OneMain Holdings Inc (OMF) 2017 Q3 法說會逐字稿

Welcome to the OneMain Financial Third Quarter 2017 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Kathryn Miller, Vice President, Investor Relations. Today's call is being recorded. (Operator Instructions)

It is now my pleasure to turn the floor over to Kathryn Miller. You may begin.

Thank you, Kathy. Good morning, and thanks for joining us. Let me begin by directing you to Pages 2 and 3 of the third quarter 2017 investor presentation, which contain important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website, and we will be referencing that presentation during this morning's call.

Our discussion today will contain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects, and these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements. If you may be listening to the call replay at some point after today, we remind you that the remarks made herein are as of today, November 2, 2017, and have not been updated subsequent to this call.

Our call this morning will include formal remarks from Jay Levine, our President and CEO; and Scott Parker, our Chief Financial Officer. After the conclusion of the formal remarks, we will conduct a Q&A period.

So now let me turn the call over to Jay.

Thanks, Kathryn, and good morning, everyone. Before I get into the business discussion, I want to extend a big welcome to our new Head of Investor Relations, Kathryn Miller. Kathryn's spent the last several years in Investor Relations and Equity Research roles and was instrumental in building out some of the leading Investor Relations programs. I'm sure you're going to enjoy working with her as much as we already have.

Now let's turn to our third quarter results. We delivered a strong financial performance highlighted by solid origination growth, attractive product mix and stable credit performance. We further captured the benefits of our embedded operating leverage and continued to strengthen our balance sheet. Importantly, we continued to see a benign credit environment and consumer confidence remains strong. This should bode well for the overall economy, growth in household spending, and importantly, consumer loan demand.

Our Consumer & Insurance segment generated $1.1 of adjusted earnings per diluted share, excluding about $0.10 of estimated hurricane impact. Like many others, the hurricanes impacted our customers, our employees and, to a lesser degree, our business. And as expected, we maintained our focus on the well-being of our customers.

Let's now take a high-level look at our third quarter financial results. Turning to Slide 5. Consumer & Insurance receivables reached $14.3 billion at quarter-end, up almost $500 million from Q2. This quarter's 19% year-over-year origination growth reflected the great strides we've made in branch productivity. With the integration now well behind us, loans closed per branch at legacy OneMain were up 47% year-over-year, reflecting the great progress in closing the production gap between the 2 networks. This was a key part of our original strategic plan, and we are proud to have made such significant progress.

Taking a look at Slide 6. Q3's credit performance was right in line with our expectations. 30 to 89 delinquencies came in lower than last year's third quarter levels, which included about 20 basis points of impact from integration and were seasonally higher than the prior quarter. Net charge-offs were 6.4% in the third quarter, up 14 basis points year-over-year. As you may recall, Q1's early-stage delinquency rate was elevated as a result of the integration, which flowed through to charge-offs this quarter. We remain on track to achieve a net charge-off rate of 6.5% in the fourth quarter and 7% for full year '17. We expect further improvements in 2018 as our rebalance portfolio continues to season.

Moving to Slide 7. As you've heard me say before, we have a great business. Over the last couple of years, we've put a great deal of efforts into integrating the 2 companies and evolving our portfolio toward a greater mix of secured lending. In fact, we've taken a portfolio that was about 30% secured at the time we brought the 2 companies together and made the transition to 41% in Q3 of '17, making for a much more resilient portfolio. And while this evolution has impacted yield in the near term, it has also contributed positively to our operating leverage and credit. As a result, we expect to, once again, deliver strong unlevered returns for full year 2017.

We believe our returns are unequaled in the lending sector by any competitor of scale. And with the integration now fully behind us, we have additional runway to enhance those returns. We see further upside in operating leverage driven by continued responsible receivables growth and our portfolio migration to a greater mix of secured lending. We expect this to lead to improved unlevered returns in 2018.

And with that, I'm going to turn the call over to Scott.

Good morning, everyone. As Jay highlighted, third quarter was another strong performance for us. The team continued to execute on our strategic objectives, and we've made great progress towards improving the quality of our portfolio, our operating execution and our financial performance. So let's take a closer look at this quarter's results on Slide 8.

We earned $69 million, or $0.51 per diluted share, in the third quarter on a GAAP basis versus $25 million, or $0.19 per share, in the third quarter of 2016. This quarter's results included $27 million of estimated hurricane-related charges.

