World Acceptance Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 5 speakers on the call.

Operator

Good morning, and welcome to World Acceptance Corporation's 4th Quarter 2023 Earnings Conference Call. This call is being recorded. And at this time, all participants have been placed on listen only mode. Before we begin, the company has requested that I make the following The comments made during this conference call 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. Such forward looking statements are about matters that are inherently subject to risks and uncertainties.

Operator

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 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, 2022, and subsequent reports filed with or furnished the SEC from time to time. The corporation does not undertake any obligation to update any such forward looking statements it makes. At this time, it is my pleasure to turn the floor over to your host, Chad Prashad, President and Chief Executive Officer.

Speaker 1

Good morning, and thank you for joining our fiscal 2023 year end and 4th quarter earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. We made several changes in early fiscal 'twenty three that we believe would have a significant impact on our business, and we've been very pleased with the results. As we discussed during prior earnings calls, we tightened underwriting about 18 months ago as economic uncertainty was increasing. At the time, inflationary pressure, concerns about delinquency normalization after a period of extraordinary portfolio growth And growing recessionary concerns were key drivers for the strategic changes.

Speaker 1

Rather than lend into the economic uncertainty, we dramatically reduced our exposure to While new customer loan volume increased in the Q1 by 5% year over year, It declined significantly by between 35% 45% during our fiscal second, third and fourth quarters of this year as we work to improve credit quality. During that time, through credit tightening, our book to look ratio decreased to a low of 20% during the 2nd quarter When we compare new customer originations to pre pandemic periods, we're still around 90% to 100% of the loan volume in comparable 4th quarters, Excluding the extraordinary growth in fiscal 2022. Today, delinquency continues to show significant improvement, Even as our book to look ratio has increased from 20% to 30% throughout the year, early stage delinquency decreased in the fiscal third quarter And late stage delinquency decreased significantly in the fiscal Q4, which we expect to result in fewer charge offs into the next and upcoming quarter. More specifically, our 1st pay default rates have remained low throughout the year, even as our approval and loan booking rates have increased. 1st quarter new customer originations had a 16% lower 1st pay default rate year over year.

Speaker 1

2nd quarter 1st pay default Rates fell 37% year over year. In the 3rd Q4, 1st pay default rates are around 25% lower year over year. We expect the new customer credit quality and low first pay default rates we experienced in fiscal year 2023 The most recent three quarters are in line with or are lower than pre pandemic comparison. They're even comparable to or lower than the low first paid default rates We experienced some vintages that were positively impacted by the COVID stimulus. Finally, we're focused on both sides of the profit equation, decreasing losses as well as increasing gross yields.

Speaker 1

In addition to the positive credit performance that we mentioned We continue to steadily improve gross yield on the same vintages. New customer originations in the Q2 This year had gross yields that were 7% higher year over year and both the 3rd and 4th quarter new customer vintages had gross yields around 25% higher year over year, Again, at the same time as a reduction in 1st pay to fall rates. As we see the normalization in Former customer loan volume, similar adjustments have been made for returning and refinance customers with a focus on increasing credit quality and All of these outcomes are an especially great team accomplishment. We consider the reports of increasing default and delinquency rates across several credit industries during calendar 2022, including the personal installment loan industry. While economic uncertainty still exists into this year, management continues to accrue for the long term incentive plan With vesting tiers of $16.35 $20.45 $25.30 per share Due to the much improved credit quality, yields and operating conditions, we anticipate the 1st tier vesting as early as the end of this fiscal year, We started this fiscal year with the stated goal of managing the portfolio In a way that would ensure it could weather the stress of negative economic pressures and this quarter's results show that we are in a position to do that as well as taking advantage of marketing of market opportunities to grow it.

Speaker 1

I'm very proud of the incredibly hard work from our branch team members At this time, Johnny Khammeuse, our Chief Financial and Strategy Officer, and I would like to open up to any questions.

Operator

We will now begin the question and answer session. And our first question will come from Vincent Caintic with Stephens. Please go ahead with your question.

Speaker 2

Hey, thanks. Good morning. Thanks for taking my questions. The first one, just on the your comments on the portfolio and So tightening underwriting, any sense for where the portfolio shrinking sort of Thank you.

Speaker 1

Hey, good morning. Great question. So I think from this point forward, I think we've experienced the maximum tightening that we will experience going forward. So we've already begun loosening our underwriting, especially into the Q3 and Q4 of this past year. Even into the Q1 of the current year, we've also begun Up a little bit on our new customers as well.

Speaker 1

So we don't anticipate the portfolio to shrink this year. We do expect to have somewhat tame growth compared to prior years, likely in the 0% to 5% range is what we would expect. Our focus now is on higher credit quality and profitability over

Speaker 3

Portfolio growth in general. Yes, just to clarify, so we've loosened underwriting relative to last fall, so in that August, September, October, November timeframe, But it's still tighter than it was 1.5 years, 2 years ago. So we're still cautious just giving The macro environment.

Speaker 2

Okay, perfect. Thank you. And you spoke about the yield or the price that you're able to put into these loans, It's great to see that increasing. Where do you expect that to be able to go at this point? And so when you're talking about underwriting, is it And maybe starting to loosen a bit, is that sort of in price or maybe how where do you expect yields to continue?

Speaker 2

Thank you.

Speaker 1

Yes. So when I talk about loosening, it's more of opening up the spigot slightly for New originations, it's really not listening in terms of pricing. As I mentioned, the yields have increased pretty dramatically in In the past couple of quarters, we continue to expect those yields to stay very high, especially for our new customers coming into the portfolio. In terms of yields, both gross and net yields into the next year, our focus is on growing The overall portfolio's gross yields and as we maintain credit quality, we expect those net yields to grow as well.

