OneMain Holdings Inc (OMF) 2017 Q4 法說會逐字稿

Welcome to the OneMain Financial Fourth Quarter and Full Year 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, Maria. Good morning, and thanks for joining us. Let me begin by directing you to Pages 2 and 3 of the fourth 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 certain 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 this via replay at some point after today, we remind you that the remarks made herein are as of today, February 15, 2018, 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. We achieved our key operating objectives and had a great fourth quarter. Credit losses were in line with our expectations. Our portfolio yield stabilized and loan receivables grew by almost $500 million in the quarter.

We also further strengthened our balance sheet, reduced our adjustable tangible leverage and issued debt at a meaningfully lower cost of funds. All in, our Consumer & Insurance segment generated $1.06 of adjusted earnings per diluted share in the fourth quarter. This was a great way to close out 2017.

As we look back at the past year, I am proud of all that we accomplished. Full year net charge-offs improved versus last year. We got continued growth on our secured lending which reached 43% of the total portfolio at year-end, reflecting a steady growth of our direct auto product. And, loan receivables grew by more than $1.4 billion, which together with our cost synergies drove the 130- basis point reduction in our operating expense ratio. So when looking back, it's safe to say we made considerable progress across all our key strategic priorities in 2017. And we're excited to continue that in 2018. In fact, with the healthy economic environment and the benefit of recent tax reform serving as the backdrop, we see a number of opportunities to drive shareholder value, and it all starts with our customer.

Historically, additional income in our customers' pockets has been beneficial for everyone. Whether it manifests itself through a boost in loan demand or improvements in credit trends, we are focused on making sure that we remain our customers' first choice for their financial needs. So while we had already planned to invest in our business this year, the recent tax reform presents a compelling opportunity to augment those plans and invest further in our core foundation, namely our platform and our people.

We are focused on providing our customers with the most efficient and rewarding experience and certainly, the ways in which we attract, serve and retain our customers are key differentiating factors. To that end, we've identified a number of initiatives to improve customer engagement, including raising brand awareness and refining our technology.

Now that we are operating as one cohesive company, we are ready to invest in our brand, elevating the awareness of who we are and how we help our customers every day. And as we become more front-of-mind in our customers' time of need, we want to make sure that we are providing the best possible customer experience. So we are investing in the technology that supports both our branches and our online capabilities. We also plan to invest in our post charge-off strategies. We believe we can improve future recoveries by collecting a larger portion of charge-off accounts internally.

And finally, our team members' dedication to providing best-in-class personalized service sets OneMain apart from the rest. So we are sharing the benefit of tax reform by raising our minimum wage and issuing a special bonus to our team members. We are also further investing in training programs, ensuring that our people are well equipped with the tools and resources they need to best serve our customers.

So we expect 2018 to be a year in which OneMain drives our momentum and strategic priorities forward. We will stick to what we do best, providing our customers with the right products to improve their financial standing and flexibility. As we continue to build value for our customers, we will enhance the fundamental trends in our business that drive the long-term value creation for all shareholders. With that, I'll turn the call over to Scott.

Thanks, Jay. We continued our momentum across the key drivers of our business, which led to a strong fourth quarter results. We earned $39 million or $0.29 per diluted share in the fourth quarter on a GAAP basis versus $27 million or $0.20 per share in the fourth quarter of 2016. This quarter's results included $81 million of estimated charges related to tax reform. Further detail on this impact can be found on Slide 13 in our earnings presentation. Our Consumer & Insurance segment earned $144 million this quarter on an adjusted net income basis or $1.06 per diluted share compared to $108 million or $0.80 per share in the fourth quarter 2016.

Let's move on to the key drivers of our financial performance. Originations in the fourth quarter were $3.1 billion, up 34% from last year and reflected a secured mix of 44%. Ending net receivables grew by almost $1.4 billion versus last year. Our strategic focus on secured lending supported this growth and reached 43% of the total portfolio by year-end. Direct auto receivables were 20% of the portfolio, up from 15% a year ago. As a reminder, this product generates the most attractive risk-adjusted returns in our portfolio.

We will continue to prioritize disciplined receivable growth in 2018, reflecting our focus on credit quality, secured lending and pricing. As a reminder, originations have historically exhibited seasonal trends with slower growth in the first quarter.

