World Acceptance Corporation (NASDAQ:WRLD) Q4 2023 Earnings Call Transcript May 5, 2023

Operator: Good morning, and welcome to World Acceptance Corporation’s Fourth Quarter 2023 Earnings Conference Call. This call is being recorded. And at this time, all participants have been placed on listen-only mode. Before we begin, the company 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, 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 such 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.

Chad Prashad: Good morning and thank you for joining our fiscal 2023 year-end and fourth quarter earnings call. Before we open up to questions, there are a few areas that I’d like to highlight. We made several changes in early fiscal 2023 that we believe would have a significant impact on our business and we’ve been very pleased with the results. As we discussed during prior earnings calls, we tightened underwriting about 18 months ago as economic uncertainty was increasing. At the time, inflationary pressure concerns about delinquency normalization after a period of extraordinary portfolio growth and growing recessionary concerns were key drivers for the strategic changes. Rather than lend into the economic uncertainty, we dramatically reduced our exposure to our highest risk customers.

While new customer loan volume increased in the first quarter by 5% year-over-year, it declined significantly by between 35% and 45% during our fiscal second, third and fourth quarters of this year as we work to improve credit quality. During that time, through credit tightening our book-to-look ratio decreased to a low of 20% during the second quarter before slowly improving to 25% in the third quarter and 30% in this most recent fourth quarter. When we compare new customer originations to pre-pandemic periods, we’re still around 90% to 100% of the loan volume in comparable fourth quarters excluding the extraordinary growth in fiscal 2022. Today, delinquency continues to show significant improvement even as our book-to-look ratio has increased from 20% to 30% throughout the year.

Early stage delinquency decreased in the fiscal third quarter and late-stage delinquency decreased significantly in the fiscal fourth quarter, which we expect to result in fewer charge-offs into the next and upcoming quarter. More specifically our first pay default rates have remained low throughout the year, even as our approval in loan booking rates have increased. First quarter new customer originations had a 16% lower first pay default rate year-over-year. Second quarter first pay default rates fell 37% year-over-year. And the third and fourth quarter first pay default rates are around 25% lower year-over-year. We expect the new customer credit quality and low first-pay default rates we experienced in fiscal year 2023 to continue into 2024.

To underscore how strong recent credit performance has been, the first pay default rates of the most recent three quarters are in line with or are lower than pre-pandemic comparison. They’re even comparable to or lower than the low first pay default rates that we experienced on vintages that are positively impacted by the COVID stimulus. Finally, we’re focused on both sides of the profit equation, decreasing losses as well as increasing gross yields. In addition to the positive credit performance that we mentioned earlier, we continue to steadily improve gross yields on the same vintages. New customer originations in the second quarter of this year had gross yields that were 7% higher year-over-year. And both the third and fourth quarter new customer vintages had gross yields around 25% higher year-over-year, again at the same time as a reduction in first pay default rates.

As we see the normalization in former customer loan volume, similar adjustments have been made for returning and refinanced customers with a focus on increasing credit quality and stabilization and overall portfolio yield as well. All of these outcomes are an especially great team accomplishment when we consider the reports of increasing default and delinquency rates across several credit industries during calendar 2022, including the personal installment loan industry. While economic uncertainty still exists into this year, management continues to accrue for the long-term incentive plan with vesting tiers of $16.35, $20.45 and $25.30 per share due to the much improved credit quality, yields and operating conditions. We anticipate the first tier of vesting as early as the end of this fiscal year assuming credit quality and performance remains stable and unemployment remains low.

We started this fiscal year with the stated goal of managing the portfolio in a way that would ensure it could weather the stress of negative economic pressures. And this quarter’s results show that we are in a position to do that as well as take advantage of marketing — of market opportunities to grow it. I’m very proud of the incredibly hard work from our branch team members as well as their supporting leaders and trainers and corporate operation support, IT, analytics, our human resources department, marketing and customer success teams. We’re successfully navigating a challenging environment and are beginning fiscal year 2024 from a position of portfolio and capital strength. At this time, Johnny Calmes, our Chief Financial and Strategy Officer and I would like to open up to any questions.

