question. One prompted once again if you have a question. Please press star one on your phone now.
Our first question comes from Moshe Orenbuch from Credit Suisse. Please state your question.
Thanks.
I was hoping.
Jason and Steve you could kind of just elaborate a little more perhaps on some of the strategic options are there.
Are they kind of at the corporate level are there.
Other sorts of things either with your lenders are.
Should that we should be thinking about just a little more elaboration there.
Yeah Moshe this is Jason.
Yeah, well I would say there.
Not a whole lot we can say about those at this moment right now, but I would say, they're more at the corporate level.
We're looking at but we've been in close contact with our lenders as well as we go through the process. So I think what we're looking to do is evaluate options that are out there minimize any kind of distraction from the team because work well we have lots to do to continue to push forward with our initiatives. We already have on hand and come to a decision that they're going to be any any kind of changes you're in the very near future.
Great.
As a follow up.
Steve kind of went through.
Really good detail.
Cost reduction what other steps.
Need to take or what else has to happen in order to as you said to return to profitability in 2023 and is that are you. As you hope are you expecting that for full year four by the end of the year like how are you thinking about what kind of achievement of profitability are we talking about.
Yes, no. Thanks, Thanks Moshe this is Steve.
As we're focusing on a number of levers I would say that.
The critical path elements are continuing to fine tune, our underwriting and credit capabilities.
As noted we've leaned into operating expenses this year and taken action on a number of areas, including compensation professional services I think that there is still more work to be done as we look to get to an efficiency ratio much closer to 20% to 22%.
And then the other side that Jason alluded to is we're focusing on some pricing enhancements, which we think are critical to continuing to make sure that we've got risk base appropriate risk based pricing in place. So as we look at that that path to profitability again, I think that extends beyond 2022, as we look at the.
23.
Alright, just should be should be more precise with you.
Jason said.
Expectations.
Getting profitable at some point during 2020.
That's correct.
Thanks, so much.
At this time, we have no further questions.
Yes.
Just wanted to thank everyone for joining us this evening on our third quarter earnings call. When I think the elevate team and elevate board for all their support and we look forward to talking to everyone next quarter. Thanks, So much for your support take care.
This concludes today's conference call. Thank you for attending.
The House has ended this call goodbye.