World Acceptance (WRLD) Q3 2020 Earnings Call Transcript

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World Acceptance (WRLD -1.06%)
Q3 2020 Earnings Call
Jan 30, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the World Acceptance Corporation sponsored third-quarter press release 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 31st, 2019, 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.

Chad Prashad -- President and Chief Executive Officer

Good morning, and welcome to our third-quarter earnings call. I'm joined by John Calmes our chief financial and strategy officer. I hope you've all had time to review the press release this morning. This quarter, we continue to include additional information about our growth, specifically to highlight the increase in our portfolio of newer customers and the corresponding risk in those bucket -- within those buckets over the last couple of years.

We believe by continuing to grow our new customer portfolio, it's a great investment for the company, and we are really focused on the expected return over the long-term. At this time, we'd like to open up the call for any questions that you may have.

Questions & Answers:

Operator

[Operator instructions] And we take our first question from John Rowan with Janney. Please go ahead. Your line is open.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Good morning, guys.

Chad Prashad -- President and Chief Executive Officer

Good morning.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Are the 7.4 million shares outstanding, is that just down quarter over quarter because of averaging down from the prior quarter's repurchase? Or is that a number as a basic figure because of the GAAP loss in the quarter?

John Calmes -- Chief Financial and Strategy Officer

The shares outstanding -- you mean the average shares outstanding? Yes, it's -- the quarter started at a lower amount than the previous quarter, right? So, it's just the impact of that.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

I just wanted to make sure that it wasn't because there was a GAAP loss that you're using basic shares as opposed to diluted shares.

John Calmes -- Chief Financial and Strategy Officer

No. No, no.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. And then, again, just -- I know you made some changes to the debt covenants during the quarter. It looked like it changed with the fixed charge coverage ratio. I just want to be sure, as we head into next year, that you still don't have an exemption in your covenants, say, for net worth for any dilution to book value caused by CECL adoption?

John Calmes -- Chief Financial and Strategy Officer

So, it's not in there yet, but we've had those and started those conversations with the banks, and expect to be able to amend the agreement to adjust for any impact from the CECL impact. But, yes, so we've come a little bit further with the implementation of CECL. We ran the model as of December 31st, 2019, and we expect the impact to be between $10 million and $20 million when we implement the CECL. So, yeah, even without an amendment coming into -- we still have the fourth quarter to build equity.

Even without an amendment, we thought we'll be OK. But at the same time, we ultimately expect to amend the agreement to adjust for that.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

So, you think that the allowance only goes up by 10% or 10% to 20% because you're at about $113 million, so, even a little bit less than that. So, you're saying the allowance only goes up $10 million to $20 million on 6/1/20. Is that right?

John Calmes -- Chief Financial and Strategy Officer

Well, yeah, so, we tend to go up $10 million to $20 million as of December 31st. If we applied the new methodology to December 31st, that number could actually come down a little bit by March 31st or April 1st due to a change in the mix of our portfolio.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. No, I mean, that's just a much smaller build to the allowance than other lenders have been guiding -- guiding to.

John Calmes -- Chief Financial and Strategy Officer

Right. But yeah, we -- it's part -- it's a difference -- we have to factor in the difference between where we're starting and where they're starting and where you're in.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK.

John Calmes -- Chief Financial and Strategy Officer

Our current allowance methodology adjusts pretty quickly for the impact of new customers and losses flow through the allowance fairly quickly under our current methodology. So, we wouldn't expect it to have a significant change.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. And then, just given the fact that we're kind of tied up -- well, I guess, this also goes back to the question on what's excluded from the covenants. Because you proposed a settlement with the SE -- DOJ and SEC for $8 million. I assume that that was just your proposal.

They haven't countered, I don't know if you're going to tell me whether they countered or not. But let's say that number is actually drastically higher and you have a loss next quarter, would that -- would that delta in book value also be excluded? Because again, we're sitting here, a little bit over $20 million, not even $20 million, actually, above the -- your covenant, your network covenant trigger. I'm just trying to understand when you can step back into the market and buy back stock, right? Because you've got CECL coming due, you're still trading above book value, right? CECL's going to consume some capital, probably less than people are thinking, employing $10 million to $20 million in the allowance, which still gets tax affected. Do you have to wait until Mexico is settled before you get comfortable putting your foot back in the water to buy back stock, right? Because all of these things, if there's a much bigger settlement in Mexico or CECL is actually -- and CECL, but they're all consumptive of book value.

