Elevate Credit, Inc.

Greetings. Welcome to the Elevate Credit first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Daniel Ray. Thank you. You may begin.

Good afternoon, and thanks for joining us on Elevate's first quarter 2021 earnings conference call. Earlier today, we issued a press release with our first quarter results. A copy of the release is available on our website at investors.elevating.com. Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. Please refer now to slide two of that presentation. Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issue today, including impacts related to COVID-19 and our most recent annual report on Form 10-K and other filings we make with the SEC. Please note that all forward-looking statements speak only as of the date of this call, and we disclaim any obligation to update these forward-looking statements. During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued today and our slide presentation, both of which have been furnished to the SEC and are available on our website at investors.elevate.com. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses. Joining me on the call today are President and Chief Executive Officer Jason Harveston and Chief Financial Officer Chris Lutz. I will now turn the call over to Jason.

Good afternoon, everyone, and thank you for joining us today. I hope you're all healthy and looking forward to summer and a broader year ahead. At Elevate, we recognize that the world is still uncertain, but I can speak for the company and confidently say we're more encouraged as a business than we have been in some time. As Chris and I will detail in a moment, our first quarter results and the underlying credit trends we are seeing, combined with increasing demand, point in a very positive direction for Elevate. With that as a backdrop, let me start on slide four with the highlights from a strong first quarter. On slide four and from our press release, you can see that our results again display outsized profitability despite the expected year-over-year weakness in revenue. As you'll recall from Chris's commentary last quarter, we expected our first quarter results revenues to be down similarly to the year-over-year compare in fourth quarter 20, excluding our sunny business. Our revenues of $89.7 million for the quarter were down 45% compared to first quarter 20, excluding the U.K. discontinued operations. While the end result was in line with our expectations, we note that the underlying demand trends tell a more nuanced and encouraging story than in quarters past. I'll speak to our view on demand in a minute, but clearly the pacing of factors such as federal stimulus, unemployment benefits, and tax refunds have and will continue to have a more pronounced short-term impact on demand in early 21 than we've seen in more quote-unquote normal years. Next, I would like to briefly speak to our profitability in another great quarter, which in our view stands as a proof point of our unique model. Specifically, Elevate generated adjusted EBITDA of $31.6 million in the first quarter, which translates to nearly double the margin compared to a year ago at 21.5%, versus 35.2%. Similar to past quarters, the disproportionate driver of our expanded profitability was the continued strength in credit. Net charge-offs of just 34% as a percent of revenues in the quarter continued to trend at the best levels in our history. Percentage of loans in good standing was at record highs. Nine in 10 brand customers are in positive repayment. We attribute this to multiple factors, including our deep understanding of non-prime consumers and ability to repay. Payment assistant tools, previously called deferrals, were at 3% of the total portfolio compared to 9% at years in. As we mentioned before, we anticipate these features to continue into the future and help non-prime consumers at times of need. We will talk about credit as it relates to demand in a minute, but the key takeaway for our results is that credit quality, as well as lower operating and interest expense, drove another strong quarter on the bottom line for Elevate, despite a very challenging backdrop. But even more directly, Elevate's model not just withstood an economic shock, but excelled both from a risk and return perspective. In the quarter, our net income totaled $12.7 million, which is up $17.6 million compared to a year ago and represents an income margin of 14%, which was similarly up 172 basis points versus the first quarter of 2020. While we're excited to see growth return, we expect earnings to be squeezed in the near term. While credit quality and lower than normal aggregate marketing expenses have aided our profitability over the past year, it is also important to note that Elevate continues to reduce our cost of capital and generate significant cash flow. On the whole, Elevate is in a very strong position to meet this increasing demand we see for 2021 and beyond. To that point, let's turn to slide five, where I'd like to take a minute and talk about what we were seeing in non-prime credit demand, both in the very near term as well as longer term. As you can see here, we have plotted average non-prime bank balances for a subset of RISE customers over 13 months. For the most part, the chart depicts the credit discipline and increased paydowns and savings as consumers pulled back spending and became prudently risk-averse throughout 2020. These accounts are from a subset of a RISE brand, but we believe these are telling in relation to demand. The spikes at certain points along this chart line up with the timing of federal stimulus payments. As you can see in the first smaller but elongated spike, the federal stimulus dollars were used to fund temporary spend needs and then were quickly used to pay down balances. The healthy consumer behavior expands much of the outside strength we have seen in the credit book over the past year. What is interesting, though, is that the second larger, more recent spike in the data does not show the same pattern. To be clear, the spike was driven by the most recent federal stimulus, but we believe the use of those funds are different than what we saw late last year. In 2021, it was clear consumer confidence and spending levels are rising. This is a very encouraging trend, not just for the broader economy, but for Elevate and consumer lending as a whole. The demand for access to credit is rising, and it has not pushed credit risk