World Acceptance Corp (WRLD) 2022 Q3 法說會逐字稿

Good morning, and welcome to the World Acceptance Corporation sponsored third quarter press release conference call. This call is being recorded. (Operator Instructions)

Before we begin, the corporation has requested that I make the following announcement. 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.

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-K for the fiscal year ended March 31, 2021, 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.

Good morning, and thank you for joining our fiscal third quarter 2022 earnings call. Before we open up to questions, there are a few areas I'd like to highlight. First of all, I'm pleased to report that we experienced record portfolio growth for the second consecutive quarter. The overall portfolio grew $211 million or 15.1% during the quarter and $340 million or 27% year-over-year. This is the largest single growth quarter on record, surpassing last quarter's $170 million in growth and our prior largest third quarter growth, which was $157 million in fiscal year 2021.

Further, we experienced this broad expansion of the portfolio across all customer types and continue to see tremendous increases in new and returning customer loan volume when compared to last year and even prepandemic levels. Delinquency remains low on a relative basis and within our expectations. It's important to note that with the change to CECL provisioning last year, we expect to grow our provision in real time as our portfolio grows and reduce our provision in real time with seasonal runoff during tax season. During periods of this rapid growth, this temporarily depresses net income as compared to our historical delinquency-based provisioning model.

The loan growth and earlier provisioning of CECL should positively impact revenue and income in future quarters. We expect the origination cohort performance to remain relatively consistent in the near term based on several factors, including overall economic environment, changes to our credit underwriting over the last year and increases of -- and increase of larger loans to retain the most attractive option for our best customers.

We continue to expect to hit our long-term incentive EPS targets before the end of fiscal year 2025. As a result of these changes, today, over 43% of our portfolio is below 36% APR and 66% of our portfolio is below 50% APR, demonstrating our ability to offer attractive loan terms to increase retention of our best customers.

Finally, as we close out this calendar year 2021, we have much to be thankful for at World. First, our branch team and those who support them have done a tremendous job of navigating the last 2 years during the COVID pandemic, putting our customers and their needs and their safety first. We continue to win Top Workplace awards across the country, including most recently, Oklahoma, South Carolina, Tennessee and New Mexico this year, in addition to being South Carolina's only Top Workplace USA winner in 2021, truly reflecting the incredible work family that our team has created, and I couldn't be prouder of them.

At this time, Johnny Calmes, our Chief Financial and Strategy Officer, we would like to open it up to questions about our third quarter fiscal 2022 earnings.

(Operator Instructions) And the first question will be from John Rowan from Janney.

Chad, I just want to juxtapose 2 comments that you just made. So you talked a lot about the upfront provisioning for growth and how origination volume is going to be as strong as it was recently or going forward, we're going to have similar origination trends. But then you also talked about there being a benefit somewhere down the line to net income, presumably when all of this provisioning from growth abates a little bit, right?

I'm just trying to figure out. Are those 2 comments about that benefit in the net income from what I presume is growth abating, it doesn't seem like those 2 are lined up correctly in time if we're going forward, right? So I'm just trying to get a sense of when we see this provisioning from growth start to ease up and that benefit that you alluded to come back into the P&L.

Yes, it's a great question. So I think there's a number of things at play here. First and foremost, we snapped back in terms of demand over this fiscal year pretty rapidly compared to last year. In calendar year 2020 during the pandemic, demand was greatly depressed for 12 to 14 months. And then during the spring of 2021, we really began to see demand come back pretty rapidly once the last round of stimulus abated.

Coming into fall and into winter, we've seen tremendous growth as well. So I think one thing to think about going forward is we experienced rapid growth in the portfolio due to snapping back from the depressed demand from the year prior. So that's one thing to think about.

And the other is we typically have a fair amount of runoff in the portfolio during our fiscal fourth quarter, which is the quarter that we're currently in now during tax season. So if you put those 2 things together, we experienced kind of an unprecedented ramp-up in the portfolio during the last 2 quarters, especially this past quarter. So along with that, we've also had to increase the provision accordingly. And then we're getting ready to enter into our fourth quarter, which is typically when we have that runoff.

