OneMain Holdings, Inc. (OMF) Earnings Call Transcript & Summary

Good morning, everybody. Thanks for participating in the Jefferies Consumer Conference. We're virtual today, and hopefully, we'll all be back in Nantucket in shorts and t-shirts live at this event next year. But very pleased to introduce our next guest. We have OneMain Financial. With -- from OneMain, we have Micah Conrad, who's the CFO; and Jenny Osterhout who's the new Chief Strategy Officer. And we welcome her. This is Jenny's recent addition to OneMain, and we welcome Jenny to the conference for the first time here. So we're going to go and do a fireside chat here in a moment. But before we do so, I'll let first of all the audience know, you guys submit questions, and we'll probably save some time to get to those at the end of the discussion here. But before we go into the fireside chat, I just wanted to give a couple of quick highlights about our investment thesis and perspective on OneMain. First of all, we have a buy rating in a very high regard for the company, and I believe the stock is a really good opportunity. Number one, we'll just reference valuation. Given the high return on capital, the strong growth prospects, the good capital returns, we think the stock is extremely attractively valued. But more importantly, a couple of things to think about is -- one is, look, this is the biggest company in a really important lending category in the U.S. It's got, by far, the biggest, call it, channel exposure. It's fully digital capabilities, but it's also got the largest branch network. And with that big presence, it's obviously got scale, better cost to capital than the competition. And we think those factors are understated in the stock price. Another thing to think about is just, if you go back for several years, if you look at the top line and bottom line growth and the credit metrics and the stability and really the efficiency of cost of -- managing costs, again, it's been a very, very successful story. And again, we think that's understated in the equity value. And then the final thing is just the growth opportunities going forward. I mean, as I mentioned, this company has full digital capabilities. It's really modernized the business with the management team over the past 3 or 4 years to give it a diversified product capabilities, diversified channel capabilities, again, doing that with a very consistent cost structure. So we think the growth outlook is very positive as well. So as you can tell, very constructive on the stock. And if you combine all those factors and think about the capital return where the company retains what it needs for growth, but then distributes the rest of the capital and dividends, special dividends and buybacks, it's a really strong capital return. And we think, again, that's really positive for the different constituencies and the investors in the stock. So -- with that, we'll hop to the fireside chat. So welcome you guys.

So Micah, the first one is kind of a little bit backward looking. Just maybe take us through the last few quarters, your perspective of what's going on and puts and takes, and then that will segue into more forward-looking discussion after that.

