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spk01: Good morning and welcome to the World Acceptance Corporation's first quarter 2024 earnings 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. The comments made during this conference call may contain certain forward-looking statements within the meaning of Section 21 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 earning press release. And in the risk factors section of the corporation's most recent Form 10-K for the fiscal year ended March 31, 2023. 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. Please go ahead.
spk00: Good morning, and thank you for joining our fiscal 2024 first quarter earnings call. Before we open it up to questions, there are a few areas that I'd like to highlight. Last year, we instituted a number of adjustments that we believe would have a significant impact on our business and have been quite pleased with the results. As we discussed during prior earnings calls, we tightened underwriting about a year and a half ago as economic uncertainty and inflation concerns were increasing. We have weathered a period of delinquency normalization after a period of extraordinary portfolio growth, as well as higher than expected delinquency and losses throughout most of our last fiscal year. Today, we continue to see lower and normalizing delinquency rates in our portfolio, as well as increasing yields, and expect this trend to continue for several more months. This is primarily due to many operations adjustments, including a heightened focus on credit quality and yields, as we previously discussed. We're also very cautiously increasing approval rates to new customers, as we still see the potential of this uncertain economic environment to impact our customers in the coming year. During the first quarter, Our customer base grew more than the prior three years, both in nominal and relative terms. New loan originations by number increased dramatically over the prior quarter by 47%, and are returning to a normal rate as a percentage of the customer base. Returned customer originations also increased dramatically, around 76% over the previous quarter, and exceeded the first quarter of last year as well. thanks to an increased focus by our marketing and operations teams. All of these outcomes are an especially great team accomplishment when we consider the reports of increasing delinquency rates across several credit industries during both the calendar year of 2022 as well as the first half of 2023. While economic uncertainty still exists, management continues to accrue for long-term incentive plan with vesting tiers of $16.35, $20.45, and $25.30 per share due to much improved credit quality, yields, and operating conditions. We anticipate the first-tier vesting as early as the end of this fiscal year, assuming credit quality and performance remain stable and unemployment remains low. We're pleased to begin our fiscal year 2024 from a position of portfolio and capital strength. At this time, Johnny Camise, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have.
spk01: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Rowan of Jani. Go ahead.
spk04: Hey guys, just on the accrual, can you repeat the accrual numbers again that you just gave? And also, you know, you had been accruing, assuming that you get to the, you know, the full, the highest hurdle, but there was a reduction in incentive compensation in the quarter. Was there any type of accrual reversal? And are you still accruing that, assuming that you reach the highest, you know, the 2540 vesting hurdle?
spk00: Sure. Good morning, John. So the tiers that we're accruing towards on an EPS basis are $16.35, $20.45, and $25.30. And we have been accruing for those over the last four-plus fiscal years, and we have not reversed any of the accruals on any of those tiers. Right, yes, we haven't reversed any expense over the years.
spk03: Over the period, we have shifted our expectations on when we may hit those, which can have an impact of changing the quarterly expense on those. But at the same time, it depends which period you're comparing it to. It's great investing. So over time, the compensation expense will decrease. as some of those tranches become fully vested and we're no longer expensing.
spk04: Okay, so I was just trying to figure out, you know, there was a reduction in incentive compensation for the quarter. If that wasn't a reversal, is this level of compensation expense a correct run rate? I'm trying to figure out if there was a reversal and it pops back up or if this is the correct run rate.
spk03: I got you, yeah. So if you're comparing Q1 over Q1, a lot of the reasons for that decrease would be the graded vesting, right? So that run rate will be appropriate at least through the second quarter of this year, and then it'll decrease again because we have the time-based vestings will happen in October, right? So that'll be another tranche that's fully vested, so then the run rate will decrease again for Q3 and Q4 of this year.
spk00: And John, I believe it's been a few years that we released the great investing schedule. We'll have to go back and look. It's been probably three or four years since we released that.
