World Acceptance Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 21, 2023

There are 5 speakers on the call.

Operator

Good morning, and welcome to the World Acceptance Corporation's First Quarter 2024 Earnings Conference Call. This call is being recorded. Before we begin, the corporation has requested that I make the following announcement. 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 any variation of the foregoing and similar expressions are forward looking statements. Additional information regarding forward looking statements and any factors that 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 Prashad, President and Chief Executive Officer. Please go ahead.

Speaker 1

Good morning, and thank you for joining our fiscal 2024 First Quarter Earnings Call. Before we open it up to questions, there are a few areas that I'd like to highlight. Last year, we instituted a number of adjustments that we believe would have a significant impact on our business and have been quite pleased with the results. As we discussed during prior earnings calls, We tightened underwriting about a year and a half ago as economic uncertainty and inflation concerns were increasing. We have weathered a period of delinquency normalization After a period of extraordinary portfolio growth as well as higher than expected delinquency and losses throughout most of our last fiscal year.

Speaker 1

Today, we continue to see lower and normalizing delinquency rates in our portfolio as well as increasing yields and expect this trend to continue for several more months. This is primarily due to many operations adjustments, including a heightened focus on credit quality and yields, as we previously discussed. We're also very consciously increasing approval rates to new customers as we still see the potential of this uncertain economic environment to impact our customers in the coming During the Q1, our customer base grew more than the prior 3 years, both in nominal and relative terms. New loan originations by number increased dramatically over the prior year quarter over the prior quarter, excuse me, by 47% are participating in the same period of time. This call is being recorded.

Speaker 1

At this time, all participants are participating in the same period of time, and exceeded the Q1 of last year as well, thanks to an increased focus by our marketing and operations teams. All these outcomes are an especially great team accomplishment when we consider the reports of increasing delinquency rates across several credit industries During both the calendar year of 2022 as well as the first half of twenty twenty three. While economic uncertainty still exists, management continues to accrue for long term incentive plan with vesting tiers of $16.35 $20.45 And $25.30 per share due to much improved credit quality, yields and operating conditions. We anticipate the 1st tier vesting as early as the end of this fiscal year, assuming credit quality and performance remains stable and unemployment remains low. Please begin our fiscal year 2024 from a position of portfolio and capital strength.

Speaker 1

At this time, Johnny Khamis, our Chief financial and strategy officer, and I would like to open up to any questions you have.

Operator

We will now begin the question and answer session. Our first question comes from John Rowan of Janney. Go ahead.

Speaker 2

Hey, guys. Just on the accrual, can you repeat the accrual numbers again that you just gave? And You had been accruing, assuming that you get to the full the highest hurdle, but there was a reduction in incentive compensation in Was there any type of accrual reversal? And are you still accruing that assuming that you reached the highest, the 25.40 vesting hurdle.

Speaker 1

Sure. Good morning, John. So the tiers that we're accruing towards on a EPS basis are $16.35 $20.45 $25.30 And those We have been accruing for those over the last 4 plus fiscal years And we have not reversed any of the accruals on any of those tiers.

Speaker 3

Right. Yes, we haven't reversed any expense. Participants Over the period, we have shifted our expectations on when we may hit those, which will have can have an impact of changing the quarterly expense on those. But at the same time, it depends what period you're comparing it to. It's great investing.

Speaker 3

So over time, the compensation expense will decrease As some of those tranches become fully vested and we're no longer expensing.

Speaker 2

Okay. So I I was just trying to figure out, there was a reduction in incentive compensation for the quarter. If that wasn't a reversal, is this level of are correct run rate. I'm trying to figure out if there is a reversal and it pops back up or if this is the correct run rate.

Speaker 3

I got you. Yes. So if you're comparing Q1 over Q1, a lot of the reasons for that decrease would be the great investing, right? So that run rate will be appropriate, at least through the Q2 of this year. And then It will decrease again because we have the time based vesting will happen in October, right?

Speaker 3

So That will be no tranche is fully vested, so then the run rate will decrease again for Q3 and Q4 of this year.

