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's second quarter press release conference call. Today, 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. 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 forward-looking statements it makes. At this time, it is my pleasure to turn the floor over to your host, Mr. Chad Parshad. You may proceed, sir.
spk01: Good morning, and thank you for joining our fiscal 2023 second quarter earnings call. Before we open up the questions, there are a few areas that I'd like to highlight. As we discussed in our first quarter earnings call, we began making underwriting adjustments at the end of our last fiscal year to protect our $1.6 billion portfolio that we had built as we were heading into economic uncertainty. This was mainly with the perspective of the impact of inflationary pressures on our customers' cash flow, and delinquency normalization coming off stimulus payments, but also with the growing concerns over the likelihood of a recession in the next year. We're pleased to have continued to execute on this preemptive plan for fiscal year 2023 by reducing our exposure to our highest risk customers and making progress to increase our gross yield. First, you'll notice a substantial decrease in new customer originations in the second quarter. much more in line with the origination volume of fiscal year 2021 than a high-growth year like last year, fiscal year 2022. However, one major difference is the $41 million in new origination volume in the second quarter of fiscal year 2021 was in a low-demand environment. In contrast, this most recent quarter's originations are in a high-demand environment where we're much more selective with a book-to-look ratio that's nearly half of the prior two years. roughly 20%. This is the third consecutive quarter of improving credit performance of our new customer vintages. First pay default rates have been decreasing with each vintage throughout the calendar year. And new customers originating in the most recent quarter have the lowest first pay default rates since we rolled out our credit grading system in late 2019. This includes surpassing the low first pay default rates on vintages positively impacted by stimulus as well. In addition to increasing credit quality, we have also focused on growing our gross yield. For new customer originations, the gross yield has increased substantially throughout the second quarter, and we expect it to remain elevated throughout the remainder of the year. Similar adjustments have also been made for returning and refinance customers as well, with an emphasis on increasing credit performance, minimizing our exposure to our higher risk customers, maintaining high customer retention, as well as increasing the gross yield where applicable. To this point, gross yields on origination in the most recent quarter have stabilized and even increased in the September month, and this is for all originations. With this emphasis on credit quality, yields, retention, and deemphasizing risk, as well as growth, as we look towards the next six to 12 months of an uncertain economy and pinning cash flow risk to our customers, We do expect a muted growth season this year in comparison to prior years. While we continue to invest in the highest credit quality new former and refinance customers, we expect our reduced book-to-look rate to continue into the third and fourth quarters for new customers especially, as well as tighter underwriting and exposure to refinances. Finally, our World Finance team is outstanding, and I'm incredibly proud of our leaders at every level in the company and the work that they've done to adjust and build the strong, and nuanced infrastructure that creates the levers for our operational leaders who need them to effectively and quickly manage our portfolio. Further, they do it with positivity, fun, and grace, and over half of our branches are in states or cities that have won top workplaces awards again this year. In addition to our overall company being South Carolina's only company to be a top workplaces winner for two consecutive years, we also recently won a National Culture Excellence Award for professional development. which truly reflects our incredible team of strong, homegrown leaders. At this time, Johnny Calmes, our Chief Financial and Strategy Officer and I would like to open up to any questions.
spk00: As a reminder, if you do have a question, please press star then one on your touch-tone phone. Please remember to pick up your handset or to put down your handset before pressing the keys. I will now pause momentarily to assemble our roster. Today's first question comes from John Rowan with Jannie. Please proceed, sir.
spk03: Good morning. Good morning. So I want to talk about the waiver you got from your lenders. How long does it cover? Are there any requirements for you to get back in compliance with the fixed charge coverage and the CPI indicator? Just give me an idea of how functionally that waiver works for you guys.
spk04: Sure, yeah, so the waiver applies to the September month end, right? So, you know, we're currently in the process of amending the debt agreement to just give more cushion going forward. And, yes, that's still in process.
spk03: So you're amending the agreement to leave more room under those two covenants? And if you're amending the agreement, is there – I mean, are there any – last time you guys amended an agreement when you were, you know, close to covenant violations, there was a big fee for it. So I'm just curious, you know, are you paying for the amendment?
spk04: Nothing that would be uncustomary.
spk03: Okay. The – You know, when I look at the charge-off rate here for the quarter, you know, 23%, you were at 22.3% last quarter. You know, when I try to estimate the CPI, right, and you have 8% delinquencies, it would indicate that you were actually at quarter end, because I don't see the monthly numbers, that you were actually under the 24% threshold for the CPI. What month did you violate, and are you now in compliance with it, or is it just the calculation's off a little bit because I don't have the monthly – DQ and SEO numbers.
spk04: Yeah, I think your – it sounds like your calculation is off a little bit. So, yeah, we missed it as of September, and it was close, but we did miss it.
spk03: Okay, yeah, no, obviously the agreements calculated on a monthly basis, but we only see the quarterly information. So I know that my estimation is not a perfect number. It's just the way you have to roundabout try to get to it. Okay. Okay, and then are you still accruing at 100% for your 2540 EPS goal? And if you don't hit that, is it all or nothing? Do you reverse out all of it? Is it partial relative to certain thresholds? And if you do reverse out of it, is there any benefit to some of these covenant issues that you're having from that reversal, or is that excluded?