Our Consumer & Insurance segment earned $123 million this quarter on an adjusted net income basis, or $0.91 per diluted share, compared to $122 million, or $0.90 per share, in the third quarter of 2016. Note that this year's third quarter performance included a pretax charge of approximately $22 million, or $0.10 per share, of estimated hurricane-related impacts.

Moving on to the key drivers of our financial performance. We grew receivables by almost $500 million from last quarter, driven by the continued strong momentum in direct auto. In fact, we ended the quarter with over $2.7 billion of direct auto receivables, or 19% of the total portfolio, up from 13% a year ago. Interest income reached $831 million in the third quarter, roughly flat with last year's levels and about 4% higher from the second quarter. Interest income was largely impacted by asset growth and the anticipated reduction in the portfolio yield due to the larger share of direct auto in our portfolio.

This quarter's yield was also reduced by $7 million, or 20 basis points, from the hurricane-related borrower assistance. We expect fourth quarter yields to stabilize around third quarter levels, excluding the impact of the hurricanes. For the first time since last year, APRs on our originations exceeded the APRs on balances leading the portfolio.

Moving on to credit. Third quarter portfolio performance remained strong. The third quarter provision was stable and in line with previous guidance, excluding a $12 million bill to reflect our best estimate of the hurricane impact.

On a GAAP basis, our tax rate was slightly elevated due to some discrete items in the quarter. As you are aware, there's currently a lot of talk about reducing corporate income taxes. Although this is far from completed, if it does come through, it could have a meaningful impact on our earnings, giving -- given we are full tax payers.

Moving to Slide 9. Let's now take a look at our operating expenses for the third quarter, where we continue to make great progress. OpEx of $295 million was $35 million lower than the third quarter of last year. Our OpEx ratio for the quarter improved by 150 basis points compared to the prior year, reflecting the successful execution of our cost-savings plan and the leverage benefits of a higher mix of direct auto. Moving into 2018, we expect continued operating leverage improvements.

Turning to Slide 10. We issued $900 million of ABS debt in September at attractive rates. The average cost of funds was 2.6%, with a 91% advance rate and an S&P rating of AA. We also retired $250 million of unsecured debt. This reduced our remaining 2017 maturities to approximately $560 million.

And on the liquidity side, we continued to be on a very strong position. We had $4.5 billion of unencumbered consumer loans, over $5 billion of undrawn conduit capacity and about $600 million of available cash at the end of the quarter.

Turning to Slide 11. We continued to delever in the third quarter. Our tangible leverage ratio was 9.5x, down from 9.9x last quarter. We remain on target to reach 9x by year-end as we expect a marginal increase in our fourth quarter debt to be outpaced by accelerated tangible equity growth as acquisition-related costs continue to decline.

As we move beyond 2017, tangible equity growth will continue to accelerate as the impact of acquisition-related costs fall below $100 million in 2018 and $50 million in 2019. All in, we've made a lot of progress on our liquidity and capital over the last year, resulting in the best position we've had since the acquisition.

With that, I'll turn it over to Jay for his closing remarks.

Thanks, Scott. We've started what we knew would be a journey almost 2 years ago. And while there's been some noise, we are thrilled to have put the heavy lifting behind us. We will continue to build on the momentum we achieved over the last couple of quarters as we close out 2017. We expect to end the year with $14.7 billion to $14.9 billion of net receivables. This outlook reflects the impacts of our pricing optimization and recent hurricanes.

As a result, for 2017, we now expect adjusted C&I earnings per share of $3.63, excluding the hurricane impact. Net-net, we feel very good about where we sit today. We are well positioned to drive stronger profitability, generate excess capital and build shareholder value. In fact, with greater capital generation and enhanced visibility towards our 7x leverage target, we plan to evaluate the potential for capital distributions in 2018.

With that, I'll turn the call back to Kathy to begin the Q&A.

(Operator Instructions) Your first question comes from the line of Michael Tarkan with Compass Point.

Capital return comment. How should we think about that dividend buyback? Just any kind of preliminary thoughts there.

I think you've said the right word, preliminary. So I think, we feel good about the progress we've made on the deleveraging. It's certainly been an important goal for us. And it's going to be important, too, looking at what the capital generation capabilities are, which we know are strong. But net-net, I'd say, it's going to be depended upon share price, our own sort of opportunities. But -- as well as what we think makes the most sense. But I'd say, one is preliminary; two, it's the kind of thing we expect to be discussing with the board, and it will have a lot to do with where the stock's valued at the time and what makes the most sense.

Okay. In terms of the growth outlook, what are you seeing competitively? Has anything sort of changed over the past few months? And then in terms of 2018, I know it's a little early, but just how should we think about your ability to continue to grow meaningfully, given the current environment?

