World Acceptance Corp (WRLD) 2018 Q2 法說會逐字稿

Good morning, and welcome to World Acceptance Corporation's sponsored second 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 today's conference 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 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 in the Risk Factors section of the corporation's most recent Form 10-K for the fiscal year ended March 31, 2017, and subsequent reports filed or furnished to the SEC from time to time.

The Corporation does not undertake any obligation to update any forward-looking statements that it makes.

And at this time, it's my pleasure to turn the floor over to Janet Matricciani.

Please go ahead.

Good morning, and welcome to our second quarter of the fiscal year 2018 earnings call.

As well as our earnings release, we've issued a script that provides more details on our results and activity.

And I'll assume that everyone on this call has read the script.

The script is filed with the SEC as an attachment to our 8-K.

Just briefly, we're continuing to see the positive results in our U.S. business that we discussed last quarter, with growth in accounts and in its outstanding balance.

And after several years of shrinkage, we're pleased to have solid growth for the third quarter in a row, and our net charge-off levels have also improved this quarter.

As the investigation into our Mexico business continues, we will decline from making comments on this area beyond what is written in the script press release.

We're now ready to take any questions that you may have.

(Operator Instructions) And we'll go first to John Rowan at Janney.

The unique borrower growth of 4.9% in the U.S. that you quoted in the press release, is that year-over-year or sequential?

Let me double check the precise number.

Growth in unique customers during this quarter, so we say -- you mean, where we said the highest in at least 5 years during (inaudible)

I'm just reading, our unique borrowers in the U.S. increased by 36,751 or 4% during the second quarter.

I'm just trying to see if that was year-over-year or sequential growth that you're reporting?

It's just growth within the quarter year-over-year.

Okay.

That's what I wanted to check.

I want you guys maybe to expand upon a little bit the -- talk about de novo strategies.

You said that you are identifying new locations and you were able to put more locations in states in which you already operate.

Maybe frame out that argument.

How significant of an opportunity is that to grow branch locations?

What are you doing differently?

And just give us -- frame out the argument a little bit for us in case there's another leg up as far as growth goes?

Yes.

Sure, John.

And just to be clear on the other question, we always compare growth in unique customers this quarter to the same quarter a year earlier due to the seasonality of our business.

This is really what makes the most sense to look at your progress, right?

Okay.

I just want to make sure I understood.

Absolutely, I understand.

In terms of de novos, obviously, we're not going to get into the details of our strategies.

We're very pleased to see these positive results.

But in concept, what we're doing differently is using a lot more information to make our decision.

I would say previously and some years ago, decisions were made based on the supervisor and, if you like, feet on the ground, looking at locations and deciding what makes sense with the drive to grow the branch numbers.

And we don't have a desire to grow branch numbers for any form of metrics.

We simply look at the locations that make sense from the -- all the information that we gather on the area, which includes data analytics of branches in the area or in demographics and various different marketing campaigns to support that de novo growth.

So it's very much an all-inclusive and collaborative strategy between our corporate departments and the field and a variety of analytical data sources to help us make the right decisions.

Does this going hand-in-hand with your push towards moving up FICO strata a little bit?

What I would say, yes and no.

I mean, we look at the kind of customer segment that we want to go after and certainly use that to make sure there's a potential branch location in an area that would service that kind of consumer.

But I wouldn't say that, that is making a seismic difference to how we think about it.

I would really call it a deeper level of analysis, and we believe that there are -- there is great a potential to grow the branches we have, add new registered in the states we're in and consider the addition of branches in new states for our business based on this current kind of analysis to determine the opportunity.

Okay.

And then just lastly, on the delinquencies, obviously, on a consolidated basis, they're up -- I would say at this time, they're up year-over-year.

And in the press release, you said that this is what drove the allowance addition.

I was certainly surprised by the allowance -- the provisioning level just relative to the charge-offs, which obviously were down year-over-year.

Maybe just give a little bit more discussion on why you see delinquencies being higher on a year-over-year basis?

Yes.

So in the U.S., we've encouraged the branches to hold and continue to work accounts that they feel like there's still possibility collecting before they charge it off.

So they're kind of stretching how long they're holding those accounts before they charge off in the branch, which has led to that increase in the 90-day bucket in the U.S. And we've seen that, that is beneficial.

So we've collected or rehabbed more of those 90-day customers -- put 90-day plus customers in this quarter than we did last year.

So that seems to be working.

And when you look at the front end in the U.S., it's a little more, in number, 8% versus last year.

So while the 90-day bucket is up, which is driving the overall delinquencies up, we don't necessarily think that will lead to higher charge-offs in the future as long as we continue to see that rehabilitation of that 90-day bucket, because we don't see as many coming in the 90-day bucket as they have in the past.

Can you refresh my memory?

If I remember, there was a change in your collection policies a while back.

I can't remember if it was in conjunction with the change in collection policies, but there was a change in the charge-off policy, which goes back to holding delinquencies longer and continuing to work them past a certain day.

Can you remind me when that happened, if we've anniversary-ed that already?

Basically, what I'm saying is just the change in charge-off policy, if we've anniversary-ed it, if there's not a comparable basis relative to last year.

I think what you're referring to is, it wasn't a change in charge-off policy, but it was a change in incentives towards the branch managers, where their delinquency standard that we determine their bonus on, their monthly bonus on, used to include earning accounts.

So we would see where, in some cases, they would charge off a 90-day account in order to make sure they met their delinquency standard, which obviously, isn't necessarily the right answer.

So that change happened in 2015.

The more recent communication just reinforced the behavior we were trying to encourage by changing that incentive in the first place.

Okay.

So there hasn't been another policy change since then?

Yes.

(Operator Instructions) And we'll go next to John Hecht at Jefferies.

A real quick money question.

What -- your tax rate was a little elevated this quarter.

What's the proper tax rate to think about you guys on an ongoing basis?

And what specifically wasn't deductible this quarter?

It wasn't necessarily it wasn't deductible.

It was -- what happened was we're shifting expenses between the U.S. tax rate and the Mexico tax rate that drove that.

But I think the expected tax rate will be similar to what it's been historically, so around that 37% mark.

Okay.

And then moving more onto the business stats.

You guys -- it seems to be, in the last 3 quarters, you're more focused on driving new business.

You're highlighting more of the inflow of new customers.

What are you specifically doing?

I mean, obviously, there's the standard things, your local marketing and obviously, the distribution of mailers and stuff.

What are you doing -- what are you focused on for the near term?

What are you excited about in terms of the conversion of new customers, and how should we think about that?

Well, there are many things that we're excited about in marketing.

As you know, we operated the test and learn strategy, so we are always dipping our toes in the water on new ideas and new ways of improving our relationships and contact with customers.

And then we will open out in full in a large way, but we do this in a capital way to start with.

I don't think I'm going to get into all of our marketing and customer-related strategies now.

We prefer to talk about them as we have rolled them out and make them happen for a while.

But I would call it better use of more data, more learning from past experience as we build on our knowledge, better use of digital channels and other channels to reach the customer and improving our relationship with our customers in a variety of ways.

Okay.

And I guess thinking about the other side of it, how do we think about attrition and what's been going on with attrition in the, I guess, incumbent customer base?

Has there been any change there from the competitive front which makes you want to focus more on new customers?

I'm not sure what you mean from the competitive side.

But if you're asking if our customers are paying off at a higher rate than in the past so it requires us to bring in new customers, the answer to that question is no, we have not seen that trend.

Okay.

What about -- I mean, do you follow the consumers that would be recurring customers and track how many of them that may have been a traditional recurring customer?

Are -- is there any change in that pattern at all?

You mean customers who would have come to us but didn't?

Yes.

I'm just thinking about a standard attrition question.

Is there anything -- obviously, you guys are getting new customers at a more favorable rate, but I assume you also track your installed customer base, and is there any change in that pattern?

That's right.

I think the answer to your question, so we're also focusing on customer retention, right?

We want to make sure that if our customer does want a larger loan that we're offering into them or when they want it, which will help them with customer retention.

And we want to make sure that we provide them with the payment channels that they want that -- and things like better branches or a nicer branch and things like that will help the customer retention.

So we're also focusing on that.

But we haven't seen a significant increase in payoffs, right, which will be an indication of lower or higher customer attrition.

Right.

So the 2 ways you can lose customers, charge-offs, payoffs.

Charge-offs, we don't see a -- bigger positive trend.

Payoffs are not -- have not changed in any kind of negative way.

And as Johnny said, we are looking at increasing our focus on how we offer large loans to customers to prevent those payoffs, whether it's a consultation loan.

But we will not be trying to move ourselves up into a purely larger loan product, for example.

