World Acceptance Corporation (NASDAQ:WRLD) Q3 2016 Earnings Conference Call January 28, 2016 10:00 AM ET
Janet Lewis Matricciani - Chief Executive Officer
John Calmes - Senior Vice President, Chief Financial Officer and Treasurer
J.R. Bizzell - Stephens Inc
John Rowan - Janney Montgomery
John Hecht - Jefferies
Vincent Caintic - Macquarie Capital
Clifford Sosin - CAS Investment
Good morning, and welcome to the World Acceptance Corporation sponsored Third Quarter Press Release 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 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 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, 2015 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 Lewis Matricciani, CEO. Please go ahead.
Janet Lewis Matricciani
Thank you. And welcome to everyone to our earnings call for quarter three of fiscal year 2016. I assume that everyone on the line, has had a chance to read our earnings release. As now, I will not read that or repeat the information that's within it. As I did last earnings call and as will be usual going forward, I'll add some details on our recent activities and successes beyond what is written in our earnings report.
During the last quarter, we've made several changes to our business activities. In order to improve our performance and to focus on our customers. The most significant change to our business practices, is that we've have ceased all field calls. Both at customers place of work and place of residence. So we no longer do, any field calls.
We've also ceased all phone calls to our customer's place of work, for collection activities. This is part of our strategy to be best-in-class in industry practices, in all our activities. And we believe, this cessation is necessary in the current regulatory environment, in which we operate. We cannot yet say, what the impact of this change will be, since we only made it company-wide, in mid-December. But to the extent, that the change negativity impacts delinquencies and charge-offs, we hope to mitigate some of the impact by implementing a more optimized phone call strategy for collections and by better underwriting in the future.
And this change also increases our efficiency of our branch team because they're now together all day in the branches except when they're doing local marketing activities. And we believe this will also improve, our training activities and our team communications. We've already significantly reduced overtime and mileage expense this year. And we have reason to believe, that these will continue to decrease with the elimination of all field calls.
We also, now have the opportunity to hire individuals as Assistant Managers with a focus on strong sales skills rather than collection capabilities, which will likely help to improve our employee turnover as well. Another change we've made, is we've improved the quality of our field meeting. For example, we're taking advantage of our state home [ph] stretch meetings, which occur in January and February, which are attended by branch managers, supervisors and the VP of the State, the SVP, to communicate important information about our company strategy and to emphasize key initiatives.
And some of the key initiatives, that we're emphasizing include customer service. We want to best-in-class in this area. We've created a customer service manual and we've also rolled out our operation Pride, which focuses on how to have optional telephone communications with customers.
Of course, we're also beginning to have infused data into everything we do including these state and divisional meetings. So that we understand performance trends and can take specific actions to improve in areas, where data showed weakness. Other activities, our branch support center based in our headquarters in Greenville is up and running and serving all states now, to help operational personnel, get fast answers with any issues they have in the branches.
Our third and newest large loan center in Alabama is now up and running. So now, every state has a large loan center, to help in underwriting our large loans. In marketing, I'm very pleased to say, that we hired new Head of Marketing, who has experience in the financial services industry and particularly in digital marketing. He's been with us about 1 month now. We've seen that digitally, we have a number of opportunities to improve the way, we interact with our customers. But also pleased with the increase in unique visitors to our website, which in December was a record high for our company and are also pleased as well with our web app, which was also a record high in December.
In fact, web applications in December were up more than 25% from November and what almost three times, what they were 1 year ago. We're still aware, there is so much more here we can do to gain customers and improve the customer experience and we also plan to improve our creative offerings. So they truly grab the attention of the recipient. And this is an area, where our new Head of Marketing also has experience. And we've begun to run and we'll continue to run new creative tests and look at their performance.
In data analytics, we've created dashboards for supervisors and Vice Presidents of Operations, who run our States, to show performance in their States and Districts. And these are now issued monthly. And we believe, this will help our leaders in the field to pin point problems and improve performance at a branch level. We've had a very positive reaction to this kind of graphical data.
