World Acceptance Corp (WRLD) 2017 Q2 法說會逐字稿

Good morning and welcome to the World Acceptance Corporation sponsored second quarter press release conference Call. This call is being recorded. At this time, all participants have been placed on a listen-only mode.

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 risk and uncertainties. Statements other than those of historical fact, as well as those identified by 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 fiscal year ended March 31, 2016 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.

And at this time, it is my pleasure to turn the floor over to your host, Janet Lewis Matricciani, CEO. Please go ahead.

Thank you and welcome to everyone to our earnings call for quarter two of fiscal year 2017. I'll assume that everyone on the line has had a chance to read our prepared remarks, as well as the script. We are trying to make the process simple and less time consuming for you all. So I won't read it word for word this time, nor repeat information within it. Instead I'm happy to answer any questions you may have regarding any of the information that was sent out to you. And so, we will take questions at this time.

(Operator Instructions) Vincent Caintic, Stephens.

Just a couple of questions. First on the delinquencies and the charge-offs. So, just kind of wanted to get your thoughts on when you expect the charge-offs to normalize and improve, and also if you can provide some additional color on what's driving the delinquencies higher, and if you could maybe give some color on if that's going to normalize down as well?

We don't know for sure when they will come back down to normal levels. But we have seen in the trends that the increase in the annualized net charge-offs and the increase in delinquencies has decreased, right? So we feel like we're certainly passing the impact, but we don't know for sure when they will normalize.

We also put in place -- I'd add to that -- three things I would say that would help us reduce delinquencies and charge-offs. One is, we now have pay by phone in all of our branches, which is now an easy way for any customer to pay at any branch via a phone call, using their debit card or any card, as MasterCard and Visa card, that's not a credit card. And we also have our collection center now in home office that right now is focused on the South Eastern Division and looking at the customers most likely to be able to pay in this manner through the collection center. But we do plan to expand that, expect to. And thirdly, we generally have a higher quality customer at the moment. We've noticed that our Beacon Scores are going up on average, now we have more higher quality customers coming in. And we believe all these three things will have a positive effect on delinquencies and charge-offs.

And on some of that -- on the data you provided, so you have some new product initiatives, your portfolio, the customer credit is getting better, smaller dollar loans, you sell some live checks. If you could give us a sense of what are your expected yields, margins, and charge-offs on that, so maybe have the model, how your portfolio looks like today versus some of these new products, how your portfolio [model] look like a couple of quarters from now?

Yes, we don't usually go through the metrics on our different strategic and marketing initiatives. But in live checks, we continue to see, for example, higher response rates compared to pre-approvals, which one would expect, and some of it depends on the other activities at the time. For example, in South Carolina, we mailed on a tax-free weekend, a back-to-school weekend and got a very high response rate. We also, for example, in Texas, for live checks have mailed in a higher quality customer. So there are actions that we're taking, including reducing our lending at lower Beacon Scores that are generally moving us into a higher quality customer. We have no intention of moving away from the small dollar loans. We want to do small dollar loans and continue across our portfolio. But generally the FICO Scores have been going up.

And also, generally our small loans have a higher yield than larger ones. So as you move up the loan size, the yield typically does come down, but the credit quality increases. So, as we've added more new customers in smaller loans, you could expect the yields on those loans to be higher.

Any sense of that growth in live checks and what the size is for that?

So as of September 30, we had $8.5 million in live checks outstanding.

The last one, just from me, so you laid out a lot of operational initiatives and I appreciate that's the new collections effort, the pay by phone and you have new marketing. Any sense for how that's going to affect the economics near term and then longer term, how that's going to look like, so in terms of expenses, collections, revenues and so forth? And that's the last from me, thanks.

Look, we'll have a better idea at the end of growth season. Obviously a lot of things are rolling out now in terms of our new initiatives. In terms of expenses and headcount, for example, we do expect that we're able to continue to reduce headcount for the hours at work, of course, we'll need overtime as appropriate as we go into tax season and other areas. But because we are no longer doing field calls that gives you some efficiencies in your offices. It's not why we stopped field calls, but it does give you efficiencies on mileage expenses, on overtime and so on.

John Hecht, Jefferies.

One more question on credit. We've seen an increase in delinquencies and charge-offs when you stopped doing field calls. I think that was part of your expectations. I mean, do you think we should see things similarly stabilize once we annualize that change in operating procedures?