Yes. Sounds great. So first of all, thanks, John. Really appreciate you hosting us today. Thanks for the great introduction. We also look forward to Nantucket in the future. We've done a lot of these virtual firesides, but we're certainly going forward to getting back on in-person again and meeting with everyone. And thank you, everyone, for joining us today and taking the time out of your morning to spend a few minutes with us. So first and foremost, I'd say our business over the last year and through the pandemic was -- it just exhibited tremendous resilience. As John had alluded to, we generated about $1.1 billion of capital in 2020, which was up about 8% versus 2019. And without living -- reliving all of 2020, I'll spend a few minutes sort of on the last several quarters and what were the drivers of that performance. And so I'll start with originations. Just going back a couple of years, we've been doing extensive stress testing over the prior 2 years before the pandemic began, and we built a relatively robust downturn playbook that we implemented last March, given all the uncertainty that we had at that time. And what this did, it significantly tightened our credit box, which was sort of a no-regret sort of move that combined with the significant government stimulus we saw over the coming months, had an impact on originations, and of course, receivables growth and most notably in the second quarter of last year. But as the year progressed, we saw certain industries and states, as all of you know, fared better than others. And we were able to adjust our underwriting accordingly. We also throughout 2020, made several enhancements to our business, including optimizing pricing and loan size. We're using advanced analytics for application routing and in-branch workflow. And also increasing our remote originations to about 50%, simply as a result of the pandemic and that continues to today. So one of the great things that came out of the last year is our acceleration of movement towards digital. And so these actions really helped us close the year down just 2% on receivables, which, when compared to other lenders in our space, is a really strong performance. And so then as we moved into 2021, first quarter was impacted by 2 rounds of government stimulus as well as just the natural tax season impacts that we see in the first quarter, and that again affected demand for our product. But what was different from 2020, we saw a much more rapid recovery in both February and in April, which really gave us confidence that underlying demand for our product is still very, very strong. And it was just periodically impacted by the government support that was being handed out. So that was originations. I think credit, another big driver, obviously, of our business. As it turned out, credit was surprisingly strong relative to prior recessionary periods, and that had to do with healthy consumer balance sheets and of course, that significant support from government stimulus. So in the second quarter of 2020, we set a historic low for this company for 30-89 delinquency at 1.63%. And then after March stimulus, we once again hit another historic low on 30-89 at 1.57%. So all of that culminates into our guidance for this year, which, as you know, charge-offs were guiding to about 5% for the full year. And so I think those are the obvious puts and takes, originations and credit given this environment. The only other thing I would add is the continued success we've had in our capital markets programs and our funding. I think John alluded to that in the intro. I think it's a really important strategic advantage for us. In May, we issued our first transaction of 2021. We had a 6-year ABS deal at 1.6%. And then we just completed yesterday, we actually closed on our -- a 6-year social bond which was up about 3.5% coupon and the first ever social bond by a high-yield issuer. So that one is a particular importance to me and the company. And I think the social bond is going to highlight our commitment to serving lower income consumers in what the Federal Reserve Bank in New York defines as credit insecure and credit at risk ZIP codes. And further, about 75% of those proceeds are going to be directed to minorities and women. So we're really proud of that transaction, and we did that for a BB- issue with the lowest coupon in history. So nothing short of great performance from our capital markets team, I want to throw that out there.

Yes, I did see that and congratulations in offering. That is a good designation. So that's a little bit of what you've seen over the past several quarters, but maybe you talk -- and you did reference April as a good recovery month, but we've seen your securitization data throughout the quarter as we've seen others. So credit remains really strong. But maybe just talk about, and again, not guidance, but your -- kind of how do you think this is a new world. It's a unique recovery. How do you think about the cadence for demand -- demand recovery and credit normalization over the next few months? And how does that guide your strategic directives over that time frame?

Yes. So on demand, as I mentioned just couple of minutes ago, we saw a rapid improvement in demand during February. We actually hit 2019 levels. We're benchmarking ourselves to 2019 at this point because 2020 was such an odd year. And after March stimulus, we have mentioned in our earnings call that during April, we saw the same sort of rapid improvement in demand coming off of that stimulus. And that's continued into May and thus far into June, which really increases our conviction, as I mentioned, in that underlying demand for our loans. And so we feel great about where we are there. On credit, as you mentioned, we post performance data for a sizable portion of our portfolio every month. This is through our ABS structure reporting, and that performance, as you noted, has continued to be strong. And so given the recent delinquency trends, we feel also great about the credit environment, and we expect strong charge-off performance throughout the rest of the year.

Okay. And then -- again, kind of this is a unique period of time. You talked about tightening last year. I mean where are we in kind of the evaluation of underwriting? I mean, you have all these moving parts. You have really strong credit metrics, maybe historic lows. You've got stimulus that should be wearing off and normalizing, and then you've got a recovering economy. All those things you mix them together, what's your appetite to loosen and when you loosen, do you loosen across the board? Or is it more tactical? And how do we think about that over the coming months as well?

