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: 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.
spk01: 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.
spk02: 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.
spk04: Thanks, Jason, and good afternoon, everyone. Building off of Jason's comments on portfolio trends, I'll spend a few minutes detailing out impacts on our financials and actions we have taken. Turning over to slide seven, I'll start by discussing the loan portfolio. Combined principal loans receivable totaled $546 million as of September 30, 2022, up 6% from $513 million a year ago, and up 3% sequentially from where we ended the second quarter. In light of the challenging macroeconomic environment and uncertain impacts of inflation on our customers, we continue to take a cautionary stance on growth investments for new customers and implemented incremental tightening of underwriting and eligibility. Relative to the same quarter last year, our growth levels of new customers were lowered by approximately 60%. As a reminder, the second half of last year represented a turning point in our growth trajectory post-COVID as we significantly ramped up growth investments. Loan growth from existing and former customers also decreased by 7% in the quarter from tightened eligibility and from the overall lower level of new customer growth in prior quarters. Staying on this slide, revenue for the third quarter was up 11% from the third quarter a year ago, due to an increase in the average outstanding loan balance resulting from second half growth experienced in 2021 and the first half of 22, while individual product APRs were modestly lower between the periods. The overall portfolio APR was down five points driven by two key factors. The first is a lower quarterly APR and rise due to a reduced mix of new loans in the rise portfolio And the second, by a higher mix of the Today Card, which has the lowest APR and now comprises approximately 10% of the combined loan portfolio. As Jason mentioned, we are currently evaluating the risk-based pricing structure and other yield-enhancing opportunities across product lines to ensure these remain in line with target margins. Looking at the bottom of this slide, adjusted EBITDA was 14.6 million for the third quarter of 22 as compared to 3 million for the third quarter of 2021. On a pro forma basis, which assumes the adoption of fair value loan accounting at the beginning of 2021, adjusted EBITDA for the third quarter of 21 would have been approximately 14 million higher with pro forma adjusted EBITDA of 17 million. Relative to Q2 22, adjusted EBITDA on the quarter improved by 2 million. Looking at the bottom right, earnings with a net loss of 15 million for the third quarter of 22 with a net loss of 11 million reported for the third quarter of 2021. Third quarter 2022 results included a one-time deferred tax asset valuation allowance impacting net loss by 9.9 million. Incorporating this one-time item, adjusted net loss would have been 5 million. On a pro forma basis, which assumes the adoption of fair value loan accounting at the beginning of 2021, pro forma net income of approximately 0.2 million or 200,000 would have been reported for the third quarter of 2021. an increase of approximately 11 million from the reported results. Relative to Q2 2022, adjusted net income improved by approximately 2 million. Consistent with our comments last quarter, we are taking a cautionary stance on growth and the appropriate actions to mitigate risk, enhance product performance, and improve profitability. Many of these actions have resulted in tightened eligibility lower line assignments, and lower new loan volumes. We are shifting from our prior guidance of flat to low single-digit year-over-year loan growth to a contraction of 8 to 12% versus year-end 21 levels. Based on this lower level of loan growth, revenue growth is estimated to be above 21 levels by approximately 15 to 20%. Our more seasoned vintages are exhibiting softer credit trends in the back half of 2022. We will be monitoring near-term delinquency trends and are working diligently with customers to provide best-in-market service and assistance, but consistent with our comments from the prior quarter, the range of potential trajectories make guidance on any other earnings component challenging. As it relates to fair value in the quarter, The fair value premium decreased approximately 50 basis points to 9.6% at the end of the third quarter of 22 from Q2 levels of 10.1% due to a modestly higher credit performance and higher discount rates, partially offset by continued shift in portfolio mix. On a pro forma basis, the overall premium as of September 30, 2021, was approximately 9.3%. as we ramped up our loan growth starting in the third quarter of 21, leading to a higher mix of new and therefore riskier customers in the loan portfolio, which carried a lower fair value premium. Turning to credit on slide eight, consistent with our expectations, total credit losses increased on both a dollar basis as well as a percentage of revenues year over year, driven by the strong growth in loans in the second half of 21 and their associated seasoning, as well as the continued inflationary pressures on the portfolio. Net charge-offs increased by $35 million from Q3 2021, and as a percentage of revenues from 35% to 59%. Sequentially, net charge-offs increased $9 million from Q2 2022, and increased as a percentage of revenues from 55% to 59%. Looking at the chart on the left, the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting, slowdown in new loan originations, increased government stimulus, and improved payment flexibility tools. Given the macro and inflationary headwinds being faced, We are pleased to see the 21 vintages still performing slightly better than 2018 levels, as we stated on our last call. However, the strong growth in the loan portfolio during the second half of 21 continues to season and impact current year loss rates and earnings. Despite incremental tightening implemented this year, the early 22 vintages have also seen considerable seasoning and are currently performing worse than early loss targets in 21 vintage levels due to the inflationary headwinds. As Jason and I have both mentioned, we are implementing further credit