World Acceptance Corporation (NASDAQ:WRLD) Q3 2023 Earnings Conference Call January 26, 2023 10:00 AM ET
Company Participants
Chad Prashad – President and CEO
Johnny Calmes – Chief Financial and Strategy Officer
Conference Call Participants
John Rowan – Janney Montgomery Scott
Vince Caintic – Stephens, Inc.
Operator
Good morning, and welcome to the World Acceptance Corporation Third Quarter 2023 Earnings Conference Call. This call is being recorded. [Operator Instructions].
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 21E of the Securities Exchange Act of 1934. That represents 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, planned, expect, believe, may, will and should or any variations 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 earnings press release and in the Risk Factors section of the Corporation’s most recent Form 10-K for the fiscal year ended March 31, 2022 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’s my pleasure to turn the floor over to your host to Mr. Chad Prashad, President and Chief Executive Officer.
Chad Prashad
Good morning, and thank you for joining our fiscal 2023 third quarter earnings call. Before we open up to questions, there are a few areas that I’d like to highlight. We are pleased with the trends that are emerging from recent policy changes. As we discussed during our most recent quarterly earnings call, we began adjusting our underwriting toward the end of our last fiscal year as the economic uncertainty was increasing. This was primarily due to three drivers, inflationary pressures on our customers’ cash flow, delinquency normalization after a period of extraordinary portfolio growth and stimulus, and growing macroeconomic and recessionary concerns.
The first trend, delinquency is showing positive trending. Our early-stage delinquency continues to decline month after month, while later stage will continue to result in elevated charge-offs into next quarter. Earlier in fiscal year 2023 we quickly reduced our exposure to our highest risk customers and successfully avoided the temptation to lend into the economic uncertainty. Now we are fortunate to be in a position of credit performance improvement during the fiscal year, especially with our new customers.
Second, we are now beginning to carefully renormalize credit. The third quarter’s book-to-look ratio increased slightly to around 25%. This is up from a low of around 20% during the second quarter. This compares to approximately 35% during the third quarter of fiscal years 2021 and 2022. The book-to-look reduction has been focused on our most risky applicants and has also resulted in significant reductions in recent first-pay default rates, which is a strong indicator of future credit performance.
For example, new customer originations in the first quarter had a 16% lower first-pay default rate year-over-year when compared to the first quarter of the prior year. Second quarter new customer originations first-pay default rates were 38% lower year-over-year. While still early, our most recent third quarter first-pay default rates show a 30%-plus reduction compared to the third quarter of fiscal year 2022. To underscore how strong recent credit performance has been, the most recent two quarters have some of the lowest vintage first-pay default rates including pre-pandemic comparisons as well as the low first-pay default rates of vintages positively impacted by COVID stimulus.
We’re especially proud of the accomplishment considering the reports of increasing default and delinquency rates across several credit industries during the second half of calendar 2022. In addition to early indications of dramatic improvements in performance for these vintages, we continue to steadily improve the gross yields. New customer originations in our second quarter of 2023 had gross yields over 7% higher year-over-year when compared to the second quarter of fiscal year 2022, while the third quarter gross yields are over 25% higher, again at the same time at a 30%-plus reduction in first-pay default rates.
Similar adjustments have been made for returning and refinance customers as well. These performance outcome are a result of incredibly hard work from our branch team members as well as their supporting leaders and trainers as well as corporate operations support, IT, analytics, HR and marketing teams. As mentioned, our increasing confidence in the early indications of performance, low delinquency and high gross yields allowed us to begin increasing marketing to new customers, our approval rates and our loan volume towards the end of the third quarter.
For reference, new customer originations were 31% of the originations in the third quarter of 2022 and 45% in the third quarter of fiscal years 2019 and 2020. This quarter, new customer originations increased with each subsequent month to 55% of comparable December volumes in fiscal year 2019 and 2020 and 45% of the prior year’s December. We expect to continue increasing our investments in marketing and new customer acquisition during the fourth quarter and into the next fiscal year.