Speaker 3

I can add to that a little bit, right. So there's also some accounting impacts to yields last year. Obviously, we don't accrue interest on loans that are more than 60 days contractually past due and when those loans roll 60 days Contracts with past due, we reversed the 3 months of interest that had been accrued to that point on those loans. So Obviously, last year with higher 6 day contractually past due loans and a large number of loans rolling 60 days contractually past due, Now the headwind to yields, now obviously that has reversed and that should be The tailwind of the yields this year. So we would expect to see yields on the overall portfolio Creep up a little bit during the year.

Speaker 2

Okay, great. That's super helpful. And the last one for me. Just if you could talk about your This conversation is with your funding partners and the banks broadly, the industry has been in difficulty over the past month. And there's Talk about some of the maybe tightening the lines that they're providing to people.

Speaker 2

So if you could maybe update us on kind of your conversations with your lenders and And any sense if you need to update us if you have any funding needs? Thank you.

Speaker 3

Sure. Yes, obviously, We've paid down a substantial amount of debt on our credit facility over the last 6 months and We've actually repurchased some bonds during the Q4 as well. So we're in a really good place as far as funding at this point. There hasn't been any indications of tightening from the credit group, but if that were to be the case, we'd be in pretty good Shape is getting the low levels of outstanding debt we have at the moment.

Speaker 2

Okay, great. Very helpful. Thanks very much.

Operator

Our next question here will come from John Rowan with Janney. Please go ahead with your question.

Speaker 4

Good morning, guys. Good morning. I want to follow Vincent's question a little bit Obviously, this is a time of year where we typically get an announcement from you guys regarding a renewal and renegotiation I'm wondering where those discussions stand, whether or not we should expect a change in The base rate or the spreads, the base rate, obviously, you didn't really address whether or not I think the prior question whether or not there potentially be a change in liquidity, but just wondering if we could maybe address the rate question, if there's any information you can provide at this time?

Speaker 3

Yes, so those discussions haven't started in earnest yet. So that typically happens, it will be a year out In June, so that's typically when we'll have our bank meeting. So we won't really start those discussions in earnest until this summer.

Speaker 4

But you usually So you usually renew it about right is about you don't let it go current, right? You usually renew it a year prior to it's

Speaker 3

That's right.

Speaker 4

Okay. So we would expect we should expect an announcement for you guys regarding any types of changes to that facility In June or the summer?

Speaker 3

Around there, yes, that's right.

Speaker 4

Okay. And then can you just Repeat, because I didn't quite get it, what you were saying about the your expectations around the accruals for your comp agreement?

Speaker 1

Yes, sorry. Yes, so we have 3 vesting tiers within our long term incentive plan. They vest at $16.35 for the 1st year, dollars 20.45 for the 2nd tier and $25.30 Per share for the last year. And we continue to accrue for those and we anticipate The first year of vesting as early as the end of this fiscal year. Again, that assumes that credit quality and performance remains stable and unemployment remains low.

Speaker 1

So We feel like we have the portfolio at a place where the yields can Put off enough revenue to achieve those targets and we've controlled G and A as well as delinquency enough To hit those targets coming up as early as the end of this fiscal year.

Speaker 4

Okay. Thank you.

Speaker 3

And just to add to that, yes, obviously, We're coming into this fiscal year with substantially lower delinquency both on the front end and the back end. And our 0 to 5 month 10 year customer It's substantially lower than it has been. So that's our most risky customer, right? So it was at 5.9% At the end of March, compared to 13.1% a year ago. Right.

Speaker 3

So We've taken a substantial amount of risk out of the portfolio. And just given where delinquency is, We would expect substantially lower charge offs going forward, obviously, barring any sort of macro event, But certainly in the near term.

Speaker 1

Yes. And to add a little more clarity what Jonny is saying. So it's not just that our lower tenure customer Base is lower in the portfolio relative to last year. It's also that those lower tenure customers today are actually much less riskier as well. So this isn't a matter of shrinking our investment in new customers in order to right size the portfolio On its own, it's a combination of both being more selective, which does result in a much lower Investment in new customers, but also with being more targeted, we're seeing much higher credit quality and much lower

Speaker 4

Okay. And then how many how much bonds did you buy?

Operator

We repurchased

Speaker 3

$9,000,000 in face value in Q4 And at around a 20% discount and then

Speaker 4

You had a 20% discount to par, correct?

Speaker 2

Correct, yes.

Speaker 3

And Another $2,000,000 in April.

Speaker 4

Did do you book a gain? Was there a gain booked in this quarter for

Speaker 3

Yes. So that the gain that gain will show up in interest expense.

Speaker 4

That's included in the interest expense number. How much is that gain in interest expense For the quarter?

Speaker 3

It was a little less than $2,000,000

Speaker 4

It's roughly $2,000,000 Did you have a discussion with the rating agencies prior to buying bonds at a 20% discount to par regarding their Assessment of its technical default?

Speaker 3

Well, there wouldn't be Technical default. There's nothing in the bond agreement that prevent us from buying shares back at a discount. So they have a concept called selective default. But we're buying these bonds In the open market, honestly, right, like we're not in any way pressuring bondholders into selling their bonds, right. And obviously, we're in a pretty healthy spot in terms of our balance sheet.

Speaker 3

So we're not distressed We're not distressed bonds pressuring bondholders into selling, right? So we feel comfortable it doesn't fall into that bucket.

Speaker 4

Okay. All right. Thank you.

Operator

And this will conclude our question and answer session. I'd like to turn the conference back over to Mr. Prashad for any closing remarks.

Speaker 1

Thank you all for taking the time to join us today. This concludes our 2023 year end earnings call for World Acceptance Corporation. Thank you.

Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your

Powered by Quartr
Earnings Conference Call
World Acceptance Q4 2023
00:00 / 00:00