World Acceptance Q2 2024 Earnings Call Transcript

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October 20, 2023

There are 5 speakers on the call.

Operator

Welcome to World Acceptance Corporation's Second Quarter 2024 Earnings Conference Call. 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 I make the following announcement. The comments made during this conference may contain certain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that represent the Corporation's expectations and beliefs concerning future events.

Operator

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, will and should or 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 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 ks for the fiscal year ended March 31, 2023, 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, Chad Prechaud, President and Chief Executive Officer, please go ahead.

Speaker 1

Good morning, and thank you for joining our 2024 Second Quarter Earnings Call. Before we open up to questions, there are a few areas that I'd like to highlight. In fiscal year 2023, we tightened underwriting as economic uncertainty and inflation concerns were increasing. For the remainder of 'twenty three and into early 2024, we weathered delinquency normalization after a period of very low delinquency, Mostly induced by economic stimulus, followed by extraordinary portfolio growth. This year, we continue to see lower normalizing delinquency rates in our portfolio and increasing yields and expect these trends to continue for several more months.

Speaker 1

These outcomes are primarily due to adjustments to our operational efficiencies, marketing and underwriting, as well as an overall heightened focus on credit quality and yields that we've discussed in prior earnings calls. We continue to see economic uncertainties and potential impacts to both customer cash flow And their credit histories, both positive and negative, on the horizon as potential outcomes for our customer base. Therefore, we cautiously have been increasing approval and booking rates for our best applicants and continue to explore ways to profitably serve more of our applicants. Today, our approval and booking rates, while higher than this time last year, remain low compared to historical norms. During the Q2, our customer base continued to grow and the number of new loan originations remained stable versus the prior quarter and increased by over a third compared to the same quarter last year.

Speaker 1

The number of new customers each quarter as a percentage of our customer base Continues to increase and we turn closer to our historical normal growth rate. The number of former or return customer originations also increased to be slightly historical volumes. That's as a percent of the customer base and it has increased both nominally and relatively compared to the Q2 of last year. This growth is important as our overall average loan balance continues to be right sized as we've discussed with the portfolio risk and yield. All originations made this quarter have approximately a 10% lower balance year over year and the average current balance outstanding has declined around 4%.

Speaker 1

While economic uncertainty still exists, management continues to accrue for the long term incentive plan with vesting tiers of $16.35 EPS target primarily due to reduced new customer investment, which would hinder overall potential growth for this fiscal year. Credit risk and economic uncertainty are likely to persist for some time and our new customer investment remains tempered and focused on the highest credit quality. We continue to see stabilizing and improving credit quality yields and operational conditions as we look forward and accrue For the $20.45 EPS target for fiscal year 2025. At this time, Johnny Calmes, our Chief Financial and Strategy Officer,

Operator

Our first question is from Vincent Caintic with Stephens. Please go ahead.

Speaker 2

Hi, good morning. Thanks for taking my questions. First one on the pullback of The $25 by fiscal 2025 EPS, just wondering if that will drive any changes to how you're thinking about Operating the business, I know there was a couple of variables you're looking at in order to achieve that $20,000,000 to $25,000,000 EPS. And just wondering what if there's any changes at all and how you're thinking of driving the business with that Focus out of the way.

Speaker 3

No, I think the big change that happened is we've just kind of Pattern where we're going to be tighter for longer, right. So we were hopeful that we could see some improvement in New customer performance and start to loosen some of our underwriting, which would allow for higher growth. We Just haven't gotten to that point yet and as a result, we won't see the growth that we'll need for this year And potentially next year that would have allowed us to hit that higher EPS. But everything else still remains the same.

Speaker 2

Okay. That's helpful. And then I guess relatedly, the $20 EPS Target, is there anything that needs to change from the conditions in the current environment to get there? Or basically, What needs to happen to get to the $20 EPS? Thank you.

Speaker 3

Yes, nothing Needs to change significantly to get to the $20 right? I mean we need to credit quality To maintain the current levels, yes, so obviously if something were to change in the macro environment drastically, If unemployment rates were to spike or something like that, that would obviously make it difficult to hit the 20, but Yes, I think we have things in place now that would allow us to hit that $20 next year.

Speaker 2

Okay. Thank you. And I guess one last one for me and I'll hop off. So we've seen the portfolio Shrinking, rightsizing recently, but it sounds like you have kind of encouraging signals in delinquencies And other underwriting seems to be taking hold. Just wondering if we should be expecting The portfolio to start to grow again or what your sense is in terms of portfolio balances going forward?

Speaker 2

Thank you.

Speaker 1

Yes, I think we'll continue to see some mild portfolio growth. We're not forecasting or shooting towards portfolio growth we've seen in the past Certainly more muted and certainly focused on much higher credit quality. We do expect that the average balances will continue to decline. We've been working on that for about a year now. So we're seeing that come through for the whole overall portfolio and not just for new customers.

