World Acceptance Corporation (NASDAQ:WRLD)
Q1 2017 Earnings Conference Call
July 28, 2016 10:00 am ET
Janet Lewis Matricciani - CEO
John L. Calmes, Jr. - SVP, CFO and Treasurer
John Hecht - Jefferies
John Rowan - Janney Montgomery Scott
Clifford Sosin - CAS Investment Partners
Good morning and welcome to the World Acceptance Corporation sponsored first quarter press release conference call. This call is being recorded. At this time, all participants are in a listen-only mode. Before we begin, the corporation has requested that I make the following announcement.
The comments made during this conference call may contain 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 forgoing 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, 2016 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, Janet Matricciani. Please go ahead.
Janet Lewis Matricciani
Good morning and welcome to our first quarter fiscal year 2017 earnings call. This morning, I will not repeat the information in the press release, as I assume that everyone on this call has had a chance to read it. As usual, I will add to more detail to the information in that press release to further describe our results and strategy.
Our results this quarter show a continued shrinkage in key metrics, that being gross loans outstanding, originations revenue and net income. Naturally, when ledger and originations reduce, earnings usually follow the same path as our interest payments and fees relate closely to the size of our ledger. The same is true for our insurance products and other income. What I would like to do today is add some color on our results and also to describe the actions that we've been taking and are continuing to take to reverse this decline and put us back on a path to growth.
This quarter, and the start of this fiscal year, has had a strong focus on continuing to roll out specific strategies, where we have seen good results. We continue to be in a test-and-learn mode and so many of our successful pilots are being rolled out one state at a time and are not yet implemented Company-wide. We strive to ensure that we are fully compliant with all state regulations and requirements before we roll out, which slows down our rollout process but helps to ensure its success.
And since many of our new pilots are not in full rollout Company-wide, we are not yet maximizing the full potential of their value. For example, we've rolled out live check successfully in Tennessee in the first campaign. We have seen that the payment pattern for the first two payments, meaning the percent of customers that made both of these first two payments, fits our expectations for this line of business, and this knowledge allows us to roll it out further with confidence.
We've now followed with a second campaign in Tennessee using the learnings from the first campaign to improve our marketing materials and recipient selection. We expect to mail new offerings in two additional states in the next two months and continue with other states after that, and the response rate for live checks has been significantly higher than that for even pre-approval.
The first payment extension, where we allow the customer to delay the first payment to a date that matches better with the day of the month where they receive income, we've allowed up to 15 days after they originate the loan, we've rolled this out successfully now in nine states and expect to have this program in place Company-wide by the end of the fiscal year. Again, each state has its own specific rules and regulations and we always want to ensure we're in compliance.
On the topic of marketing, we continue to strengthen our marketing strategy. We did see a decrease in total new borrowers and former borrowers in the first quarter of fiscal year 2017 compared to a year earlier, but I should point out that this is on a mail campaign that during the first two months of this year, April and May, was at less than 15% the total of the volume of mailings last year in April and May, and only about 10% of our total mailings in these two months two years ago.
This is a purposeful strategy. We know that response rates are historically low in these two months and the charge-offs are higher for loans originated in these two months. Therefore, we have pushed back the vast majority of our mailings into quarter two of fiscal year 2017 and beyond. Basically, in online, we are improving our marketing and also increasing our ad spend online and testing new displays and retargeting products. We're still getting a higher bounce rate of our initial landing page than we would like, but we believe that our new Web-site that is under development should help reduce that.
The number of unique visitors to our Web-site is up significantly from the same month a year ago. In June, we had a 65% increase in unique visitors to our Web-site, and this total was a record-high for our Company. Our Web app volume is also up 65% in the first quarter and we're now getting significantly more Web apps per day than in our history, and this is before we're even into growth season. In fact, in June, compared to last year, our Web apps were up 200%.
We're running an initiative to increase our branch focus on responsiveness to this Web applicant community through new training material and increased monitoring of branch effectiveness through conversion rates. The Web app now is still a fairly simple application that leads to a phone call to the applicant from their local branch in order to complete the full application. We recognize that we can benefit from having a more detailed application process online and are making progress towards that objective, and we are starting to see real benefit from our new marketing strategy.