John Calmes -- Chief Financial and Strategy Officer

Right. So, we feel like we can't elaborate too much on the accrual from Mexico, but we feel like it's a reasonable estimate for the ultimate settlement. So -- and you guessed me around, that coming in the fourth quarter, that is our -- historically our largest-earning quarter. So, we expect to add equity quite a bit during the fourth quarter.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. All right. Thanks. I'll let someone else hop on.

Operator

And now we take our next question from Vincent Caintic from Stephens. Please go ahead. Your line is open.

Vincent Caintic -- Stephens Inc. -- Analyst

Hey, thank you, and good morning. Just -- I'll take a step back in more bigger picture question. So, appreciate you highlighted your long-term fiscal 2025 guidance on the press release. I guess, from this point getting there if you could just discuss how you envision sort of that five-year framework or the four-year framework working? And kind of from where we're seeing it today, where you have EPS declines year over year, how does it -- when and how does it inflect? And how do you get from here to that long-term guidance?

Chad Prashad -- President and Chief Executive Officer

Yeah. Good morning, Vincent. This is Chad. A lot of the way that we view this the last couple of quarters, is this is an investment into future growth, both for the company but also for EPS.

In the last two years, we've grown our portfolio by -- the number is here, a little over 20%. And we've also instituted the number [Inaudible], and that only increased the rate that we gained new customers, but also increased our retention of former customers and current customers, and reduces the risk of the portfolio in the back end. And so, it's our firm belief that this initial investment in gaining new customers and increasing the market share, as long as we continue to retain customers and treat them fairly so they stay with us over the next couple of years and we grow them into a less-risky portfolio long term, we believe it will pay dividends. So, this initial lump that we're taking is really just an investment to kind of expedite our overall long-term growth objectives.

And it's one thing that we pointed out before, but I think it's worth pointing out here again. You know, a lot of the growth, roughly half of it in the last few years, has come from acquisitions that were opportunistic. They are fairly large acquisitions. So, when we see those and the price makes sense, we are happy to take them down and as long as we believe that they are accretive to the long-term objectives of the company.

At the same time, we put a lot of work in growing organically. So this quarter, we tried to highlight some of our organic growth without the acquisitions, just to kind of have more of an apples-to-apples comparison. You know, so this year, we grew 23% year over year, excluding acquisitions -- or sorry, year-to-date excluding acquisitions, which is roughly the same as last year, but head and shoulders over what have been in years past. So, we believe that the combination of rapid growth of new customers, as well as, the retention that we're seeing in current and older customers will help us not only jump-start the growth of portfolio but begin to rightsize it quickly.

And I think, we're beginning to see that begin to happen, and we'll probably see that happen within this quarter, the fourth quarter for us. So, that's one side of the equation. The other side of the equation for hitting this long-term earnings per share target is reducing the number of shares outstanding. So, we did go out earlier this year and begin a fairly aggressive repurchase program.

We'll probably try to continue that within the next couple of quarters and a lot of that has to do with the equity that's available and what the share price is. So over the long-term, it's really as simple as these two things, coupled with controlling our cost to service, and all of our models show that we're on target to hit this in the next five years.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. Gotcha. And from your models, I guess, so this year, we've seen the EPS, you made those investments. When do you -- when should we expect to see the harvesting of that growth? Let's say, more like a fiscal 2023-year type event? And then, I guess, when you have your charts, which are really helpful about your new customers versus your tenured customers, and it seems like two years is the dividing point.

So, is it -- and this is your -- this past year is your first year of accumulating these new customers. So, is it more of like, I guess, once we get to the two-year mark, you will start to see that inflection? I just -- I guess, I'm just trying to -- just wondering when we see the harvesting, the EPS growth of the company.

Chad Prashad -- President and Chief Executive Officer

Yes. That's a great question. So, you know, from the chart in the press release, it's broken out into customers less than two years and customers for more than two years, and it looks like a fairly substantial clip. It's actually much more subtle than that.

And so, with the new CECL methodology going forward, we have fairly granular buckets for the types of customers and investors that we have. So, we'll begin to see it more rapidly, I would say, within the next couple of quarters, especially, as CECL comes into play. We'll begin to see the reserves come down, you know, granted we don't make any large acquisitions that dramatically change the distribution within the portfolio, that the portfolio will remain, basically, the same. As those customers age in six-month, nine-month, 12-month buckets, we'll begin to see it rather rapidly.

