This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good morning and welcome to the World Acceptance Corporation sponsored fourth quarter press release conference call. This call is being recorded. At this time, all participants have been placed on listen only mode. Before we begin, the corporation has requested that I make the following announcement. These comments made during the conference call may contain certain forward looking statements within the meaning of the 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, and any variation of the foregoing 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 corporate most recent Form 10-K for the fiscal year ending March 31, 2021. 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, Chad Prashad, President and Chief Executive Officer.
spk04: Good morning, and thank you for joining our fiscal 2022 fourth quarter and year-end earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. First, for the third consecutive quarter, we've experienced record growth in origination volumes. During the fourth quarter, gross originations grew by approximately $220 million more than the prior year fourth quarter, and at over 700 million surpassed our prior strongest fourth quarter originations by approximately 40%. We attribute this record growth to positive customer experiences increased marketing intelligence, and larger loan offerings, all in the midst of tighter credit underwriting for new customers that we began in the third quarter. Further, we experienced this broad expansion across all customer types and continue to see tremendous increases in new and returning customer loan volumes when compared to last year or even pre-pandemic levels. In particular, new customer originations in the fourth quarter increased from approximately $25 million to over $60 million as new loan applications increased significantly by 64% versus the fourth quarter of fiscal 21 and 41% versus the fourth quarter of fiscal 20. In all, we experienced an exceptional 37.8% year-over-year portfolio growth. We are confident that this extraordinary growth is profitable growth, but recognize that growth at this rate is likely unsustainable. Therefore, we believe our continued and additional credit tightening that we recently began in April will also result in further reduced credit risk and higher profitability as we slow growth and reduce the credit provision in the new year. Another contributing factor was the significantly lower paydowns and lower runoff in the most recent fourth quarter. Traditionally, we see runoff averaging approximately 12 to 12.2%. approximately $200 million for our beginning portfolio size. This quarter's runoff was just over 5%, or only $80 million, largely resulting from our move to higher-balance loans, which are less subject to lump-sum payoffs through tax refunds. In other words, that approximate 7% difference equates to around $150 million of higher-performing ledger going into the new fiscal year. Regarding credit performance, We expect the origination cohort performance to remain relatively consistent in the near term, based on several factors, including overall economic environment, changes to our credit underwriting, and increase of larger loans to remain the most attractive options for our best customers. We continue to expect to hit our long-term incentive EPS targets of $25.40 per share before the end of fiscal year 2025, and we are accruing accordingly. Further, delinquencies remain within expectations and lend confidence to long-term EVA expectations. It's important to note that with the change to seasonal provisioning last year, we expect to grow our provision in real time as our portfolio grows and reduce our provision in real time with any seasonal runoff, which is traditionally during tax season. During periods of rapid growth, this temporarily depresses net income as compared to our historical delinquency-based provisioning model. The loan growth and day one provisioning of CECL should positively impact revenue and income in future quarters, especially in quarters when we begin to decelerate our growth rates. For the entire year, we originated approximately $800 million more than in the prior year, with over $200 million of that being unseasonal during the most recent fourth quarter. With this growth, as mentioned before, we've also significantly increased our loan loss reserves under CECL accounting. I'd also like to point out that over the last five years, we've achieved over 10% compounded annual growth rate in the portfolio, including the dramatic reduction we experienced throughout the pandemic. Finally, aside from our continued record growth, we have much to be thankful for and excited about at World. First, our branch team and those who support them have done a tremendous job of navigating the last two years and putting our customers' needs and safety first. Second, we continue to win top workplace awards across the country, with over half of our branches being in winning states or regions this year, in addition to the overall company being South Carolina's only company to be a Top Workplaces USA winner for two consecutive years, reflecting the incredible culture that our world family has created and continues to foster. I couldn't be prouder of them. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, And I would like to open up the questions about our fourth quarter and fiscal year 2022 earnings.
spk00: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question comes from Vincent Cantick of Stevens. Please go ahead.