We're focused on profitability and we use data analytics to make decisions to open branches and merge branches because we want to maximize profitability, at the branches we have. We want to merge branches, where we can do so with an increased profitability because it makes sense. We now only open branches, where data shows [indiscernible], expected to be strong demand and data analytics are involved in every merger and open decision for our branches.
We're also focused on cost reductions. As I mentioned, mileage cost is down significantly, even before we stopped all field calls. So we expect this to decrease further because [indiscernible] become more efficient. Overtime costs have been reduced. They saved our $600,000 already this year compared to last year, so far. And we expect, they'll save us up to $1 million, this year and reduced overtime.
We've also seen some good things in our growth, during growth season, which for us is October through December. More former borrowers came in during growth season for loans with us than did 1 year ago. And although our open loans, same-store revenues and refinancing volumes decreased over the quarter, the rate of decline is slowing as compared to prior quarters and this is been true over the last few quarters in these categories.
We feel this is a good sign, that our initiatives are improving results. Although, it is certainly too early to know the full trend. We will continue to focus on improving our results. And although we brought in fewer customers overall during this growth season, than last year. We find it very positive, that the customers who came in, were higher quality customers, as measured by higher average Beacon scores. And all this was done without Head of Marketing during growth season and now we have someone with the expertise to also drive our creative's to the next level.
But we still have a lot to do. Especially in IT, we're focused on upgrading our technology in all the branches having virtual terminals and [indiscernible] internet every terminal and this will allow us to improve in many areas going forward, including the delivery of models to branches, credit reports at every terminal, so we can then do everything we need for an application, at one workstation.
Allows us to update [ph] data analytics to share with branches more easily, and is more efficient as employees don't need to move to other terminals. Part of what to come, is also to update our underwriting models and to improve digital customer connection channel, to create a full optimized digital experience for current and potential customers.
Now there are number of areas, where we feel ahead in the industry like having every branch with debit card terminals, so customers can pay on a debit card. And texting, which we do to more than half our customers, of course of all opted in for this service. And furthermore, we were the first in our industry to sell out charged-off accounts and now others have followed in our wake.
We were aware of opportunities, where we can improve our competitive position. For example, in terms of accepting payments by phone, which we've been testing in our collection center. We're also behind in taking online payments as well as our techniques in digital marketing, as I mentioned already and we need to consider using external data sources, more effectively for underwriting and we're taking steps to fill all of those gaps.
On the CFPB front, I appreciate that you may have questions. But as we stated before, we don't intend to make further statements until, we reach the end of the process and conclusion. I know that the market is looking forward towards regaining our growth in accounts and ledger. Our focus is on bringing in higher value, lower risk customers through better marketing and underwriting and thus increasing our profitability.
We now have data on customer profitability, by state, by credit score range, by whether or not they're former customer and their payment history, if they're refinancing. So now we feel able, to read out unattractive customers and focus on our most attractive segments going forward.
In summary, we look forward to growing and improving our business, building on our culture of data analytics, collaboration and quality customer service, as we've technological improvements and best-in-class practices throughout our company. Very excited about what we're doing. Thanks for your time and I'd now like to open the call to any questions.
[Operator Instructions] we'll take our first question from J.R. Bizzell with Stephens Inc.
Yes, good morning and thanks for taking my questions. I guess, the first question I have 30,000 foot view. Just wondering, if you could give us an update Janet, maybe on kind of what you're seeing in the competitive environment, what you're hearing from your branch managers about what they're seeing in their respective fields. That's the first question.
Janet Lewis Matricciani
So, in terms of the competitive environment. I think some of the things I've mentioned is, what we're seeing as well we're behind in terms, for example our online presence. And in terms of, some other areas, where we can certainly improve, that I've mentioned like in our use of IT and how we manage that. But, a branch might as also seeing I mean a lot of good signs as I mentioned with higher quality FICO scores coming in, but it is also a time of lot of change for us, right as we develop our technology and data analytic skills, so that we can seed our future growth and as we develop these capabilities, we expect to get back to growth.