Q&A Session

Operator: We will now begin the question-and-answer session. And our first question will come from Vincent Caintic with Stephens. Please go ahead with your questions.

Vincent Caintic: Thanks. Good morning. Thanks for taking my question. The first one just on the — your comments on the portfolio and tightening underwriting. Any sense for where the portfolio is shrinking sort of where you kind of expect it to land? And is there more tightening that you expect? And sort of, what’s assumed in your current underwriting cost are now in terms of macro conditions? Thank you.

Chad Prashad: Hi. Good morning. Great question. So I think from this point forward, I think, we’ve experienced the maximum tightening that we will experience going forward. So we’ve already begun loosening our underwriting, especially, into the third quarter and fourth quarter of this past year. Even into the first quarter of the current year we’ve also begun loosening up a little bit on our new customers as well. So we don’t anticipate the portfolio to shrink this year. We do expect to have somewhat tamed growth compared to prior years likely in the 0% to 5% range is what we would expect. Our focus now is on higher credit quality and profitability over portfolio growth in general.

Johnny Calmes: Yes. Just to clarify so we’ve loosened underwriting relative to last fall sort of that August, September, October, November time frame but it’s still tighter than it was 1.5 year, 2 years two years ago. So we’re still cautious just given the macro environment.

Vincent Caintic: Okay. Perfect. Thank you. And you spoke about the yield or the price that you’re able to put into these loans which is — it’s great to see that increasing. Where do you expect that to be able to go at this point? And so when you’re talking about underwriting is it — and maybe starting to loosen a bit is that sort of in price or maybe how — where do you expect yields to continue? Thank you.

Chad Prashad: Yes. So when I talk about loosening it’s more of opening up the tickets slightly for new originations. It’s really not loosening in terms of pricing. As I mentioned the yields have increased pretty dramatically in the past couple of quarters. We continue to expect those yields to stay very high, especially, for our new customers coming into the portfolio. In terms of yields both gross and net yields into next year our focus is on growing the overall portfolio’s gross yields. And as we maintain credit quality we expect those net yields to grow as well.

Johnny Calmes: And I can add to that a little bit right? So there’s also some accounting impacts to yields last year. Obviously, we don’t accrue interest on loans that are more than 60 days contractually past due. And when those loans roll to today’s contractually past due, we reverse the three months of interest that have been accrued to that point on those loans. So, obviously, last year with higher 60-day contractually past due loans and a large number of loans rolling to today’s contractual past due now the headwind to yields. And now obviously, that has reversed and that should be a tailwind to the yields this year. So, we would expect to see yields on the overall portfolio creep up a little bit during the year.

Vincent Caintic : Okay. Great. That’s super helpful. And the last one for me. Just if you could talk about your just conversations with your funding partners and banks broadly. The industry has been in difficulty over the past month. And there’s been talk about some of them maybe tightening the lines that they’re providing to people. So if you could maybe kind of update us on kind of your conversations with your lenders and any sense if you need to update us if you have any funding needs. Thank you.

Johnny Calmes : Sure. Yes, obviously, we’ve paid down a substantial amount of debt on our credit facility over the last six months, and we’ve actually repurchased some bonds during the fourth quarter as well. So, we’re really in a good place as far as funding at this point. There hasn’t been any indications of tightening from the credit group, but if that were to be the case, we’d be in pretty good shape just getting the low levels of outstanding debt we have at the moment.

Vincent Caintic : Okay. Great. Very helpful. Thanks so much.

Operator: Our next question here will come from John Rowan with Janney. Please go ahead with your question.

John Rowan : Good morning guys.

Chad Prashad: Good morning.

John Rowan : I want to follow-up Vincent’s question a little bit here. Obviously, this is the time of year where we typically get an announcement from you guys regarding a renewal and renegotiation of your credit facility. I’m wondering where those discussions stand, whether or not we should expect a change in the base rate or the spread to the base rate. Obviously, you didn’t really address whether or not, I think the prior question whether or not there potentially be a change in liquidity. But just wondering if we could maybe address the rate question, if there’s any information you can provide at this time.

