Elevate Credit, Inc.

Welcome to the Elevate Credit Third Quarter 2022 Earnings Conference Call. At this time, all participants have a listening mode. Later, we will conduct a question and answer session. I'll now turn the call over to your host, Daniel Rhea, Chief Communications Officer. Mr. Rhea, you may begin.

Good afternoon, and thanks for joining us on Elevate's Third Quarter 2022 Earnings Conference Call. Earlier today, we issued a press release with our third 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, along with our annual report on Form 10-K and other filings we make with the SEC. These include impacts related to the current economic environment, including high inflation and interest rates and COVID-19. Please note that all forward-looking statements speak only as the date of this call, and we disclaim any obligation to update these forward-looking statements. During our call today, we'll 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 issue 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.

Thank you, Daniel, and hope everyone is doing well. Similar to last quarter, I'll begin the call with our updated view of the current environment and our strategic response. I'll then give a brief overview of our results and end my remarks with where Elevate is moving in the future. To recap the last year, our team started in late 21 with a clear plan to temper growth and bring margins back into focus for 2022. We anticipated at that time a normalization of credit. What we did not anticipate was the magnitude of inflation and a quickly shifting macro environment, particularly as it trained non-prime Americans. This summer, we pivoted our plan to slow originations further. Additionally, we took proactive steps to lower operating expenses. On the underwriting side, we are implementing new affordability assessments and income verification tools that will not only help with future growth, but can also help with ongoing account management. I'd like to highlight three areas of emphasis. First, on cost, we have made the difficult but appropriate decision to aggressively right-size our expense base for the current environment. by implementing furloughs and additional expense reductions beyond personnel. Second, on credit, in addition to the new underwriting enhancements I just mentioned, we are working diligently to review risk factors in the current portfolio relative to what we're seeing in specific cost of living and affordability categories. For example, we are working proactively with higher risk customers to assist where possible to help customers weather the current environment. Lastly, on revenue, While we mentioned slower growth, we are also actively pursuing opportunities to improve pricing leverage and segmentation based both on product mix and what we are seeing in a lack of available credit from traditional bank lenders. In sum, it is clear that 2022 and 23 will be more challenging than we originally expected, but we firmly believe we are positioning the company well to see the growing opportunity to serve more near-prime consumers when economic visibility increases. If we start on slide four, I'll reiterate that this is a difficult market for both consumers and lenders. Volatility always makes decision-making difficult, but when paired with persistently high inflation and a rising probability of recession, strategy needs to pivot. For Elevate, I'm proud that the company and our teams continue to be nimble in the current market, and we continue to position the company to best serve both the borrowers that need us and our shareholders. To speak to our strategy holistically, let's organize across demand, credit, and what we're doing operationally in today's shifting market. First, on demand and growth. As you have seen from the banks that have reported results so far, credit availability is shrinking, and this makes our large addressable market that much larger. That said, Elevate is also highly focused on driving the best returns for our shareholders, and we believe that it is best achieved in this market through measured and selective growth utilizing new and improved tools to assist with income verification and affordability assessments in real time. You can see our strength in the 3% growth in originations over the last quarter. To be clear, the demand for products significantly exceeds the originations pace, but we believe it is prudent to make loans to borrowers where we have the highest degree of confidence and the best line of sight to strong returns. The natural question, of course, is when do we expect a turn and can accelerate growth? Ultimately, we believe a stabilization in inflation and interest rates will be the first step. On a daily basis, we are evaluating key internal and external indicators to give us the confidence needed to lean in. Underwriting beyond 2022 already assumes a weakening economic environment with higher unemployment and inflation. The challenge in the short term is what pays for timeline is to get to that point. It is important to be transparent about what we know and what we don't, and given there are unknowns, the right strategy is to be measured and selective with the loans we originate. As a reminder, as volatility eases, we anticipate the ability to lend to a more creditworthy borrower that has been walked out of traditional options previously available. On that point, let's talk about credit and what we have seen in our 21 and now seizing 2022 vintages. The story here is also about volatility and how the rapid and persistent increase in cost of living has stressed borrowers beyond initial underwriting scenarios. Steve will speak in more detail about our vintages, but clearly 21 and 22 have been difficult, and that backdrop helps to inform our decisions on growth and targeting in the near term. There is more we can do to insulate returns and profitability beyond our speed originations. Elevate has made difficult decisions this year to proactively reduce our expense base. Specifically, during Q3, we furloughed approximately 25% of our workforce, and we'll begin seeing the full impact of that decision on our financials starting in the fourth quarter. This action was part of a series of planned reductions to operational expenses that included decreases in executive compensation, an elimination of many external vendors, and a narrow corporate focus on existing brands. Additionally, we continue to strengthen our credit decisioning by enhancing affordability assessments. Many of these process improvements stem from the challenges we have faced in our 21 vintage. We are beginning to see the benefit in our current underwriting and believe there will be long-term value in the use of these tools in the 23 vintages. To complement these enhancements, we are now evaluating if portfolio yield appropriately aligns with consumer risk performance. To bring that point home, we have consistently lowered yields year after year to reward borrowers. We are now evaluating if the risk portfolio adequately matches the decreases, and we anticipate making changes going forward. Lastly, Elevate and its board of directors are conducting a strategic review process with the intention of maximizing value for our shareholders. As you know, we have been active investors in our own company through our share repurchase over the past three years and continue to see highly compelling value in our stock. With that, let's flip to slide five, and I can give some additional detail on the current financial health of borrowers and how Elevate innovates to best help this population when more and more financial institutions are turning away. First, as I mentioned, the number of use cases for Elevate's products is rising and expanding quickly. The average cost of living has greatly outstripped wage growth for our target consumers and is likely to continue in the near term. Additionally, specific factors for certain populations are also set to change rapidly. For instance, approximately 48 million student loan borrowers will be set to resume payments in January of 23 and will be doing so at a very stressful time. As a result, Elevate is looking at ways to help non-prime Americans, and let me detail a few of those. First, payment flexibility features. Match Pay and Skip Payment tools were first utilized as self-service tools online during the pandemic. We are expanding these enhancements in more proactive ways and pushing out more directly to borrowers that are exhibiting signs of early stress. These features are both good for us in protecting the book and good for consumers as no additional cost is incurred. To date, thousands of consumers have utilized these features that were battle-tested in the early stages of COVID. Second, regarding student loans. In light of the student loan deferral period ending, we have proactively begun to reach out to consumers with options should they feel the impact of these resumed payments. We estimate that approximately 20% of the portfolio has some form of student loan debt. However, we do not anticipate repayment on these loans to present a material drag on performance. Elevate is proud to be the leader in customer-friendly assistance tools and believe it is more important than ever for both our current customers as well as a large and growing set of Americans looking for help. Lastly, before I turn the call to Steve, I'd like to clarify Elevate's funding position as it relates to both our originations growth as well as strategic review. Elevate's product debt facilities have capacity to originate business in excess of the volumes we are producing today. Steve will detail our corporate debt shortly, but we have added additional liquidity to position this through the current market environment. We are in full compliance with all financial covenants and remain in close contact and have strong working relationships with our lenders. Similarly, our decision to conduct a strategic review is a function of our mandate to maximize value for our shareholders. Regardless of the conclusions of our review, we believe to elevate this position both strategically and financially to grow and drive value for shareholders. We are making decisions in real time to unlock greater value for our platform and are very much anticipating a return on profitability in 2023. With that, let me turn the call over to Steve for a review of our financial results.