Speaker 1

And John, I believe it's been a few years that we released the grid investing schedule. We'll have to go back and look. It's been probably 3 or 4 years since we released that.

Speaker 2

Okay. And then just to switch gears a little bit. Obviously, you renegotiated the credit facility. There was no change in rate on Correct. It's still the same.

Speaker 2

I think that was it whatever the spread is over so far, that's still the same spread?

Speaker 3

That's correct, yes.

Speaker 2

And there was was there one lender taken out? Because there were some shifts in it. I saw there was a lender put in, but did anyone pull out of the facility?

Speaker 3

Yes. So there were 2 banks that needed to come out for different reasons. And yes, we had 2 banks came out and 1 bank that came in.

Speaker 2

Okay. And then I guess just maybe one last question, I probably should have done before we went into the next question. But you've kind of given some numbers in the past. I mean, What is it, the 25.30 is effectively the number for fiscal 2025 based on the compensation plans? We talked probably a couple of quarters ago about what kind of loss rate you needed to see to get there.

Speaker 2

Obviously, you're at like 16% You still need to be materially lower than that. I think you were giving kind of a high single digit, low double digit type Is that still what you're targeting

Speaker 4

to get

Speaker 2

to these EPS hurdles?

Speaker 3

That's right. Yes. So The charter freight has improved substantially, but we still see room for improvement going forward.

Speaker 2

Okay. And just to be clear, the 25thirty, that's the 2025 figure. You mentioned changing the timeframe at some point. That's still 2025, right?

Speaker 4

That's correct.

Speaker 2

Okay. All right. Thank you. I'll hop back in the queue.

Operator

Our next question comes from Vincent Caintic of Stephens. Go ahead.

Speaker 4

Hi, good morning. Thanks for taking my Just wanted to expand on John's mind of questioning and maybe just Pull up a little bit. So the fiscal 2025 EPS target at $25.30 Just wondering if you could walk through the bigger drivers and how to get there since we're $1.62 this quarter. So it would be a material increase in run rate EPS. You spoke a little bit just now about the charge offs, but any other kind of key components

Speaker 3

Yes, sure. So I'll say, one of the most important components at this point will be the charge off freight. And we again have seen substantial improvement there and see room for continued improvement. And we will need some growth in the Sort of the later quarters to help drive revenue there. But we are seeing some benefits of a shift in the portfolio To smaller loans, right?

Speaker 3

So that shift is driving up our overall yields. You can see that the yields increased in Q1 versus Q4 of last year and Q1 of last year, right? So The growth that we had in the Q1 was coming from The small loan portfolio, we actually had some a little bit of shrinkage in the large loan portfolio and some growth in the small loan portfolio, which has Some tailwinds to yield and we'll need to continue to do that and that will benefit revenue. And I'll say continuing to control costs, right? We've done a really good job of controlling costs over the last couple of years And we'll continue to do that with some buybacks mixed in as well in the later half of this year and next year.

Speaker 4

Okay. Thank you. That's very helpful. And would it be possible No, no. The metrics that we're seeing in your results is the portfolio results.

Speaker 4

So, of course, having originations that were A little while ago, but if you could maybe talk about sort of the economics of the loans that you're originating today. Are they already Sort of that high yield, low loss and low unit expenses, where we would already get to that $25 EPS. Just trying to see that path from your current metrics

Speaker 1

So when we started tightening about this time last year, a little before during the Q1 of the last fiscal year, especially with new customers, We began to experience much higher credit quality and much higher performance, a dramatic improvement, especially from Mid Q2 last fiscal year and on a dramatic improvement in the gross yields of those ones we originated. However, As we've talked about, there's a much lower volume of those loans that we were originating. So while those credit tranches are performing very well, They are very small and don't carry a lot of weight in the overall portfolio or at least haven't For what we're originating today, the quality remains very similar to that. The But we've been able to continue to grow those tranches on a subsequent basis. So in terms of size and weighting the portfolio, That's on the new customer origination front.

