Good afternoon, and welcome to the Enova International Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova International. Please go ahead.

Thank you, operator, and good afternoon, everyone. Enova released results for the third quarter 2022 ended September 30, 2022, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today’s call are David Fisher, Chief Executive Officer; and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I’d like to note that today’s discussion will contain forward-looking statements, and as such, is subject to risks and uncertainties. Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release, and in our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements, as a result of new information or future events. In addition to U.S. GAAP reporting, Enova reports certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today’s press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I’d like to turn the call over to David.

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I’ll start with an overview of our third quarter results and then I’ll discuss our strategy and outlook for the fourth quarter of 2022. After that, I’ll turn the call over to Steve Cunningham, our CFO will discuss our financial results and outlook in more detail. The third quarter was another strong one for Enova. Revenue in the third quarter increased 42% year-over-year and 12% sequentially to $456 million. Adjusted EBITDA was $115 million and adjusted EPS was $1.74, both increases from Q3 of last year. As these results demonstrate, the Enova team executed extremely well to deliver solid top and bottom line results despite the economic uncertainty. Last quarter, I know some question whether we were being overly optimistic and are forward-looking commentary, believing that we would not be able to effectively manage credit given high levels of inflation and the corresponding rising interest rates. But our deep experience, sophisticated and proven machine learning driven analytics, diversified product offerings, strong balance sheet and our world class team enabled us to adapt to the changing landscape. As a result, credit quality across our portfolio remains solid. Net charge-offs were 8.4% in the third quarter. This is slightly higher than Q2 as we continue to add a large number of new customers, which were 43% of total origination. Despite the increase over Q2, net charge-offs remain well below pre-COVID levels of 13.4% in Q3 of 2019 and 13.8% in Q3 of 2018. In addition, at the end of the quarter we saw improvement in early payment performance across recent vintages, which is an encouraging sign as we head into what is typically our busiest season. For years, we have spoken about the strength of our technology, our analytics, our…

Thank you, David, and good afternoon, everyone. We’re pleased to report another quarter of solid top and bottom line financial performance that was in line with our expectations and characterized by focused growth, stable credit, operating cost discipline and balance sheet flexibility. Turning to our third quarter results, total company revenue rose 12% sequentially and increased 42% from the third quarter of 2021 to $456 million. The increase in revenue was driven by the growth of total company combined loan and finance receivables balances, which on an amortized basis were $2.6 billion at the end of the third quarter, up 11% sequentially and nearly 60% higher than the third quarter of 2021. As David noted, total company originations for the third quarter totaled $1.2 billion, up 10% sequentially and 40% higher than originations during the third quarter of 2021. Originations from new customers remained strong, totaling 43% of total originations as our marketing activities continue to attract new customers across our products. Small Business revenue increased 15% sequentially and 72% from the third quarter of the prior year to $173 million. Small business receivables on an amortized basis totaled $1.6 billion at September 30, a 16% sequential increase and 80% higher than the end of the third quarter of 2021, as small business originations increased 75% from the prior year quarter to $807 million. Revenue from our consumer businesses increased 10% sequentially and 29% from the third quarter of 2021 to $277 million. Consumer receivables on an amortized basis ended the quarter at $1.1 billion, up 3% from June 30 and 35% higher than the end of the third quarter of 2021, as consumer originations of $396 million were flat to the prior year quarter. Looking ahead, we expect total company revenue for the fourth quarter to grow sequentially, but…

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from David Scharf with JMP. You may now go ahead.

Thank you. Good afternoon. Thanks for taking my questions.

Hey, David.

So it wouldn’t be 2022, if I didn’t start off just asking about credit. And what I’m wondering is, Dave, Obviously, Fed actions and inflation are impacting consumer household liquidity, but we haven’t really seen a meaningful change in the employment backdrop. And if there is unemployment, it may be more of a white-collar kind of phenomenon. But I’m wondering, since the fair value mark was more pronounced for your consumer loans as opposed to small business, is there an implied unemployment rate in 2023 since these are less than a year duration that’s embedded in sort of your loss forecasting?