Interest income was $875 million in the fourth quarter, up almost 7% from last year's levels and about 5% higher from third quarter. The year-over-year income growth primarily reflected higher-average assets, while the sequential increase reflected growth in our average assets and higher portfolio yield.

For 2018, we expect yield to remain relatively stable around fourth quarter levels. Modest fluctuations may occur from quarter-to-quarter depending on product mix, pricing and day count.

Fourth quarter other revenue was $138 million. This was down 5% compared to last year, primarily reflecting lower capital gains. We expect this declining trend to continue in 2018, largely due to lower returns on our investment portfolio.

Fourth quarter credit performance was in line with our expectations. 30- to 89-day delinquencies were 2.4%, 90-plus delinquencies were 2.3% and net charge-offs were 6.4% for the quarter and 7% for the year.

Total reserves increased by $9 million to $724 million, which represented 4.9% of receivables, compared to $715 million or 5% in the prior quarter. The decline in the ratio reflects the continued improvement in our loss outlook. On that note, we expect 2018 credit losses to come in below 7% for the full year. This reflects the benefits of our secured lending focus and disciplined underwriting. That said, our loan loss reserves should increase reflecting asset growth. Also, recall, we tend to have seasonal releases in the first quarter and builds in the third quarter in line with our reserving processes.

Fourth quarter operating expenses were $299 million, $26 million lower than last year. Our OpEx ratio improved by 140- basis points compared to the prior year, reflecting the leverage benefits of our cost-savings plan and asset growth.

Going forward, we expect to achieve continued operating leverage although to a lesser degree, given our planned reinvestments Jay mentioned earlier. These investments combined with modest compensation and benefit increases should lead to around 5% operating expense growth from 2017 levels.

Moving on to our funding and liquidity. We were very active in the debt markets in the fourth quarter. We issued $875 million of 5-year unsecured debt at 5.6% as well as $600 million of 1 year revolving direct auto ABS at 2.6%. In addition, shortly after the quarter end, we retired $700 million of our 6.75% 2019 unsecured debt maturities.

On the liquidity side, we continue to be in a very strong position. We had $5 billion of unencumbered consumer loans and over $5 billion of undrawn conduit capacity.

Excluding the impact of tax reform, we achieved our target tangible leverage ratio of 9x. We remain on track to achieve 7x by the end of 2018.

Looking back over the last year or so, we've been able to achieve ratings improvements in our secured and unsecured programs. Specifically, we issued our first direct auto deal with a AAA tranche. In addition, we had certain tranches of our personal loan programs upgraded to AAA. We also received multiple upgrades on our corporate ratings. We plan to build on this momentum in 2018 and increase our mix of unsecured debt. Doing so will enhance our strong liquidity profile even further by freeing up assets and extending the duration of our maturities. We believe these efforts will lead to continued improvement in our credit rating.

Overall, we made significant progress on our strategic priorities that we laid out for the year, and we look forward to building on the strong foundation in 2018. With that, I'll turn the call back to Jay for his closing remarks.

Thanks, Scott. I'd just like to say that although the transaction hasn't officially closed, we are grateful to Fortress for all the support they provided, and we are very excited about our future shareholders, Apollo and Varde. Together, we are aligned in what will drive shareholder value over the years to come, which is very much a continuation of the strategic objectives we have laid out: disciplined growth; appropriate risk-adjusted returns; strong credit; and an even stronger balance sheet. As we execute on these priorities, we will build a more resilient and profitable business. And with that, I'll turn the call over to the operator to begin the Q&A.

(Operator Instructions) Our first question comes from the line of John Hecht of Jefferies.

First of all, the auto secured, you gave the composition of the overall receivables base. I'm wondering where are they as a percentage of total originations. And is that mix going to balance out in 2018 to a point where it doesn't change much? Should we consider or think that the auto origin -- the auto secured portfolio will continue to grow as a portion of receivables this year?

Yes. We would expect the auto originations to continue at -- kind of increasing. It just won't increase at the same rate that it has over the last year or so, John. And so we do expect the percentage of direct auto to continue and increase.