spk04: Okay. And then just to switch gears a little bit, obviously you renegotiated the credit facility. There was no change in rate on that facility, correct? It's still the same. I mean, does it, whatever the spread is over so far, that's still the same spread. That's correct. Yep. And there was, Was there one lender taken out? Because there were some shifts in it. I saw there was a lender put in, but did anyone fall out of the facility?
spk03: Yeah, so there were two banks that needed to come out for different reasons. And yes, we had two banks that came out and one bank that came in.
spk04: Okay. And then I guess just maybe one last question. I probably should have done this before I went into the next question, but You know, you've kind of given some numbers in the past. I mean, what is it? The 2530 is effectively the number for fiscal 2025 based on the compensation plans. You know, we talked probably a couple of quarters ago about, you know, what kind of loss rate you needed to see to get there. Obviously, you know, you're at like 16% this quarter or 16 and change. You still need to be materially lower than that. I think you would give me kind of a high single-digit, low double-digit type number. Is that still what you're targeting to get to these EPS hurdles?
spk03: That's right, yeah. So the chart upgrade has improved substantially, but we still see room for improvement going forward.
spk04: Okay, and just to be clear, the 2530, that's the 2025 figure, because you mentioned changing the time frame at some point. That's still 2025, right? That's correct. Okay, all right, thank you. I'll hop back in the queue.
spk01: Again, if you have a question, please press star, then 1. Our next question comes from Vincent Kaintick of Stevens. Go ahead.
spk02: Hi, good morning. Thanks for taking my questions. Just wanted to expand on John's line of questioning and maybe just pull up a little bit. So the fiscal 2025 EPS target at $25.30. Just wondering if you could walk through the bigger drivers and how to get there since we're $1.62 this quarter. So it would be a material increase in run rate EPS. You spoke a little bit just now about the charge-offs, but any other kind of key components to get from, you know, here in the first quarter of 24 to get to that run rate for the full year 2025? Thank you.
spk03: Yeah, sure. So, obviously, you know, one of the most important components at this point will be the charge-off rate. And we, again, have seen substantial improvement there and see room for continued improvement. We will need some growth in the later quarters to help drive revenue there, but we are seeing some benefits of a shift in the portfolio to smaller loans. that shift is driving up our overall yields. You can see that their yields increased in Q1 versus Q4 of last year and Q1 of last year. The growth that we had in the first quarter was coming from the small loan portfolio. We actually had a little bit of shrinkage in the large loan portfolio and some growth in the small loan portfolio, which has created some tailwinds to yields. We'll need to continue to do that and that'll benefit revenue. And obviously continuing to control costs. We've done a really good job of controlling costs over the last couple years and we'll continue to do that with some buybacks mixed in as well in the later half of this year and next year.
spk02: Okay, thank you. That's very helpful. And would it be possible – I know the metrics that we're seeing in your results is the portfolio results, so, of course, having originations that were a little while ago. But if you could maybe talk about sort of the economics of the loans that you're originating today, are they already sort of that high yield, low loss, and low – unit expenses where we would already get to that $25 EPS, just trying to see that path from your current metrics versus kind of what you're putting on today. Thank you.
spk00: Yeah. Hey, Vincent, this is Chad. Great question. When we started tightening about this time last year, a little before during the first quarter of the last fiscal year, especially with new customers, we began to experience much higher credit quality, much higher performance, a dramatic improvement, especially from mid-second quarter of last fiscal year and on, a dramatic improvement in the gross yields of those loans we originated. As we've talked about, there was a much lower volume of those loans that we were originating. So while those credit tranches are performing very well, they are very small and don't carry a lot of weight in the overall portfolio, or at least haven't for some period of time. For what we're originating today, the quality remains very similar to that. The expected performance and expected both gross and net yields we believe will also be similar to what we have been originating in the past fiscal year. But we've been able to continue to grow those tranches on a subsequent basis, so in terms of size and weighting the portfolio. That's on the new customer origination front. There's been a similar pattern for the former customers who are returning. And then in terms of refinancing, we put a number of things in place, and that's where the majority of the portfolio really sits is with customers that have a good bit more tenure. So we've had a number of things in place that we're beginning to see overall portfolio increases in yield as well as overall performance and decrease in delinquency. So it does take time. This is a process we began over a year ago, but we're beginning to see a trickle through the overall portfolio. And so that's really where, you know, as it gets to the whole portfolio versus just new customers, we'll begin to see increased net yields, you know, as we anticipate hitting that $25.30 target by the end of next fiscal year.
