World Acceptance Corp (WRLD) 2006 Q4 法說會逐字稿

Good afternoon and welcome to the World Acceptance Corporation Sponsored Fourth Quarter Press Release Conference Call. [Operator Instructions]

Before we begin, the Corporation has requested that I make the following announcement.

The comments made during this conference may contain forward-looking statements within the meaning of Section 27A of the Securities Exchange Act 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. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include changes in the timing and amount of revenues that may be recognized by the Company, changes in current revenue and expense trends, changes in the Corporation’s markets and changes in the economy. Such factors are discussed in greater detail in the Corporation’s filings with the SEC.

At this time it is my pleasure to turn the floor over to your host, Sandy McLean, CEO.

Thanks, Kevin. Welcome to the World Acceptance Fourth Quarter Conference Call. With me is Mark Roland, our President and Chief Operating Officer, Kelly Snape, our Chief Financial Officer, as well as other members of our management team.

I’ll spend the next few moments reviewing the quarterly results and then any of us would be more than happy to answer any questions that you may have.

On our last quarter conference call, while we were not pleased with the quarterly earnings results, we were very upbeat about the success of our third quarter busy season and what it should mean going forward. At the end of December, our year-over-year growth and receivables had grown to 20.7%. At the same time, we have seen a decrease in our delinquencies. We felt that these factors should translate into increased revenue, lower charge-offs and higher earnings.

As it turned out, that’s exactly what happened. For the fourth quarter, our net earnings grew to $18.1 million or $0.96 per share, which was a 26.3% increase over the $14.3 million or $0.73 per share for the prior year fourth quarter. This excellent quarter resulted in fiscal year earnings of $38.5 million or $2.02 per share, which was a 13.3% increase over the $34 million or $1.74 per share for FY05.

The primary driver of the Company’s earnings is the balance of receivables outstanding. We ended the fiscal year with an annual growth rate of 18.4% in gross loans. This compares to a FY05 growth rate of 13.5%. It is especially noteworthy that a large percentage of this growth was internally generated as opposed to growth through acquisitions.

During FY06 the Company grew its growth loans by $64.8 million, compared to $41.4 million during FY05. At the same time, the Company acquired approximately $9.1 million in gross loans during FY06, compared to approximately $27.4 million in FY05. While both strategies are very important to the overall success of the Company, internal growth is much preferred and less expensive.

One question that may be asked is why we were more successful in our internal growth this compared to FY05. First, each year we refine our direct mail process, identifying potential customers through mail lists that we purchase. We should continue to improve this process going forward.

Second, during our busy season in the third quarter, we were in excellent position regarding our delinquencies and we were in a better position to focus on account growth rather than on collections. Third, because acquisition opportunities were not as readily available during FY06, all levels of internal management were very focused on maximizing sound profitable growth.

Fourth, the law change in Texas, created an excellent opportunity to supply pent up demand in that state through the legal restrictions. And finally, we opened more de novos during FY06 than in the previous year, which will generate greater internal growth than an acquired branch.

Primarily as a result of the excellent growth results in Texas, we did have a slight change in the mix in the portfolio at March 31st. Small loans increased from 68% of the portfolio at the beginning of the year to 71% at the end of the year. Large loans decreased from 30% to 27% and sales finance remained the same.

Although Texas had the highest growth rate, other states did very well. For the fiscal year, the states grew by the following percentages. Texas 41.2%, Georgia 16.6%, South Carolina 14.2%, Oklahoma 21.6%, Louisiana 21%, Tennessee 3.1%, Illinois 28.5%, Missouri 9.6%, New Mexico 19.9%, Kentucky 6.8%, Alabama 17.6% and Mexico by $1.4 million.

As would be expected, our loan volume grew by a similar percentage or 18.4%. During FY06, we made 1.45 million loans for a total loan volume of $1.2 billion, with an average growth loan of $841. This increased from average loan of $754 in FY05.

From an office network standpoint, we began the year with 579 offices, opened 44 new offices, purchased 3 offices and closed or sold 6 non-performing offices to end the year with 620 offices.

The result of the above was a very good increase in revenue on both a quarterly and annual basis. Total revenue increased 21.7% to $73.4 million for the most recent quarter, compared to $60.4 million for the quarter ended March 31, 2005. FY06 revenue was $243.3 million, a 15.4% increase over the $210.6 million in FY05.

Same-store revenue increased by 17.1% for the quarter and 10.1% for the year in the 516 offices that were open throughout both periods.

Another key factor in the Company’s excellent quarter was the reduction in delinquencies and net charge-offs. Recent delinquencies on 60-day or more days passed due decreased from 2.5% at 3-31-05 to 2.1% at March 31, 2006. Contractual amounts decreased from 4.1% at the beginning of the year to 3.4% at the end of the year.