For example, in the month of July, up until today, originations from former borrowers are up 2% from a year ago in that month and new borrowers are up 17% from the same month a year ago, although we only mailed 65% of last year's June volume. And year-to-date, former borrowers are up 3%, new borrowers are flat, although the volume of mails sent to-date is about one third of a year ago up-to-today, because we are still stress-testing our strategy and we're still working to expand our universe of attractive potential recipients safely rather than over-mail the same small universe. So overall, this fiscal year, up to today, we have more new and former borrowers coming in and receiving loans from us than we did a year ago up to today.
Other good news is that the credit quality of our customers is increasing. On average, our new originations are at credit scores as much as 15 or more points higher than a year ago. This is true for new borrowers and former borrowers. Our strategy of eliminating the highest risk customers and focusing on growing higher quality accounts is showing signs of success.
While the number of customers at lower credit scores reduced in April and May, the number of customers at higher credit scores increased over those two months. Even though we didn't grow as much as last year in those two months, we actually grew the best customers and cut out the highest risk loans, and as I said, average credit scores of new customers grew by more than 15 points.
To the extent the credit scores are predictive of charge-offs, this would imply that we can expect a positive effect on our charge-offs from this increasing credit quality of our customers. And for our present borrowers, credit scores are still flat compared to a year ago. So this influx of new borrowers and former borrowers at higher credit scores means overall the average credit score of course will go up.
For refinancing, our volume continues to be at a lower volume than quarter one in fiscal year 2016. This can be attributed primarily to us having 6.4% fewer customers in the U.S. than a year ago. So we have a smaller base of customers to which to offer refinancing opportunities. However, it is also slightly lower as a percent of current customers. This is not due to an increase in customers paying out early or paying out their last payment and leaving us, but appears to be due to our customer base choosing to wait a month longer to refi small loans and two months longer to refi large loans compared to the prior two or three years. This is good news because it appears we are not losing our customer base to competitors but are keeping our current customers satisfied.
Now that I've discussed revenue and growth generated, let us talk about cost to the Company. As stated in our press release, delinquencies and charge-offs have risen this quarter. Some of that is due to the fact that we were generating recoveries a year ago through the sale of our charged-off accounts, an activity we have not continued. But this is not entirely the reason.
We stopped field calls last December without giving the field a chance to put in place mitigating strategies, because we believed it was the right immediate action to take given the regulatory environment. Right afterwards, we saw delinquencies and charge-offs rise. We believe this is a temporary situation as the field adapts to the new collections or features which are through letters and phone calls only and we believe that rates will normalize to more historic levels over the coming months.
However, we also have seen from our pay-by-phone pilot that pay-by-phone is a very attractive option for our customers and may be a mitigant to increased charge-offs from having eliminated field calls. So we now have pay-by-phone as a priority to roll out Company-wide to all branches by the end of the next quarter. We are also putting in place an internal collections team to improve on our collection strategy pre-charge-offs, and this will allow our branch service representatives to focus our energies on providing the best possible customer service.
We've rolled out new underwriting guidelines that will allow us to better select those customers with high likelihood to pay us back and to restrict our loan offerings where our models tell us potential customers have a very high likelihood of charge-offs. These guidelines will be shared with all of our state Vice Presidents at our Annual Meeting in April and have now been rolled out to all of our branches.
On the personnel front, eliminating field calls and focusing on other efficiencies has allowed us to decrease personnel in the field. And so our personnel cost for average open office were down. We have 8.9% fewer personnel in the U.S. at the end of the first quarter of this fiscal year than we did at the same time one year ago and we have about the same number of personnel in Mexico. The Mexico personnel is not increased despite our growth there. This shows that we are managing our business more efficiently and effectively, and we also continue to see our overtime costs reduce significantly.
Regarding the opening of new branches, as I've mentioned before, we've moved from acquiring a certain number of branches to be opened per year to making branch open or merge decisions on an individual basis where data and local market knowledge show they are likely to be successful. We closed 14 branches in total in the first quarter of 2017 across a number of states, which is higher than normal. We don't expect that to continue at current level, but we do expect to have fewer branch openings as we focus on maximizing long-term profitability and strengthening performance of our existing branches.
We've improved our sourcing for our office supplies, moving to a new nation-wide vendor. This not only means significantly lower shipping costs for the Company, but it also means faster delivery and an easier ordering process.
In terms of personnel changes, this month we appointed Clint Dyer, our SVP of our South Eastern Division, to EVP of Branch Operations and this will be effective September 1, 2016, and we are delighted about this. In this new role, Clint will be responsible for ensuring excellence in all of our branch and field activities and ensuring new programs and innovations are rolled out successfully to all our branches. Clint has been with World for 20 years and has a rich and deep understanding of all our business and strong relationships with our state Vice Presidents and field personnel.
Clint will report to me. His replacement as SVP of South Eastern Division as well as the two other U.S. divisional SVPs will move from reporting to me to reporting to Clint. Our SVP of Mexico will continue to report directly to me. I'm very pleased about Clint's role, which strengthens our business, and this change will allow me to focus on strategic products and service changes, but I'll still remain closely involved in ensuring strong branch level performance.
In Mexico, we continue to be pleased with the growth of our Mexican business. Our gross loans outstanding increased by almost 25% in the quarter. We see strong growth in Mexico, especially in our VIVA business which is a payroll deductible business line offered to union members. We've begun testing other payroll-deductible products there which do not focus on union membership as a criteria for receiving a loan.
Now regarding proposed regulation from the CFPB on small dollar lending, as the proposal stands at present, the effect on our business practices is fairly limited but we will not be able to determine that conclusively until the final new regulations come out.
So to summarize, we continue to be a Company in transition as we improve in multiple areas, including our marketing and underwriting competencies and IT functionality. We're seeing positive signs that we are improving our efficiency, such as higher response rate in our mailings and higher number of former borrowers and new borrowers coming to our branches, but these are early stages and it will take time to show that our initiatives are yielding very strong positive results. We remain excited about the impact of all of the changes and innovations that we've put in place and are putting in place and look forward to continuing to progress and strengthen our Company.
I'll be happy to take any questions at this time.
[Operator Instructions] We'll first go to John Hecht from Jefferies.
First of all, you mentioned the refi percentage is slightly lower than the year ago and you mentioned the borrowers are waiting an additional month on average before they refi. So I'm wondering, number one, do you have the refi statistics, and number two, why do you think the customers are – what's changed in behavior that they want to wait a little longer?
Janet Lewis Matricciani
We do have the refi statistics and we did do the analytics to work this out, but we don't show all of our metrics publicly, but we have looked at that and feel confident that it is our borrowers waiting another month or two. Why they are waiting another month or two can depend on multiple factors. You can have economic factors that help you to do it, the fact they feel a need to refinance less often, petrol prices are lower. But these are speculative comments. It's very hard to identify a particular reason that's causing customers to wait another month. I think the most important thing for us is they are choosing to wait another month and they are choosing to wait with us and they are happy with our customer service. They are not choosing to go elsewhere.
Okay. And then you mentioned you're migrating toward a higher credit score. Is this a FICO score or is this your own internal credit score? And a follow-up to that would be, you've experienced rising charge-offs and you talked about there's a few different factors including the lack of a sale of charged-off assets, but at what point do you think, based on your forecasting or just your expectations because you are migrating to higher credit score, when do you think those will stabilize going forward?
Janet Lewis Matricciani
The first question was about the credit scores. This is not our internal credit score. We work with Equifax and they have Beacon scores and this is looking at those scores. Beacon score of course is not the only indicator of credit quality, this is why we all in this industry have models to help us understand, but the Beacon score being higher is a positive indication of course.
In terms of the charge-offs, we'll have to see how this plays out and see – we believe our mitigating strategies of having pay-by-phone in the branches, which is a great choice for customers who don't want to come into the branch, and internalizing and centralizing collections pre-charge-offs will also have a very positive effect, but it is too early to speculate about the timing for this to have an impact on our business.
Okay. And then the last question, and you guys mentioned this both in your statements and in the press release, the marketing was down and it sort of seems like there was just sort of a timing difference in one year doing things because you're getting a different, as you mentioned, effectiveness rate, how should we think about – does that mean, because marketing is down this quarter, we should expect it to creep up next quarter from a timing perspective or are you just getting more efficient overall and we should expect marketing expenses to continue to be comp lower on a year-over-year basis?
Janet Lewis Matricciani
We are getting more efficient in marketing and you can measure that by of course your response rate for the cost of different campaigns depending on the materials that you use, but we have no intention to reduce our marketing budget for the year. As I said, we're just pushing it back to later in the year at a time when we think the customer quality is higher and the response rates are higher. So we expect to have the same marketing budget as we've had a year before, it's simply choosing a better more attractive universe and more responsive universe to which to mail.
