World Acceptance Corporation
Q1 2019 Earnings Call Transcript

Published: 25 Jul 2019

[Operator:]

Good morning and welcome to the World Acceptance Corporation sponsored First Quarter Press Release Conference Call. This call is been 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 announcements.The comments made during this conference call may contain certain following-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 facts 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 use 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 ending March 31, 2019 and subsequent reports filed or furnished with 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, Chad Prashad President and Chief Executive Officer.

[Chad Prashad:]

Good morning. This is Chad Prashad. I'm also joined by our Chief Financial and Strategy Officer, Johnny Calmes. I trust that you've all had a chance to review the press release as well as the script filed with the 8-K this morning. At this time, we're glad and open to any questions that you may have.

[Operator:]

Thank you. [Operator Instructions] We will now take our first question from John Rowan of Janney. Please go ahead.

[John Rowan:]

Hello.

[Chad Prashad:]

Hey, John.

[John Rowan:]

Hi. Okay. So just wanted to dig into the charge-offs a bit here. Obviously, they're up in guidance and the script though you continue to look for about dollars and charge-offs to be up going forward. But what I'm trying to look at is there was acceleration of growth here in the quarter and it seems like you're indicating that on historical basis new versus old customers and still charging-off at the same rate.What are you seeing in the new customers, right? I mean, you have a longer-dated loan portfolio relative to some of the other shorter-term products. I'm trying to figure out if -- like the timing of when you put these loans on how quick they are defaulting? Are we seeing first payment default? I'm trying to figure out what's making more of these customers go into default within -- frankly these are longer-term loans, right? So the payments are shorter upfront. And whether or not there is any change in low rates so they didn't look -- I mean, they didn't look like the delinquency numbers were up too much. So if you can just address that I would appreciate it.

[Chad Prashad:]

Yeah. Great question John. So overall we're not seeing a large difference in low rates or anything like that from a customer tenure perspective or credit quality perspective. The main driver in our overall increase in delinquency and charge-offs mostly in charge-offs for the past quarter and in prior quarter as well has been due to just an overall increase in the weighting of newer customers to World versus prior years.This past quarter, a customer that had been with World for less than a year at the time of the origination has increased over 40% year-over-year and that's on top of a 20% increase year-over-year that we experienced last year at the end of the same quarter. Previously, the company had been mostly flat to negative in terms of new customer growth in the preceding four years. So it's a rather large shift in weighing the portfolio towards newer customers.Today, approximately 25% of our portfolio is these customers who have been with World less than a year at the time of their origination and historically that's been closer to 17% to 18%. So it's -- generally it is not a increase in delinquency or loss rate in any particular group of customers, it's just that newer customers are the riskiest customers and we have more of them, both in terms of overall legers, but also in terms of their weighting within the portfolio.

[John Rowan:]

Right. But part of the question was also that, given that these are longer-dated loans, I would expect that there be a little bit of a delay between a surge in growth and the actual growth in charge-offs, right? Because you're giving longer-dated loan you shouldn't see that -- you shouldn't see a lot of first payment defaults, right?So, is the timing to charge-off on new loan changing at all? The timing of charge-offs for new customers, I should say, right? Not existing customers. But the new cohort where they're charging off at X months last year, now they're charging off at X minus one month this year, that's really the heart of the question.

[Chad Prashad:]

Yes. We haven't seen anything like that. And keep in mind that, most of our newer customers do start on shorter-term loans to begin with, but we haven't seen necessarily an increase in the amount and times of any origination charge-off for new customers.

[John Rowan:]

Okay. Thank you. That’s it.

[Chad Prashad:]

Yes.

[Operator:]

We will now take our next question from Vincent Caintic of Stephens. Please go ahead. Your line is open.

[Vincent Caintic:]

Hey. Thanks. Good morning. Maybe, just taking the step back and appreciate the color that was given on the script. But just looking at the earnings being down, is there anything to call out in terms of one-time things that happened this quarter? Or seasonality, just for the first -- the fiscal first quarter that where you would see, say, earnings growth in future quarters and there's just more front-loading for the fiscal first quarter?

[Johnny Calmes:]

There's no real, what I call, one-time things. The expense, which are our health benefits, it was higher than it has been in recent history. It's still in a very manageable place, but it's running higher -- it did run higher this quarter than it has in recent quarters. Obviously, we have the long-term plan as well, right? Which is -- it's great investing, so it's front-end loaded.That expense, right now, is running in the $7.5 million to $7.7 million a quarter. Starting in Q3, that's going to drop down to around $6 million and then Q3 -- Q4 and for the next two quarters, it will be around $5.5 million, right? So we've shared that schedule with everybody. So you should see that personnel expense decreasing going forward.With the acquisition this quarter, we did have a sizable increase or decent increase in headcount, but we expect that to stabilize going forward, unless of course, we have another acquisition. So, personnel expense should stabilize and actually decrease as you see -- as we move into the second calendar year -- or second fiscal year of the long-term plan.