So I think, what the branches are seeing is, is similar to what, I've said in my verbal speech. Branch managers need and our number one focus, is on bringing new customers into our branches. We've also said, we have two main factors always focused on. One is growing loans the right way, you still need to keep your strong underwriting. And the second is, regulatory compliance. And the branch focuses on those same areas.
Excellent, thank you. And I guess kind of switching gears and just to be, the debt collection policy, a major change here if you will and like you said there are some positive points for your branches. But just wondering, maybe if you could kind of go into more detail around, how often and what percentage of collections were done in person, outside of the branch?
Janet Lewis Matricciani
Obviously the vast majority of our loans, don't have field calls. But there was still a part of our collection strategy and full compliance with all regulatory requirements and done in a lawful and correct manner. I don't have the statistics you're asking for in terms of the number of collection calls. But we do know that in certain areas, the cost of collection calls for example when you factor in mileage and time out the office.
And certain branches could certainly outweigh the benefits. But like I said, it's too early to know the effect of stopping the field call, at the moment. We believe, that this will be a benefit to the company because we will ensure that we continue with strong underwriting going forward and use the time now available to keep the team together, in the office working on growing customers and improving customer service.
And I guess kind of building on this longer term and thinking about the regulatory focus here on kind of the collection processes at the branch level. Just wondering, if you all have kicked around and or are planning on kind of doing some work around maybe doing a centralized collection process for your loans as opposed to collections at the branch?
Janet Lewis Matricciani
Yes, this is not a new idea to us and this is certainly something that we're thinking about. We're looking at optimizing and all different forms of our business and all processes and procedures from a valuation forms of personnel to, how a loan application is used, how documents are received and sent from the large loan centers, and a centralized collection strategy is no different from this. And we would expect to talk more about these kind of things, as we launch relevant opportunities, but this is not a far agenda, at all.
Thanks for taking my questions.
And next we will go to John Rowan with Janney Montgomery. Your line is open.
Just two questions. So first, can you explain the issue with the tax rate and what we should expect going forward, to that line item?
Sure. I can't go into too much detail, I don't want to go in too much detail. But basically we had an opinion from a judge in one of our states written [ph] in the second quarter and the same judge reversed his own opinion in the third quarter. And that resulted in a needing to reserve against that tax position. Ending up about $1.7 million impact on income tax this quarter.
As you can see for year-to-date it's, the effective tax rate is relatively flat and we expect that for the year-to-date, for the full year as well.
Okay and then for Janet, you talked a lot about your technology and improving it and obviously there is a big shift in the market toward [indiscernible] analytics, more variables, trying to pin point cost reserve [indiscernible] they're going to pay you back. Can you maybe give us, more of a I don't say, details, but some quantitative points as to what you've done. Maybe just simply, how many variables, you used to use, how many do you have now, how many do you expect to get to, how many to some of your peers. Just maybe [indiscernible] about the argument, how far along we're in the process to getting to the point, where you're comfortable with the data analytic set?
Janet Lewis Matricciani
Well, I guess I don't have the numeric data to hand at the moment, on this call. But I wouldn't say we're behind what the general market is doing in terms of, how we think about the data that we have for analytics of the business. In fact I think, we're very pleased with what we're doing on our dashboard and the data that we can pull from our systems to look at trends in profitability, account growth and so up by branch district, state and division over a period of time.
In terms of using external data sources, to help us the wider range of data sets you can get about your customer, the better you can, also learn about your customer. And we're having various conversations there to look at different data that we can add, that is not necessarily added by competitors, but we believe is a competitive advantage for us in the marketplace. I haven't got the specific metrics behind that to give you at this moment.
Okay, thank you very much.
And next we will go to John Hecht with Jefferies. Your line is open.
Thanks very much. Actually you gave, I guess or gave us [indiscernible] lot of different initiatives internally and I completely understand the logic and focus [indiscernible]. I'm wondering, what does it mean and have you guys given a thought to what it means sort of kind of overall cost levels, as we stepped through the next few quarters, whether it's up or SG&A or any component in that?
So part of the roll out of internet to every terminal, in every branch. Obviously, there's a cost associated with that, it's a few million dollars. But that will be spread over three years to five years. So while there will be an impact, it wouldn't be a significant impact to any individual year. Well, we wouldn't expect it to.