Sure. I'll take this quick. But where we take the best proxy of consumer demand of the applications we're seeing, and I'd say, applications remain strong across the board from solid customers. So we haven't seen really any let up in application flow or customer demand. We've generally said we feel as we did. I think it's early to put any proxy out for 2018 growth. I think we'll probably discuss that as we round out the year. But I think the kind of pace we've been running at and the applications we've been seeing, I think we feel good about for now.

Okay. Fair enough. And then lastly, I've got to ask it, but the reports around potentially strategic alternatives or sale, just any comments on that front.

As you can imagine, we don't comment on market rumors.

Your next question comes from the line of Arren Cyganovich.

If you can talk a little bit about the loan yield. You'd mentioned that the yields were coming on higher than the existing book. Can you talk about what the yields were on new originations? And just thinking about into 2018, do you expect that trend to continue to come in higher than the existing loan book?

Yes. I think for a competitive reason, I don't think we want to get into the specifics. But we've been, through the quarter, testing pricing, as we mentioned last quarter, in different segments. We're not done yet as regards that testing. But clearly, we did mention that origination APRs are higher than those in the portfolio that are exiting. What I would tell you, as we mentioned before, it takes some time for the portfolio to remix just like we've done on the loss side. So I think as you go into '18, we feel good that we've kind of stabilized. And then the trajectory, I think we'll give you a little bit more color around that as we get into '18 guidance in next quarter.

Okay. And then the modest amount of, I guess, shortfall in terms of the projection in 3Q. How much was that -- how much was related to the pricing increases versus the hurricane impact?

It's a combination of both. And it is very difficult to disaggregate all the competent pieces of that. So I'd say that both the third quarter and the kind of the fourth quarter outlook are a combination of both the pricing and the hurricane impacts.

Your next question comes from the line of Moshe Orenbuch with Crédit Suisse.

On last question, I mean, I know you don't want to give specific guidance for '18, but if both the third and fourth quarter kind of growth had some impact from the hurricanes and your application volumes are strong, I mean, it seems reasonable to assume that it could be modestly better in '18 than it was in the second half of this year. Is that a reasonable assumption?

In terms of growth?

In terms of growth, yes.

Certainly. I think if we don't have hurricanes, we'll certainly do better than if we did have hurricanes. So look, we -- as I said, we feel good about the applications we're seeing. We feel good about the productivity enhancements we continue to make in our branches. And net-net, life without hurricanes will certainly be smoother and more pleasant.

Got it. From your mouth. With respect to the funding, I mean, obviously, the secured funding you did in Q3 was really good pricing. Any thoughts about remixing more towards secured, just given the gap in -- sort of how do you think about that in 2018?

Moshe, this is Scott. I'd say that we like the kind of the balance we've been in for a couple of reasons. One, the unsecured gives us a long duration, gives us a steady kind of amount every year that we can do on the secured side. The balancing is, as we've talked about our liquidity sources, kind of short-term multiyear conduit facilities. And so having the unencumbered assets to pledge against them gives us the liquidity in the event that capital markets. So it's a balancing act. But we kind of like the mix where we are and don't expect to shift that materially as we go into 2018.

Okay. Last thing for me is just nice work on the operating expenses. And you've made some comments that suggest that, at least from an efficiency standpoint, it should continue to improve, if you continue to grow. I mean, any kind of further thoughts you can flush out for us?

I think -- as we've mentioned before, I think I said on previous calls, we're going to want to fine-tune that. But we expect to see nominal growth in operating expenses, mainly driven by our kind of business model. And having normal inflationary costs in our comp in (inaudible). But given the fact that our receivable growth will outpace that, we will continue to see operating expense leverage. Just won't be at the pace you've seen on the chart as we've gone through both nominal reduction as well as asset growth. So I think it's still -- there's still positive operating leverage in our model.

Your next question comes from the line of John Hecht with Jefferies.

I'm wondering if you -- I didn't get a ton of details in terms of the disposition of originations in OneMain versus the traditional -- where the legacy Springleaf advances. I wondered if you can give us how those performed amongst the various segments there? And what's the composition? Is there any difference in composition of loan originations at that level as well?