Okay. And then, Jay, you talked about where leverage will be at the end of the year, your guidance. You talked about, I guess, the ratings increases and so forth. Can you give us an update in your thoughts about capital returns? I know they're not in the near future, but they might be coming next year. What's your thoughts on the capital base? And what you might do with excess capital over time?

Sure. I think we've tried to be pretty clear that our key priorities are getting our leverage to where we think it needs to be, which is at least 7x. And as we approach that, I'd say we remain exactly where we are is, the board will actively discuss what makes the most sense to the extent there's excess capital in the business. But at this point, we're more than pleased with the way the rating agencies have looked at our trajectory and we'll continue that. And as we approach the end of 2018, I suspect we will have active conversations at the Board level, which we'll share with all shareholders appropriately.

Our next question comes from the line of Arren Cyganovich of Citi.

The tax reform is putting a little bit more money in the consumers' pockets. I was wondering if you could discuss if you're seeing any indications yet from customer activity if that's impacting the first quarter. And what your expectations are, whether or not this will cause more pay downs or because of increased income that will actually give them some capacity to borrow more?

I'd say a couple of things. One, it's still early, so it's hard to tell any immediate impact. So that's the first thing. And really on your second one, it's probably yes and yes. There'll be some people that probably elect to take the savings and retire debt. And there will be others who have the confidence based on free cash flow to take on some additional debt. So what the exact balance is, hard to tell. But I'm sure we'll get a little bit of both as we do most tax seasons when refunds come.

Okay. Fair enough. In terms of the outlook on the yield, I think you said it will be -- expect to be relatively stable. I'm wondering why it wouldn't be rising if you're starting to get an inflection in terms of new originations coming on higher than what your book is rolling off.

Yes. This is Scott. So as you know, you've seen the increase in secured. So we expect the secured percentage of the portfolio to increase. John just asked a question about direct auto. So the way we kind of think about it is the pricing actions we were able to do is offsetting kind of the lower pricing on the direct auto product.

Our next question comes from Mark Hammond of Bank of America.

I have 2 questions. So first, on the tax savings. I get about $100 million delta when you change the tax rates. Would you bucket that between tech, marketing and employees and if that number's off just broadly by percents?

Bucket, what -- reinvestments you mean, Mark?

Right. That additional savings from the tax rate going lower. I see that tech, marketing and employees are listed. Just specifics on where that's going to go?

Yes. I don't think we need to give specifics. I think the expectation is we were looking for normal kind of inflationary increases on expenses. I've mentioned that before. And as part of the tax reform, it does give us the opportunity, as Jay mentioned, to really reinvest in our customer -- how we engage with our customers and making it easier by investing in technology as well as our employees to continue to evolve as an overall business.

Okay. And then switching to financings. So I was wondering if you can elaborate on what in your business or the ABS structures or in the rating agencies minds changed to prompt them to assign a AAA rating to your only senior tranche and in that latest deal?

I think it's a continuation of the credit performance on the portfolio. So we're happy that, that was recognized by the rating agencies. And it gives us, I mean, additional access to new investors because of the new structures that we can kind of put out in the marketplace.

Our next question comes from the line of Michael Tarkan of Compass Point.

Just on a mix basis, if we're at sort of 43%, 44% now, and just long term, where do you think that levels off from secured, unsecured mix?

Yes, I think we kind of have -- on the near term, we would feel good if we can continue to increase the secured mix to 50-50. A lot of that is dependent on the customer base and the overall kind of trajectory when we get there. But I think that's kind of where -- we would like to get to that level. As you remember, prior, Springleaf was kind of more 55%. And so we'll -- it doesn't -- for us, the secured products are one of our more profitable product lines. So it would be good both from a overall credit performance as well as overall profitability to continue to grow that secured mix.

Okay. I guess competitively as you grow that secured mix like are you seeing any sort of different dynamics? Is it still sort of pretty stable from that perspective?

I'd say yes. There is certainly, the indirect of market is a recently competitive one. The direct market where we're providing customers choices sort of on the spot in the office, there's not as much competition. So we'll continue to see that as a very viable option we can put in front of customers.

Okay. And then last one for me. Any updated thoughts on new accounting around CECL. I know it's a little ways away, but I'm just curious how are you thinking about it now?