[Vincent Caintic:]

Okay, that's helpful. And then maybe just talking about the new customers and the strategy. So, appreciate that the revenues grew 13 -- grew double-digit year-over-year, but having your provision expense, your credit and your expenses grow higher than that. Is there sort of a timeframe where you see that this can sort of normalize? Or when -- basically when should we expect the -- is there a timeframe when you expect that that would -- that you would started to slow down on your revenue -- or your provision build and your expenses versus -- relative to the fee revenue growth?

[Johnny Calmes:]

Sure. Yes I think the G&A expense should level off for the reasons I was just speaking to. In regards to the provision, it'll -- it reacts to our growth, right? So, if we continue to accelerate our new customer growth, we continue to see relative increases in the provision going forward.So, it's -- obviously our goal is to hopefully continue to accelerate our new customer growth and so as long as we do that, we may see those relative increases. But a lot of the provision growth is just a function of a growth in the portfolio, right? So, our charge-offs increased $6.8 million during the quarter, $4.1 million of that was simply due to the increase in the average loans outstanding, right?So -- and another $1.5 million of the increase in provision was just our general reserve that we apply to all loans and increased $1.5 million this quarter because we grew almost $95 million during the quarter versus $58.5 million last year, right?So, a lot of that building provision is simply due to growth. And then the rest is related to the change in mix and the increase in new customers which are as Chad said are our riskiest customers.

[Vincent Caintic:]

Got you. And for the new customers I guess how does the pipeline looks? Are we going to see a lot of growth in new customers for the next year or two years? Just sort of how do you think about that?And then is there a way to -- and maybe this is a strategic call, but is there a way to throttle that where if you have more customers, maybe you charge more or try to like pace the level of growth in those new customers? Thanks.

[Chad Prashad:]

Yes. So, we view growth in the next couple of years in basically two channels. We have organic growth and we have acquisition growth that we've experienced for last two years. And we continue to see is the -- for the foreseeable future continued steady growth on the organic side which again we've experienced this quarter as well as.And it seems that all of the processes we have in place throughout our acquisition channels as well as through our field operations, throughout the company continued to report continued organic growth.On the acquisition side, we've just positioned ourselves to be very opportunistic. And so when the portfolios that present themselves are accretive to the company, we are prepared to take those down. We do see in the near future an increase in the number of potential acquisitions that doesn't always translate into deals that we close just based on quality of the accounts and what we think -- how we think it might work within our existing portfolio. So I do see in the short term there is still the potential for more acquisitions in the short term as well.

[Vincent Caintic:]

Okay. Got you. I'm sorry to spread one more question and I'll get back in the queue. But in terms of your acquisitions versus your share buybacks, when you think about your capital, is there -- what sort of hurdle rates? And when you're thinking about say buying back stock versus these acquisitions, could you give us a framework of how you think about that? Thank you.

[Chad Prashad:]

Sure. Yes. So we have a hurdle rate that we use internally yes, don't actually want to share that. We use it as we price our acquisitions. But right now we feel comfortable with both acquisitions and -- well most acquisitions as well as the repurchase program. So we're comfortable with where the share price is today and return that should generate in the future.

[Vincent Caintic:]

Got it. Thanks very much.

[Operator:]

[Operator Instructions] We will now take our next question from Kyle Joseph of Jefferies. Please go ahead. Your line is open.

[Kyle Joseph:]

Hey, good morning. Just following up on the acquisition questions. Looks like your branch count grew in the quarter was that acquisition-driven or are those de novo openings?

[Johnny Calmes:]

It was a little bit of both, but it was -- majority of that growth was through an acquisition. So I think the acquisition we had during the quarter was around 50 locations and -- I'm sorry around 100 locations and we kept 25 of those open. So that -- but we also had some closures and a few de novos in there as well. But the vast majority of the new locations during the quarter were result of the acquisition.

[Kyle Joseph:]

Okay. And when you guys are talking about acquisitions? Are you thinking about just portfolio acquisitions or stores come with those as well?

[Johnny Calmes:]

Both, right? So ideally, we can roll their locations into an existing location of ours. But in this past case during the quarter there were -- they had 25 locations that were either in areas that we are currently or at least part of the way from existing locations. So it makes sense to keep those open.

[Kyle Joseph:]

Got it. And then obviously your growth has been very impressive, but on right my hands around, what's driving this growth? Obviously, you guys are outpacing call it the market level of growth. Is it marketing on your point? Is it -- obviously aided by the acquisitions, but your same-store growth is very impressive and I just kind of want to get your thoughts on what's driving that?

[Chad Prashad:]

Yes. It's a combination of several things. So portfolio acquisitions have definitely contributed to same-store growth year-over-year continued refinement and improvement throughout our marketing channels as well as contributed towards that growth. But also further collaboration with our field operations and a growth mindset within our operations has been very receptive towards new customer growth.

