Welcome to the OneMain Financial First Quarter 2024 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Peter Poillon, Head of Investor Relations. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Peter Poillon. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us. Let me begin by directing you to Page 2 of the first quarter 2024 investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of the OneMain website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects, and these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, April 30, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our Chairman and Chief Executive Officer; and Jenny Osterhout, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question-and-answer session. I'd like to now turn the call over to Doug.

Thanks, Pete, and good morning, everyone. Thank you for joining us today. Today, I'll cover our results for the first quarter as well as discuss our strategic initiatives. Before I do that, I want to welcome Jenny Osterhout to today's call in her new role as Chief Financial Officer. I've worked with Jenny for many years, most recently in her role as Chief Strategy Officer at OneMain, where she worked closely with Micah and me and had responsibility for strategy, new products, technology, digital, corporate development and has been a key partner in driving our strong performance the last several years. As you get to know her, I'm sure you will find her to be strategic, knowledgeable and a straight shooter. I also want to thank Micah for facilitating a smooth transition and he will continue to partner closely with Jenny and me to drive value for our customers and our shareholders in his new role as Chief Operating Officer. I'll start by saying we feel very good about the results this quarter, especially the credit trends as we are seeing clear evidence that the credit tightening actions we have taken over the last couple of years are driving delinquency and ultimately losses in the right direction. Capital generation, the key metric against which we measure financial performance and manage our business, was $155 million this quarter. Our receivables grew 6% year-over-year, benefiting from our expanded product offerings and strong balance sheet. We have been able to grow our portfolio and our customer base while maintaining a cautious credit posture across all of our products. Year-on-year total revenue growth was 7%. Our originations totaled $2.5 billion, down 10% from a year ago, a result of our disciplined management of the business where we only make loans that meet our return…

Thanks, Doug, and good morning, everyone. I'd like to start by saying that it's great to be here on my first earnings call as Chief Financial Officer of OneMain. Doug, Micah and I, along with the rest of the executive team at OneMain, will continue to focus on serving our customers, managing the company to outperform in any environment and executing on the strategy that we laid out at Investor Day in December. 2024 is off to a strong start with the first quarter highlighted by positive momentum, resulting in our continued proactive and granular management of the portfolio, ongoing expense discipline and further enhancement of our already strong balance sheet. First quarter net income was $155 million, $1.29 per diluted share, down 13% from $1.48 per diluted share in the first quarter of 2023. The current quarter included a $27 million restructuring charge associated with expense initiatives that will support strategic investment in the company. C&I adjusted net income was $1.45 per diluted share, essentially flat as compared to the first quarter of 2023. Capital generation was $155 million for the quarter compared to $179 million a year ago, reflecting the impact of the current macroeconomic environment on our interest expense, yield and net charge-offs. Managed receivables this quarter were $22 billion, up $1.3 billion or 6% from a year ago. This does not reflect receivables from the Foursight acquisition, which closed on April 1. So the receivables growth this quarter is all organic. First quarter originations of $2.5 billion was down seasonally from the fourth quarter and down 10% year-over-year as we've maintained our conservative approach to new originations. As discussed in previous quarters, a good portion of our tightening has come by a pricing action that we've taken, which offer what we view as a compelling trade-off…

Thanks, Jenny. We feel really good about the direction of credit as we have carefully managed our underwriting and pricing to ensure we meet our return hurdles. Our new products, credit card and auto finance, have matured nicely and are positioned to be major contributors to profitable growth in the coming years. And as we deepen our customer relationships and expand and diversify our product offerings, we have further solidified our position as the lender of choice to the non-prime consumer. As always, I'm incredibly grateful to all of our talented team members who are highly committed to helping our customers meet their credit needs today but also helping them progress to a better financial future. With that, let me open it up for questions.

[Operator Instructions] And our first question will come from John Rowan with Janney.

Jenny, I just want to unpack what you were talking about with the delinquency buckets and the growth math, right? Because it sounded like you said that one of the buckets, maybe the 30-89 day came down more than you would expect seasonally because of the Fed growth math, but maybe the 90-plus day did not come down in lockstep because of that growth math. I just want to make sure you understood that correctly. And maybe just walk us through what we should expect the gross math, the effect on delinquencies going forward?