spk02: Okay. That's very helpful. Thanks very much.
spk01: Our next question comes from John Rowan of Jani. Go ahead.
spk04: Hey, guys. Sorry, just a couple of quick follow-ups. So just to be clear, you guys are no longer on waivers with the revolving credit facility, correct? I didn't, no. I just wanted to make sure that you are now not in violation of the debt covenants. Because I only saw an adjustment to the fixed charge coverage ratio.
spk03: Yeah. Yeah, so no, we're in good shape relative to all the covenants on the debt facility. Yeah, so we did change. The fixed charge coverage ratio, obviously, it looks like interest rates might be higher and for longer. So that was really just to make sure that we have plenty of room over the next three years so we don't need to amend again in the future. So that's kind of what was driving that. But the collateral performance indicator, that's still part of the credit facility, correct?
spk04: Sorry, yes, that is, and we're in really good shape there. Okay, and then just last question for me. Obviously, you're more bullish on growing new customers now than I think you were a year or so ago when you really pulled back. It wasn't going to be a year ago, but three quarters ago when you really started to pull back on new customer volume. What's different today with the new customers than you saw back then when, obviously, we had spiking losses that caused you to pull back on that cohort. What's different now? Is there a change in first pay defaults? What makes you so sure that growing new customers at this point is not going to yield the same results? Thank you.
spk00: Yeah, that's an insightful question. There are a couple of things, and before I begin, I just want to caution a little bit. I'd say we're more bullish, but we're not – you know, strongly bullish on growing new customers at this time, right?
spk03: So we're still tighter today than we were, much tighter today than we were a year ago. So we've just, we've loosened from relative to Q3 of last year where we were extremely tight.
spk00: That's right. So in terms of where we've been able to loosen and be slightly more bullish and grow the new customer loan volume, It really comes down to where we've seen great operational performance. It's where we've seen the gross yields grow. We've seen delinquencies decline. And as we've seen that, those operational results, it gives us more confidence to begin loosening in certain areas. And actually, in many states, we're not loosening in terms of credit quality but we are beginning to drive more of those higher quality customers in or make more attractive loans and increase the approval rates for those that we're desiring the most. Again, still seeking to grow the overall gross yield during that whole process. So there's a little bit of a chicken egg here, so it's not like we're moving down the credit spectrum or anything like that to lower the credit quality in order to juice application flow or approval rates or anything of that nature. It's as we're seeing the performance of those loans and also we're seeing the gross yields and customers accept those terms. You know, this is a very different origination environment today this summer than it was last summer, given the higher interest rates and other creditors have pulled back. You know, so it gives it a little more confidence and on the margin being slightly more bullish.
spk04: Okay. Thank you very much.
spk01: Our next question comes again from Vincent Kaintick of Stevens. Go ahead.
spk02: Thank you. Just one quick follow-up. You mentioned shared purchases later this year. If you could remind us what, if any, limitations you have, just so we can kind of frame how much to share your purchases to model in. Thank you.
spk03: Sure. The big hurdle there is we need to get the fixed charge coverage ratio back over two. We may get there after the second quarter, but we fully expect to be there after the third quarter, which would mean we could either start buying, repurchasing in Q3 or Q4. We still have the same 50% of net income requirements that we've always had in there.
spk02: Okay, great. That's all I had. Thanks very much for the clarification. Yep.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Chad Prashan for any closing remarks.
spk00: I just want to thank everyone for taking the time to join us today, and this concludes our first quarter earnings call for World Acceptance Corporation. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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