Also during the quarter, net charge-offs as a percent of average net loans decreased to 11.6% annualized from 13.9% for the prior year fourth quarter. This decrease brought our annual charge-off ratios in line with the prior year ratios. Although we have been showing increases during the first three quarters of the fiscal year, for the fiscal year we ended up with a charge-off ratio of 14.8% compared to 14.6% during FY05.

We attribute this reduction during the quarter to the decrease in delinquencies that we experienced in the third quarter, combined with a dramatic decrease in charge-offs due to bankruptcies in the fourth quarter. Bankrupt charge-offs decreased by $853,000 or 35.7% when comparing the two fourth quarterly periods.

Another area of improvement was our G&A expenses. During the quarter our G&A, as a percentage of revenue, declined to 48.6% from 49.4% during the fourth quarter of FY05. These percentages for the two fiscal years declined from 53.2% to 52.8%. Additionally, our G&A per average open office increased by 6.9% when comparing the two fiscal years.

Our tax preparation business, which is very important to our fourth quarter revenue, also had an increase. Although this has become a very competitive business, we increased the number of returns prepared by approximately 3.5% to about 57,000 returns and the net fees generated by 10.5% to approximately $7.6 million.

Highlights of our expansion into Mexico include the following. We now have 4 offices in operation in Juarez, with a 5th expected on line in the next two weeks. We have a little over 3,000 accounts opened with a total balance 18.2 million pesos or $1.9 million U.S. and a total of 8 accounts that are delinquent 60 days or more and to this point we have had no charge-offs.

Continued expansion plans are underway with potential office locations being identified in Matamoros and Reynosa. All results are in line with Company expectations and we anticipate having as many as 15 offices in Mexico by the end of the fiscal year.

Finally, the Company’s return on average assets of 11.9% and return on equity of 19.9% continues our excellent trends that we have seen in past years during FY06. All in all, we had an excellent quarter and resulting fiscal year and we are very excited about the prospects for FY07.

At this time, any of us will be happy to answer any questions, Kevin.

[Operator Instructions] Dan Fannon with Jefferies & Co.

Hi guys, thanks for taking my questions, a couple of note-keeping questions. Is the $416 million that you reported in the press release for loans outstanding, is that the end of period loans as of March 31st?

Yes.

Okay and can you talk about --

Dan, that’s the end of period gross loan receivable.

Okay.

Okay?

Yes. I just was making sure that was an average. Okay, thank you. And then, can you talk about -- you said the new stores potentially for 15 in Mexico by year-end. Can you talk about total expansion, expectations for the year and what other states outside of Mexico you might find attractive, at this point, for growth?

At this point in time we have identified no states that we plan to enter, other than the 11 that we currently are operating in the next fiscal year. Going forward, as you know, there were numerous law changes pending, none of which have actually passed, but we will continue to monitor that and evaluate those opportunities as they may or may not arise.

Okay. But it’s safe to say that you still think that your largest or your best opportunity now for growth is Mexico, at this point?

In the existing 11 states. There are still a lot of opportunities in those states or at least some of them more so than others.

Okay. You gave the percentage of demand up year-over-year for Texas. Can you talk about what the Texas contribution was for this past quarter?

From an earnings standpoint?

Just from a loan standpoint.

Well, I mean --

Or earnings, yes.

Well, I can’t, from an earnings. That’s why I wanted to clarify that. It would be very difficult to isolate those particular, I mean, the part of the contribution of earnings from those existing as well as new stores in those states. So I certainly am not prepared to address that. As far as loan growth in the State of Texas, on a year-over-year basis, it was $28.9 million.

That’s the outstanding in Texas or the increase?

The increase. This is $99.3 million at the end of the year versus $70.3 million at the beginning of the year.

And then, lastly, can you please walk through if there were any onetime items, both on from an income perspective or an expense perspective, in the quarter that you don’t see as recurring?

Yes. As you know, we did have some severance charges relating to the termination of Mr. Jones. They amounted to roughly $817,000 on a pre-tax basis. Also, we had what I kind of consider a onetime change -- well, not a onetime charge, but a onetime revenue event. It’s not really -- certainly not extraordinary.

But we are not following hedge accounting regarding the $30 million swap that we put into place. And as a result of that, we have to mark that instrument to market at the end of each quarter and it resulted in a $492,000 gain for the current quarter. So the two onetime charges come close to offsetting but not entirely.

Okay, great. Thank you.

Okay.

[Bill Devellon with Tiatin Capital Management].

Thank you. It’s Bill Devellon with Tiatin Capital Management. We have a couple of questions. First of all, if you would please discuss further your plans for opening in Mexico? You’d mentioned the 15 locations. Where are the branch managers coming from and that whole process, given that its been our understanding that you’ve taken folks from prior branches and you only have 4, I think you’d mentioned, opened so far?

And then secondarily, let’s circle back, if we could, please, to the delinquencies and charge-offs and we’d be interested in your commentary as to why those two have fallen off so nicely.

Let’s take the second one first. As far as delinquencies are concerned, its difficult to pinpoint exactly what’s taken place. We saw the improvement in the March quarter and we certainly -- that is one of the two things that we focus on around here all the time, is the sound growth in our loans and the collection process.

And we are very -- we monitor these delinquencies and what we consider bad debt on a daily basis and we want to keep this delinquency at lowest level from the point of the slow file, which is anything that’s one day or more past due. And I think we continue this process and it’s hard to explain exactly. I don’t know that I can explain exactly why we see fluctuations. It may be part of the economy or whatever.

But regardless, those reductions in delinquencies contributed to the decrease in charge-offs during the fourth quarter as well as the reduction in bankruptcies that we talked about earlier.

And Sandy, before we continue to Mexico, would you view the decline in delinquencies as somewhat sustainable or as more of an aberration?

I wouldn’t comment on that, because you’ve seen our delinquencies and charge-off ratios fluctuate dramatically over the years and those are forward-looking statements that I would not be comfortable addressing.

Let me follow-up with that. Is it something that you, internally, even have a real window on or is it one of those things that more just happens?

Well, I think we have a little input to the process, but there are certainly external factors that come into play.

Thank you. Okay, Mexico.

In Mexico, the larger we get the easier it is to open additional offices. As you know, we did move one, actually two people over from the States to begin that expansion program. Everybody else is being hired within Mexico so that the larger the branch, I mean, the more branches we get the easier it is to expand.

As we go into new areas, it’s going to be more difficult to open that many offices because we’re not sure how mobile these employees are. They may or may not be willing to move. That is yet to be determined. But really, to answer your question, the more offices opened the more assistant managers that we’re training that will become future managers.

And one final follow-up. The offices in Mexico, are they formatted, from a staffing perspective, very similar to just an average office here in the States?

We have generally staffed them with -- let Mark Roland address this. Mark is really responsible for the operations and has been very instrumental in the Mexican expansion and although I can answer, I think he can probably answer it better.

Hi, this is Mark. To answer your question, those offices are staffed at a higher level than we have in the U.S., primarily because of the process that we’re going through to underwrite our credit decisions in Mexico. As you know or may not know, credit reporting in Mexico is very limited.

There is a credit bureau that exists. It has very limited information on our customers. So our validation process, as we go through loan underwriting, includes personal visits to individuals’ residences to validate that they live there, that they are who they say they are and so that process is more labor intensive.

So we have more assistant managers in a typical Mexican branch than we do on the U.S. side. Probably the average branch in the U.S. is approximating 4 employees total and I would guess that as these branches come to maturity that we’re looking at 8, 9, 10 employees.

However, the flip side of that is we’re seeing much denser account-loading in these branches. Our first office in Juarez is now up to approximately 1,400 accounts outstanding and is continuing to grow. So we’re not positive where that kind of brick wall is that we seem to hit in the United States in terms of account loading in a particular branch.

And curiously, your charge-offs are substantially less in Mexico. To what degree do you think that has to do with that more hands-on underwriting approach and is there something in terms of lessons that you can actually take from Mexico and bring them back here to the States and implement them in the branches here?

Well, I think there are a couple of things there. One is we have haven’t had an opportunity -- that first office opened in the September quarter last year. I don’t have the exact date in front of me. So we’re dealing with loans that are less than seven months old. So we would anticipate, certainly, much lower charge-off levels, at this time, than anywhere in an established place on the U.S. side of the border.

But I believe there are a couple of factors down there. One is the ability to identify our customer down there, due to the forms of identification that they carry, is very strong. So once we have their voter registration card and government-issued federal ID, there’s almost no possibility that we’re dealing with a fraudulent or fictitious customer.

The other part of it is that, at least in Juarez we’re finding the job and residential status of these customers to be extremely stable. There is a function in Mexico, through the federal government, where moneys are borrowed to buy their personal residences, a function called “Infonavit”. And once those individuals are buying into their residence, we know where they work and we have their identification nailed. We pretty well know where they are.

I think, really, the most important factor here is that there seems to be a level of personal responsibility in Mexico with regards to their debt that we might not have seen in the U.S. for a number of years.

Thank you both. That’s very helpful.

Henry Coffey from Ferris, Baker Watts, Inc.

Our questions have been answered. Thank you.

There are no further questions at this time.

Thank you very much and we appreciate you all joining us today on our conference call.

Thank you for your participation. Before concluding this afternoon’s teleconference the Corporation has asked me again to remind you that comments made during this conference may contain certain forward-looking statements within the meaning of Section 27A of the Securities Exchange Act 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. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include changes in the timing and amount of revenues that may be recognized by the Company, changes in current revenue and expense trends, changes in the Corporation’s markets and changes in the economy. Such factors are discussed in greater detail in the Corporation’s filings with the SEC.

This concludes the World Acceptance Corporation quarterly teleconference. You may now disconnect. Thank you.

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