Finally, our world finance team is outstanding. I’m incredibly proud of our leaders at every level in the company and not just the great accomplishments that I mentioned earlier, but that they embrace opportunities with positivity, fun and grace.
At this time, John Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from John Rowan of Janney. Please go ahead.
John Rowan
Good morning, guys.
Chad Prashad
Good morning.
John Rowan
The incentive — the $7 million of incentive change that you noted in the press release, is that a reversal? And if so, which line item is that? And I assume it would be in personnel. Is that correct?
John Calmes
Yes, that is in the personnel expense. That’s correct. And there was — two things going on there. One portion is a reversal related to some officers who left the company during the quarter. And the other is a shift from the branch level of compensation from bonus to base pay.
John Rowan
Okay. So what part — I’m trying to figure out what the run rate is on that number going forward. Obviously, the reversal won’t be there next quarter. I mean how much of the $6.9 million is a reversal as opposed to a change in comp?
John Calmes
I don’t have that number in front of me right now, but I believe it’s around $3 million, but I can check that.
John Rowan
So I mean, is it safe to assume that the $40.7 million, that next quarter, it’s $45 million — back to that $45 million because it would exclude that $3-ish million reversal?
John Calmes
Yes. That’s fair, yes.
John Rowan
Okay. So I appreciate the non-GAAP numbers that you put in, but I mean your portfolio did come down. So I think just putting the — taking the allowance — or taking the provision now and putting the charge-offs in maybe overstating the impact of credit. But your allowance ratio did come down sequentially. Is that — I’m trying to figure out why that came down if it was a change in the seasonal factors that you’re using? Or what drove — I’m looking at the number, it was saying, 12.9% versus 13.5% last quarter.
John Calmes
Yes. So that is a big piece of it, right? So I mean, you can look at the seasonality factors in the earnings release, right? And you go from a factor of 1.05 to 0.94, right? So that is certainly a piece of it, which makes sense, right? I mean our — the risk in the portfolio will be the lowest at December right before the tax refund season, right? But another big factor in that was just the shift in lower tenured customers, right?
So obviously, that zero to five month bucket carries a much higher expected loss rate than the longer tenured buckets do. And as of December, that — the zero to five month bucket makes up only 7.4% of the — sorry, 7.1% of the portfolio. And that was at 9.8% at September, and 13.8% last December, right? So we’ve taken out a substantial amount of risk from the portfolio by reducing those new customer originations.
John Rowan
Okay. But in the comments, and you talk about — and I’m just trying to figure out how this impacts the portfolio going forward about increasing new customer originations. I’m trying to — what was the comment that you made regarding increasing originations? Because you said even in the press release about increased loan originations toward the end of the quarter.
Chad Prashad
That’s right. So as we’ve been able to prove to ourselves that we could grow throughout this period at the same time is dramatically reducing the first-pay default rates within these vintages. We did begin to grow sequentially, November over October and December over November in terms of new customer investments. And we’ll continue that into the fourth quarter and the next fiscal year as well.
So to the earlier question, there’s the seasonality factor. There’s less of a risk in the overall portfolio as there’s been less investment in new customers. But at the same time, the investments we’re making in new customers over the last two quarters are much less risky than you would have historically seen. So that’s also a factor into the overall reserve rate.
John Rowan
Okay, and then I’m just trying to — you talked about better originations. I mean, next quarter, does the loan portfolio go up or down from where it is today?
Chad Prashad
Typically in the fourth quarter, we have a fair amount of runoff, and that’s primarily driven to tax season and tax refunds. I don’t think we have any expectation that this fourth quarter will be any different than prior fourth quarters in terms of runoff. And also the fourth quarter is not typically a quarter of a large investment in new customers. So I wouldn’t expect us to grow at a higher rate in the fourth quarter this year than we have in any prior year.
John Rowan
And then last question for me, where do you stand on your covenants, the waivers, and when would you potentially be refinancing your revolving credit facility? Thank you.
John Calmes
Sure, yes. So we amended the credit facility in — during the quarter, and we have plenty of room on all the covenants and there are no waivers as of the quarter end. And so we will look to extend that facility in this coming summer.