significantly higher. In fact, the excess savings taken by many consumers over the course of 2020 make the year ahead very bright for our industry. Healthy and rebounding demand combined with strong savings and low existing leverage is an ideal environment for a lender and it seems that 2021 has that backdrop. Let's now turn to slide seven and talk for a minute about the marketing plan in 2021. As I mentioned, we believe factors including the most recent federal stimulus will make the week-to-week demand trends in Q2 choppy, very similar to what we saw in the first quarter and much of last year. That said, the underlying demand improvement that I detailed on the previous slide, combined with improving employment and overall economic strength, will broaden the funnel for consumers we can market to. We expect need for access to credit among non-prime consumers to increase as the economy continues to reopen. To be clear, our strategy and that of the banks we support is to grow 2021 remains the same as I described last quarter. Our plan and pacing over the year will take a three-tiered approach that begins first with loans to previous or existing Elevate and Bank customers. The second and third tiers, though, are what have us more excited about the second half of 21. As we navigate the short-term pace of federal stimulus and tax refunds in the coming quarter, we expect to reinitiate broader direct mail campaigns. We have significant experience with these campaigns and hope to have a better line of sight as we get to the second half of the year to provide more specific guidance as a result, which Chris will speak to as well. Last is the third tier of our growth strategy, which will expand the credit partner channel. As you'll remember, we undertook a meaningful refresh of our credit models recently to handle both the volume and different credit decisioning steps involved in the partner channel. We are excited about the testing we had done initially and believe the opportunity to elevate in these channels can be large. In fact, we more than doubled our partner channel over the last two quarters and we anticipate adding several more in 21. The marketing mix will continue to diversify throughout the year. In March, for the first time in more than five years, we saw non-direct mail traffic outpace our direct mail traffic. In total, we believe we can drive growth through all three tiers in the second half of 2021 and beyond. That said, above all else, I want to be clear that growth across each tier will continue to be dictated by returns and profitability, and as a result, we want to reiterate the philosophy of measured growth that ramps over time. To put more simply, we're not going to open the floodgates and are happy to sacrifice percentage points of revenue or origination growth for solid profitability and cash flow. Now, turning to slide eight, I'm excited to announce a new offering for Elevate. As you may have noticed, Elevate.com has a new look and feel. The new website is something the team has been working hard on for the past several months. Our goal is to create a full-service destination for non-prime consumers who where they can find the immediate credit they need, as well as tools and information that will help them make meaningful financial progress. This fulfills our mission of Good Today, Better Tomorrow. We are excited about leveraging our deep understanding of the non-prime consumer to serve them more deeply. The website features a proprietary tool called Score 40, which helps non-prime visitors identify what immediate actions can help them improve their credit score by at least 40 points. This is just the first of several tools that will engage the consumer with a unique offering found nowhere else. We also have a broad range of content tailored just for the non-prime consumer. Over the coming months, we will be adding products and services to a marketplace page as well. The new Elevate.com will help us lower acquisition costs over time, build long-term relationships with the non-prime consumer, and give us access to a new revenue stream in the form of referral fees on ancillary products. Of course, this is just the beginning as we expand the website's reach and impact. We're excited about what this can mean for Elevate and to the non-prime consumers we serve. Before jumping to the next slide, I would like to briefly address the Today card. Today card grew total accounts by more than 18% compared to year-end and continued to experience low CACs. We are encouraged by the trajectory, even with the seasonality and stimulus. Finally, I'd like to wrap up a few thoughts before turning the call to Chris. I'd like to note that over the first quarter, Elevate repurchased 2.5 million shares, or roughly 6.5% of our outstanding shares. I won't say a lot here, but clearly we believe our company is very undervalued relative to both current profitability and most certainly what profitability we believe is possible in the years ahead. Chris will speak more to our capitalization, but we want to make the point that as long as Elevate is undervalued, we will continue to utilize our authorization to repurchase shares. Second, I'd just like to wrap with a few thoughts in the past few years for Elevate relative to our goals and what we see ahead. As you can tell, there's a lot of excitement about the future here at Elevate. In the last few months, we have rolled out updated models, added additional flexibility to our brands, grown up partner channels, launched Elevate.com, and continue to grow low APR products, and this is only the start. Candidly, it has been a challenging few years where external factors have impacted the progress of our ultimate goal. which is to help the very large population of Americans that have limited access to credit. While the global pandemic rippled across every part of our lives, the credit needs of the new middle class, which is 50% of the country, remain just as underserved as they were a little more than a year ago. In fact, in many cases, credit is less available today than it was then. While it certainly wasn't in the plan, COVID-19 has served to validate and stress test our model and elevate paths with flying colors. As we hopefully turn the corner on the pandemic, we see very bright days ahead for our company and look forward to achieving the goals we originally set out to achieve. With that, let me now turn the call over to Chris to detail the results.