Elevate Credit, Inc.

Good afternoon, ladies and gentlemen, and welcome to Elevate Credit's second quarter 2022 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone keypad. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Daniel Ray, Director of Public Affairs. Please go ahead.

Good afternoon, and thanks for joining us on Elevate's second quarter 2022 earnings conference call. Earlier today, we issued a press release with our second quarter results. A copy of the release is available on our website at investors.elevate.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 issued today, including impacts related to COVID-19 and economic conditions, and our most recent annual report on Form 10-K and other filings 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. Joining me on the call today are President and Chief Executive Officer Jason Harbison and Chief Financial Officer Steve Trussell. I will now turn the call over to Jason. Good afternoon.

Thank you, Daniel, and to everyone on the call. I'm going to begin the call with some high-level observations about trends year-to-date, both for Elevate and for the consumer finance market more broadly. Then I'll provide a summary of our results for the quarter and our outlook for the rest of 2022. If we turn to slide four, we'll begin with the first half of 2022, wherein, generally speaking, our results have been in line with our original expectations. That said, we, like many others, have seen some signs of softening credit showing at the end of June and through July as inflation has started to impact the portfolio. I'll speak to credit in more length in a second, but in terms of demand, the combination of inflation, particularly fuel costs and groceries, and the lack of federal stimulus this year are driving incremental demand across the full spectrum of our products. While this dynamic broadens an addressable market that is already very large, Elevate will remain committed to a measured and returns-focused approach to growth. We have recently made the cautionary and, in our view, very prudent decision to throttle down growth in the near term, given the uncertain path of inflation and the range of credit outcomes that exist with certain borrowers. That said, we believe our core philosophy to focus on returns, paired with our market-leading borrower flexibility and fraud tools, positioned Elevate well to navigate the market. As you know, Elevate has developed products and capabilities to increase our ability to provide credit solutions selectively across a wider set of credit bands. Better yet, these opportunities become immediately actionable as volatility eases. Let me comment on inflation as it impacts customers. As I mentioned, the pressure of rising inflation became increasingly apparent in credit trends beginning in late June and through July. At this point, we believe it is prudent to assume that a current level of inflation will drive softer credit performance compared to our original forecasts. We'll speak more to vintage-level differences, but the bulk of the heightened level of delinquencies is being seen in 2021 loans where inflation-related assumptions were much lower and higher level of savings rate were prevalent. On the other hand, the 2022 vintage is performing in line or better than expected due to our recent adjustments in credit models. Turning to credit, in July, we have seen moderately higher than anticipated delinquency rates across all products. To be clear, the vintages and their unit economics remain within our historical bands, albeit above our initial credit performance targets. But if the current rate of inflation continues, we believe credit performance could continue to soften. We, like every other business in the world, operate in real time, and while the recent decline in gas prices and some of the headlines have improved, we believe it is prudent to preserve returns over growth. For this reason, we have modified our full-year 2022 outlook to assume a lower rate of origination and revenue growth and have withdrawn our full-year earnings and EBITDA guidance. Steve will provide the details in a minute, But strategically, I will say that our change in outlook is 100% in line with the value creation philosophy that has been in place at Elevate since I became CEO in 2019. If you flip to slide five, let me take a minute to share some of the data that we follow closely as part of our non-prime tracker, specifically as it relates to the impact of inflation. As you can see in the chart at left, gas prices very quickly presented strain to consumers in the first and second quarters of 22 for both prime and non-prime Americans. And if we look at the right side of this page, one can see that even the majority of prime borrowers are now saying that one or more factors are causing a lot of strain on their month-to-month finances. The chart also shows how federal stimulus and higher levels of savings in 20 and 21 stabilized trends, but now in 22, we are seeing the uptick alongside rising inflation, primarily from gasoline, grocery costs, and housing costs. While inflation has been on our radar for much of the year, we hadn't seen the impact on 2021 loans until late June of this year. Our 2022 vintage is performing better because of changes we made to our underwriting throughout the year. These changes in metrics are the primary reason we decided to moderate growth starting in late June. We are closely monitoring the fiscal health of the consumer as it relates to credit. As mentioned, we do expect credit performance to become more stressed going forward, but we do not foresee a shock or significant underperformance on loans for two key reasons. Both prime and non-prime borrowers entered the period of inflation with higher level of savings at any point in recent history and continue to see strong employment rates. Should we note further strain on consumers, we have best-in-class flexibility tools across all the products on the platform that we are able to push out in a more proactive manner as needed. These tools were developed pre-COVID, then battle-tested, and we are now rolling out our next-generation AI-enhanced payment flexibility tools that meet consumers' needs in times of enhanced volatility. We do see potential upside in the model and the ability to lend to broader credit bands as the market stabilizes and prime borrowers tighten further. Strangely, our opportunity to grow is broadening, but the environment as it relates to credit stabilization is the overriding factor in our decision making. So, to summarize what we know today, one, while we see modest softness on credit at present, we anticipate slightly more pronounced in the second half of the year. Two, even with softening credit performance, we believe a loan to the portfolio will generate returns similar to pre-COVID ventures. Three, we plan to be more cautious in these growth originations in the back half of the year, but we also see broadening opportunities to be selective and make loans to high credit borrowers given the wider market of Americans seeking loans. At present, all three of the products currently on the platform are seeing strong demand, even as we slow new originations. With that backdrop for context, let's now turn to slide six to summarize our second quarter results. As mentioned, Elevate performed largely in line with our expectations for the quarter and year-to-date. As a note, remember that our year-over-year comparison will continue to look skewed on growth in charge-offs given the replenishment of the portfolio following the pandemic. Our combined loan principal receivable grew by 33% from the lows of last year and now total $532 million. Growth was broad-based across all products, with Rise and Elastic growing approximately 23% and 34%, respectively. The TodayCard product continues to see high demand as the portfolio more than doubled compared to a year ago and now represents over $50 million of outstandings, or about 10% of our total portfolio. As a result, our revenue for the second quarter of $118 million grew 39% from the growth in average loan receivables year-over-year, despite a slight drop in APR from the increasing portfolio mix of the TodayCard. Our customer acquisition costs, or CAC, were down an aggregate 26% year-over-year. These costs totaled approximately $300 per loan in the second quarter, which is at the upper end of our target range. On CAC, I'd like to emphasize that the recent increase we have shown in our results is not a function of demand. The higher CAC we've experienced year-to-date has come primarily from our continued selectivity in underwriting and originations and the higher mix of new customers. Adjusted EBIT off the quarter totaled $12.3 million, which was up 6% compared to a year ago. Our adjusted EBITDA margin was 10.5% for the quarter. Steve will further detail our outlook, but as I previously mentioned, we believe it is prudent to lower our growth expectations for full 2022 given the stresses in the economy and the impacts to our customers. With that, let me take a second to formally introduce Steve Trussell, our new Chief Financial Officer. Steve has been with us since May and comes to Elevate with a significant amount of consumer finance experience with his over 17 years at Discover Financial. We are lucky to have Steve be a part of what I believe is a very deep bench, including Chris Luce and Chad Bradford. With that, I'll turn it over to Steve.