John Rowan
If I’m not mistaken, John, it was around June, you used to do it every year, correct?
John Calmes
That’s right. Yes.
John Rowan
Okay, all right. That’s it for me. Thank you.
John Calmes
Thank you.
Operator
Thank you. [Operator Instructions] Next question comes from Vince Caintic with Stephens. Please go ahead.
Vince Caintic
Hey, thanks so much. Thanks for taking my question. Just a quick follow-up from John Rowan’s questions. So it is encouraging to see that the first-pay defaults are improving. I’m just kind of wondering, all else being equal, if you can kind of play out how you think that’s going to roll into delinquencies and losses because just the 25% is high, but are we now — should we expect kind of going back to historical levels and sort of what’s the cadence to get there? Thank you.
John Calmes
Sure. Yes. So as you can see, the front-end delinquency as of December is much lower than it was in September and as well as it historically is at December, right? So medium term, that looks like — it indicates that charge-offs start to come down. At December, the 90-day delinquency bucket is still relatively high, but it did come down from September. I think in dollars, it came down around $4 million, $5 million since September. And we expect that to continue to come down during Q4. At this point, during January, the 90-day bucket has already come down close to $6 million from December.
And that’s with charge-offs for January look to be lower than they were in December. And kind of looking forward, you can tell that February charge-offs should be lower than January and March should be lower than February, right? So all the trends look very positive.
So we believe by the time we get to March, the delinquency picture should look pretty good and lead to lower charge-offs from that point. But that being said, but we do expect elevated charge-offs in Q4 relative to historicals. But they should be better from a growth standpoint compared to Q3.
Vince Caintic
Okay. That’s very helpful. Thank you. And helpful January data, I really appreciate that. The ADQs [ph] that came down $6 million. And then I guess in terms of the credit reserves, is the level that we see today anticipating those declines? Or should we be expecting further reductions in credit reserve allowances?
John Calmes
No. So we haven’t forecasted the declines that happened in January explicitly in the allowance, right? So a lot of that will be baked in, but there’s nothing sort of additional — no additional reductions for what we’re seeing today.
Vince Caintic
Okay. That’s helpful. And last one for me, so I appreciate that the number of new customers or low-tenure customers has shrunk, and it had an impact. And now it seems like, okay, there’s an opportunity to grow the business. You’re going to be spending more in marketing. If you can maybe help us understand like now with the growth that you’re anticipating going forward, going after new customers going forward, what’s the difference in terms of the quality of new customers you’re going after or maybe the learnings that you’ve had for what you’re going after with new marketing going forward versus sort of the prior new customers that maybe had the — generated some of the higher loss content recently?
Chad Prashad
Yes, sure. So during the last two quarters, we had fairly dramatic reductions in our overall marketing spend, especially for new customers. So one of the main reasons that loan origination volumes declined within those two quarters isn’t just a factor about the reduction in our overall approval rate. It has as much to do with driving new applications as anything else as well.
So we feel fairly confident that many of the changes we’ve been able to make very successfully from an operational perspective, allow us to turn marketing back on and do it in a way that drives in applications that we know that we are very likely to approve and at the same time, be able to judge the risk accordingly and price them accordingly. So one of the factors in December’s originations increasing has to do with turning that marketing back on, albeit to a much lower level than we’ve done historically.
So that gives us confidence that as we turn or increase the marketing investment, we’ll be able to drive those new customer applications and be able to approve them appropriately and as well as book them without having any dramatic reductions to first-pay success and without having any reductions to overall expected gross yields on those loans.
Vince Caintic
Okay, that’s very helpful. Thanks so much.
Chad Prashad
Yeah.
Operator
Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Prashad for closing remarks.
Chad Prashad
In closing, we are pleased with the changes to our portfolio and believe it will generate significant cash flow in the coming operating environment, fiscal 2024 and the fourth quarter of fiscal 2023. Thank you for taking the time to join us today. This concludes the third quarter earnings call for World Acceptance Corporation.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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