Thanks for the question. Let me give a bit more context. So the way we think about it, the weighted average life of our receivables has increased from that slower growth that I mentioned. And we decreased the number of new originations, meaning those younger originations, so those originated in the last 2 quarters, think of that as Q4 and Q1, and those younger originations as a percentage of the overall book today are 24% of the book. And on a pre-COVID book, that was growing more or would have been about 33%. So we increased the average age of our receivables for nearly 10% of the book. And that matters because those new originations have a sub-1% delinquency, and we replaced those with those older vintages that have about a 4% delinquency. So to put that in context, excluding that change in the growth dynamic, it would be, like you said, a little bit lower than last year. And that's to the 30-89 delinquency. And we expect that impact will decrease as we get newer vintages on the books. We aren't seeing anything abnormal with our 90-plus, I just want to add that into.

Okay. And then, Doug, maybe just discuss kind of the market opportunity in credit cards. We haven't talked a lot about the fee structure on the credit card, but obviously, there's a proposal out to -- or finalized rule out to reduce late fees. How do you see that market shaking out in the next couple of years with the new fee structure and what's your opportunity there?

Look, we think we've got a huge opportunity in credit card. To put it in context, we have a 20% market share in the $100 billion personal loan market. And the credit card market for the nonprime consumer is about $500 billion. So run simple math, if we got 1% market share in the $500 billion market, we have $5 billion of receivables. And right now, we have under $400 million. So we think there's a very large growth opportunity for us without us taking on any sort of undue risk. And so we really like our product, which the way it's designed is payments equal progress, which means as you are a good payer, we will share some economics with you, either decrease the rate or increase your line after 6 on-time payments. And then we've got a graduation strategy where people can start with a card with an annual fee. And if they have 24 on-time payments, they can go to a no-fee card. And so we have a unique value proposition. We know the nonprime consumer. We've got a lot of history with this consumer. We've got a lot of infrastructure. We can do things like cross sale cards and loans, and now we're adding auto. And we've been slowly building this business, very deliberate, for 3 years. As I mentioned, we've got a tight credit box and we're going to be very disciplined in the rollout. When it comes to late fees, I actually really like our positioning. Incumbent players, who have a huge book and late fees were a big part of their business, are going to have to shift the value proposition. We have the advantage of being a challenger. And we've assumed this was coming and built in a business model where we can hit our 20% ROE thresholds with the $8 late fee. And so there's lots of levers from pricing, to annual fees, to the structure of the card. And so I think we'll see how it all shakes out. Most of the large players, what I've heard who are already out there, basically said they'll take up pricing to make up for the fee. People will do what they're going to do. We've built the model. So we've assumed it's going to be an $8 late fee that will be the max that we'll be able to charge and we'll build a great business with that as the parameters.

Our next question will come from Terry Ma with Barclays.

This is Julia [indiscernible] for Terry. Two questions. First on originations, which were down 10% year-over-year. Was that driven by incremental tightening during the quarter or more a function of what you did in the last couple of quarters pulling through? And then what do you need to see to get less conservative with underwriting?

Yes. First quarter is seasonally our lowest origination quarter. People just had a fair amount of spending around the holidays and then tax refunds come in, which is a big check for most people in America. Originations were on pace of what we expected. And we've stated that we think our receivables will be $24 billion at the end of the year. We still think we're on pace for that. I'd also note, originations were down in the first quarter, 10% year-on-year. They were actually down 13% year-on-year in the fourth quarter. So the trend lines are not disturbing us at all, and we expected this with seasonality. So I think part of the year-on-year is seasonality. We also, as I mentioned, did 2 things: one is we increased pricing in certain segments. There, we really like the trade, lower originations, but more profit. And in this environment, we'll take that trade all day long. And then we have incrementally tightened our credit box during the year last year, which also contributed to it. What do we need to see to open the credit box? We are being conservative. As I mentioned, there's still some cross currents in the macro economy. On the positive side, unemployment is low, wage growth has been healthy and inflation has slowed but bumping up against that is prices are still persistently higher than they were in 2019 and interest rate environment remained uncertain, which affects housing prices, especially in the overall economy. We continually have a, what we call, weather vein where we're booking a de minimis amount of business right below our credit cutoff. It's actually profitable. It just doesn't meet our 20% ROE threshold. So we look at the performance of those loans we've been originating. And so we'll keep an eye on that. When we decide to loosen up a little bit, it's not a big bang. I mean we underwrite by state, by risk grade, by product type, by the channel where the customer comes from, if it's a new customer, whether they're coming through a digital channel or direct mail channel or walking into our branch, we see different performance. We have former customers, present customers, new customers. And so I think you can expect us to when we loosen up, do it in distinct pockets. And I'd also just mention, every month, we are changing assumptions and we do some loosening and some tightening and just the net effect over the last year has been more tightening than loosening. And so we're quite comfortable with our originations. I just want to repeat, we don't manage the growth, we manage the profitability and we view growth as an outcome of running a great business, having a great value proposition to customers, having a great customer experience. And so we're super comfortable with where we are now, and we'll keep an eye on both the macro and our internal data and we'll decide where we go from there.