[Kyle Joseph:]

All right. And then last one from me. I understand growth and credit performance of new borrowers, but can you give us a sense for the credit performance of your existing customers? Any sort of changes you're seeing there? And then in addition to that, give us a sense for how you envision the reserve given sort of the evolving credit performance?

[Chad Prashad:]

Yes. So I mentioned earlier that there is -- the increased weighting in new customers but on the -- the more tenured customers which were old. So if you look at customers who have been with us for at least a year, whether they have been with us and paid off their account and then came back to us or been with us continually for a year out through several years.Overall their performance is the same to -- actually has improved in some areas. So we feel really good about the strength of our portfolio, especially as the portfolio ages. So what we have experienced recently is just increased risk of their overall portfolio just due to the rating of -- just due to the weighting of an increase in newer customers.But for the more tenured customers we haven't experienced any softness in their charge-off rates or delinquency.

[Kyle Joseph:]

Got it. Thanks very much answering my question.

[Chad Prashad:]

Thank you.

[Operator:]

And we will now take our final question from Clifford Sosin of CAS Investment Partners. Please go ahead. Your line is open.

[Clifford Sosin:]

Hey guys, thanks for taking my question. So maybe just -- if you can just spend a moment walking through the analyses that you are doing on your end that get you comfortable that this is -- that the higher rate of charge-offs is really just the consequence of a mix shift towards more newer less tenured borrowers. Maybe just walk us through the data that you're looking at to get you comfortable with that statement?

[Chad Prashad:]

Hey Cliff, this is Chad. Thanks for the question. So the way that we monitor this and it's evolved somewhat over time and some of it has been unnecessary evolvement due to our increase in acquisition activity over the past couple of years and some of it's just been a change in mindset, as we've brought in new perspectives with my move to the CEO position and bringing in new folks in the strategy and analytics department.So the way that we look at things now is, we basically stratify our portfolio by customer tenures, as well as a few other attributes and monitor their delinquency and charge-off rates over time. So that gives us a lot of confidence.And when we bring in portfolio acquisitions and basically mesh them with our existing portfolio, it takes out some of the weirdness that we used to see in terms of new customers, former customers and repeat customers. So now that we look at the overall customer tenure with World those existing customers melt into this methodology and so we stratify that way.We have a lot of comfort in the overall charge-off rates as we turn them out through the stratified portfolio. And it also allows us to perform what-if analysis. So if we were to basically have the same mix of customer tenure that we have last year with today's portfolio size, we can see what that would look like compared to the actual portfolio mix that we have today, which gives a lot of confidence that most of what we're seeing today is due to the weighting and new customers and not from change in the credit risk portfolio -- credit risk profile of the entire portfolio.

[Clifford Sosin:]

That's helpful. Thank you. And you mentioned that the mix of less than one year tenured customers rose from 17.5% to 25% of the portfolio. Is there any chance you can quantify, how much higher the charge-off rate is for those newer customers? Just as a way for us to try to triangulate to how the mix of newer customers impacts the overall charge-off rate?

[Chad Prashad:]

Yes. We don't typically share that. It is higher than the average portfolio as you know, and it hasn't changed dramatically over time. But that's just a number we don't typically share.

[Clifford Sosin:]

What about in terms of the bridge done that you provided [indiscernible] if you can try to provide a figure for the mix if that [indiscernible] in terms of dollars of charge-offs?

[Chad Prashad:]

I'm sorry, I didn't catch the very end of that Cliff.

[Clifford Sosin:]

I apologize. My daughter is screaming in the back-end. Is there any chance -- John provided a helpful mix of the rise in charge-offs and said that the dollar baked to drove that. And I was wondering if there was a way you could provide -- what you estimate the mix effect of charge-offs was versus the other being overall performance effect?

[Chad Prashad:]

Cliff, are you asking for the mix of the increase in charge-offs that's due to the overall portfolio increase or versus…

[Clifford Sosin:]

Yeah. So John said that there were $6 million of higher charge-offs and then $4 million related to larger -- the larger portfolio and other -- few other factors. I was wondering if you could just quantify in dollars, roughly how much higher charge-offs were on account of more new customers. That's all.

[John Calmes:]

Right. We don't have that in front of us right now. But we can look into doing that in the future.

[Clifford Sosin:]

That’s right. Thank you very much. I appreciate it.

[Chad Prashad:]

Yeah. Thanks, Cliff.

[Operator:]

And it appears there are no further questions at this time. I would like to turn the call back to Mr. Prasad for any additional or closing remarks.

[Chad Prashad:]

Thanks for joining us today for the conference call. And this concludes the fiscal 2020 first quarter earnings call. Look forward to you joining us for our second quarter earnings call in October.

[Operator:]

Thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference. You may now disconnect.