Vincent Caintic -- Stephens Inc. -- Analyst

OK, Chad. Thanks so much.

Chad Prashad -- President and Chief Executive Officer

Yeah. Thank you.

Operator

And we'll now take our next question. [Operator instructions] Our next question is from Kyle Joseph with Jefferies. Please go ahead. Your line is open.

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning. Thanks for taking my questions. First is, I wanted to talk about the competitive environment. Obviously, you guys have found pockets of growth and have been growing very strong.

But just talk about the competitive environment, both from other storefronts, as well as, online.

Chad Prashad -- President and Chief Executive Officer

Yes. So, over the last couple of years, I think one of the biggest changes we've seen in the industry is growth of not only awareness but adaption -- or sorry, adoption of customers with installment loans. Over the last five to seven years, I think the growth within the entire industry has been tremendous. A lot of that recognition of the product itself has, I think, to do with online lenders, but also more credit reporting related to this industry in general.

So, customers see it more as an alternative product to payday and title loans, rightfully so, and it's just raised awareness, in general. And I think, that's one of the benefits that we've seen throughout all of the industry in general, right? So with that being said, we've done a lot in the past year, specifically, to target customers who are looking for installment loans, looking to improve credit. We've rebranded ourselves and the company to more accurately reflect what differentiates us in the marketplace. And yes, I think the other thing that is interesting here is that in the last couple of years, we've seen that customers who are interested in rebuilding their credit histories, see us as a viable option for that, and we've seen a lot of success with customers in that area.

So, we've continued to see that, and I think, we've benefited from customer recognition of the product, and also, the improvements that we've made here in terms of soliciting those customers, and kind of bringing them into the marketing funnel, if you will.

Kyle Joseph -- Jefferies -- Analyst

Got it. That's very helpful. And then, just factoring in CECL and kind of the -- as your book matures, can you walk us through sort of day one impact in CECL and day two? I know you touched on it earlier and you highlighted the potential to equity. So, that would be a tax-adjusted number of what your reserve increase would be.

But more along the lines of how you're thinking about day two impacts.

John Calmes -- Chief Financial and Strategy Officer

Right. So, I think the new model could create some more volatility within the year. But it should be fairly neutral over the course of the year, right? So we're anticipating using customer tenure and the associated loss rates to project what the losses will be. So, in periods of large growth, like, the third quarter where we add a lot of new customers and they're typically shorter-tenured customers, that could drive the allowance up.

But we see, in the fourth quarter, typically those lower-tenured customers will pay off or charge-off during the fourth quarter. So because of that, you could see swings throughout the year due to seasonality. But over the course of the year, it should be fairly neutral, as far as an impact on the provision, we believe it will be.

Chad Prashad -- President and Chief Executive Officer

Yeah. I think to kind of highlight a couple of things there related to potential acquisitions. If you go back over this fiscal year, earlier in Q1 and Q2, we had some fairly significant acquisitions. And we began to see those show up in our provision and our loss rates in Q3 specific -- Q2, then also in Q3, and potentially even in Q4, as those portfolios begin to age.

One of the differences with CECL is if we were to take on a large acquisition, you would see the reserve increase dramatically in that quarter, right? So, there could be the case in the future where we take on a large acquisition and it has dramatic impact to the EPS within that quarter, right, versus having that spread out over time. But again, that's something we have to keep in mind and think about, as far as what we think is the best potential long-term investment for the company.

Kyle Joseph -- Jefferies -- Analyst

That's very helpful. Thanks very much for answering my questions.

Chad Prashad -- President and Chief Executive Officer

Thank you.

Operator

[Operator instructions] We have no further questions at this time. Mr. Prashad, I'd like to turn the conference back to you for any additional or closing remarks.

Chad Prashad -- President and Chief Executive Officer

All right. If there's no other questions, I appreciate all of you being able to join us today for the third-quarter earnings call. We look forward to speaking to you guys in the spring for the fourth-quarter earnings call. Thank you.

Operator

[Operator signoff]

Duration: 20 minutes

Call participants:

Chad Prashad -- President and Chief Executive Officer

John Rowan -- Janney Montgomery Scott LLC -- Analyst

John Calmes -- Chief Financial and Strategy Officer

Vincent Caintic -- Stephens Inc. -- Analyst

Kyle Joseph -- Jefferies -- Analyst

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