Very helpful. And then on delinquencies, the 30-89 days moving in the right direction, could you talk about your near-term outlook and the confidence level and timing on getting back to your 6% to 7% target on loss ratio, please?

Sure. As I said, we like the trends. Quarter-on-quarter, we were 56 basis points down on our delinquency, which is a bigger drop than we saw in 2018 and 2019. And so we're really feeling like we've turned a corner. Our front book is in line with expectations and performing well. And we think peak losses will be first half of 2024. The math will take it down from there. The business we're booking now is in that 6% to 7% loss range in aggregate at the portfolio. When we get there is going to depend on a lot of factors, our growth, does the macro remain stable, et cetera. So we're not calling when we're getting there, but we like the business we're booking now. It meets our 20% return thresholds, and we like the general trends.

And we will take our next question from John Hecht with Jefferies.

First question is, just based on the guidance and the seasoning of the back book, it looks like I think charge-offs should be peaking, I think, in this quarter. The ALL has been pretty consistent for several quarters, but how do we think about where the ALL might go once you've gone to that peak charge-off cycle?

Thanks. I'll take this. So I think you've hit it pretty spot on. We're pretty pleased with what we see on delinquency. We still think we're going to be in that range of 7.7% to 8.3% for the year, for the annualized loss rate, and we feel pretty comfortable in that range. I think typically, you would see delinquency move to charge-off about 2 quarters later. So you can expect to see the delinquency that we have here moving in the third quarter? And also, there's some seasonality in delinquency as well. So we have our lowest delinquency in this quarter, in the first quarter of the year, as customers get their tax refunds and then we trend upward throughout the remainder of the year. So you expect those same seasonal patterns to continue. But we're pretty pleased with this improvement in delinquency, and we expect that to translate to losses later in the year.

And just to round that out, the ALL ratio, like you keep it at consistent levels or if delinquencies start to drop with that drop.

Yes. I think we're going to be thinking about reserves. We take into account what's happening in the macro environment, the growth of the book, obviously, lifetime losses as well. So you know we've maintained our 11.6% coverage ratio for reserving and we'll be continually looking at all those factors as they change. And as we get to a more normalized environment, we'd expect reserve coverage to start to come down. But for now, we're very happy with where we have our reserves.

Okay. That's helpful. And then how do we think about yields? I mean, you're clearly -- on the front book and the personal loan book, you priced a lot higher. But how do we think about yields with that mix and then the delinquency buckets and then also the auto and card segments. How should we think about the impact of all those factors on yields in the near term?

Yes. I can walk a little bit through yield because it's flat here. And we discussed we're deliberately taking those pricing actions and we increased APR by over 100 basis points. We're only starting to see that flow through the portfolio, but it will -- in time, it will take sort of full effect. And then offsetting that is the impact of the current macro environment, which you're seeing flow through charge-offs. And then there is some increased impact from the auto book, specifically. But we like that trade that we're making for the lower loss volatility and lower APR content. So over time, we think yields in a normalized environment would come back on the personal loan book to about 23% to 24%. And in the auto finance, it would remain in about 15% to 17%. So really, it will depend on the product mix going forward in terms of where that lands.

Our next question will come from David Scharf with Citizens JMP.

You know, maybe just a couple of technical follow-ups. On the loss rate, there was an elevated recovery rate in the quarter. And I know you mentioned you had some opportunistic sale of charge-offs. Are you planning on increasing that? Or are you involved in any forward flow arrangements for charge-off sales? Or was this just a sort of one-off event?

No. We were always looking at internal and external collections and we continue to see pretty strong recovery performance and positive trends. So we're still above our pre-pandemic recovery levels, and they're in line with our expected charge-offs. So we had $77 million in this quarter, which included that $11 million you mentioned of post charge-off debt sales. That's pretty consistent with prior year where we had $10 million of post charge-off debt sales. So again, we're always looking at that trade and making decisions where the economics are good. But overall, we're actually quite pleased with where recoveries are.

Got it. Got it. So just to clarify, there's no forward flow arrangements as far as debt sales are concerned?

No.

Okay. And just a quick follow-up on OpEx. The $27 million restructuring charge, is there a way to translate the movements in the quarter to sort of an annualized expense savings. I mean, how we should interpret?