I'd say at a high level, the loan mix has looked very similar. Once we integrated marketing, underwriting, the -- what's being closed across any of the branches looks very similar. Certainly, by states, there is going to be differences, but between the 2 networks, the production of what's coming through clearly of the legacy books from each. But on originations, they're almost identical. I think that for the first part of the question, we knew there was a big gap in terms of how the 2 companies went about their business historically in terms of OneMain historically having a much larger focus on present customers Springleaf largely on growth. And we knew a big priority was to close a differential to put emphasis on both new customers and growth and, look, I'm thrilled with where the third quarter got to. We've almost achieved parity, and we've probably done maybe a quarter or 2 faster than we even expected. So across the board, a real takeup across the programs, understanding of the various marketing initiatives. And I feel like we're really well positioned for next year.

Okay. Great. And then I wondered if you could talk about, I guess, the iLoan platform for lack of a better term. How much of your business has shifted to more than online presence? What does that mean from a competitive perspective as we think about the future?

Sure. At a high level, I'd say omni-channel is very important to us. It's important that customers have choices, how they interact, et cetera. I think I've said it on previous calls, we continue to see a growing percentage of new customers apply online, we respond online and we get to a lot of prescreening and even potentially underwriting before they come to a branch. But today, 99% of the customers that we close a loan for are coming into the branch, we're going through the normal set stuff verification, product suitability, et cetera. And that's an important part of the overall relationship. So what I'd say is, being equipped digitally to handle the changing dynamics has been important priority of ours for years. I think we're doing a very good job executing on that. And I expect to continue in that way. But I will say, the in-person interaction that you get, the fact that it -- we think it not only helps initially, but helps with that relationship over time, is an important part of our model. But we also understand, and we'll continue to look at for those that may or may not want to go to a branch [that are] the better credit ways to fulfill that. So net-net, I'll answer your earlier part, iLoan is very tiny really incubator for us and something we think about for technology. But the core business is very omni-channel, and we continue to look for ways to make sure we can suit all the customers needs that fit our box appropriately.

Your next question comes from the line of Sanjay Sakhrani.

I guess, there's a lot of moving parts between the portfolio yields versus the mix and then the provisions as well as you have some vintages sort of seasoning and stuff. As we look ahead, maybe could you guys help us think about the risk-adjusted yields of the portfolio and where they should stabilize?

Yes. So I think what I would focus more on would be the unlevered return aspect. I know risk-adjusted yield, as you kind of think about the secured portfolio, you might have a little bit lower yield, you have lower losses, but also it's the size of the loan and the operating leverage you get out of that. So I think when you're looking in that, that's what we've kind of -- as Jay mentioned in his prepared remarks, what we're looking at is driving up unlevered return. And clearly, we look at risk-adjusted yield for the different products. But it's really focused on the overall profitability to the company based on each one of the products. So the secured tends to have a little bit lower risk-adjusted yield, but it's made up with the operating leverage.

And then when we think about the mix of loans, is it that we're going to continue to move towards direct auto? Or can we shift back towards another -- towards consumer installments?

Well, I think we're growing both parts of the portfolio. So it's not that we're not getting the growth. It's just something as we've looked at, the different market opportunities, the different customer needs. There is clearly a need for the product. It's both a good product for our customer and profitability for us. But I think the overall book has continued to grow, and the component parts of the portfolio will continue to grow just at different rates. Part of that's based on a question about where we see the market. The products we provide gives us the ability to close certain loans that we would not normally do on an unsecured basis. So it gives us, I think, another leg relative to some of the competitors out there.

Sanjay, the other thing I'd add is, in terms of direct auto, it sort of depends on what car the customer has. So at the end of the day, we don't totally control whether a customer has a car 10 years in newer, 10 years in older. It's sort of we'll just wind up in that bucket. I don't need to get into sort of the average age of the car in America. But most cars are over 10 years old on the road, and particularly, a lot of our customers' car is. So we want to meet the demands of what they have, and we'll sort of size or set up loans appropriately based on the collateral they bring or have available.

Final question back on capital distribution that was asked earlier. I understand it's really early to sort of discuss how you might do it. But just in terms of the levels of payouts that could conceivably be done, given all the various constituencies you have, is there any way to sort of frame that for us like how much of a payout you could potentially do? And then maybe just on the stock, I mean, you guys have demonstrated quite a bit of progress. I mean, I'm just curious what your views are on the stock and sort of why it hasn't broken out yet in terms of the multiples.

I think it's early to figure out percentage of capital distribution that could be sort of reinvested versus distributed. But net-net, we have a great business that generates significant returns on equity. And we think that is the single best investment for the capital. We can continue to compound at 20%-plus, which is sort of what the core business makes. It's -- but at the same time, you've heard us say, we're not going to put on growth. It doesn't make sense for the long term. So I think we want to look at the mix. To the last part of your question, I wish I had a great answer as to why we trade where we do. But I think if we continue to do what we're doing, which is continue to put on responsible growth, continue to see enhancement in the unlevered return, as Scott just alluded to, we think time will take care of itself because it is a great business.