No, it’s more analytical than macroeconomic. We’re not putting macro, big macroeconomic adjustments into our fair value calculations. But look, I mean, we’ve run this business for almost the entirety of it with unemployment rates much higher than where they are today. So if unemployment rates do move up in 2023 or 2024, even somewhat meaningful, I mean they can double. I mean and that’s still kind of getting back to a more normal level of – a more normal unemployment rate. So that’s not a big conserve of ours. In addition, wages have been very, very strong. Wage growth has been very strong. And that kind of supports people being able to pay back their loans also. So look, there are some choppiness and bumpiness in the credit markets and individuals and kind of pockets that can be impacted. But that’s where our experience and our analytics has worked really, really well. And yes, we have to put in a lot of hard work to keep it on the right path, but it’s something we absolutely know how to do. We know how to put in that hard work and seen us how stable. Not only is our credit been good, but it’s been just really stable over the last several quarters despite how much the macroeconomic environment has changed.

Yes. No, clearly. And maybe a follow-up on that is, you think about your origination strategies. It sounded like just given some of the macro uncertainties it felt like or it sounded like you’re leaning more towards limiting duration risk as opposed to waiting originations towards higher quality near prime credits. Can you just walk through some of the reasoning there? It sounds a little – in some way it maybe a little counterintuitive.

For some reason, the world believes that higher – loans to higher credit quality customers are less risky and on an individual loan, sure. But in your portfolio where you can do – where you have – we have great experience estimating loss rates. That’s not true at all. We can be off by 100s of basis points in our default estimates or charge-off estimates and still be fine. You’re a super prime credit card lender and you’re off by 50 or – 50 basis points and your charge-off estimates and things start getting bad pretty quickly. So credit quality is what we do super well. And we have no concerns about our ability to underwrite across the near prime and subprime spectrum. Duration risk is what can get more challenging in an uncertain macroeconomic environment. You have loans that are out there three, four, five years, and the economy takes a major turn, you have a big portfolio that you now need to deal with. So we did is pivoted to a portfolio kind of where a large majority of the loans we originated in the last couple of quarters, have average durations of less than a year, you can react very quickly if the economy turns. And so that’s really been our focus over the last quarter or so. As I mentioned in my prepared remarks, that’s going to continue to be our focus over the next several quarters. So for example, if you think about our near prime installment book, that’s probably going to – can reduce the most. But across the rest of our portfolio, whether it’s SMB that has some of our lowest APRs or subprime consumer that has some of our highest APRs, we’re going to continue to be moderately across balancing growth with risk because we’re comfortable with the duration of those loans.

Got it. If I can just squeeze in just a mechanical question as a follow-up to that. The yields came in a little higher than we were forecasting this quarter, particularly for consumer. Should they continue to sequentially trend up in consumer because of the mix shift away from near prime or the third quarter average levels, could sort of benchmark to model over the next few quarters?

Yes, David, I think – this is Steve. I think some of what you’re seeing is some of the mix shift that David talked about in the consumer side. But even if you just take a look at quarter-to-quarter this year, we’ve averaged between one of consumer side, which is not sort of out of range. And I think SMB has been very, very flat. So the top of the house is a little bit more of a mix shift. But underneath it will be driven by the products, which would be probably a little bit more challenge David discuss.

Got it. Okay, thanks so much.

Thanks, David.

Our next question will come from John Rowan with Janney. You may now go ahead.

Good afternoon, guys. So I know you gave guidance for the fourth quarter margin of 60% to 65%, past the fourth quarter is 55% to 65% still the right number?

It is at the top of the house, John. That’s still our – what we think our sort of long-term range will be. There will be quarter-to-quarter variations in that, obviously, because we’re not sort of in a typical environment, but 55% to 65% is the right way to think about consolidated.

And then in the fourth quarter, obviously – well, in the third quarter, we did see a 16% charge-off rate in the consumer book. Maybe can you just touch on that historically speaking, and whether or not that’s a peak given some of the early payment default information that you provided in your commentary?

Well, like I mentioned in my commentary, we are seeing early stage delinquencies in the consumer portfolio down sequentially, which usually is a very positive indicator of what’s to come. And if you take a look at this year, our consumer charge-off rates on a quarterly basis have been between 14% and 16%. In 2018 and 2019, they intended to range between 13% and 17%. So sort of well within the historical norms and really positioned coming out of the quarter with a pretty resilient book based on what we’re seeing with credit quality.