Yes. I mean, I think it's -- remember, we underwrite to a 20% return on tangible equity for all of our loans, and that's sort of -- that's the marginal loan that we'll underwrite. And -- that hasn't changed. So when we went into the pandemic, what we simply applied there was some stress losses into that framework. And as I've mentioned, given that we -- one of the things that came out of the pandemic, we've always underwritten by state, but we implemented also some industry level underwriting where we looked at low risk, high risk, medium risk industries. And thinking high risk, you're talking about leisure and hospitality, you're talking about food service and that sort of -- those sort of areas that were hit pretty hard in the pandemic. Industries like health care performed really well from an unemployment perspective. So we implemented that into our underwriting back in May of last year. And as we saw things unfold over the last year or so, we were able to ratably open up our underwriting bid and reduce the loss expectations on those particular cohorts that we saw performing really well. And so I would say we still are exhibiting a degree of caution around those higher-risk industries, but starting to really get back to where we were in 2019.

Okay. And then we're going to talk more about, call it, kind of industry factors for a moment here. And I know you've got some new products, so we'll set those aside. But how do you think about the secular growth of -- and I know you're right, you underwrite for 20% return. So you'll grow at a pace that's reasonable given how you're tactically underwriting. But how do you think about the secular trends within the installment lending? And do you see opportunities for market share gain? And then how do we think about your growth versus the industry growth over the next 3 to 5 years in the core business or the traditional legacy business?

John, I can take that one. I think this one is a pretty simple story that relates back to what Micah had mentioned earlier in terms of we see strong consumer demand coming back. You see it from the Fed data. You see the expectations for the fall in terms of 7% to 8% annualized growth based on the second half of the year. We think that's going to go into the -- that growth is going to go directly into the personal loan market. And we are tracking -- at the moment, we're tracking above market. We think we're doing very well compared to our peers. And we expect fully to return to strong pre-COVID growth levels. So that's our expectation, and I think that's what we're seeing in the market.

Okay. And then -- that's very helpful. And then maybe talk about -- you guys are launching a credit card product. Maybe talk about your plans for that, is it much cross-selling, is it new customer acquisition, what's the cadence of the rollout going to be and so forth? And how much of this could be -- can this be additive next year? Or is this something that's a longer-term kind of strategic add on?

So this one I'm really excited to talk about. We've been working on this pretty fast and furiously. So I'm both excited about the progress that we've made, but also really see as sort of a fantastic addition to our portfolio and what we can offer to both our customers as well as you mentioned an entry way into meeting OneMain. So we see it as sort of this natural extension in that it really adds from -- we have this episodic loan product now. And it adds a transactional product, which means you interact with us more, we learn more about you so you get the virtuous circle of, as we know you better, we're actually able to underwrite you better. So we think that's fantastic. In terms of the journey, as I mentioned before, you can do either of the two journeys. You can join -- we have our current OneMain customers and our current OneMain customers have about 5 cards in their wallet and $10 billion in card balances. So we really do see our current OneMain customers as a real opportunity. When you look at our funnel also, we -- there's -- the folks who come to us for a loan, but we're unable to provide them with a loan. So about 10 million folks come to us for a loan and about 1.5 million of those are underwritten for their loan. And the question becomes, can you offer them something else? Could you offer them a card? So we also think that's a huge opportunity. And card is -- it's a big -- it has big TAM. It's over $420 billion. It's a bigger market than the personal loan market. So we're really excited about that. We think it also leverages our skills. So we talked about this earlier, but the underwriting, our marketing capacity, you mentioned our branch network and also how we're doing digital distribution now, but we really see that as a huge benefit in terms of adding cards and really getting into the card market quickly. In terms of the product, we know this customer base quite well, and we think we can provide a differentiated product that's really designed for them, that speaks to both their rational needs. So when you think about the product, APR line, et cetera, that's the rationale. But their emotional needs that we know them well from surveys and how we're talking to them, and then also just experience. No one else has been designing for this customer base. So we're looking at a mobile-first card design and we're building it new. So our goal is to have the card in market this year to test it for the beginning of next year. And then by the end of '22, early '23, to really start to scale. And we think -- I mean, if you look at the team that we have on board, I think we've mentioned this before, but we hired Nick Clements, who was formerly with Barclaycard, and also has experience in the startup space. And he has surrounded himself by this sort of first-class team. It's really -- they've been moving quite quickly, and they've put great partners in place. So we have MasterCard as our network. And so we're really excited about the progress we've made. And also, we're -- I mean, we're fully committed to making this a multi-billion dollar receivable business over the course of the next few years and see it as a great propeller of growth. So we're absolutely excited about cards.