Your final question comes from the line of Rick Shane with JP Morgan.

Couple of things. You talked about the transition to the secured lending and clearly seeing the benefits in terms of credit and also, frankly, in terms of operating leverage as you extend the term of the loans. I am curious, typically, auto has a different reserve policy than you guys have observed, if we look at the comps that are out there. Is that something that we need to think about headed into 2018 in terms of extending some of those reserves as the mix shifts?

Rick, this is Scott. As we've talked about, we've had a consistent methodology for kind of our reserving, different products have different loss emergence periods. I would say that there's not a significant difference between the personal loans and the auto loans that we have. But if that trend did manifest itself over time, we would adjust for that. But it's still in line with our overall loss emergence and reserving policy that we've had so far.

And then I'd like to just talk about the guidance a little bit for the remainder of the year. When you look back at the comments basically, yield's been in line, you've highlighted the normalization of credit in line with expectations and the normalization of volumes at the former OneMain branches. OpEx has been observed as doing very well. All of that said, even ex-ing out the hurricane impacts, you guys did lower guidance, went below the low end of the guidance. What do you really attribute that to? Is it -- because, again, if you look at those individual metrics in the way you described them, it sounds like everything is in line to better.

I think, Rick, we've mentioned earlier that on the receivables side, it was attributable to 2 things: one was pricing optimization and the hurricane. The hurricane in the fourth quarter we expect to be less of an impact from the third quarter. But as we continue to work through our pricing, we factor that into our outlook. And that's kind of why we brought down the receivables.

We do have one more question from the line of Mark DeVries with Barclays.

The $27 million you called out as a hurricane impact was comparable to some other consumer lenders that have much larger portfolios. So I was just hoping to get some color on kind of why it might have been that size kind of states where you might have had exposure loan types where you might have had more of an impact? And also whether you expect any kind of lingering effects into the fourth quarter?

Yes. So if you go -- the overall amounts, I break it down into the C&I, there's kind of really 3 component pieces that I called out, Mark. So $12 million was on the loan loss reserves. And we had -- we used historical experiences that we have in different scenarios and different natural disasters used out as a proxy for estimating the impact in the hurricanes for this quarter. And so we feel good that we've addressed that based on our historical information. We had about $3 million of additional reserve build in our insurance business. We feel that, that's modest, given that portfolio. I called out the $7 million on interest income, which was related to, as others have done, borrowers assistance and helping our customers get through a tough time. And then the last piece, which is outside the C&I segment, was we put up $5 million for some of the legacy real estate that we have on the portfolio set up reserves for that. So I think at the end of the day, you can never say you got everything, but we felt pretty comfortable with our estimate that we've provided for the potential impact from the third quarter.

Okay. And then just one other question on the charge-off guidance. If you're calling for 4Q at 6.5%, which is only up about 10 basis points. When you would normally expect to see -- in the last 2 years, you had kind of an 80 to 100 basis point sequential increase from seasonal weakness. Is that mainly due to the fact -- I think you called out that 1Q delinquencies were elevated due to integration-related expenses. Was this quarter kind of artificially elevated and then that completely flows through explaining why you'd have a mostly flat charge-off in 4Q?

I think the simple answer, Mark, I know there's a lot of details we provide in the supplement. But if you go back and look at the credit trends, the best proxy for the next quarter's losses is the 90-plus delinquency. And if you look at second quarter, 90-plus delinquency was 2.1 kind of yielded that kind of mid-6% charge-offs. The delinquency we ended the third quarter was 2.1, so not to do symmetry or direct math, but it's that's kind of the driver of why fourth quarter is what it is. It's based on what's in the 90-day bucket. And kind of we've seen improvement as we've talked about, take out the integrations, some of the historical numbers last year, as Jay mentioned, there's some noise in the predictability, but we've talked about the improvement on collection effectiveness in the back-end of our buckets. And that is manifesting itself from 30 to 89 days to 90-plus and then, ultimately, the charge-off.

I will now turn the floor back over to Kathryn Miller for any additional or closing remarks.

Thanks, Kathy. This actually concludes our call for the morning. So please feel free to reach out to us with further questions. Thanks, and have a great day.

That concludes today's conference call. Please disconnect your lines at this time, and have a wonderful day.