We like the product we have, but we certainly look at adding to it.

And we'll go next to Clifford Sosin at CAS Investment Partners.

Can you provide some additional detail around the increase in provision and charge-off in the Mexican business?

Which of your 2 lines of business in Mexico was this related to, and if there's any underlying detail about the cost that we might able to learn about?

So, yes.

I can't think much about the costs.

But I will say that we're just coming in the Viva business, so the union payroll deduct business versus the traditional business.

So charge-offs and delinquencies in a traditional installment loan business in Mexico are steady and improving in some aspects.

So the charge-offs -- increased charge-offs and the delinquencies came in the Viva business.

What I will say is that the net portfolio for Viva in Mexico after allowance is around $24 million, and we did stop lending in that business in August.

So the -- so just to be clear, the Viva business, you stopped -- it's in run-off now.

It was $24 million of balances -- and $24 million of balances now?

Yes.

So net-net balance after allowance.

Got it.

So was this a discrete union where there was an issue?

I don't want to get in too much more detail about the business, but that's -- I just to share that detail.

And then secondly, was there any impact on the business, either during or after the quarter from natural disasters?

There, in Mexico, there was earthquake and a bunch of storms and...

Yes, we do believe we had an impact in our branches in Louisiana or in Texas principally, yes, due to weather effects, which we can't control.

But what we do, of course, is we track how fast we can get these branches reopened.

And I think it was quite extraordinary the number of branches we got opened in a day, or 2 days and 3 days.

But of course, there was always a small negative impact when you miss a few days of lending, but we don't consider it significant.

(Operator Instructions) And we'll go next to Vincent Caintic at Stephens.

Just a couple of questions.

First, wanted to get back to provision again.

I want to break out, if you could, how much of the provision was driven by growth versus maybe what you're seeing in the existing portfolio.

I understand some of the changes you made to working the delinquencies more and so forth, but I'm guessing you probably have already reserved for those.

So I'm wondering maybe if the provision is more of the growth orientation you're having, or if there's something else to it?

Sure.

The additional provision related to growth during the quarter was $1.2 million.

And we actually saw an improvement in net charge-offs, even with related charge-offs in Mexico, so another decrease of $2.4 million in charge-offs.

And then they would increase due to the higher delinquencies of $2.8 million.

$1.3 million of that was in the U.S. and the rest was in Mexico.

So -- and we also had an additional provision for the Mexico business outside of just delinquency.

Okay, got it.

That's helpful.

And then in terms of the marketing expenses, so I saw it grow and of course, you also had some growth, so it could be a good investment.

But I'm wondering, I've heard with some of the companies that have reported already, there's kind of mixed trends on customer acquisition costs.

And I'm wondering if you're seeing anything in terms of your acquisition costs moving up or down or if it's becoming more competitive or not in terms of acquisition.

We've seen improvement in our customer acquisition costs.

And I'd add a bit more to that.

The way that we operate with marketing is, of course, we have a budget for the year, but we're not constraining marketing based on don't exceed the budget.

We are on track.

We've spent more in this quarter than previously, but I think that's smarter marketing.

And what we're doing is completely focused on long-term profitability.

So if we can bring in more customers and it makes sense to spend more on marketing now, we will do that in order to be investing in our future.

The customer acquisition cost, as Johnny said, have not gone up in our different channels in a significant manner even though we are getting higher response rates.

We believe this is -- even though I should say we're obviously going deeper in different segments and I would say the reason the acquisition costs are not going up significantly is because they're simply using more knowledge and information and getting better at sending the right product to the right customer at the right time.

Okay.

That makes sense, very helpful.

And then the last what I had on Mexico.

I know you can't talk about the investigations, so setting that aside.

But just wondering if that's having any impact to the business where I can say that that's maybe onetime in nature or the business should have been growing a bit more or more profitable ones this thing -- the investigation passes?

You know, Vincent, I think at this time, we're going to really limit our comments on Mexico to what we have written in the script and simply await the completion of the investigation or any material information before saying more on that topic though I appreciate and understand your interest.

And I have no additional questions at this time.

I'll turn the program back over to our speakers for any additional or concluding remarks.

I don't think we have anything extra to add today.

We appreciate all the questions, and wish everybody a great day.

Thank you, and once again, ladies and gentlemen, thank you for your participation.

This does conclude World Acceptance Corporation quarterly teleconference.