That's great. Good update. And I look forward to seeing the development of that business. So I appreciate that. So turning to something a little different, it's the capital return. Obviously, the capital return strategy has become a key element of the shareholder focus. Micah, maybe just because we have -- it's quite a big audience here, maybe give us the framework for the capital return strategy. And how do we think about this, not just for the next year, but 3 and 5 years in terms of your commitment to return capital versus the balance between that and the growth that you might get out of the credit card business? And then are there other acquisition opportunities that take place over time that you need to think about as well?

Yes. So let me start with our capital allocation priorities, which we've discussed pretty consistently over time. And these are rank orders. So these are in order of priority. Number one is to fund all loans that meet our minimum return hurdles. And that's at the margin 20% return on tangible equity. And we've used that for our installment loans. It's going to apply for credit card as well. Number two is to continue to invest in our business, which includes organic investment and includes some inorganic acquisition opportunities. We just added a company called Trim that we talked about on our last earnings call. And just to give you a couple of fact points there, I think -- in 2019, you might recall, we grew our receivables by 14%. And as Jenny mentioned, we feel really good about secular growth opportunity in the installment loan space and also in the credit card business. But we also invested around $25 million in 2019 in our digital strategy and the supporting infrastructure that goes along with that. And we increased that to $50 million last year. And this year, we've committed to spend around $100 million on investments. And those are investments that are outside of really our core installment loan product and are intended to provide growth in the future. And we're going to continue to analyze and prioritize that growth going forward over the coming years. Getting to the third leg of the stool, any excess capital beyond those 2 priorities, we're going to return to shareholders. And given all that, as we mentioned earlier, our business generates significant capital well above the amounts that are needed to fund new loans or investment in the business. And there's been a lot of capital to share with shareholders over the years, and we expect that to continue over the next 5 years as defined just to use your time line, John. But let me give you a little framework also just around the capital returns. When we began our programs back in early 2019, we set our regular dividend. That is the first piece of our capital return strategy, and we set that at $0.25 a quarter, about $1 a year, which was well below what we could afford. And then we were supplementing that regular dividend with periodic special dividends, which we consider every first and third quarter of the year alongside our Board. And when we think about our level of our regular dividend that we're very mindful to set this in a place where even in a stress environment, we feel like we can sustain that level of dividend. And so the intent was to start small, grow it over time. We've done that. We've got a couple of increases over the last 2 years. We now have a regular dividend of around $0.70 quarterly, which is $2.80 annually, which represents approximately a 5% yield on our current stock price. And so we're going to continue to evaluate special dividends every first and third as we've done in the past. We said we have a bias towards dividends, but we also introduced a $150 million share repurchase program on our last earnings call to further diversify our capital return strategy and -- with those buybacks, we expect them to be programmatic, meaning we expect to continually and consistently support our shares to the market over time.

Okay. That's great detail. So again, to the audience, there's only a couple of -- a few minutes left here, so please put your question out there if you have any. But I've got a couple of more topics I want to visit before we conclude here. First one is competition. Is there any change over, call it, any washing out or change in the environment over the course of the pandemic? And then also as we reemerge out of the pandemic, are you seeing any changing competitive aspects? And I guess maybe that's more of the traditional product. I assume there's probably not a lot of commentary in the card business now, but just given you're just launching that. But if there is any commentary there, please let us have it. And then the bolt-on to that would be there's been a big focus on buy now, pay later. Are you seeing any ramifications on the adoption of that in the business? So maybe just a broad swath of competitive discussion points.