Sure. So we're already seeing that. So when we look at the increase in [many of the] charge-off quarter-over-quarter, it has been coming down and the delinquency has stabilized, as far as the increase in those delinquencies. To answer the point, the positive thing is that while field calls may be an effective collection tool, they weren't very efficient. So, while we have seen an increase in net charge-offs and in provisions, to a large extent that's been offset by decreases in headcount. And obviously we're focusing on reducing those charge-offs going forward. So we can have the benefit of both.

You guys also referred to you guys had incrementally more new and recurring customers, but was smaller average loan sizes. I know you gave some color on that. And then you also mentioned higher Beacon Scores, or higher credit scores. I'm wondering what's going on in the front-end in terms of either underwriting or advance rates or so forth, needed to drive that change, or number two, what are you seeing in terms of customer behavior that's driving that change?

I am not sure it's the customer behavior that's different, but what we're definitely seeing is we're originating more loans -- higher Beacon Scores, because we're being conservative and careful in our lending policy. So we're saying that we have more new borrowers and former borrowers coming than we have had before in the same quarter, and of course that's a very positive trend, because the new borrowers and former borrowers become your customers over the long-term going forward, part of your customer group. And also what we've seen is that for the new borrowers and former borrowers, we've been cautious in our lending, so we may lend smaller balances, but overall we're getting growth. We've also put a suggested floor in place for our lending in our branches. We always allow folks to make this objective decision in a branch, because we believe that having that relationship with a customer and that branch knowledge is a strength over a pure model. We put in suggested floors to reduce lending at lower Beacon Scores and therefore, lower charge-offs. Same on our marketing, we are tightening our marketing to be more focused on a higher Beacon Score, if you like, customer. Of course, complexity of a marketing model has a whole series of additional factors. And we see that both for former borrowers and new borrowers and even so we find customers, the Beacon Scores, which is a rough indication of what you can expect in charge-offs or credit risk, have all gone up this quarter compared to the same quarter of a year ago.

So if I take that maybe smaller advance rates, higher credit scores, I mean it's indication that you guys in some ways are tightening, at least you're tightening maybe the kind of the framework for which type of customers you're trying to focus on going forward. If that's accurate, then are you tightening because of stress you're seeing in your portfolio, or tightening because of just general credit risk in a secular basis or just trying to plan for the future, maybe with respect to regulatory changes and so forth?

No, really, we are tightening, alright, because we're doing lesser for riskier customers in lower segments, but we're doing it as a business decision, based on the future growth and profitability, and removing, if you like, the areas where we feel we can't successfully be profitable in the ways that we want to, and increasing in the areas where we believe there is a strong profitable opportunity. So we are very happy with the results we're getting, which is in line with our strategy, the business strategy.

And last question, you mentioned loansbyworld.com. You're seeing good growth in originations in that channel. Just on that, is it a 100% electronic origination, or are those loans generally closed within a branch?

Let me explain clearly. First of all, we have our new website, yes, loansbyworld.com and the other URLs that we own will now feed through that, and we are very excited about this new website. I encourage everyone to have a look, it is up and running.

And then, what was the second question?

100% of the loans are closed in the branches still. So, the customer can start their quotations online and they will receive a phone call from our branch manager, or branch personnel, but ultimately they fill up and close the loan in the branch.

Yes. We value the customer relationship, and are not trying to be a pure online lender in that kind of manner. We like to close the loans in the branches for these customers that we originate online.

Bill Armstrong, CL King & Associates.

A couple of questions. You shifted some marketing spend out of Q1 and into Q2. I was wondering if you could remind us of what type of marketing that was and do you think that that shift was effective?

So, we look at our response rates at different times of the year, month-by-month and time-by-time to maximize our marketing budget, which we're not reducing. We're just spending more wisely. Our marketing is a mix of invitation to apply, pre-approval to live checks in printed form, and then originations on the Web, as we just talked about. And so, we maximize that mix based on the time of year, the response rate for that, and really it's better data analytics that's allowing us to bring in more new and former borrowers than we have on the same quarter of a year ago. We have much more sophisticated modeling to help us understand whom to mail, when to mail, what product to mail and I should also add, we have much stronger creative material.

Now your originations, though, still were down 7% year-over-year. Do you see this marketing and these other initiatives that you've been describing, starting to maybe get that turned around and maybe starting to add some point, where we -- should we start to see some increases again in origination volume?

The large thing driving the decrease in origination volumes is refinancings. So when you look at new and former customers, which we're attracting through the marketing channels that has increased 4.5% this quarter over last quarter.

And we have put in place various initiatives to have better marketing for our customers to have balance available to refinance. So, we have put in some different strategies that we believe will be strongly in our customers interest.

And second question -- it's actually two questions regarding the CFPB. One, any update on the NORA letter process? And then the second one, the regulations that the CFPB is expected to hand down are widely expected to substantially reduce payday lending volume, industry-wide. In looking at your installment loan product, do you see opportunities, as these restrictions on payday lending come into play? Do you see opportunities to capture some of that demand, which obviously will still exist, sort of, to displace the payday loans going forward?

Okay. I've written down your two questions, as we've established I can't remember two at the same time otherwise. So, the first question, on the way CFPB, do we have an update? And the answer, and the only answer I can continue to give is, we don't expect to have anything substantial to say until the end of the process, and we don't know the timings of that. And we're not going to be speculating, we're not in the business of speculating. So we don't feel it's appropriate to say any more than that. I understand your need to ask. We always address this in the prepared remarks and we simply have nothing to say regarding the CFPB and the NORA letter.

Secondly, regarding the regulations on the industry that you referred to, this is not precisely your question, but let me say that as it stands today, we expect a minimal effect, a non-significant effect from the current proposed regulations from the CFPB, but obviously we cannot know what the final regulations will be and we continue to follow that. I feel your question regarding payday, which perhaps is a more general question code, as we see the payday market shrinking, do we believe there is opportunity for us? And we actually do believe that and we believe and are working on the fact that if more potential customers understood the difference between a payday product and our product, there are many attractive criterion, attractive features of our products that somebody who no longer has access to a payday loan and meet the criteria for our underwriting can be interested in, yes, in terms of a fully amortizing installment loan.

John Rowan, Janney.

Just one question for me. Can you remind us of maybe the historical schedule of when you would go back to your lenders and renegotiate your credit facility? Have there been any additional discussions with your lenders to loosen up the restrictive facility that's in place now and just what any type of contingencies might be in place -- not contingencies, but what has to happen for there to be some type of looser -- I won't say looser, but more accommodating revolving credit facility?

Yes, we do that on an annual basis. We won't revisit again until sort of March, April, May of next year. Obviously, if we have some clarity from the CID, we would likely go back to it at that point and renegotiate then. But absent that, it will be normal annual process, in the spring.

When you go back and renegotiate, following the NORA letter and the CID, we saw a very big increase in the origination cost. I mean, are we still looking in at that type of ballpark, or lenders are a little bit more comfortable at this point and maybe you don't get (inaudible) that can get $5 million origination fee, maybe just give us an idea of what to expect on that front?

That was two years ago. Right? So, besides that extension, we didn't have that large origination fee. And we expect that post CID that the rate would go back to what it was previously, from a 5% floor to a 4% floor. Again, we can't speak for them, but that's what we believe we are having.

You don't think that there is any negotiating power even if there is no resolution that CID to get the restriction on share buybacks lifted?

They have agreed to let us buy back small amount of shares in the next quarter, nothing significant, just $5 million, to kind of offset the annual share-based comp grant. So there is some flexibility within the Bank group that we're seeing.

(Operator Instructions) Vincent Caintic, Stephens.

Just one more quick one on the allowance. So just when I think about the credit reserves, they've declined year-over-year, but we've seen the charge-offs increasing, but I was wondering if you had a forward-look on how you're thinking about the allowance and if that implies anything on what you're thinking about charge-offs if the allowance that you're using right now is what we should be thinking about going forward. Thanks.

The allowance as a percentage of outstanding loans have increased year-over-year. So, while I know that the provision quarter-over-quarter did decrease, that was largely due to a $5 million provision that we took in the prior year quarter, where we had a policy -- or a [consol] policy to accrue up to the rolling 12 month net charge-offs. So, while it looks like the originations came down, our allowances are still higher as a percentage of outstanding loans than it was last year.

(Operator Instructions) And there are no other questions. So I'd like to turn it back to Janet Lewis Matricciani for any additional or closing remarks.

We appreciate everyone's questions today. We are glad to answer them. We're very excited about growing our Company and we believe that building on our culture of data analytics, collaboration, and quality customer service, with the technological improvements and best-in-class practices we are very busy putting in place throughout our Company, we will be able to grow and strengthen our Company, improve our results going forward. So, thank you very much for your time. We appreciate it. And have a great day.

Thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference.