Good morning, and welcome to World Acceptance Corporation's Second Quarter 2024 Earnings Conference Call. This call is being recorded. At this time, all participants have been placed on listen-only mode. Before we begin, the corporation has requested that I make the following announcement.

The comments made during this conference 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 facts 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, 2023, 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 2024 second quarter earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. In fiscal year 2023, we tightened underwriting as economic uncertainty and inflation concerns were increasing.

For the remainder of 2023 and into early 2024, we weathered delinquency normalization after a period of very low delinquency, mostly induced by economic stimulus, followed by extraordinary portfolio growth.

This year, we continue to see lower and normalizing delinquency rates in our portfolio and increasing yields and expect these trends to continue for several more months.

These outcomes are primarily due to adjustments to our operational efficiencies, marketing and underwriting as well as an overall heightened focus on credit quality and yields that we've discussed in prior earnings calls.

We continue to see economic uncertainties and potential impacts to both customer cash flow and their credit histories, both positive and negative on the horizon as potential outcomes for our customer base.

Therefore, we cautiously have been increasing approval and booking rates for our best applicants and continue to explore ways to profitably serve more of our applicants. Today, our approval and booking rates while higher than this time last year, remain low compared to historical norms.

During the second quarter, our customer base continued to grow and the number of new loan originations remained stable versus the prior quarter and increased by over a third compared to the same quarter last year.

The number of new customers each quarter as a percentage of our customer base continues to increase, and we are returning closer to our historical normal growth rate. The number of former or return customer originations also increased to be slightly above historical volumes.

That's as a percent of the customer base and has increased both nominally and relatively compared to the second quarter of last year. This growth is important as our overall average loan balance continues to be right-sized as we've discussed with the portfolio risk and yield.

All originations made this quarter have approximately a 10% lower balance year-over-year, and the average current balance outstanding has declined around 4%. While economic uncertainties still exist, management continues to accrue for a long-term incentive plan with vesting tiers of $16.35 and $20.45 earnings per share.

We were no longer accruing for the $25.30 stretch EPS target, primarily due to reduced new customer investment, which would hinder overall potential growth for this fiscal year. That growth or lack of growth reduces the earnings power for the next fiscal year.

We believe this move is prudent for the long-term health of the company as credit risk and economic uncertainty are likely to persist for some time and our new customer investment remains tempered and focused on the highest credit quality.

We continue to see stabilizing and improving credit quality yields and operational conditions as we looked forward and accrue for the $20 and 45% EPS target for fiscal year 2025. At this time, Johnny Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have..

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Vincent Caintic with Stephens. Please go ahead..

Hi. Good morning. Thanks for taking my questions. First one on the pullback of the $25 by fiscal 2025 EPS. Just wondering if that will drive any changes to how you're thinking about operating the business? I know there was a couple of variables you were looking at in order to achieve that 2025 EPS.

And just wondering what – if there's any change at all and how you're thinking of driving the business with that focus out of the way?.

No. I think the big change that happened is we - we're just kind of pattern where we're going to be tighter for longer, right? So we were hopeful that we could see some improvement in new customer performance and start to loosen some of our underwriting, which would allow for higher growth. We just haven't gotten to that point yet.

And as a result, we won't see the growth that we'll need for this year and potentially next year, that would have allowed us to hit that higher EPS. But everything else still remains the same..

Okay. That's helpful. And then, I guess, relatedly, the $20 EPS target. Is there anything that needs to change from the conditions in the current environment to get there? Or basically, what need to happen to get to the $20 EPS? Thank you..

Yes, nothing needs to change significantly to get to the $20, right? I mean, we need to – credit quality to maintain the current levels. So obviously, if something were to change in the macro environment drastically, if unemployment rates were to spike or something like that, that would obviously make it difficult to hit the $20.

But I think we have things in place now that would allow us to hit that $20 next year..

Okay. Thank you. And I guess one last one for me, and I'll hop off. So we've seen the portfolio shrinking rightsizing recently, but it sounds like you have kind of encouraging signals in delinquencies and other underwriting seems to be taking hold.

Just wondering if we should be expecting the portfolio to start to grow again? Or what your sense is in terms of portfolio balances going forward? Thank you..

Yes. I think we'll continue to see some mild portfolio growth. We're not forecasting or shooting towards portfolio growth we've seen in the past year or two. Certainly more muted and certainly focused on much higher credit quality. We do expect that the average balances will continue to decline. We've been working on that for about a year now.

So we're seeing that come through for the whole overall portfolio and not just for new customers. In conjunction with that, you're beginning to see with those lower balances, also having higher yields, you're beginning to see the overall portfolio yields increase over the last two quarters as well.

So we would anticipate seeing that continue throughout the rest of this year..

Okay. Great. Thanks very much..

[Operator Instructions] The next question is from John Rowan with Janney. Please go ahead..

Good morning..

Good morning..

As far as like ongoing personnel expenses, obviously, there was a $5-ish million reversal of prior accrued expense.

That's not an ongoing reduction to that line item, correct? Because that's an accrual from – that's a reversal of prior accruals, correct?.

It is, but it will also reduce the expense going forward, right, because we're no longer accruing for that tranche..

But not the $5 million less per quarter, right?.

No, no..

Okay. Any plans for repurchases? Or was there any change? I know you've got – you basically renegotiated your credit facility.

Was there – any change in repurchase authorization? When will you look to start it up again, if you can?.

Yes. So the current credit agreement allows for repurchases once the fixed charge coverage ratio gets back to 2, 2 to 1, and we're just shy of that this quarter, but we should be there by the end of next quarter, and that will allow for repurchases starting in fiscal Q4..

Okay. And then I think you touched on it before, but I was trying to calculate something while you said it. The seasonality in the loan portfolio, obviously, typically loans go up and in the December quarter, down in the March quarter. But loans also usually typically go up from June to September.

So I'm just trying to parse out if the credit tightening and what we're seeing is what's a little bit of an abnormal sequential decline here in the September quarter.

Like how that affects going forward? Are loans going to go up next quarter and then down in March? Like how should we think about that?.

Yes. No, I think we would expect the same seasonality. Typically, the September quarter, we do show some growth, obviously, not to the same level as we show in the December quarter historically. We still expect to see that growth in the December quarter.

But yes, the big change versus the history is we are still substantially tighter on new customer originations than we have ever been. We're still seeing very strong application flow, but we've reduced our approval rates substantially..

Yes, I think it's important to point out that during the last quarter, we actually did grow our customer base and number of accounts, but the average balance is lower. So the overall portfolio size is lower. So - and it's something we've mentioned before in rightsizing the loan sizes also helped us increase the overall yield.

And it's important to do that in conjunction with the overall credit quality as well..

Okay. And then just one bigger question. Obviously, you've been in the highest tier accrual for next year, just looking the consensus estimates in mind too. I mean, we're nowhere near before this, we're nowhere near where you would need to accrue even for the $20.45.

John, we've talked about in the past, needing to get to a high single-digit or high single digit, maybe low double-digit type charge-off rate. We're obviously not near there now, although you obviously have improved credit quality. I just – I'm curious about your comment earlier, how you said we have the pieces in place now to reach $20.45 next year.

I'm paraphrasing a little bit versus what you said. Obviously, the goals have been changed from the mid-20s to $20.45.

I don't think that you hit even the lower number with the 16% charge-off rate? I'm just trying to figure out what are the pieces in place that nothing really material needs to change for you to get to $20.45 next year when obviously, the run rate of earnings $2.71, which I mean even includes a big reversal in it.

I mean not gigantic, but a big reversal. How do we get there because that run rate is nowhere near $20.45, but yet you're saying nothing material needs to change for us to get to that number? I'm just – I'm having trouble marrying those comments together..

Yes. So we expect to – we see the credit quality of the portfolio continuing to improve, right? So as we move forward, two things should continue to happen.

One, we expect the credit quality absent of any other macro events should continue to improve on the existing portfolio, right? And the loans that – the new customers that we are adding are performing at a much higher level from a credit quality standpoint and have much healthier yields, right? So as we move forward, and it will take – to get to the $20 EPS will take some growth, right, over the next 18 months.

And we expect that to happen, right? We expect at some point over the next 18 months, there will be more clarity with where the economy is going and hopefully be able to start losing a little bit, right? But so with that, you'll have higher – better performance on the new customers at higher yields.

And we expect the credit quality of the existing portfolio to continue to trend better..

Okay. I was a little confused just with the comment you said that we kind of have – nothing major needs to change from now to get to there. But it's not – nothing major needs to change from what we reported this quarter, but we have to continue certain trends.

Am I interpreting that correctly?.

Right. Yes..

Okay. All right, that's it for me. Thank you..

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

Thank you for taking the time to join us today. And this concludes our second quarter fiscal year 2024 earnings call for World Acceptance Corporation..

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