Yes. So I can take that. I mean, first of all, we are extremely teaming looking at what's happening in the market, both for personal loans cards, and we'll talk a little bit about point of sale as well. We -- in terms of what we saw through the pandemic, we saw -- Micah mentioned, we saw a few exits at the beginning of the pandemic and -- that enabled us to increase our market share in the personal loan market by a few percentage points. I think what we're starting to see is those folks are coming back in, and we're seeing increased competition that's aligned with more demand from customers and from consumers. We have yet to see any major structural shifts in the personal loan market based on changes from COVID. If I flip a little bit to point of sale, and you mentioned buy now, pay later. We don't think of buy now, pay later as a direct threat to our business based on the size of the loan. Buy now, paying later is about $1,000 under and our average loan size is about $7,500. And so we don't see it as a direct competitor, but we are watching it and really watching the broader point-of-sale market and to understand customer behavior and where customer preferences are going. But really, it's about watching those. In terms of the card market, we're watching. I think everybody else has seen, again, back to the same data. I mean everybody else has seen what's been happening in the card market. And it really aligns with what we talked about before in terms of consumer behavior, and we're starting to see that shift.

Okay. Very helpful. And then my last topic, and then I'll look at the Q&A board after this is -- first of all, I appreciate your participation here. It's been a very constructive update on the business, so I appreciate all that. But just over the next few quarters, what do you think investors should be focused on for you guys? And what are your top objectives?

Well, let me start, and I'll let Jenny add her thoughts. I think honestly, I think investors should focus on the attributes of our business that are real strategic advantages in our space. And John, we touched on a few of these. But just to close out, our deep experience with the near-prime customer is a tremendous advantage for us. We've been doing this a long, long time, and no one has the rich data set that we have. We've been supplementing that with advanced analytics for credit decisioning. And in our proprietary underwriting, that is second to none. I think those are all key elements to us achieving the kind of loss performance that we achieved from this type of customer. I would also add our 1,400 branches. We get a lot of questions about how digital and remote is going to impact our branch network. And we really feel like our branch network is a competitive advantage. And if you -- if we were a bank, we'd have the seventh largest branch network in the country. And that's important in the near-prime segment in terms of servicing and our ability to, again, generate the loss performance that we do. Nonetheless, we've invested in omnichannel distribution. So today, 50% of our loans closed without a customer even entering the branch, which is just another strategic advantage for us to work on the operating model going forward. And I mentioned a little bit earlier also, our mature funding capabilities and our liquidity have been evident through the pandemic and a huge strategic advantage for us. We demonstrated through the pandemic, we can raise funds. We drew half of our conduit facilities out of an abundance of caution and sort of a test just to demonstrate the actual real liquidity that was there, and we did it without any concerns or hitches from any of our bank partners. And I talked a little bit already about the funding we've done recently. So those are the things I think you should think about when you think about OneMain and our advantages. And in terms of the objectives, I'll hand it to Jenny for any further remarks.

Yes. No, I would just say, if you look slightly -- the end of your near term, I think of our customer engagement and thinking about how to take -- we -- today, we have about half our customers are returning customers. And so there's really something to customer engagement. And what we're trying to do is figure out ways [Audio Gap] and maintain that relationship. So that when there is a need again, we're the folks that they come back to and that we maintain that relationship. And we really think card, and Micah mentioned Trim, are 2 great examples of what we're doing that specifically speak to looking to improve that customer engagement. And we're really looking to do that. I mean, sort of starting in the -- by the end of the period you mentioned.

Okay. Well, we have 1 minute left and I did get one question from the audience, so I'll throw it out there. And the quick question is, with respect to the capital return, is there any -- was that influenced at all by the big shareholder? Or does that -- is that cap return strategy disrespective of any large shareholder influence?

Yes. I would say mostly, John, it's the latter. I mean, we have -- our large consortium of shareholders certainly is a part of our Board and a part of that discussion, but I wouldn't say it was particularly driven by them.

Okay. Well, that's great. I appreciate you guys' participation. Everybody, have a great day and look forward to catching up face-to-face soon.

Thank you, John.

Thank you, guys.

Great. I appreciate it.

Thank you.

Thanks.