Right. Thank you very much.
We'll now go to John Rowan from Janney.
Just wanted to go back to the later refinancing, what was it again, you said two to three months, typically later?
Janet Lewis Matricciani
For our refinancings, it appears that [indiscernible] are waiting about a month longer for small loans and a couple of months longer to refi large loans compared to previous two or three years.
Is that changing the economics of the loan at all? I mean, obviously the refinance period obviously coincided historically with when the amortization and the Rule 78 would start to actually increase and move back toward a faster amortization. Is the later refinancing starting to change the economics or is it just kind of following that same point, just with a longer duration loan?
John L. Calmes, Jr.
This is John. It does change the economics, right. It's amortizing loan, right. So the loan [indiscernible] but we don't think it's a significant change in the economics of the loan. So it's certainly something that we are comfortable with.
Okay. And then again, just why are you so confident that the charge-offs are going to move down? I mean not doing field calls is a permanent change. I know, obviously you mentioned to me about pay-by-phone in the branches. Is that really the only mitigating factor? So why you think – or just personnel adjustment in the field or what else gives us confidence that the charge-offs are going to go back down to a more historic level?
Janet Lewis Matricciani
First of all, as I said or point to, we gave our customers kind of no warning to expect this change because we acted immediately and felt it was best in the regulatory environment. So there is naturally a period of adjustment afterwards. Secondly, as I mentioned, the credit scores of our customers are going up in higher quality, and therefore, we're getting a higher quality of customer in the door, and so we would naturally expect charge-offs to go down, as I talked about in detail in my script. Also, the pay-by-phone, as I said, give customers another option who don't wish to come in the branches and perhaps were expecting to be field-called and reminded and they don't have that now. And finally and very importantly, we believe that centralizing the collection center and running that away from the branches will help us manage a much better system and strategy of receiving payments and managing pre-charge-off collections.
Okay. Thank you very much. That's it for me.
[Operator Instructions] It looks like we do have another question from Clifford Sosin from CAS Investment Partners.
I apologize if this was mentioned at the very beginning of the call, because I unfortunately joined it [midway] [ph], but can you give an update as to the progress of your live check program which you tested early last quarter? And then also, maybe if you can just reiterate your stance on that thing, anything about the CFPB investigation, that would be helpful.
Janet Lewis Matricciani
Sure. Okay, two completely different questions. In terms of live check, so let me start with that one, in terms of live check, the Company never before in its history had done live check. So we didn't have internal data and wanted to be very careful in our testing. So we started in Tennessee with a small pilot but large enough to give us significant data, and what came in was a very positive result.
First, we saw our response rate soar up to five times as high as we got for pre-approvals, and secondly, the second question of course is, are those responding of the credit quality that you expect, and the answer is, yes absolutely, based on the first two payments. Of course more data gives us more information, but having those first two payments coming in line with our expectations is very significant.
This allowed us to therefore better mail in Tennessee and do a larger campaign, and also prepare for and begin our campaigns in other states, and we intend to keep rolling this out to other states carefully and using all the data we get of course to improve our model. So we believe this will be an important distribution channel, if you like, for us. That answers your first question.
Yes. I guess, on that topic, have you done additional live check campaigns or did you do any in the quarter, have you done to-date this quarter?
Janet Lewis Matricciani
They are literally happening in the next couple of months and we will talk about them as we do them, but we are literally in the prose of launching into other states right now.
Okay. So as we think about the year-over-year levelling off of new and former borrowers, it's right to think about only the impact of the one Tennessee pilot, the rest is other factors?
Janet Lewis Matricciani
So far, up until now, only impact of live check is not really significant because it's a small Tennessee pilot, but we believe by growing this and other initiatives – first you test and learn, right, then you do it across several more states and then you do it Company-wide, so the impact continues to grow. You just want to do it safely and with knowledge behind you that gives you confidence.
Thank you. And then if there's any color you can provide on the CFPB investigation, it'll be great.
Janet Lewis Matricciani
Sure. On the CFPB, the only thing I'm going to do is state what we've always said on the CFPB, which is that we don't expect to have anything substantial to say until the end of the process. We don't know the timing for that. And since we're not in the business of speculating, we just don't feel it's appropriate to say any more than that at this time.
It appears there are no further questions. Thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference.
Janet Lewis Matricciani
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