Yes. Yes. The easiest way -- I do think the easiest way to do that is to think of the OpEx ratio, the 6.7% OpEx ratio. Obviously, the direct cost save is well in excess of that $27 million onetime restructuring charge. So it just gives us the ability to create further capacity and continue to invest in the business throughout the year, but I would look at the OpEx ratio and expect that OpEx ratio to be about 6.7% for the year. And that's a 30 basis point drop as compared to last year. So we feel like it's a pretty good drop and shows the disciplined management while we're simultaneously rolling out all of these new products.

Yes. And it's built in -- we are always cutting some places and investing in some places. We think that's what disciplined management is. And the charge we took and the cost saves around that were built into the guidance we gave you last quarter. So I wouldn't change anything around that.

Our next question comes from Rick Shane with JPMorgan.

Two things. Look, the delinquency trends, as you guys have cited, looked good in the first quarter. It is worth mentioning some context, which is that other companies have cited some headwinds in Q1 credit related to lower or delayed tax refunds. I'm curious, it seems like you guys might have a little bit of potential -- something left in the tank if tax refunds come through. How are you looking at that? And I don't mean that to be spun as a positive question or leading question, but I'm curious how you guys are thinking about tax refund season and whether or not we're going to see a catch-up.

I mean, we didn't see that data. We heard other companies come in. I mean, our view, we thought tax refunds came in pretty normal. So we are not factoring in any big boom of tax refunds coming in at abnormal times. If they do, that will be upside, but that's not the way we're thinking about it. We're managing the book tightly. And I won't repeat myself too much, but we like the direction. The front book is becoming bigger. Everything is happening as we thought the math would play out. And so we like that direction.

Yes, I'll just add a little bit here. I mean, overall, we are seeing actually a slight increase in the total amount refunded to customers. So with average refunds are up about $100. And there's probably about 3 weeks left in the season. I think we're feeling pretty good about where we are. You see that in the delinquency results, and we'll see what happens next quarter.

Got it. And the word I think I was grasping for, but I've been up since 3'O clock, was tailwind. The second thing, and this question came up a couple of times. On your guidance slide, you pulled out the little box that talked about your medium-term strategic priorities. Is there anything to read into that? Or is that still realistically what you're targeting?

No, that's what we're targeting. You shouldn't read anything into it. It's just -- we put together earnings slides every quarter. But what we laid out at Investor Day, we stand by 100%, which is to targeting $30 billion of receivables in the medium term, to have net charge-offs in the 6% to 7% range and to have our capital generation, return on receivables, in the range we've run historically. And so we feel very confident in our trajectory to get there. We've got a lot of opportunities with our current business, our superior business model, our cards and our autos. So we definitely stand by where we're headed and where we laid out at Investor Day.

Our next question comes from Nate Richam with Bank of America.

Can you talk a little bit about the demand environment from consumers under this current backdrop? I guess it more elevated given like higher inflation, maybe the need for more deconsolidation or is it more or less the same?

Demand is pretty strong. It peaked in the first half of 2022. And it's now been a lot more normal. We're seeing kind of -- if you look industry-wide, we think demand is about what it was in 2019 and has hit -- industry has kind of gone back to a state of postpandemic equilibrium. As I mentioned, demand is always a bit slower in the first quarter, and you see that in our originations and you generally see that across the industry. We've been pretty pleased that we've been able to book good business with the increased pricing, which shows our competitive advantage in our positioning in the market. And so I think the demand environment is healthy. We don't see any reason that it will fall off in any significant way. Generally, the way it works, which is counterintuitive, I think most people think, oh, if you go into a recession or if customers are really struggling, they take out more debt. The reality is consumers are actually pretty rational, and they take out debt when they -- they take out debt when they're feeling good about things. And so we see demand pretty steady in this quarter.

Awesome. And then turning back to expenses. The run rate from here looks pretty solid. And I was just curious, what specific areas are you looking for these reinvestments? And will it be a steady throughout the year trickle down? Or is it more an opportunistic timing of a bulk of those reinvestments?

Yes. I think it's more of the latter of what you described. So we'll look at -- as we're growing out our new products and as we're looking at what is happening throughout the year with both the macroeconomic environment and with our customers, where we want to make those investments. So it could be both geographically, where we see growth opportunities, it could be based on the product growth. But we want to leave ourselves some room to make those investments, and we're feeling pretty good about where we are in terms of expenses.

All right. Thank you very much. So I see we're coming up on the hour. So I want to thank everyone for joining us this morning, and we're looking forward to talking with all of you in the near future.

Thank you.

Thank you. And this does conclude today's OneMain Financial First Quarter 2024 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.