World Acceptance Corporation (NASDAQ:WRLD) Q3 2023 Earnings Call Transcript

World Acceptance Corporation (NASDAQ:WRLD) Q3 2023 Earnings Call Transcript January 27, 2023

Operator: Good morning, and welcome to the World Acceptance Corporation Third Quarter 2023 Earnings Conference Call. This call is being recorded. . 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 represents 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, planned, expect, believe, may, will and should or any variations 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, 2022 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’s my pleasure to turn the floor over to your host to Mr. Chad Prashad, President and Chief Executive Officer.

Chad Prashad: Good morning, and thank you for joining our fiscal 2023 third quarter earnings call. Before we open up to questions, there are a few areas that I’d like to highlight. We are pleased with the trends that are emerging from recent policy changes. As we discussed during our most recent quarterly earnings call, we began adjusting our underwriting toward the end of our last fiscal year as the economic uncertainty was increasing. This was primarily due to three drivers, inflationary pressures on our customers’ cash flow, delinquency normalization after a period of extraordinary portfolio growth and stimulus, and growing macroeconomic and recessionary concerns. The first trend, delinquency is showing positive trending.

Our early-stage delinquency continues to decline month after month, while later stage will continue to result in elevated charge-offs into next quarter. Earlier in fiscal year 2023 we quickly reduced our exposure to our highest risk customers and successfully avoided the temptation to lend into the economic uncertainty. Now we are fortunate to be in a position of credit performance improvement during the fiscal year, especially with our new customers. Second, we are now beginning to carefully renormalize credit. The third quarter’s book-to-look ratio increased slightly to around 25%. This is up from a low of around 20% during the second quarter. This compares to approximately 35% during the third quarter of fiscal years 2021 and 2022. The book-to-look reduction has been focused on our most risky applicants and has also resulted in significant reductions in recent first-pay default rates, which is a strong indicator of future credit performance.

For example, new customer originations in the first quarter had a 16% lower first-pay default rate year-over-year when compared to the first quarter of the prior year. Second quarter new customer originations first-pay default rates were 38% lower year-over-year. While still early, our most recent third quarter first-pay default rates show a 30%-plus reduction compared to the third quarter of fiscal year 2022. To underscore how strong recent credit performance has been, the most recent two quarters have some of the lowest vintage first-pay default rates including pre-pandemic comparisons as well as the low first-pay default rates of vintages positively impacted by COVID stimulus. We’re especially proud of the accomplishment considering the reports of increasing default and delinquency rates across several credit industries during the second half of calendar 2022.

In addition to early indications of dramatic improvements in performance for these vintages, we continue to steadily improve the gross yields. New customer originations in our second quarter of 2023 had gross yields over 7% higher year-over-year when compared to the second quarter of fiscal year 2022, while the third quarter gross yields are over 25% higher, again at the same time at a 30%-plus reduction in first-pay default rates. Similar adjustments have been made for returning and refinance customers as well. These performance outcome are a result of incredibly hard work from our branch team members as well as their supporting leaders and trainers as well as corporate operations support, IT, analytics, HR and marketing teams. As mentioned, our increasing confidence in the early indications of performance, low delinquency and high gross yields allowed us to begin increasing marketing to new customers, our approval rates and our loan volume towards the end of the third quarter.

For reference, new customer originations were 31% of the originations in the third quarter of 2022 and 45% in the third quarter of fiscal years 2019 and 2020. This quarter, new customer originations increased with each subsequent month to 55% of comparable December volumes in fiscal year 2019 and 2020 and 45% of the prior year’s December. We expect to continue increasing our investments in marketing and new customer acquisition during the fourth quarter and into the next fiscal year. Finally, our world finance team is outstanding. I’m incredibly proud of our leaders at every level in the company and not just the great accomplishments that I mentioned earlier, but that they embrace opportunities with positivity, fun and grace. At this time, John Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. First question comes from John Rowan of Janney. Please go ahead.

John Rowan: Good morning, guys.

Chad Prashad: Good morning.

John Rowan: The incentive — the $7 million of incentive change that you noted in the press release, is that a reversal? And if so, which line item is that? And I assume it would be in personnel. Is that correct?

John Calmes: Yes, that is in the personnel expense. That’s correct. And there was — two things going on there. One portion is a reversal related to some officers who left the company during the quarter. And the other is a shift from the branch level of compensation from bonus to base pay.

John Rowan: Okay. So what part — I’m trying to figure out what the run rate is on that number going forward. Obviously, the reversal won’t be there next quarter. I mean how much of the $6.9 million is a reversal as opposed to a change in comp?

John Calmes: I don’t have that number in front of me right now, but I believe it’s around $3 million, but I can check that.

John Rowan: So I mean, is it safe to assume that the $40.7 million, that next quarter, it’s $45 million — back to that $45 million because it would exclude that $3-ish million reversal?

John Calmes: Yes. That’s fair, yes.

John Rowan: Okay. So I appreciate the non-GAAP numbers that you put in, but I mean your portfolio did come down. So I think just putting the — taking the allowance — or taking the provision now and putting the charge-offs in maybe overstating the impact of credit. But your allowance ratio did come down sequentially. Is that — I’m trying to figure out why that came down if it was a change in the seasonal factors that you’re using? Or what drove — I’m looking at the number, it was saying, 12.9% versus 13.5% last quarter.

John Calmes: Yes. So that is a big piece of it, right? So I mean, you can look at the seasonality factors in the earnings release, right? And you go from a factor of 1.05 to 0.94, right? So that is certainly a piece of it, which makes sense, right? I mean our — the risk in the portfolio will be the lowest at December right before the tax refund season, right? But another big factor in that was just the shift in lower tenured customers, right? So obviously, that zero to five month bucket carries a much higher expected loss rate than the longer tenured buckets do. And as of December, that — the zero to five month bucket makes up only 7.4% of the — sorry, 7.1% of the portfolio. And that was at 9.8% at September, and 13.8% last December, right? So we’ve taken out a substantial amount of risk from the portfolio by reducing those new customer originations.

John Rowan: Okay. But in the comments, and you talk about — and I’m just trying to figure out how this impacts the portfolio going forward about increasing new customer originations. I’m trying to — what was the comment that you made regarding increasing originations? Because you said even in the press release about increased loan originations toward the end of the quarter.

Chad Prashad: That’s right. So as we’ve been able to prove to ourselves that we could grow throughout this period at the same time is dramatically reducing the first-pay default rates within these vintages. We did begin to grow sequentially, November over October and December over November in terms of new customer investments. And we’ll continue that into the fourth quarter and the next fiscal year as well. So to the earlier question, there’s the seasonality factor. There’s less of a risk in the overall portfolio as there’s been less investment in new customers. But at the same time, the investments we’re making in new customers over the last two quarters are much less risky than you would have historically seen. So that’s also a factor into the overall reserve rate.