spk01: Thanks. Good morning. Thanks for taking my questions. Um, first question just on the, uh, the charge off rate. So it looks like, uh, this past quarter you had a 19% charge offs, um, which I think would imply, you know, you had a really strong loan growth rate this quarter. So it would imply that, you know, with a normal, with a slower loan growth rate, you'd have charge offs in excess of 20%. So just sort of wondering what's the normalized, you know, annual charge off rate we should be expecting, um, as we go over time. Thank you.
spk02: Sure. Yeah, so it was in, you know, a little under 20% this quarter, and, you know, obviously the math suggests that growth has been lower. It might have been a little bit higher, but it's still relative to, if you go back to fiscal 2020, right, which is the last period or year we had with substantial growth, like we've had in the past, It's in line with that, as well as delinquency is in line with that. We feel good about where that is relative to our growth and especially the new borrower growth that we've had. It's difficult to... to give a projection of what that's going to be going for, because so much of it's determined by the mix of portfolio, right? So, you know, as we see the portfolio age, you know, that should drive the loss rates down. Obviously, there's a lag, right? So, you know, it'll take a quarter, maybe two for the portfolio, all the envy growth that happened in Q3 or Q2 and Q3 and Q4 to kind of work its way through. But then, um, you know, it, it should, you should sort of see those loss rates come down, um, fairly significantly.
spk01: Okay. Okay. That's, um, that's helpful. So it seems like maybe this is, uh, I mean, it's hard to say, of course, to your point, but, um, that the target losses that you're looking for, assuming your mix that you're targeting, would be below the current range, or is this a comfortable sort of NCO level for you for your underwriting?
spk02: Relative to the growth, we're comfortable where we are, right? But as Chad pointed out, as we move forward, You know, we don't expect to maintain the same level of growth that we've seen over the last nine months, right? So, we plan to be a lot more selective, especially around new bars going forward, right? So, we could see that mix shift in the next couple of quarters. Okay.
spk04: Yeah, that's right. This is Chad, just to provide a little more clarity around that. the net charge-off rate really is dependent, as Johnny mentioned, on the portfolio mix. So as that portfolio mix changes and ages, you would expect the NCO rate to come down as well. And further to Johnny's point about tightening credit underwriting as we slow down our growth from these extremely high levels, you know, we've already begun reducing our approval rates, especially for new customers, and they were much lower in the fourth quarter, and, you know, they'll continue to go down throughout the first quarter of this fiscal year.
spk02: Okay. Just a little bit more about where we are today. So, yeah, we're through April now, right, and, you know, the delinquency rate um is is trending down from march as as we would expect right so you know as charge also will follow delinquencies right so um yeah as that delinquency continues to decrease as we expect it to the the charge also decrease um as well okay that's a very helpful detailed feedback thank you um
spk01: And just a second as the follow-up question along those lines. So the underwriting changes you made to tighten in April, if you could describe maybe what those are in more detail. And is there any particular surprises you've seen, you know, maybe the payment rates slowing down or anything else that was unusual that caused tightening? Or maybe if you could just describe what the kind of the variables on the tightening. Thank you.
spk04: Yeah, yeah, great question. So we began tightening underwriting in the third quarter, mostly due to just a tremendous amount of application flow and wanting to maintain and improve credit quality and use this as a really good opportunity to do that. The second is, as we moved into larger loans, it's really important for us to make sure that our new customers have the credit risk profile that allows them to move into larger loans as well. So when you make that initial investment into the customer, we want to make sure that we can retain them for as long as possible. And that means making sure they would qualify for higher credit quality loans in the future, that they fit that profile. So to your question around, you know, what does that credit underwriting look like, tightening look like? So we made additional changes in April. To give you some perspective before we made those changes, The overall booking rate of new customers fell by 17% compared to the same fourth quarter of 2020. So prior to pandemic really impacting anything there. And we have tremendous increases in overall application flows. So in the fourth quarter, applications were up 46% versus pre-pandemic level 68% year over year. The vast majority of that is being digitally sourced. So Using it really is an opportunity since we've done a great job in terms of marketing intelligence and really changing the brand and culture within our branches and the excitement there. We have a large increase in overall application flow, so we can use this as an opportunity to tighten underwriting at the same time.
