World Acceptance Corporation (WRLD) Earnings Call Transcript & Summary

Good morning, and welcome to World Acceptance Corporation's First Quarter 2025 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 represent 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, plan, expect, believe, may, will and should or any variation 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, 2024, 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 is my pleasure to turn the floor over to your host, Chad Prashad, President and Chief Executive Officer. Please go ahead.

Good morning, and thank you for joining our fiscal 2025 first quarter earnings call. Before we open up to questions, there are a few areas I'd like to highlight. We've talked a good bit about rightsizing and derisking the portfolio over the last year or 2 as well as returning to moderate growth this year. In the first quarter of 2025, we experienced moderate growth in our customer base of around 50 basis points. Our average balance declined slightly, and gross yields improved across all customer types. Year-over-year, our average balance has decreased almost 7% from June 30, 2023. Currently, our average loan balance has decreased over 11% from the peak average loan size, which was towards the end of fiscal year 2023. Along with that decrease in average loan size, we've significantly improved our gross yields, delinquency and G&A expenses. As the underlying portfolio improves, our loss reserves have also declined year-over-year in step with the maturing of the portfolio. We are focused on modest single-digit high credit quality growth this year through specific strategies for each of our customer types. For new customers, we've adjusted our acquisition channels and are already increasing our approval rates while minimizing losses. In the first quarter, while new customer loan volume was down about 8% in dollars within the quarter year-over-year, our new customer average loan balance also decreased, and the number of new customers in the quarter declined by only 3.5% year-over-year. We're also -- we also improved our first pay default rates, which are an early indication of success for those customers. This is part of a low-cost growth strategy in terms of both the upfront cost of acquisition as well as the total cost of acquisition for a tenured performing customer. As we've regrouped to a higher credit quality and performing portfolio, we've grown a large paid-off customer population that continues to return as a former customer and make up a larger percent of our nonrefinance loans. As we increase their weighting in the portfolio, our net yields and income naturally improved. Within the quarter, both returning and refinance customers had a similar trend in improvement in performance and yield as well as lower average balances. While the former customer loan volume in dollars declined 7.6% this quarter versus first quarter last year, the number of former customers actually increased by 6.3% year-over-year. For returning former customers, the average balance of those originations decreased 13%, and the average yield was significantly higher, and they have the lowest first pay default rates of our nonrefinance originations. Similarly, refinance loan volume in dollars decreased 5% within the quarter year-over-year, while the number of refinances actually increased 6% in the quarter, and the average balance of those originations decreased 10%. With these shifts in the portfolio makeup and the weighting continuing into the second quarter, we expect to see yields and delinquency trends continue to convert into the same revenue and income trends that we're already seeing this year. To date, in the second quarter, we've seen growth in our former customer base. Currently, we're at the highest number of former customers in July that we've had going back at least 10 years, all at lower average balances, higher yields and great credit quality, leading us to expect continued low delinquency. To date in July, new customers has improved over the prior 2 years as well, but our focus remains on a low total cost of acquisition of performing customers, and we'll continue to invest wisely for high credit quality growth as we work towards moderate single-digit ledger growth this year. In addition to portfolio performance, our prudent management has also resulted in 9.9% reduction in G&A expenses this quarter compared to the first quarter last year. This is especially important during a prolonged period of increasing expenses nationwide. With economic stability increasing and improved portfolio performance, management continues to accrue for the long-term incentive plan with vesting tiers of $16.35 and $20.45 earnings per share. Even with the much improved credit quality yield and operating conditions I've discussed, we'll continue to build confidence throughout the second quarter on achieving these targets, especially the $20.45 for the full fiscal year target. Finally, we have an absolutely amazing team here at World, and I'm very grateful for their commitment to their customers as well as to each other. They are helping our customers every day to establish credit, rebuild credit and meet their immediate financial needs. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open to any questions that you may have.

[Operator Instructions] The first question is from John Rowan with Janney.

Chad, did I hear you correctly saying that you're going to grow ledger by mid-single digits or low single digits for '20 -- well, fiscal 2025?

Yes, that's right.

Okay. So I mean, just -- so you're talking about -- I mean you're talking about off of period end fiscal 2024. So the $1.3 billion gross or, I don't know, $847 million net, just mid-single-digit growth off of that number by the end of the year?

Yes, that's right.

Okay. Is there a reason why -- it looks like you guys increased the allowance ratio a little bit sequentially. Is there -- are you changing any expected loss rates?

I think a lot of it was just the expected loss rates increased faster this year than it did relative to last year. But they're still -- they're lower at June 30 this year than they were at June 30 fiscal '24. So we haven't increased them. So it really more has to do with what happened last year. The expected loss rates were decreasing faster in Q1 of '24 than they were this year, if that makes sense.

Okay. And just to be clear, you're still accruing for $20.45 of earnings for this year in the incentive comp because there was something in the press release about lower incentive compensation?