Yes. CECL kind of goes in place in 2020. So I think the -- we are doing our internal analysis and evaluation of the new accounting standards. And I think as we get into later '18, early '19 as we form that and we see kind of how the rest of the industry is forming that, I think we can give a little bit better clarity around the impacts of that new accounting standard going forward.

Our next question comes from the line of Henry Coffey of Wedbush.

Now that you sort of finished your process with Fortress and can sort of focus [next] both on the business inside but also on the environment outside more, what's likely on the unit growth front either in terms of acquisitions, new store openings, new products? Or is it just going to be nursing the basic business and maximizing same-store sales growth and profitability of those units?

Look, it's a good question. Overall, I'd say we're very focused on our overall branches and efficiency and productivity and making sure that they continue to grow. We think we've got a great suite of products today that we're able to put in front of customers. But I said there's no immediate plans to add to the product base. But we're always looking at things that are helpful to our customers that can be overall, additive without sort of being dilutive. We continue the good news. We continue to have more than adequate loan demand we see. And it's really a matter of sorting through and getting through that. So I'd say for the most part, expect business as there is, as she goes. We'll look at markets where we think there is loan demand we may be underpenetrated. We may open a few branches here and there. But for the most part, I think you can probably expect the branch count to be pretty flattish over time.

Do you have any thoughts on competition? I mean, your business has great access to capital, seeing great credit. Obviously, that's happening with some other parties as well. But there were companies like Avant that pulled way back from the market. You got the payday lenders getting into installment lending, though with a much higher rate. And then, of course, you have at the other end you have Lending Club offering loans that -- to supposedly good credits at your rates. So what are you seeing in the competitive horizon?

Look, those are all things we pay a lot of attention to. I think you identified a few that thought that this was an easy customer base to lend, so you give money and they'll just naturally pay it back. And I think people found out that pricing this customer and getting the right return to trying to do all that without collateral and without that in-person experience is not the easiest thing. So overall, we continue to see ourselves in a pretty good place. But we're always sensitive to what's out there. I'd say more than necessarily just the online players you mentioned, there is all kinds of local credit unions, things in the local communities. And we just want to make sure we're front-of-mind and we provide the best experience and maintain those relationships as long as we can and certainly great to start with the basis we do with almost 2.5 million customers and 8 million to 10 million former customers where we're front-of-mind when they need something.

Our next question comes from the line of David Scharf of JMP.

Most of my questions have been answered, but just a couple of follow-ups, Jay. I believe you mentioned part of your tax savings investment or reinvestment was going to be focused on the recovery side on building up more in-house collections. Can you remind us -- I mean, at this point, how much of your post charge-off recoveries are actually either outsourced or sold? Whether this is a material development we should be thinking about or more just around the edges?

It's just around the edges. We've talked before that as we transition kind of the OneMain portfolio there was a higher proportion of other activities, now as we've gotten through integration, we see the opportunity to reduce that even further. We'll continue to leverage third parties, but we think there's a good investment to bring more of that in-house based on our collection effectiveness and our servicing model. But it's on the edges. It's not a material item.

Okay. That's helpful. And then just lastly, maybe as a follow-up to the last question on competition. I think it was about, maybe a year ago or so, Jay, you had, in response to questions about competition, highlighted specifically around the edges some more competition from subprime credit card. Is that something that you're still feeling? Or is that backing off as we think about other sources of capital?

I'd say, one, we don't think of it of as competition. To the extent there are subprime cards most of them are sort of sub-$500 for the few of the brand name ones that are out there. And it's just a different product and not one that we compete with, which is our typical loan is $6,000 to $7,000 and used much more to refinance a fair amount of debt. Those cards are much more, I would say, for general purpose to allow people the flexibility in life. So I think what I mentioned a year ago when certainly was one that was in my -- find it, in terms of providing clarity was just much more that it's on the landscape and something that was in the customers' wallet. Look, we look a lot at what's in our customers' wallet without referring to anyone else's advertising. And I'd say we've seen a very stable mix of customers use of credit cards, other installment debt, other auto debt. And it's really been very stable in the last year in terms of how much debt our customer has and number of line items, et cetera, particularly, for the customers we approve and put on the books. So my reference was much more to it was out there, then its competition. But I'd say as we look back over the last year, since I made the comment, it really has been very stable in terms of the use of debt by our customers.