One thing to think about going forward is we don't -- we're not forecasting what we think our demand would be and what our portfolio growth would be. But to the question about, when does this provision build kind of pay off in terms of reconciling those 2 statements, it's really a matter of when growth continues to be substantial but doesn't necessarily continue to accelerate at the same rate.

And what we've seen in the last 2 quarters, especially a pretty substantial acceleration in growth that's unprecedented, and we've -- as I just mentioned, we set the second quarter in a row of historical growth for the company. When that begins to slow, then we'll begin to pull back on that provision.

So is it fair to say that maybe once you start anniversary-ing the last 2 quarters of substantial growth that kind of the optics of keeping that historic growth record on track is obviously just mechanically a lot more difficult. Would that be kind of the targeted range of when we see this heavy provisioning start to ease up?

Yes, certainly, whenever that growth begins to decelerate, right, and still be substantially decelerate, we'll begin to see that. So there's the annualized view of that, so we begin to lap the last 2 quarters. But again, there is that fourth quarter where typically we have substantial runoff in the portfolio, and that's also, I think, where you would begin to see it pretty rapidly.

Okay. And then turning to credit. Obviously, charge-offs were up. We can all look back at the pre-COVID numbers and see that the charge-off's really not asymmetric relative to pre-COVID, but there was a different portfolio composition between large and small loans prior to COVID. Is this where you expect to be on charge-offs with this portfolio composition?

And then just, I guess, a real simple question. On a comparably mature pool, are charge-offs higher or lower on large loans versus small loans? Charge-off rate, not dollars.

Yes. So let me answer that first -- the last question first. So from the way that we provision from a CECL perspective, we look at each individual loan, how it's made compared to a cohort of that same credit quality/tenure of customer in the past. And yes, typically, you're going to see your larger loans have a lower charge-off rate and provisioning rate than your smaller loans. More importantly, you're going to see your higher credit quality customers have the same thing with a lower provisioning and expected charge-off rate than your smaller loan customers and lower credit quality customers. And those 2 things are typically very highly correlated, right?

And in terms of what this -- the portfolio looks like today, we have experienced record growth, again, the whole portfolio. But in terms of new customers, new customers are up substantially year-over-year. Even within the quarter, we grew roughly 1/3 in terms of new customer balance. And again, each of those is provisioned accordingly. So what does this look like going forward? And what does the mix look like and also the corresponding provision? A lot of it depends on what the opportunity is and demand is in the market, right?

So to the extent that we continue to see good opportunity with new customers, we'll continue to extend credit to them. To the extent that we can continue to retain our best customers with more attractive rates and products, then we'll continue to do that as well. So it's tough to say what this looks like in the future in terms of product mix. It's more opportunistic than anything else.

Okay. And just last question. Why was the tax rate so low in the quarter and what is the correct tax rate going forward?

Yes. I can answer that, John. So the -- we saw a lot of windfall tax benefits during the quarter as we had some restricted share vestings and stock option exercises. That exercise -- that share price is much higher than what the running fair value was. So that was driving that, a lot of that.

We still -- under normal circumstances, we'd still think that 21% to 22%. But the reality is, if we -- if the share price stays elevated because we had 1 large grant 3 years ago, you'd still expect to see those -- some of those windfall tax benefits in the future as well, right? So they're just not -- it's not very predictable on what that's going to be.

(Operator Instructions) The next question will be from Vincent Caintic from Stephens.

In the comments, you reiterated your expectation to meet the fiscal 2025 EPS performance target. And I was wondering if you could help us maybe just understand your -- the medium-term view of how you get there in terms of the loan growth and then I guess you have the credit and so forth. If you could just help us walk through to that.

Sure. I'll start, and Johnny, if you want to chime in, please do as well.

Sure. Yes.

Yes. So in terms of overall portfolio growth, we certainly expect to continue to grow. Whether or not we continue to grow at this rate is still to be determined. As I mentioned before for John Rowan, a lot of it's opportunistic in terms of how we grow the portfolio and customer base and then also on the customer retention side.