Okay and then, on the advertising side. I mean, obviously there is a pick up in the quarter, it's seasonal. Is there anything, you've been advertising consistently, I guess relative to prior years but as you guys noted, new customer acquisition or just in general borrowing levels are down.
I'm wondering, should we see a change in terms of advertising strategy going forward or is it more of the same, it's just harder because you're underwriting more tighter, it's harder to, the acceptance rate, maybe down despite advertising in the same levels.
Janet Lewis Matricciani
So, I think there's a couple of answers to that one. First of all this year in growth season and we've tested quite a few different forms of creative's. And naturally when you test the effect, when you see a great response, is limited by the fact that it was a test and next year, will be to roll out some of those effective test at a much greater level.
Secondly, we have found that in terms of looking at direct mail versus digital strategies. There's a great emphasis that we need to place on the digital front. And also need to be as more effective in direct mail and we're starting to do that and who we send mail to. So I wouldn't say that the market isn't there, it's just a question of using data analytics more effectively to select the right customer.
I'm not sure that means an increase in our advertising or marketing budget. It means, using the money more effectively to maximize the response and effect in booking rate and knowing for where you put your advertising dollars and that is a very big focus for us that [ph] our new Head of Marketing now.
Okay, final question and when you can juxtapose the migration lower charged-offs versus higher delinquencies. Is there, anything with respect to the changing corrections procedures leading that outcome or is this just a signal of your borrower's kind of trends or anything we could glean from that?
Given the uncertainty and then higher delinquencies year-over-year. We're carrying more allowance as compared to net loans, as we have in the past. So the 744, 714 the allowance net loans was 8.9%, this quarter was down 0.3%. So, we are still in a reasonable range of what our model is telling us, the allowance should be. But we're at the higher end of that range and its carrying little bit extra, due to the uncertainly.
Yes, I guess the question is more about, the charged-offs in the quarter compared to well year-over-year and then you're telling us, you're reserved adequately and so forth, but maybe there is increase in charge-offs coming or how do I? How do I, kind of put the takeaway from this.
I'll tell you, it's a function of delinquencies being up. Right, so to your point. So charge-offs have been trending better for several quarters now. But we saw a pickup in delinquencies in December. So we thought it was appropriate to hold a little bit of additional allowance at December 31 because of that.
Okay, I guess sorry to keep asking. But is that a regional weakness or is that just across the board and the delinquencies or is there any trigger, that you thought caused that increase in delinquencies?
It is and actually across the board and every state. It is more pronounced in some states versus others. But yes, I'm not sure that answers your question or not.
Okay, so I'll work [indiscernible] get back to you. Thanks very much.
[Operator Instructions] we will go next to Vincent Caintic with Macquarie. Your line is open.
A couple of questions. First, appreciate the change of the collections as part of the ongoing side [ph] change [indiscernible] going environment. Are there any other practices that we should be contemplating that might be changing in the future?
Janet Lewis Matricciani
I would say there is nothing specific on our horizon, but we're going to continue to monitor the regulatory environment and decisions that come out and are made as regards other companies or new rules or laws and where decisions are made, we are going to air [ph] on the side of cautiousness, even when we know we are in full compliance with regulatory, rules, procedures and state laws and regulations. But that's not something specific I can think of at this moment. Again, we will be monitoring closely and see what comes up.
Okay, got it. Second question is, how's the market for the sale of charged-off and actually [indiscernible]. Lowered gas prices had any impact on what you're seeing for charge-offs? Thanks.
Sure. So, yes, we're still under our current contract for the sale of the charge-off. So we haven't been testing the market for any future sales. So, as far as the impact on gasoline prices are on charge-offs. There is no specific data to say that's what it is for sure, but we do believe that the decrease in gasoline prices has probably positively impacted our charge-offs sort of, if that answers your questions.
Thanks very much guys.
And next we will go to Clifford Sosin with CAS Investment. Your line is open.