spk01: Okay, gotcha. And last one for me, I think from the last earnings call when you talked about you know, achieving your EPS targets, uh, the $25 by fiscal 2025, you outlined the, the, you know, the growth trajectory, I think it was what, uh, kind of high single digits plus your capital return and your underwriting. I get just, um, maybe if you talk about it, that's still, uh, in mind, you're still on that path, uh, to get there with those, uh, with those, uh, three, uh, variables.
spk04: Yeah. I mean, I'll, so I'll start, I'll let Johnny, uh, chime in as well. So with the amount of growth we've had this year in the overall ledger, it really does come down to the, you know, how rapidly we decelerate the overall growth rate. There's two pieces to that. The first is, you know, every new customer that we bring in is significantly more risky than existing customers. And with C4 Visioning, we have to provision for that up front. So as you can see in this quarter, We had rapid growth, not just in terms of customer retention, but also record originations, and with that comes pretty substantial CECL provisioning. As we slow that down, yes, we're still accruing towards $25.40. We believe that a portfolio the size that we are today can certainly put off that amount of cash, and I think you can see that in the press release as well. It really comes down to making sure that We are prudent for the long-term investments for new customers for the company. So we are still looking at the long-term EVA of every applicant to make sure that those are good investments. And we're still very opportunistic. So as we see those, we'll continue to make them. So it's really difficult to say that we're aiming at a specific percent growth rate. You know, we keep our eye towards the overall economy and, you know, any influences there that may impact demand, but also influences we think may impact repayment rates in the future. So, you know, all that to say we aim to be opportunistic. We really aren't setting a certain percent growth rate in order to hit those targets, but we think that the portfolio size we have today certainly allows us to do so in a decelerating growth environment.
spk01: Okay, great. Very helpful. Thank you.
spk00: Again, if you have a question, please press star 1. The next question comes from John Rowan of Jani. Please go ahead.
spk03: Good morning, guys. Good morning, John. So, John, I appreciate you not wanting to give a NCO rate that you're underwriting to kind of in a steady-state environment, but You're obviously giving a target for significant earnings growth based off of this run rate to get to your accrual target in fiscal 2025. Now, when I look back historically, your loss rates have been anywhere from the low single digits to the mid-teens to near 20%. Maybe if you could help us narrow it down to one of those three buckets, you have to have an outlook on it to have the confidence that you're going to get to that earnings figure Um, maybe not necessarily give us an exact number, but give us a ballpark figure as to what loss rate you're currently underwriting to. Um, so we have, you know, I feel like a, a decent. Oh, yeah.
spk02: So I can kind of give you a, you know, a range, right. So, um, you know, where we are right now, right. Is, you know, this is what we've been saying, right. And becoming more selective going forward with, um, new, new customers. This should be near the top, right? So as the portfolio ages, we expect that loss rate to come back down. Long-term, do I think it can settle in the high single digits? I think that's fair long-term. As far as the timing and when exactly that's going to happen, it's hard to say. But, you know, so basically I can say, like, as far as the mix is, right now it's probably skewed more to MVs than it will be in the future, right? So that says that the loss rate should start to trend down, right? You know, obviously we don't want to get a position where we completely cut off MVs. or a new bar of growth, right? So there's always going to be some risk in the portfolio higher than just our existing customer expected loss rate. So, yeah, somewhere between where we are and high single digits, you know, trending towards the high single digits over time. But, yeah, it's just, it's hard to give the exact timing on that, right? Because it, you know,
spk03: No, that's fair enough. I mean, listen, you know, I've covered the stock for a while and you look back in time and high single digit is a lower number than what I remember ever seeing even pre-financial crisis. You know, is there something kind of just fundamentally different in the credits that you're underwriting with that type of, you know, embedded loss rate relative to the history of world?
spk02: No, it's the shift to these larger loans, right? So as the mix of the portfolio, so with the shift to larger loans, we should retain our best customers longer, right? So as that mix starts to right size and as the portfolio ages, the loss rates will move back towards that, right? But again, I'm not saying we'll definitely get there because a lot of it will be determined by our our appetite for risk on new customers, right? So that's what makes it so difficult to give an exact number, right? Because we can change our appetite for that new borrower customer in the future, right? And that will change what that loss rate would be.