We've done a number of things in the past couple of years to dramatically reduce our servicing costs and enable us to continue to grow and move more towards a fixed cost model in terms of servicing versus a marginal cost model, meaning that a lot of our branches, the way that they are structured today can grow substantially in terms of the customer base and certainly in terms of the portfolio without having to add a significant amount of cost there.

We've also introduced a number of things in terms of customer service and the channels that our customers can access their accounts and increase the self-service options, so that helps us towards that goal. So in the future, the kind of math that we're seeing here at a high level is to reduce cost -- reduce our servicing costs while continuing to grow the portfolio.

And then from a credit perspective, we've done a number of things last year to proactively monitor and seek the highest credit quality customers we can, especially on the new customer side. Continuing to do that so that we keep close tabs on what our expected losses are and our corresponding provision. And so that over time, especially with the amount of repurchases we've made on the stock repurchase plan over the last 2 or 3 years, we firmly believe that we can hit those targets by the end of 2025. John, that covers it, right?

Yes.

Okay, great. And I guess a follow-up to John Rowan's question just -- and I understand there's seasonality with the credit provisions in the next quarter. You usually get lower -- the lowest credit provisions out of the year. But I guess when you look at delinquencies and charge-offs climbing, just -- I guess it's hard, but kind of wondering if we should continue to expect that, especially -- it sounds that -- it seems like you have -- you're growing quickly.

And I guess maybe thinking medium term, you have a lot of new customers, but it's kind of the medium-term view that eventually those new customers become existing customers. And so you go from that indexed charge-off rate of, I think it's 1.5x to your returning customer rate of 80% of the index. So I guess, medium term are expecting your NCL rate to drop significantly once you're matured with the business?

Yes, I think long term, that's true, right? But in the short, medium term, there still needs to be this normalization, right? So we said in the earnings release that, that 0 to 5-month customer, right, has grown substantially since last year, right? It grew from 8.6% of the portfolio to 13.8%, right? So you see that having -- already having an impact on delinquency. And charge-offs will follow that, right, and normalize over the short term.

But yes, but as those customers are mature and we continue to grow that back book of longer-tenured customers, long term, I would expect that the charge-off rate in delinquencies to ease back down, probably lower than historical levels.

Okay, great. And last one for me, and I'll get in the queue. Just I noticed that the -- so in the script, you mentioned the funding costs climbed 200 basis points. I was wondering if you could talk about kind of the funding in more detail, what drove that higher? And what levels we should expect going forward?

Yes, sure. So if you recall, we issued some bonds in the second quarter, right at the very end of the second quarter on September 27, I believe it was. So we effectively swapped 4.5% variable rate debt for 7% fixed rate debt right at the end of the quarter. So that's the combination of that driving the rate up as well as just the growth and buybacks during the quarter driving the outstandings up is what drove the interest expense up.

With the -- we haven't seen an increase in the rate on the LIBOR rate debt yet. So we're still at the floor on that is priced to 1-month LIBOR, right, which is significantly below the 1% floor. So there'll need to be several interest rate hikes before we start to see the impact on that portion of the debt.

(Operator Instructions) And we have a follow-up again from Vincent Caintic from Stephens.

Okay, yes. So just last one for me. So your share repurchase activity has been pretty strong. Your debt-to-equity leverage is already at 1.8x. So I'm wondering if you could talk about what you're thinking in terms of your ability to continue the elevated levels of share repurchases and what your target is.

Yes, sure. So historically, we've always said we have a target of 2:1 debt to equity. And that our leverage ratio is always the highest at that December quarter just because of funding all the growth that happens in Q3. So we'd expect to see some natural deleveraging in the fiscal fourth quarter as the portfolio runs off.

But yes, we have -- as we said in the earnings release, we have $84 million available under the debt agreements to repurchase shares. And that will only continue to build as we continue to add net income over the future periods. So yes, I think we'll continue to repurchase shares in line with that.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chad Prashad for any closing remarks.

Thank you. Thank you, guys, for joining us today, and this concludes our third quarter earnings call. We look forward to chatting next quarter. Thank you.

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