I want to understand the little better, the new initiatives that were call it in, that were rolled out for growth season, this year. Which were impactful and which kind of worked as expected, which were not impactful and didn't work as expected. And then also, maybe if you can discuss in a more detail of things that were piloted, during growth season. And which was impactful and which weren't? Specifically, I want to focus on sort of items sort of directly related to new customer acquisition.
Janet Lewis Matricciani
Well, part of new customer acquisition is also bringing former borrowers back. In this growth season, we had an increased focus on mailing former borrowers that we believe will be attractive and have enjoyed past good experience with us and that was successful. We came up with new creatives [ph], that we felt were better targeted to our audience and also modernized, for the year that we're in and environment we're in, in just terms of test fund, lookout etc.
And also, that had the right messaging for our customers and some of those test had significant increase left. We're also focused on maximizing, where we put our marketing. So not trying to get the same number of applications at every branch, but really focused on where the highest response rates, were and that was helpful to us. And where we can do better I think is, in the digital channel.
We're still learning this business, we're pleased to have a Head of Marketing, who understands online very well. There is certainly better ways that we can make our presence known and available to new customers in the digital world, whether it is on a computer or a mobile device.
So just so I can understand the difference between things that were because obviously new customers, there were lot of things at times, a lot of these were successful. But new customers were down year-over-year and so, I guess I'm trying to understand what was new and successful and rolled out. Versus what was new and successful and piloted, was a thought towards hopefully the piloted things, may have more of an impact in the future, as they get more fully rolled out.
Janet Lewis Matricciani
Well I guess, what was rolled out, was a significant focus on bringing former borrowers back because we believe folks really appreciate and enjoyed our experience with us and it's very gratifying to get so many former borrowers back. And then there were just, Cliff a lot of small tests that were piloted, that you can't pilot and rollout at the same time. Like I said, like new creatives [ph] or targeting different small customer groups or some work on the internet around search engine optimization and so on. And on the internet front we were, we feel, even though we have record volume. We feel, we could have done a whole lot better and we're learning from that.
So I guess what I'm trying to understand is, off the things that show benefit were most rolled out during the growth season or were most in test pilot mode and hopefully benefit going forward?
Janet Lewis Matricciani
I think in this growth season because we haven't done as much testing in the past. It was really a time of test and learn. So I don't think, we expected a massive change during growth season. But as we learn and develop from those tests. We expect and hope to be in a stronger position from that learning going forward, that wasn't a seismic change in our marketing strategy during growth season.
Okay, so what you're saying is, I shouldn't necessarily interpret a great deal from the year-on-year new customer performance because the tests, which were hopefully had an impact were not rolled out during in - during that period?
Janet Lewis Matricciani
I understand your question, you're saying, did you roll out some major new initiative from what switch you expect is incredible [indiscernible] in growth season and then did not achieve them, no. This growth season was again about testing and learning and improving in many areas, what we're doing and bringing in expertise to help us and improve in areas that are very important to us, such as digitally.
Can I ask a hypothetical? I took your test results, that were successful. And I recognized, there is a question about the scalability of these things and so forth. But if I took the successful test results, and imagine that they were fully rolled out. Do you believe, you found at this point enough things to do better where if they had all been rolled out at scale, that the company would have shown meaningful in customer growth or do you think, that you still that, do you still need to sort of test and find new things that will drive growth in order to get [indiscernible].
Janet Lewis Matricciani
I think, this is a question that we're going to have to answer over a period of time, with our new Head of Marketing. There were some tests that were winners for us. As you said, it's hard to know, if you rolled out in full the what the response would be and for how bigger segment it's appropriate for, but this is going to be some of our work over the next nine months, as we prepare for the - to also launch and test products as we prepare for the next growth season.
I wouldn't say there is a magic silver bullet. Oh, we weren't doing one thing and that one thing is the answer. It is a series of changes and improvements that we're working on now, that are going to help us create the growth, we're looking for.
Thank you very much.
And it appears we have no further questions at this time.
Janet Lewis Matricciani
All right, well. Thanks very much. And if there aren't any other questions. We'll just wish everyone a good day. Thank you.
Thank you for your participation. This concludes the World Acceptance Corporations Quarterly Teleconference. You may disconnect at any time.
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