Got it. So the main take away is overall, household leverage is pretty stable in terms of what you're seeing in new underwriting, in new applications?

For our customer base, yes.

For the loans that we're booking. For the loans we're booking

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

Most of my questions also has been asked and answered. But I guess, maybe to just -- to talk about some of the investments that you're making, and how they will factor into loan growth. What things could kind of get you to between that range of 5% to 10%? What would get you kind of towards the lower end? And what will get you towards the higher end? And for what time frame will those investments kind of benefit loan growth?

Look, when we think about the -- I'll sort of separate in 2 questions. One, high level growth. First thing we're most focused on is maintaining our risk-adjusted returns and maintaining the credit box we've had out there. So we are not at any point going to chase growth for the sake of chasing growth. And I want to be really clear on that. So to the extent the market allows us to grow, at the upper end, and we can maintain our credit box and credit standards and as Scott talked about, moving the book closer to a 50% mix of secured, which is where we ultimately like to be, we will see the higher end. To the extent we don't see the loans we want to book, it may wind up at the lower end. But as we sit here today, the good news, the customer is in reasonably good shape. As we all know the vast majority of our customers are paycheck to paycheck. But when we you look at their overall debt loads, their income capacity and their ability to support it, the good news is it's pretty darn solid. As I'd say when we think about the investments we're making, I'd say they're all things on the margin. I don't see any of them materially driving short-term growth. I see them all helping long-term value of what we're providing to our people and our customer base. So I don't think any of them will necessarily be meaningful in 2018. But I'd say, the most important message you'll probably hear from us, and it would be any one of us, is we'll take the growth that comes our way, but we're going to do it with the loans we want to do it with.

Got you. Makes sense. And then, Scott, could you talk -- just flesh out a little bit just the plans -- the financing plans. Obviously, the rates that you're getting on both secured and unsecured are kind of a lot better than what's rolling off. And so maybe could you talk through what we're likely to see in 2018?

Yes. Moshe, I kind of talked a little bit about that. I think we're going to continue to access both markets and assuming the markets there, we would like to kind of do a little bit more on the unsecured side, as I mentioned to kind of continue to increase -- move our durations and continue to get a nice ladder of future maturities that will help us on our liquidity as well as less encumbered balance sheet. So I don't think there's a material change in kind of what we've been doing. We just would like to make sure that we have the continued balance between both types of funding.

Do you have the approximate cost of the debt that's either maturing or that you can pay off in '18, the unsecured?

Well, the unsecured, we have no maturities in 2018. I mentioned that we -- the $700 million we paid off in January was the 2019 maturity and the coupon on that was 6.75%. So as we keep going that took our 2019 maturity stack down to $700 million. So as we kind of get there now you're kind of looking into really kind of 2020, 2021s where we have a mix of different coupons on that debt. So as Jay mentioned, we're in a position right now which the -- given current markets our funding costs of new originations versus that expiring has been beneficial to us. I'm not going to make a forecast whether to continue that point. But the overall strategy is to continue to balance the funding going forward.

Our next question comes from the line of John Rowan of Janney.

Two quick questions. Have you guys had to change anything on the auto side for -- I believe, there was a recent adjustment to the Military Lending Act and whether or not, whatchmacallit, ancillary products are counted against usury under the MLA. Just have you had to make any changes because of that?

Look, we pay a lot of attention to the MLA. We understand sort of the implications of what can and can't be offered, and we sort of probably made those modifications about a year ago.

Okay. No. But I believe, there was a recent change regarding gap contracts to service members and their family very recently, just a matter of fact. The second question. Just can you guys go over the -- just the guidance that you gave. Scott, you just said that there was going to some reserve releases, was that first quarter or first half? And then reserve building later in the year. Can you just repeat what you said, I think I was down?

Yes. So as you know, if you look back over the last couple of years, first quarter is seasonally a reserve release, because it's our highest loss quarter. And then in the third quarter, which is seasonally our lowest loss, we have a reserve build.

Our final question today comes from the line of Ken Bruce of Bank of America.

My questions have been answered. So I'll leave it at that.

Thank you, ladies and gentlemen. That was our final question. This does conclude today's conference call. You can disconnect your lines at this time. And have a wonderful day.