Right. So a lot of it has to do with -- there's 2 things going on there. We had some officers, field officers leave during the quarter, which led to some -- or retired during the quarter, which led to some releases. And -- but it's also with the greater vesting nature of the long-term plan, there's just less expense to accrue. So relative to last year, we're no longer accruing for the third tranche. So that's not in there. And there's basically 6 time-based tranches in that plan. We're only still accruing for one of those tranches because the others have been fully expensed. So that's what's driving that share-based comp number coming down.

And John, yes, we are still accruing towards $20.45. But the main factors into achieving that for this fiscal year are really some things around growth, yields and delinquency. So as we continue throughout this current quarter, the second quarter, we'll build some confidence around how likely we continue to think that is.

Yes. So I mean I was going to get into that next. I mean we've spoken in the past about -- I remember the $25.30 tranche, which obviously you stopped accruing for. I mean, we had kind of penciled in a -- the only way to get to that number is a high single-digit type loss rate. I think at the $20-something number or $20.45 number, you're talking about a low double-digit type loss rate, if I remember correctly from prior conference calls. Your charge-off rate came down a little bit year-over-year, but it's still 16.4%. Like we're still really far away from a low double-digit loss content. How do you -- how are you getting there? I mean -- then to be frank, I mean, you have to actually overcompensate given -- for the remaining 3 quarters of the year, given you were at 16.4% for the quarter. How are you getting to that type of number?

Yes. So there's a few things there. So over the last 12 months, the yields have continued to increase, and that takes some of the pressure off of the net charge-off rate, right? So -- but to be fair, yes, we still need to see improvement in that net charge-off rate, and we see a lot of the things happen operationally that can lead to that. So yes, so it's a combination of yields continuing to increase, continued improvement in that net charge-off rate and some modest growth. And as Chad said, we'll build some confidence in whether that's achievable by September. We'll have a pretty clear picture by September.

Okay. I mean wouldn't modest growth actually hurt your chances to get to that? I mean modest growth would help next year. But given how much you have to reserve for your CECL provision, I would think that the modest growth actually is a hindrance to earnings growth?

Fair enough. It depends when that growth happens, right? So you're right. So modest growth that all happens in Q4 doesn't help us a whole lot, but if we can get it in the next quarter or so, there's enough revenue that comes with it throughout the fiscal year that it benefits us.

Okay. And then...

And John, that's also...

Yes, sorry, go ahead.

Yes. That's also why we have focused more on former customers. One, just a lower cost of acquisition; but two, also their performance leads us to accrue less for them. And then overall profitability is higher for those -- for that group of customers. And then for new customers, we're still focused on new customers, but we are looking at lower total cost of acquisition. And when I say that, I'm talking about not just the marketing spend, but operational spend as well as provision loss on that group. So with all that in mind, yes, we're very aware that any growth we have hurts in the short term. And so, one, we recognize we still have to do it as a company because that feeds the future success for the portfolio; but two, making sure we do it incredibly prudently from a cost perspective and credit quality perspective.

Okay. And then last question for me. Just what's the right tax rate to use? A little bit lower than my model for the quarter. I just want to make sure I have it going forward.

Yes, it kind of changes quarter-to-quarter, but it's still that 20%, 21% for the year.

You say 20% to 21%?

Yes, for the year.

[Operator Instructions] The next question is from Guy Riegel with Ingalls & Snyder.

I was just curious, can you speak to -- hello? Can you speak to the regulatory environment in the states you operate in as well as on the federal level?

Yes. So at the state level, there's 2 states over the last couple of years that we have moved to be sub-36%, both Illinois and New Mexico. For the other states that we operate in, we haven't seen any significant changes from a regulatory or legislative perspective. Of course, every state we operate in, we are regulated by those states and supervised by those states and continue to be so. At the federal level, as you know, back in February, the CFPB published an order establishing their authority to supervise World. We continue to cooperate with them and their supervision process. This is both our first supervision by them as well as their -- one of their first supervisions of an installment lender. So we expect that they're going to focus on the areas outlined in that order and that this will be a learning process, and it will likely be very difficult for us to judge any of their time lines. However, their order does give us the ability to petition to end their supervisory period over 2 years. But this time, aside from the supervision order itself from the CFPB, we don't have any other updates to report on.

Okay. So to date, it hasn't -- they haven't impacted your business?

No, no, not to date.

Okay. And then I thought maybe a while ago, you maybe mentioned the possibility of securitizing some of your loans. What's the status of that?

Yes. So we're actually in process as we speak of creating a warehouse facility, and that's sort of the first step in the securitization process, right? So we hope to have that warehouse facility rolled out in the -- probably fiscal third quarter.

This concludes our question-and-answer session. I would like to turn the conference back over to Chad Prashad for any closing remarks.

Thank you for taking the time to join us today, and this concludes the first quarter earnings call for World Acceptance.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.