tightening, underwriting capabilities, and revenue enhancements that are intended to help mitigate these trends going forward. Our quarterly net principal charge-offs as a percentage of our average combined principal loans receivable was 11% for the third quarter of 22, and remains within our historical experience. Past year principal balances totaled 10.9% of the principal loan portfolio as of September 30, 2022, up slightly from 10.3% as of June 30, 2022, and continue to remain within our historical range of 9 to 11%. On this line, we also show the customer acquisition costs through the first nine months of 22. which is within our target range. We maintain customer acquisition targets that allow us to achieve unit economics. These targets are between $250 and $300 for Rise and Elastic products and sub $100 for the Today card. We continue to pursue diversity in our marketing mix between direct mail, strategic partner, and digital channels. We expect to be within our target range for customer acquisition costs for the remainder of the year and on a full year basis. Shifting to slide nine, operating expenses in total for the third quarter were just above 35 million, lower than the third quarter of 21 by 5.8 million, or 14%, and versus the second quarter of 22 by 4.8 million, or 12%. The sequential decrease in expense was primarily driven by aggressive actions we have taken to lower compensation and professional services expenses as we continue to strive toward an efficiency ratio of 20 to 22% and partially mitigate the impacts of higher credit losses. The actions we have taken to date are expected to translate to a run rate reduction of 17% versus the first half of 22. It is worth highlighting that expense management will continue to be a key performance lever that we focus on during this challenging economic environment. Regarding the liquidity and funding, we ended the quarter with a total cash balance of 76 million. The company paid down its VPC debt facilities by approximately 25 million in the first quarter, while drawing down 80 million on all of its debt facilities and turn notes during 2022. The company had an overall average cost of funds of 9.7% as of September 30, 2022, up from 9.3% as of September 30, 2021. The majority of our debt has a fixed rate until maturity in January of 24. On the VPC facility, new borrowings are priced at three-month LIBOR plus 7%, subject to a 1% LIBOR floor. As noted in our quarterly disclosures, in partnership with our primary lender, Victory Park Capital, we amended several components of our loan agreement to accommodate impacts from higher credit losses on debt facility covenants and parent cash levels through the end of the year. We continue to have constructive relationships with all of our lenders as we manage through the impacts of this macroeconomic environment. We have also added further liquidity buffers to ensure we are poised to weather the current environment. As Jason mentioned, we are in the midst of a strategic review to maximize value to shareholders. That said, we remain optimistic on leaning back into growth and improved profitability as volatility in the market eases and the overall product, credit, and risk enhancements boost the portfolio in 2023. With that, let me turn the call back over to the operator and open it up for Q&A.
spk00: If you would like to ask a question, please press star 1 on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now. Our first question comes from Moshe Orenbuck from Credit Suisse. Please say your question.
spk03: Great. Thanks. I was hoping, Jason and Steve, you could kind of just elaborate a little more perhaps on some of the strategic options. Are there Are they kind of at the corporate level? Are there other sorts of things, either with your lenders or that we should be thinking about? Just a little more elaboration there.
spk02: Yeah, Moshe, this is Jason. I would say there's not a whole lot we can say about those at this moment right now, but I would say they're more at the corporate level that we're looking at, but we've been in close contact with our lenders as well as we go through the process. So I think what we're looking to do is evaluate options that are out there minimize any kind of distraction from the team because we have lots to do to continue to push forward with our initiatives we already have on hand and come to a decision if there's going to be any kind of changes here in the very near future.
spk03: Great. And as a follow-up, Steve kind of went through in fairly good detail the cost reduction. What other steps do you need to take or what else has to happen in order to, as you said, to return to profitability in 2023? And Is that, you know, are you expecting that for full year, for, you know, by the end of the year? Like, how are you thinking about what kind of, you know, achievement to profitability are we talking about?
spk04: Yeah, no, thanks. Thanks, Moshe. This is Steve. So, you know, as we're focusing on a number of levers, I would say that, you know, the critical path elements are continuing to fine tune our underwriting and credit capabilities. As noted, we've leaned into operating expenses this year and taken action on a number of areas, including compensation and professional services. I think that there's still more work to be done as we look to get to an efficiency ratio much closer to 20 to 22 percent. And then the other side that Jason alluded to is we're focusing on some pricing enhancements, which we think are critical to continuing to make sure that we've got appropriate risk-based pricing in place. So as we look at that path to profitability, again, I think that extends beyond 2022 as we look at the, you know, in the 23.
spk03: Right. And just to be more precise, when you, you know, when Jason said, you know, expectations and you're saying getting profitable at some point during 2023. That's correct. Great. Thanks so much. At this time, we have no further questions.
spk02: Just want to thank everyone for joining us this evening on our third quarter earnings call. I want to thank the Elevate team and Elevate board for all their support, and we look forward to talking to everyone next quarter. Thanks so much for your support. Take care.
spk00: This concludes today's conference call. Thank you for attending.
Disclaimer