Speaker 1

There's been a similar pattern for the former customers And then in terms of refinancing, we put a number of things in place and that's where the majority of the portfolio really sets us with customers that have a good bit more tenure. So we've had a number of things in place that we're beginning to see Overall portfolio increases in yield as well as overall performance and decrease in delinquency. So It does take time. This is a process we began over a year ago, but we're beginning to see a trickle through the overall portfolio. And so that's really where as it gets to the whole portfolio versus just new customers, we'll begin to see increased net yields As we anticipate hitting that $25.30 target by the end of next fiscal year.

Speaker 4

Okay. That's very helpful. Thanks very

Operator

much. Our next question comes from John Rowan of Janney. Go ahead.

Speaker 2

Hey, guys. Sorry, just a couple of quick follow ups. So just to be clear, you guys are no longer on waivers with the revolving credit facility, correct? I didn't I just want to make sure that we are now not in violation of debt covenants. They only saw an adjustment to the fixed charge coverage ratio.

Speaker 3

Participants Yes. So, no, we're in good shape relative to all the covenants on the debt facility. So, we did change The fixed charge coverage ratio, obviously, it looks like interest rates might be higher and for longer. So that was really just to make sure that we have plenty of room over the next 3 years So we don't need to amend again in the future. So that's kind of what was driving that.

Speaker 2

Participants But the collateral performance indicator, that's still part of the credit facility, correct?

Speaker 4

Sorry, yes, that is and we're in really good shape there.

Speaker 2

And then just last question for me. Obviously, you're more bullish on growing new customers now than I you were a year or so ago when you really pulled back, it wouldn't be a year ago, but 3 quarters ago when you really started to pull back on new customer volume. What's different today with the new customers than you saw back then when obviously we had spiking losses that caused you to pull back on are in the cohort. What's different now? Is there a change in 1st pay default?

Speaker 2

What makes you so sure that growing new customers at this point is not going to yield the same

Speaker 1

Yes, that's an insightful question. So there are a couple of things. And before I begin, I just want to caution a little bit. I'd say we're more bullish, but we're not strongly bullish on growing new customers at this time,

Speaker 3

So we're still tighter today than we were much tighter today than we were a year ago. So we've loosened From relative to Q3 of last year where we were extremely tight.

Speaker 1

That's right. So in terms of where we've been able to loosen and be are slightly more bullish and grow the new customer loan volume. It really comes down to where we've seen great operational performance. So we've seen the gross yields grow. We've seen delinquencies decline.

Speaker 1

And as we've seen that, Those operational results, it gives us more confidence to begin loosening in certain areas. And actually in many states, we're not loosening in terms of credit quality, but we are beginning to will be able to provide more of those higher quality customers in or make more attractive loans and increase the approval rates for those that we're desiring the most. Again, still seeking to grow the overall gross yield During that whole process, right. So there's a little bit of a chicken egg here, right. So it's not like we're moving down the credit spectrum or anything like that to Lower the credit quality in order to juice application flow or approval rates or anything of that nature.

Speaker 1

As we're seeing the performance of those loans and also we're seeing the gross yields and customers accept those terms, This is a very different origination environment today this summer than it was last summer, given the higher interest rates and other creditors have pulled back. So it gives it a little more confidence on the margin being slightly more bullish.

Speaker 2

Okay. Thank you very much.

Operator

Our next question comes again from Vincent Caintic of Stephens. Go ahead.

Speaker 4

Thank you. Just one quick follow-up. You mentioned share repurchases later this year. If you could remind What if any limitations you have just so we could kind of frame how much to share repurchases to model in? Thank you.

Speaker 3

Sure. Yes. So the big hurdle there is we need to get the fixed charge coverage ratio back over 2. And participants We may get there after the Q2, but we fully expect to be there after the Q3, so Which would mean we could either start buying repurchasing in Q3 or Q4. And then we still have the same Sort of a digit percent of net income requirements that we've always had in there.

Operator

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

Speaker 1

I just want to thank everyone for taking the time to join us today. And this concludes our Q1 earnings call for World Acceptance Corporation. Thank you.

Powered by Quartr
Earnings Conference Call
World Acceptance Q1 2024
00:00 / 00:00