And I would just add, as you think about that number in Q4 and kind of Q1, we’re still generating strong numbers of new customers. And Q4 can be a big new customer quarter as well. So you’ll see a little bit of that flow through, but it shouldn’t be anything dramatic.

On the other point too, and this kind of dovetails into what David just mentioned, even if charge-offs are higher in the fourth quarter, with you focusing in on more of the short-term products, right, there’s some yield that comes along with those as well as an offsetting factor, right? Is that something that will continue into the fourth quarter, possibly, if we do see a higher charge-off rate, just would we have a corresponding yield adjustment in the consumer book?

Yes. I mean the net revenue margin considers that range that we gave you in the guidance there. And like we mentioned in the commentary, a lot of the changes sequentially in what’s happening with the credit metrics is driven by the expected seasoning of these vintages as we bring them on. So with new customer mix and mix of product underneath, there can be some variations from quarter-to-quarter, but that net revenue guide is sort of your best indicator of how that will sort itself out.

But yes, I mean if you think about the mix shift, it’s mostly from moderately lower APR loans to higher APR loans.

Yes. And then just last question for me. We’ve heard a couple of conference calls here now with lenders saying that competition has gotten a lot weaker and they can exploit kind of these pockets of weakness. What do you attribute that to? Is that just credit fear? Is it liquidity crunch? We’re hearing, frankly, of some dislocation in the ABS markets over the last few weeks. I’m just trying to pinpoint what it is that’s causing competition for you guys specifically to show up weaker than has been in the case – it has been in the past? Thank you.

Yes, I think it’s both. And I think you’ve seen it in some of the public companies and there’s – we’ve seen it in some of the private companies as well. There are companies that have struggled with credit, both on the SMB side and on the consumer side, decent sized public companies. I think you’ve heard talk about issues in their kind of near prime book and kind of shifting to higher credit quality customers, which is great for us because we know how to underwrite near-prime customers. We’re super comfortable doing it and are not struggling there. And I think there’s a little bit of flight to quality in the ABS market, the securitization market, term loan market, their kind of seasoned issuers that have proven performance like us have been able to continue to issue is – warehouse facility in place a few days ago $770 million, I think Steve said a liquidity at the end of the quarter. So we’re super strong position there. But yes, there are lenders both on the consumer side and the small business side. There’s a couple on the news in the last couple of days that have pulled back at significant layoffs because they don’t have a strong access to liquidity right now. Have you seen these dislocations tend to be shorter-term in nature? These markets tend not to be shut down for years on end, but we have plenty of liquidity now. We’re still able to access the markets, and I think that’s going to put us even a stronger place going forward.

Okay. Thank you.

[Operator Instructions] Our next question will come from John Hecht with Jefferies. You may now go ahead.

Hey guys, thanks very much. I think most of my questions have been asked. I’m wondering – I know you guys, to some degree, could track the use cases of the credit you provide. Given kind of the emerging inflationary environment, is there any change in the use case or the behavior of the borrowers? Or is it pretty consistent with what you’ve seen over the last several years?

Very, very minor. I think the – but yes, I think over – especially during COVID where there was a lot of stimulus money, the use cases tend to be a lot more towards big one-time emergencies. And then I guess that would be expected and with all the stimulus that’s why demand was down a fair amount during 2020 and into 2021. Now, it’s pivoted a teeny bit to kind of smaller cash needs than kind of big life-changing types of things, but it’s really around – yes, just I mean the kind of – if you look at kind of what people are using money for now, it’s not different than historic numbers. It’s just kind of getting a little bit more back to normal kind of post-COVID.

And then I guess, pivoting or kind of following on some of the questions about competition. Is the – are you able to assess that the – because of the favorable competitive environment that the customer acquisition costs are going down? Are you able to kind of optimize that a little bit more?

I think what we’ve been able to do is be a bit more conservative on credit and still originate pretty high levels and show good origination growth. So if competition was stronger, us being a bit more conservative on the credit side, it might have resulted in lower levels of originations. So it tends not to affect CPS, right, as much because you try to originate to your ROE targets. We did raise our ROE targets a bit, and so that helps. But no, it really is just keeping origination levels high despite tighter credits.

Okay. And then final, just because it’s always interesting to track some of your new growth endeavors, but any update with Brazil or Pangea?

Pangea, yes. They’re both doing well. This market hasn’t really – hasn’t hurt either a lot of them. Brazil’s economy is actually starting to turn around a little bit and they’re actually – their currency has done better against the dollar than pretty much any currency in the world over the last six months. So that’s been a good sign. And Pangea is nice that it’s a teeny bit recession – without even recession resistance, they kind of benefit a little bit by recessions as wages go up, people can send more dollars to kind of to other countries. And so yes, Pangea is doing really, really well. I mean the growth rates are very, very high in that business. It’s just still tiny. So that’s why we’re not talking more about it.

Yes. Okay. Thanks very much, guys.

Yes.

Thank you.

Our next question will come from Vincent Caintic with Stephens. You may now go ahead.

Hey, good afternoon. Thanks for taking my questions. I wanted to focus on the SMB side since you were discussing that you’re looking to kind of grow into SMB side and maybe scale back on the consumer side. And it’s a broad question, if you could talk about the health of the small business borrower what they’re using the loans for? To be candid, there’s I think, less of a focus on small business because there’s not many other – there’s not other publicly traded – pure-play companies out there. So maybe if you could kind of give us an idea of that, what the health of that small business? And also, are there leading indicators to track when to gauge the health of that small business borrower? Thank you.

Yes. Good questions. I think one thing to keep in mind, right off the top on that question is we do a lot of segmentation within our small business lending by industries and by states and by size. And so, which is something we do much less of on the consumer side. So there are definitely industries right now that are hurting. And we’ve been smart. We’ve been staying away from them for a while. So construction has been a place where we really start backing away from three or four quarters ago, which was a great decision in hindsight. Trucking has been a complete mess that whole industry is just messed up between fuel prices and supply chain issues, both affecting ability to repair your trucks and also keeping trucks full. I mean, that industry is just a complete mess. So we backed away from trucking very early this year as well. Those are just two examples. At a more micro level, we’re really fine-tuning where we’re comfortable lending and where we’re not. So it’s hard to describe SMBs as a whole. Beyond that, the pandemic what got a lot of weak small businesses. And the ones that are left looked stronger than they did pre-pandemic, less competition. Businesses were able to weather the storm tend to be better on and that’s giving us some confidence going into the recession. And then third, they’ve been able to pass along on price, and that’s why there’s so much inflation. Yes, there’s supply – they’re paying more for some of the stuff they’re doing, but they’ve been able to pass along price, which is why we’re seeing inflation. And the consumer is still spending, and that’s keeping these small businesses doing well. So we obviously keep a close eye on it and not only at a macro level with a very, very micro level, we look at it. But as of today, credit in that business is looking very, very good.

Okay. Great. Thank you. And another question for Steve on the funding side. Maybe if you can talk about any additional funding needs and the impact of rising rates and what’s maybe also what you’re seeing on spreads. It’s nice to see that you recently had a funding completed, but if you could talk about what you’re looking at the next couple of quarters? Thank you.

Sure. So as we talked about, we’ve been very successful raising new facilities and new money with favorable terms. Say, overall, spreads are a little wider just in terms of the nature of the environment that we’re in, but we are definitely on a competitive basis on the good side of that, as you can see with our cost of funds continuing to come down year-over-year. And I think with further rate increases, only about half of our debt structure is floating rate. And if you just take a look at how much the Fed funds has moved just this year and just take a look at our cost of funds in Q4 is flat to where we are today. I think that demonstrates that we’re not entirely floating, and we’re also still capturing some of that spread benefit that we had locked in over time. So I feel really good about our ability to continue to bring on capacity as we need it as we continue to grow going forward and doing that in a very economical way.

Okay. Great. And I guess with the plan to shorten duration on the loans, I would think that the velocity of your capital is going to increase. So perhaps, I would think maybe the funding needs would actually go down all else being equal, if that’s a fair comment. Just your thoughts there.

Yes. I mean I – maybe a touch, but we’ll still need to be accessing external financing for small business, for example, maybe a little less on the consumer side, but definitely still needing the markets for small business.

Okay. Great. Very helpful. Thanks so much.

Okay.

This concludes our question-and-answer session. I would like to turn the conference back over to David Fisher, CEO, for any closing remarks.

Yes. Thanks, everyone. We appreciate you joining our call today and look forward to speaking with you again next quarter. Have a good evening.

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