spk04: Hey, John, if it's helpful, and hopefully I don't repeat exactly what Johnny said in just different words, but... You know, we don't really have an NCO rate we target at the portfolio level, right? So we target an NCO rate at the individual customer level relative to the cost of acquisition, what we expect their EVA to be over the lifetime, et cetera. So there's a lot of kind of pieces that go into that math at the new customer acquisition level. Once that customer has been with us over time, their risk is dramatically lower, and there's a number of factors that go into the overall portfolio NCO rate. First and foremost, as Johnny was talking about, you have your new customers, so depending on what the appetite is, what the market looks like, we think the return will be, we'll make those investments accordingly, which certainly will impact and bring the overall NCO rate up with the more new customer investments we make. The other part of that, to which Johnny was just talking about, is on the large loan side, There's two pieces. One is as we are underwriting new customers that we believe will be long-term large loan customers, we're certainly looking for a higher credit risk profile. So that has two negative impacts to the NCO rate and bringing them down. First and foremost, our new customers will have a lower credit risk is the expectation. And as they stay with us longer, that will continue as well. The second is, as we've moved into larger loans, we are retaining our customers longer, whereas in the past we may have lost them to competitors at lower interest rates and larger loans. As we're retaining them longer and they're our best customers, they naturally do have a lower NCO rate. So, you know, I'll have to say, as the portfolio ages, that's really the most important part of this conversation because that is a large percent of the portfolio and we'll see those NCO rates come down and they certainly could hit into the single digits because the portfolio today is setting up to be much different than it has been in the past and already is quite different with the portfolio mix we have. But the customer base is certainly on the road to being significantly different than it has been in the past. Is that helpful?
spk03: No, it is. And, you know, I kind of want to attack the topic of the, you know, the investing hurdles in 2025 with two different methods, right? So first is the top-down look at, you know, growth and the provision via, you know, via charge-offs. But in the past, World has, under prior management teams, used the vesting hurdle issue to lever up the balance sheet and basically try to buy back stock to meet those hurdles. So maybe if we look at it from the bottom up, is there any appetite to do such a strategy to meet the vesting hurdle in 2025?
spk04: So I appreciate the question. I think it's really insightful. But I'll speak first. And Johnny, if you want to chime in, please do. when we first put out the long-term incentive plan, the goal for us as a management team from the board is for us to think as long-term as possible. As part of that, we also removed, you know, short-term incentives, including bonuses for our executive team. So we don't have any annual bonuses. We're not, you know, looking to hit certain quarterly targets or even annual targets. Our goal is to build, you know, the most valuable asset we can for our shareholders long-term. So, you know, as As the lead of the executive team, I'm really not interested in monkeying with things as we get closer to the vesting cliff to make sure we hit it. Certainly not at the expense of the long-term value of the asset that we've created here. That's certainly the perspective that I have going into this. We have bought back a fair amount of the float over the last couple of years. as long as we believe that the stock price is a good investment and accretive for our investors, we'll continue to repurchase. And, you know, again, we're very opportunistic, but, you know, that's not something that we're looking forward to into the future in terms of, you know, trying to, let's say, necessarily hit a certain target to make any decisions that might be short-term at the expense of the long-term value of the company.
spk03: Okay, I appreciate it. I mean, last time there was kind of a stated intent to move leverage to a significantly higher level, right? And so it was a little bit more obvious. I mean, obviously, share purchases are a good thing. I was really more commenting on whether or not there was just a, you know, could be an overall, you know, complete departure from what, you know, what types of leverage rates we're seeing now. So I appreciate the insight. Thank you.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Mr. Prashad for closing remarks.
spk04: In closing, we are pleased with the many improvements in our operations and culture that have helped result in our record growth this year and believe our portfolio will continue to generate significant cash flow in the coming quarters and years. Thank you for taking the time to join us today. This concludes the fiscal year 2022 earnings call for World Acceptance Corporation.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer