Q3 2023 World Acceptance Corp Earnings Call
Speaker 2: The.
Speaker 3: Oh, gosh. Oh, gosh. Oh, gosh.
Speaker 4: Good morning and welcome to World Acceptance Corporation's third quarter of the 2023 earnings conference call.
Speaker 5: The call is being recorded.
Speaker 6: At this time, all participants have been placed on listener-only mode.
Speaker 7: Before we begin, the corporation has requested that I make the following announcement.
Speaker 8: The comments made during this conference.
Speaker 9: Paul may contain certain for-looking statements within the meaning of Section 21e of the Security Exchange Act of 1934.
Speaker 10: That represents the corporation's expectations and beliefs concerning future events. But forward-looking statements are about matters that are inherently subject to risk and uncertainties.
Speaker 11: Statements other than those of historical fact. As well as those identified by the words, dissipate, estimate, and plan.
Speaker 12: Expect, believe, may, will, and should, or any other variations.
Speaker 13: before going into later iterations.
Speaker 14: in Selminar Act directions are forward-looking statements.
Speaker 15: Additional information regarding forward liquid statements and any factors that could cause actual results or performance that differ from the expectations expressed or implied in flood forward liquid statements are included in the paragraph discussing.
Speaker 16: for the looking statements in today's earning press release and in the risk factor section of the corporation's most recent form 10K for the fiscal year ended March 31, 2020. And support subsequent reports filed with or furnished to the SEC from time to time.
Speaker 17: The corporation does not undertake any obligation, update, and e-forward looking statements in place."
Speaker 18: It's time. It's my pleasure to turn the floor over to your host, to Mr. Chattanova, for Chad, President and Chief Executive Officer.
Speaker 19: Good morning, and thank you for joining our fiscal 2023 third quarter earnings call.
Speaker 20: Before we open up to questions, there are a few areas that I'd like to highlight.
Speaker 21: We are pleased with the trends that are emerging from recent policy changes.
Speaker 22: As we discussed during our most recent quarterly earnings call, we began adjusting our underwriting toward the end of our last fiscal year as economic uncertainty was increasing.
Speaker 23: This is primarily due to three drivers.
Speaker 24: inflationary pressures on our customers' cash flow, delinquency normalization after a period of extraordinary portfolio growth and stimulus.
Speaker 25: and growing macroeconomic and recessionary concerns.
Speaker 26: The first trend, delinquency, is showing positive trending.
Speaker 27: Our early stage delinquency continues to decline month after month, while later stage will continue to result in elevated charge-offs into the next quarter.
Speaker 28: Earlier in fiscal year 2023, we quickly reduced our exposure to our highest risk customers and successfully avoided the temptation to lend into the economic uncertainty.
Speaker 29: Now, we are fortunate to be in a position of credit performance improvement during the fiscal year, especially with our new customers.
Speaker 30: Second, we are now beginning to carefully renormalize credit.
Speaker 31: The third quarter's book to look ratio increased slightly to around 25%.
Speaker 32: This is up from a low of around 20% during the second quarter.
This compares to approximately 35% during the third quarter of fiscal years 2021 and 2022.
The book-to-look reduction has been focused on our most risky applicants and has also resulted in significant reductions in recent first pay default rates.
which is a strong indicator of future credit performance.
For example, new customer originations in the first quarter had a 16% lower first paid fault rate year over year when compared to the first quarter of the prior year.
Second quarter new customer originations first pay default rates were 38% lower year-over-year.
While still early, our most recent third quarter first pay default rates show a 30 plus percent reduction compared to the third quarter of fiscal year 2022.
To underscore how strong recent credit performance has been, the most recent two quarters have some of the lowest vintage first pay default rates, including pre-pandemic comparisons, as well as the low first pay default rates of vintages positively impacted by COVID stimulus.
We're especially proud of this accomplishment considering the reports of increasing default and delinquency rates across several credit industries during the second half of calendar 2022.
In addition to early indications of dramatic improvements in performance for these vintages, we continue to steadily improve the gross yields.
New customer originations in our second quarter of 2023 had gross yields over 7% higher year over year when compared to the second quarter of fiscal year 2022. While the third quarter gross yields are over 25% higher, again, at the same time, a 30 plus percent reduction in first pay default rates.
Similar adjustments have been made for returning and refinanced customers as well.