Johnny Calmes : Yes. So those discussions haven’t started in earnest yet. So that typically happens — we’ll be a year out in June. So that’s typically when we’ll have our bank meeting. So we won’t really start those discussions in earnest until this summer.

John Rowan: I mean, you usually renew it about — right is about — you don’t let it go current, right? You usually renew it a year prior to — it’s…

Johnny Calmes : That’s right.

John Rowan : Okay. So we would expect — we should expect an announcement from you guys regarding any types of changes to that facility in June or this summer.

Johnny Calmes : Around there, yes. That’s right.

John Rowan : Okay. And then can you just repeat, because I didn’t quite get it, what you were saying about the — your expectations around the accruals for your comp agreement?

Chad Prashad : Yes. Sorry. Yes. So we have three vesting tiers within our long-term incentive plan. They vest at $16.35 for the first year $20.45 for the second tier and $25.30 per share for the last year. And we continue to accrue for those and we anticipate the first year of vesting as early as the end of this fiscal year. Again, that assumes that credit quality and performance remains stable and unemployment remains low. So we feel like we have the portfolio at a place where the yields can put off enough revenue to achieve those targets, and we’ve controlled G&A as well as delinquency enough to hit those targets coming up as early as the end of this fiscal year.

John Rowan : Okay. Thank you.

Johnny Calmes : And just add to that yes, so obviously we’re coming into this fiscal year with substantially lower delinquency both on the front end and the back end. And our zero to five-month, 10-year customer is substantially lower than it has been. So it’s a – that’s our most risky customer, right? So it was at 5.9% at the end of March, compared to 13.1% a year ago, right? So we’ve taken a substantive amount of risk out of the portfolio. And just given where delinquency is we’d expect substantially lower charge-offs going forward obviously barring any sort of macro event but it’s certainly in the near term.

Chad Prashad: Yes. And I add a little more clarity to what Johnny is saying. So it’s not just that our lower 10-year customer base is lower in the portfolio relative to last year. It’s also the – those lower-tenured customers today are actually much less riskier as well. So this isn’t a matter of shrinking our investment in new customers in order to rightsize the portfolio on its own. It’s a combination of both being more selective which does result in a much lower investment in new customers. But also with being more targeted we’re seeing much higher credit quality and much lower expected loss rates within that bucket as well.

John Rowan: Okay. And then how many – how much bonds did you buy?

Johnny Calmes: We repurchased $9 million in face value in Q4 and at around a 20% discount. And then…

John Rowan: 20% discount to par correct?

Johnny Calmes: Correct. Yes. And another $2 million in April.

John Rowan: Did you book a gain – was there a gain booked in this quarter for…

Johnny Calmes: Yes. So that – the gain will show up in interest expense.

John Rowan: That’s included in the interest expense number. How much is that gain in interest expense for the quarter?

Johnny Calmes: It was around – a little less than $2 million.

John Rowan: It’s roughly $2 million. Is there – did you have a discussion with the rating agencies prior to buying bonds at a 20% discount to par regarding their assessment of its technical default?

Johnny Calmes: Well, there wouldn’t be a technical default. There’s nothing in the bond agreement that prevent us from buying shares back at a discount. So they have a concept called a selective default but we’re buying these bonds in the open market anonymously, right? We’re not in any way pressuring bondholders into selling their bonds, right? So – and obviously we’re in a pretty healthy spot in terms of our balance sheet. So we’re not a distressed – we’re not distressed bonds pressuring bondholders into selling, right? So we feel comfortable it doesn’t fall into that bucket.

John Rowan: Okay. All right. Thank you.

Operator: And this will conclude our question-and-answer session. I’d like to turn the conference back over to Mr. Prashad for any closing remarks.

Chad Prashad: Thank you all for taking the time to join us today. This concludes our 2023 year-end earnings call for World Acceptance Corporation. Thank you.

Operator: The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect your lines.