Speaker 1

In conjunction with that, you're beginning to see with those lower balances also having higher yields, you're beginning to see the overall portfolio yields Increase over the last two quarters as well. So, we would anticipate seeing that continue throughout the rest of this year.

Speaker 2

Okay, great. Thanks very much.

Operator

The next question is from John Rowan with Janney. Please go ahead.

Speaker 4

Good morning.

Speaker 3

Good morning. Good morning.

Speaker 1

As far as

Speaker 4

like ongoing personnel expenses, obviously, there was a $5 ish million reversal of prior accrued expense. That's not an ongoing reduction That line item correct, because that's an accrual from that's a reversal of prior accruals, correct?

Speaker 3

It is, but It will also reduce the expense going forward, right? So because we're no longer accruing for that tranche.

Speaker 4

Correct. But not the $5,000,000 less per quarter, right?

Speaker 3

No, no, no, no, no.

Speaker 4

Okay. Any plans for repurchases or was there any change in OU, you've got You basically renegotiated your credit facility. Was there any change in repurchase authorization? When will you look to start it up again if you can?

Speaker 3

Yes. So the current credit agreement allows for repurchases once the fixed charge coverage ratio gets back to 2 2 to 1 and we're just shy of that this quarter, but we should be there by the end of next quarter And that will allow for repurchases starting in fiscal Q4.

Speaker 4

Okay. And then I think you touched on it before, but I was Trying to calculate something while you said it. The seasonality in the loan portfolio, obviously, typically loans go up in the December quarter, down in March quarter. But loans also usually typically go up from June to September. I'm just trying to parse out if the credit tightening and what we're seeing is what's a little bit of an abnormal Sequential decline here in the September quarter like how that affects going forward?

Speaker 4

Are loans going to go up next quarter and then down in March like how should we think about that?

Speaker 3

Yes, I think we would expect the same seasonality. Yes, typically the September quarter we do show some growth, obviously not The same levels we show in the December quarter historically. We still expect to see that growth in the December quarter. But yes, the big change versus history is we are still substantially tighter on new customer origination Then we have ever been. We're still seeing very strong application flow, but We've reduced our approval rates substantially.

Speaker 1

John, I think it's also Sorry.

Speaker 2

Yes, I

Speaker 1

think think it's important to point out that during the last quarter, we actually did grow our customer base and number of accounts, but the average balance is lower. So the overall And it's something we've mentioned before in rightsizing the loan sizes also help us increase the overall yield. And it's important to do that in conjunction with the overall credit quality as well.

Speaker 4

Okay. And then just one bigger Question. Obviously, you've abandoned the highest tier accrual for next year. Just looking at the consensus estimates in mind too, I mean, we're nowhere near Before this, we're nowhere near where you would need to accrue even for the 2,045. John, we've talked about in the past You know, needing to get to high single digit or high single digit, maybe low double digit type charge off rate, we're obviously not near there now.

Speaker 4

Although you obviously have improved credit quality, I'm curious about your comment earlier, how you said we have the pieces in place now To reach 2,045 next year, I'm paraphrasing a little bit versus what you said. Obviously, the goals have been changed from the mid-20s to 2,045. I don't think that you hit Even the lower number with the 16% charge off rate. I'm just trying to figure out what are the pieces in place in that nothing really material needs to change for you to get to 2,040 next year, when obviously the run rate of earnings, dollars 2.71 which I mean even includes a big reversal in it, I mean not How do we get there because that run rate is nowhere near $20.45 but yet you're saying Nothing material needs to change for us to get to that number. I'm having trouble marrying those comments together.

Speaker 3

Yes. So we expect to see the credit quality of the portfolio continuing to improve, right? As we move forward, 2 things should continue to happen. 1, we expect the credit quality, absent Of any other macro events should continue to improve on the existing portfolio, right? And The loans that the new customers that we are adding are performing at a much higher level From a credit quality standpoint and have much healthier yields, right?

Speaker 3

As we move forward and it will take to get

Operator

to the

Speaker 3

$20 EPS will take some growth right over the next 18 months And we expect that to happen, right. We expect at some point over the next 18 months, there will be more clarity With where the economy is going and hopefully be able to start losing a little bit, right. But So with that you'll have better performance on the new customers at higher yields and we expect the

Speaker 4

Okay. I I was a little confused just with the comments that we kind of have nothing major needs to change from now to get to there. But it's not nothing major needs to change from what we reported this quarter, but We have to continue certain trends. Am I interpreting that correctly?

Speaker 1

Right.

Speaker 4

Yes. Okay. All right. That's it for me. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Prashad for any closing remarks.

Speaker 1

Thank you for taking the time to join us today. And this concludes our Q2 fiscal year 2024 earnings call for World Acceptance Corporation.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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World Acceptance Q2 2024
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