These performance outcomes are a result of incredibly hard work from our branch team members, as well as their supporting leaders and trainers, as well as corporate operations support.
IT, Analytics, HR, and Marketing teams.
As mentioned, our increasing confidence in the early indications of performance.
low delinquency and high gross yields allowed us to begin increasing marketing to new customers, our approval rates and loan volume towards the end of the third quarter.
For reference, new customer originations were 31% of the originations in the third quarter of 2022, and 45% of the third quarter of fiscal years 2019 and 2020.
This quarter, new customer originations increase with each subsequent month.
to 55% of comparable December volumes in fiscal year 2019 and 2020, and 45% of the prior year's December .
We expect to continue increasing our investments in marketing and new customer acquisition during the fourth quarter and into the next fiscal year.
Finally, our World Finance team is outstanding. I'm incredibly proud of our leaders at every level in the company and not just their great accomplishments.
that I mentioned earlier, but that they embrace opportunities with positivity, fun, and grace.
At this time, John Camiz, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have. jury No.1
Thank you. We'll now begin the question and answer session.
Pass request you may press star the one in your touchstone phone
Using a speakerphone, please pick up your handset before pressing the keys.
To scroll your questions, please press star then 2.
This time we'll pause momentarily to assemble the roster.
The first question comes from John Roland of JAMIE. Please go ahead. Just LI let you go back then a minute.
John Rowland of J&E. Please go ahead. Morning guys.
Good morning. The incentive, the seven million dollars of incentive change that you noted in the in the press release, is that a reversal and if so which line item is that and I assume it would be in personnel is that correct?
Yes, that is in the personnel expense, that's correct. And there was, there's two things going on there. One portion is a reversal related to some officers who left the company during the quarter, and the other is a shift from, you know,
The branch level compensation from bonus to base pay.
Okay, so what part, I'm trying to figure out what the run rate is on that number going forward. Obviously, the reversal won't be there next quarter. I mean, how much of the 6.9 million is a reversal as opposed to a change in comp? I don't have that number in front of me right now.
I believe it.
around 3 million but I can check that
So I mean, is it safe to assume that the 40, you know, 40,700,000 that next quarter it's.
45 million back to that 45 million because it would exclude that three ish million dollar reversal
That's better, yep.
Okay, so I appreciate the non-GAAP numbers that you put in, but I mean your portfolio did come down, so I think just putting the,
Taking the allowance out, taking the provision out and putting the charge offs in is maybe overstating.
overstating the impact of credit, but your allowance ratio did come down sequentially.
Is that I'm trying to figure out why that came down if it was a change in the seasonal Factors that you're using or what drove you know, I'm looking at the number it was I was taking twelve point nine percent versus thirteen point five percent last quarter
Yeah, so that is a big piece of it, right? So you can look at the seasonality factors in their interleaves, right? And you go from a factor of 1.05 to, you know,
.94, right? So that is certainly a piece of it, which makes sense, right? I mean, our, the risk in the portfolio will be the lowest at December , you know, right before the tax refund season, right? But another big factor in that was just the shift in
and lower tenured customers, right? So, obviously that's a zero to five month bucket.
carries a much higher loss rate than the longer tenured buckets do. And as of December , that
the zero to five month bucket makes up only 7.4% of the, sorry, 7.1% of the portfolio. And that was at 9.8% at September .
and 13.8% last December , right? So we've taken out a substantial amount of risk from the portfolio by reducing those new customer originations.
Okay, but in the comments you talk about, and I'm just trying to figure out also how this impacts portfolio going forward about increasing new customer.
Originations, I'm trying to, what was the comment that you made regarding increasing explosions.
Because you said even in the press release about, you know, increased loan originations toward the end of the quarter.
That's right. So, you know, as we've been able to prove to ourselves that we could grow throughout this period, at the same time as dramatically reducing the first pay default rates within these vintages, we did begin to grow sequentially November over October and December over November in terms of new customer and...
But at the same time, the investments we're making new customers over the last two quarters are much less risky than you would have historically seen. So that's also a factor into the overall reserve rate.
Okay, and then I'm just trying to, you know, you talked about better originations. I mean, next quarter does the long portfolios go up or down from where it is today?
Typically, in the fourth quarter, we have a fair amount of runoff, and that's primarily driven to tax season and tax refunds. I don't think we have any expectation that this fourth quarter will be any different than prior fourth quarters in terms of runoff. And also the fourth quarter is not typically a quarter of
a large investment in new customers. So I wouldn't expect us to grow at a higher rate in the fourth quarter this year than we have in any prior year.
And then last question for me, where do you stand on your covenants, the waivers, and when would you potentially be refinancing your revolving credit facility? Thank you.
Sure, yeah, so we amended the credit facility in during the quarter and we have plenty of room on all the covenants and there are no waivers as of the quarter end. And so we will.
Look to extend that facility in this coming summer.
If I'm not mistaken John , it was around June you used to do it every year, correct? That's right, yep.
Okay, all right. That's it for me. Thank you
Thank you.
Thank you. And again, if you have a question, please press star then one.
Next question will come from Vince Kaintak of Stevens. First of all,
Hey, thanks so much. Thanks for taking my questions. Just a quick follow up from John's questions, but. So it is encouraging to see that the, the 1st pay defaults are improving. I'm just kind of wondering being equal if you can kind of play out how you think that's going to roll into delinquencies and losses because.
know just the the 25% is is high but are we now should we expect kind of it going back to historical levels and
on sort of what's the cadence to get there. Thank you.
Sure, yes, so as you can see, the front end delinquency as of December is much lower than it was at September and as well as it historically is at December , right? So, medium term...
that looks like it indicates that charge offs start to come down. At December the 90-day delinquency bucket is still relatively high, but it did come down from September . I think in dollars it came down around four or five million since September . And we expect that to continue to come down.
During Q4, at this point during January , the 90 day bucket has already come down. Close to 6M from December and that's with. Charge off for January look to be lower than they were in December .
And you got looking forward, you can already tell that February charge off should be lower than January and March should be lower than February , right? So all the trends look very positive. So, we believe by the time we get to March, the delinquency picture should look pretty good.
and lead to lower charge-offs from that point. But, you know, that being said, like, we do expect, you know, elevated charge-offs in Q4 relative to...
to historicals, but they should be better from a growth standpoint compared to Q3.
Okay, that's very helpful. Thank you. And helpful January data, we appreciate that 98 DQs that came out 6 million.
And then I guess in terms of the credit reserves, is the level that we see today anticipating those declines or should we be expecting further.
reductions in credit reserve allowances. Thank you.
No, so we haven't forecasted the declines that happened in
in January , explicitly in the allowance, right? So, you know, a lot of that will be baked in, but there's nothing sort of additional, no additional reductions.
for what we're seeing today.
Okay, that's helpful. And last one from me. So appreciate that.
that the number of you customers
or low tenured customers has shrunk and it's had an impact and now it seems like okay, there's an opportunity to grow the business, you're going to be spending more on marketing. If you can maybe help us understand like now with the growth that you're anticipating going forward, going after new customers going forward, what's the difference?
in terms of the quality of new customer you're going after, or maybe the learnings that you've had.
for what you're going after with new marketing going forward versus sort of the prior new customers that maybe had generated some of the higher...
lost content recently. Thank you.
Yeah, sure. You know, so during the last two quarters, you know, we had fairly dramatic reductions in our overall marketing spend, especially for new customers. So, you know, one of the main reasons that loan origination volumes declined within those two quarters isn't just a factor about
the reduction in our overall approval rate. It has as much to do with driving new applications as anything else as well. So we feel fairly confident that many of the changes we've been able to make very successfully from an operational perspective.
allow us to turn marketing back on and do it in a way that drives in applications that we know that we are very likely to approve. And at the same time be able to judge the risk accordingly and price them accordingly. So one of the factors
And December's originations increasing has to do with turning that marketing back on.
albeit to a much lower level than we've done historically. So that gives us confidence that as we turn or increase the marketing investment, we'll be able to drive those new customer applications and be able to approve them appropriately and as well as book them.
without having any dramatic reductions to first pay success and without having any reductions to overall expected gross yields on those loans.
Okay, that's very helpful. Thanks very much.
Thanks very much. Yep.
Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Pichard for closing remarks.
In closing, we are pleased with the changes to our portfolio and believe it will generate significant cash flow in the coming operating environment, fiscal 2024 and the fourth quarter of fiscal 2023. Thank you for taking the time to join us today. This concludes the third quarter earnings call for World Acceptance Corporation.