spk04: There's three different targets, right? And we are still accruing for them. The plan runs through 2025, right? So we have through March 2025 to hit it. It's three different targets and they are cliffed, right? So it's not a proportional payout, right? So if in the end we we don't hit a target, I don't think we could hit a target, it would reverse. Because it's share-based comp and non-cash share-based comp, it doesn't impact those covenants.
spk03: Okay. All right. That's it for me. Thank you.
spk00: Yep. Our next question comes from Vincent Cantick with Stephens. Please proceed, sir.
spk02: Hey, good morning. Thanks for taking my questions. First on the charge-offs and credits, so you were talking about on the prepared remarks that first payment defaults are improving and maybe were the best since 2019. The charge-offs are at the highest level, and so I'm kind of wondering if you can help us understand how that's going to trend. If the first payment defaults are down now, should we expect by, say, in a quarter or two that charge-offs would have normalized And then on the press release, I saw that seasonality table, and if you could help us understand how to interpret that. Thank you.
spk01: Sure. All right. So first off on the credit quality and lower first pay default rates that we're experiencing. So we've made a number of underwriting changes going back to our fiscal third quarter last year. So, you know, during the October through December quarter last year. Um, you know, continuing through, uh, the, the winter and spring, we made escalating changes to underwriting. So, you know, really for us, the, the highest first pay default vintages, uh, were originated last October to December. Um, and coming forward, you know, each subsequent vintage has performed, uh, better. And so in terms of how we'll see or how long it takes for that to run into lower charge-offs, typically when we look at accounts that have – or ventures that have high first-paid default rates, we'll see those charge-offs occur anywhere from six to eight months afterwards. But there is impact to the overall portfolio as well. And so, in reality, I would think during the third quarter and fourth quarter, we'll begin to see some reduction in charge-offs from those vintages, and especially from the most recent vintages that have had the most dramatic increase or improvement in credit quality. Now, with that being said, it is important to note, and I want to make sure it's very clear, that our new customer vintages The most recent ones, especially, these are much lower investment dollars, so the origination volumes are much lower. So going forward, while these vintages are performing better, they will have a smaller impact to the overall portfolio. The underlying changes that we've made, especially on the refinance side in the first and especially the second quarter of this fiscal year, we'll begin to see changes or impacts to the charge-off rates you know, more than likely in the fourth quarter of this fiscal year from those changes. And those impact a much larger percent of the overall portfolio.
spk02: Okay, great. That's super helpful. Thank you. And then switching to the yield side, so I've seen that the yield has been compressing, and you've explained it as, you know, moving further up market and larger loans. Has that mix stabilized at this point? Essentially, I'm wondering if the yield of this past quarter is what we should expect going forward, or is there continuing to be a mixed shift where we should expect that to come lower because you're targeting higher yields and better credits? Thank you.
spk04: I think there's sort of two competing things happening there, right? So, you know, as... Yeah, as... the large loan makes increases that it does reduce the overall yields. And right now, it's not so much of a growing that large loan portfolio as much as it is because the new loan originations, new borrower originations are so much lower that the small loan portfolio is not growing as fast. Does that make sense? So it's not that we're growing large loans faster, it's just we're growing the small loans slower. So that is kind of having that shift in mix. But the loans we are originating are happening at higher yields. So that should offset some of that. And there's also some accounting nuances that are happening or have happened over the last 12 months that we would expect to start to reverse over the next six months. Yeah, I think ultimately the net effect should be certainly at least the stabilization in yields, but potentially an increase in yields.
spk02: Okay, perfect. That's helpful. That phenomenon of the large loan portfolio, it's not like the mix changing, but the small loan portfolio isn't growing as quickly. Do you expect that to continue? in the near term, or is that sort of stabilized at this point?
spk01: I would expect us to have certainly lower small loan portfolio growth than we did last year, but probably more in line with what we experienced in the most recent quarter. You know, if the ballpark you're going for is probably the same percentage. Relative to the same quarter of the prior year. That's right.
spk02: Okay. Okay, gotcha. Very helpful. Thank you.
spk00: As a reminder, if you do have a question, please press star then one on your telephone and wait for your name to be announced. Our next question is a follow-up from John Rowan with Jannie. Please proceed.
spk03: Yeah, just thought of one more. So, you know, you're obviously renegotiating your credit facility. I asked if there would be a big fee, but I probably should have asked, are there any other changes that could happen as a result of The covenant breach rate change and or change in commitment level from the lenders that you would anticipate?
spk04: We don't expect anything significant.
spk03: Okay. All right. Thank you.
spk00: At this time, we are showing no further questioners in the queue, and this ends our question and answer session. I would now like to turn the call back over to Mr. Prashad for any closing remarks.
spk01: Thank you. In closing, we are pleased with the changes that we've made to our portfolio and believe we'll continue to generate significant cash flow in the coming operating environment. Thank you for taking the time to join us today, and this concludes the second quarter earnings call for World Acceptance Corporation.
spk00: Conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
Disclaimer