World Acceptance Corp (WRLD) 2017 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 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 release, and in the Risk Factors section of the corporation's most recent Form 10-K for the 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.

At this time, it is my pleasure to turn the floor over to your host, Janet Lewis Matricciani. Please go ahead, ma'am.

Thank you. Good morning, and welcome to all of our participants on the phone today for third-quarter FY17 earnings call. I will assume everyone has now received both the press release and the earnings call script and had time to read that information. So we will move straight into questions, and we'll be happy to open the floor to whatever folks would like to ask about this morning.

(Operator Instructions)

John Hecht, Jefferies.

Good morning, guys, thanks very much. You spend a bit of time in the call script that you filed discussing new customers, and your success in bringing on -- on-boarding new customers. I'm wondering, can you give us some characteristics about the new customers, maybe FICO, or some of the credit scoring of the new customers versus the customers that maybe you have lost? Then can you also talk about maybe attrition rates, because you're bringing on new customers but your customer level is shrinking, so what type of customers are you either choosing not to serve or are migrating away from you?

Sure, okay, there were several questions embedded in that, so let's see if we can get to all of them. In terms of the new customers we're bringing on, and also the former borrowers we're bringing back, the average credit scores are purposefully higher than they have been in the past, between 2 points and 12 points, depending on which segment you look, which is significant in terms of a higher credit quality of customer. So in every segment, a new customer, a former customer, we have a higher credit quality, as in the Beacon score, that we look at, which is one indicator.

In terms of attrition rates, what we have seen is that we are retaining customers as well as we have in the past, it's not that customers are choosing any higher rate to pay off and leave us, which is very important to understand where your customers are going. It's really [attrition] through charge-offs, which I talk about in the script, which is a key area of focus for us. We have several strategies in place to work on that area and reduce the charge-offs, so that component of retention is higher.

Finally, you asked about who we are choosing to serve, and we are choosing, and seeing the results, to serve fewer customers at the lowest credit scores or credit quality scores, if you like, and where we are making loans at lower credit scores we are making smaller loans, and choosing to make smaller loans because we know as these customers prove out their credit-worthiness we can happily, when they so desire it, grow them into a higher loan amount. So that is a cautious lending strategy, if you like. But we feel very pleased with the number of new and former borrowers that we brought back, because of course retaining those customers and growing them will lead us to future ledger and revenue growth.

I appreciate all that.

Does that answer your question?

That gives me some good color, I appreciate that. A second question, more technical, how should we think about reserve policy? How many quarters forward for expected charge-offs do you reserve for, or do you look at it against the delinquency pipeline, in terms of modeling?

We look at it in both ways, right, so the way we come up with our allowance is we look at how delinquencies have been migrating over the last 12 months. And then also we'll have some (inaudible) adjustments to that, based on do we think the last 12 months represents what's going to happen in the next eight months, right? Generally, we keep around seven to eight months' worth of net charge-offs in the allowance.

Okay. Appreciate that refreshing reminder. Then the final thing is, obviously your live check program is underway and it looks like it's bringing in a good pipeline of new customers. Maybe can you give us an update on some of the electronic or online focuses, and where we are on that front?

Oh sure, if you mean in terms of online web applications?

Correct.

Sure. In this area, I feel we have really gone from strength to strength, with a record December and solid conversion rate, and our teams are getting better at being responsive to these web apps as they come in. But the results in each month, and the results overall in the quarter, are significantly higher than we've ever experienced in the past.

Some of that is our improvement in digital strategy, as we get smarter in how to use, if you like, the digital place, and some of that -- because just by virtue of having more customers coming, you end up in that positive cycle of the internet where you feature higher in searches, and that brings in more customers, and then you again continue to feature more highly. So we've really had an excellent time so far with our online strategy, but yet, there is a long way to go. We are a relatively newcomer in the online space.

I appreciate that. Thanks, guys.

Vincent Caintic, Stephens.

Thanks very much, and good morning, guys. My first question is around the bank credit line discussions and the renewal, I believe it is set for March 2017. I'm wondering how your conversations are going, and if there is any maybe positive discussions, in terms of relief of some of those restrictions, such as with share buybacks?

Sure, so actually our refinance and renewal happened in June 2017, so we haven't started our official talks with the band group yet. Obviously, we've had some formal conversations with them. It's too early to indicate where that might go from here.

Okay. Got it. I will follow up next quarter, then. In terms of the customers, so I thought that was very useful when you broke out the number of new customers you're getting, and a bit of the mix. One of the things that you have had over in the 10-Qs is the mix of the different loan originations you have had, whether it's new customers or the return of former customers, and refinance of customers, and I think the refinancing has been about 70% to 75% of your overall portfolio, even as the portfolio has been shrinking a bit. I'm wondering in terms of the mix of customers that you're originating, if you have a preference for one or the other, and if you're getting these new customers, if you might see more of the maybe new customers or the return of former customers taking over the mix, rather than having a large supply of refinanced customers?

Let's talk about that. In refinancing, obviously you have a smaller base, and we know that we have been based in terms number of customers, as I talk about, has been shrinking, if you have a smaller base, you can naturally expect fewer refis overall. But actually as a percent of our base, in terms of percent of the accounts that we have, our refis are not reducing, and in large loans we see a larger number of refis.

So your mix can change, simply because we are now better at bringing in new and former borrowers, so when we grow our new and former borrowers, even if refis stay at the same percentage of our overall customer base, you're going to naturally -- they're going to be a lower percentage of the originations that you are doing. But you're right, as we bring in new and former borrowers at improved credit quality scores, and in a cautious lending environment for those lower credit quality scores, you can expect the overall portfolio mix to improve in terms of credit quality.

Okay, definitely. Yes, I think so. I this if -- I would have expected the refis maybe as an overall percentage to decline a little bit if you're -- maybe taking a step back and wondering, if you care if you make a decision about whether you want that mix to increase or decrease, or stay the same, simply because if you have maybe a customer who completes their loan rather than refinances, do we think about that customer as having a better credit quality, or is a refinancing -- the customer has a better quality so you are actually wanting to extend the loan further?

We look at multiple statistics. Of course, any customer who pays off their loan, whether at the end of the term or early -- and as we've talked about, we're not seeing an increase in that' becomes a former borrower, and that will go into the former borrower pool, with a goal to bring them back in. But it is certainly our philosophy in refis not to miss the opportunity that when a customer has money available, and conforms with our underwriting policies, that we let the customer know, and if their credit merits it, and they choose to move to a higher loan amount, we can do that for them.

So I wouldn't say it's a focus more on one than another, it's a philosophy of providing each customer group what they want. There is no restraint here in terms of needing to pick one customer group or another. We would like to be successful in every area, and that is our plan, and as I've talked about, we are seeing some of those results already.

Got it. Actually, that is very helpful. Just the last one I had on the charge-off and delinquency trends, so we saw the charge-offs higher quarter-over-quarter, and then maybe delinquencies might have ticked up a little bit, but should we expect the same trends as we are seeing delinquencies maybe ticking up a bit, or conversely how quickly -- well, how should we think about maybe the credit -- charge-offs moving over time, as you have delinquencies maybe ticking up or ticking down?

So far as the trends, this quarter last year was the last one [pre-us] (inaudible) goals, so as far as continuing to see increases going forward, I would expect that to stop or level off, and hopefully even decrease, so this is the last quarter of a bad comp [per se].

And also I would say that what is encouraging for us is that if your credit scores are up, and you're making smaller loan amounts and fewer loans to customers in lower credit score bands, now you would believe that in a normal environment your future charge-offs would be lower. But as Johnny said also, front-end delinquencies are improving, which can also be considered a traditional indicator of future charge-offs. So there are several indicators that we believed were going in the right direction there, and actually from preliminary data, it appears that January will already be better than last year on a provision basis.

Okay, that is very helpful. Thanks very much, guys.

(Operator Instructions)

John Rowan, Janney.

Just kind of high level here, revenue was off 6%, provision was up 13%, but we talk about -- I know you talked about in the press release in the comments about how the increase in charge-offs is offset by personnel expense, and earnings are down 35%. It's not from funding costs or higher share count. Where does the negative leverage come from? I mean you're talking a lot about growth in your immediate delivery. Is the negative leverage in the stores? Do you look to rationalize costs further? It doesn't seem like you're planning on closing any more stores in the near future. So I just want to kind of understand where it's coming from?

Sure. So we certainly have some opportunities to continue to decrease our expenses in the field, but also one of the key things is to grow revenue, right? So there is a point where you can't continue to decrease the headcount in the field and be open the hours you want to be open. So to some extent, we still have some room there, but obviously the most important thing is to grow our revenues with our existing branch count.

And I'd just add to what Johnny said, and say if you started a lower ledger and fewer customers than there are at peak, naturally that has an effect on revenue, also adding more smaller accounts. We haven't changed our interest rates, and the foreign exchange -- change in the foreign exchange rate in Mexican pesos and dollars actually contributed $1.9 million to that decrease in revenue. As Johnny said, there are variable costs and fixed costs that don't go away when your revenues are down slightly. But bringing in these new accounts, and therefore which we expect will lead to a growth in revenue, will take care of some of that.

Okay, and then just to go back to the conversation on the revolver, obviously we're all going to kind of wait for the middle of this year to see what new terms we would get on any revolver, but is there any kind of contingency plans in place in case the negotiations don't go well to add some other type of permanent capital, because just given your free cash flow, you probably don't generate enough cash flow to pay off the revolver when it matures next year? So I just want to understand your process in making sure you have liquidity through the next few years?

So our cash flow is very strong, right, and I wouldn't believe that the bank group would rather pull the line from us, versus continuing to pay it down and pay them off, right? So the existing line lasts until June of 2018. While it may not be paid off or couldn't be paid off by June of 2018, it could certainly be paid off by the following year, right? So just rationally, I wouldn't expect the bank group to make that decision.

Generally, with our cash flows and existing facility as it -- it essentially drops to [$370 million] on March 31. With the cash flow that we have in the fourth quarter, that should be more than enough capital for us to continue to operate and grow as much as we need. We predict that we can.

Fair enough, and obviously if you extend out a couple of years, your cash flow will take care of the facility. But it could even come down to another massive origination fee, like they charged you a year and-a-half ago. So I just want to understand kind of your planning if they come to you with another bigger origination fee on the facility, do you look to raise some capital to maybe just get rid of the facility altogether?

In the future as things calm down and become more clear, it is possible, and maybe even likely, that we will go to the market and try and raise additional funding or a different source of funding, right, and not rely so much on the revolver. A lot of that depends on the market, right? So we'll assess what that would cost us, and decide what's -- how to move forward with that.

Okay, fair enough. Thank you for answering my questions.

You're welcome.

(Operator Instructions)

Clifford Sosin, CAS Investment Partners.

Hi, guys. I was wondering if you can provide some sort of update on early returns in the tax business? Thanks.

It's very early to ask this question, because of course we're just in mid-January, and the tax season has literally just begun, but early indicators are very positive. We've put in place a lot of strategies to help us with tax, such as earlier marketing and better information sharing with customers about this service early. And I really can just say that at this moment we're tracking it on a daily basis, and we're very pleased with our early indicators, but it is very early days.

It can be very tricky to compare in the early days, because the tax season has started earlier this year versus last year, and over time that will smooth out. But it's difficult to try and assess where we are this early in the tax season.

Thanks.

At this time, there are no further questions.

(Operator Instructions)

There appear to be no further questions at this time.

All right. Well, thank you very much to all participants for being on our earnings call today, and have a great day.

Ladies and gentlemen, thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference. You may now disconnect.