World Acceptance Corp (WRLD) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the World Acceptance Corporation's first quarter press release conference call. [OPERATORS INSTRUCTIONS] I would now like to introduce your host for today's conference, Mr. Sandy McLean. Mr. McLean you may begin your conference.

Thank you. Before we begin, I would like for Judson Chapin our in-house counsel to read a statement.

Good morning. This press release may contain various forward-looking statements within the meaning of section 27A of the Securities and Exchange Act of 1934 as amended to represent the company's expectations or 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 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 markets and changes in the economy, particularly in the markets served by the company.

Such factors are discussed in greater detail in the company's filings with the Securities and Exchange Commission. Thank you.

Thank you. Welcome to the World Acceptance Corporation first quarter conference call. I am Sandy McLean, Chief Executive Officer. With me is Mark Roland, President and Chief Operating Officer. Kelly Snape, Vice President and Chief Financial Officer and other members of senior management. I will spend a few minutes reviewing the quarter results after which any of us will be glad to answer any questions. We are very pleased to be able to report that fiscal 2007 has begun with an excellent start.

Our first quarter showed improvement in all areas and resulted in record first quarter earnings. For the quarter, net income amounted to 10 million of 36.6% increase over the 7.3 million earned during the quarter ending June 30, 2005. Diluted earnings per share for the quarter were $0.53 per share a 41.9% increase over the $0.38 per share for the prior year first quarter. The higher increase in earnings per share when compared to earnings growth is due to the share's repurchase during the previous 12 months.

The earnings of World Acceptance Corporation are driven by 4 primary factors, first, the growth in the loan portfolio and the resulting increase in revenues. Second, control over delinquencies and resulting charge offs. Third, expense control and resulting general and administrative expenses. Fourth, interest rate and resulting cost of funds.

The momentum in loan growth that we built during the third and fourth quarter of the fiscal 2006 has continued during the first quarter of fiscal 2007. In March 31, 2006, our year-over-year -- year over prior year growth -- year over prior year growth, gross loan increase was 18.4%.

During the current quarter we have seen this annual growth rate continue to increase. In June 30, 2006, there was 448 million in gross loans outstanding a 20.7% increase over the 371 million in loans at June 30, 2005. While acquisitions will continue to be important to our overall growth strategy, they have played a small role in the past year.

During the first quarter of both fiscal 2007 and 2006, we purchased approximately 1 million in gross loans. Fortunately, during the past year we were able to more than compensate for reduction in acquisition opportunities with increase internal growth. Which is preferred. The change in Texas law raising a maximum loan from $540 to $1080, which became effective just September 1, 2005, continues to enhance our internal growth rates'. The year-over-year growth in Texas was 44.5%.

However, other states had excellent increases in loans as well, 7 of our other 10 states had year-over-year growth rates in excess of 15%. Primarily as a result of our loan growth, total revenues amounted 63.8 million for the current quarter which is a 23.3% increase over the 51.8 million during the first quarter of fiscal 2006. Revenue from the 569 office that will open throughout both periods grew by 19.8%.

Finally, our office expansion is also an important driver to our loan and revenue growth. We began the current quarter with 620 offices. During the quarter we opened 23 new offices, acquired a single office and closed 3 nonperforming offices leaving a total of 641 offices opened at June 30, 2006. As previously stated, we intend to be more a little more aggressive in our office expansion this year and plan to open additional 45 offices during the remainder of fiscal 2007.

The second major has a determining factor of earnings of our loan delinquencies and losses. The best indicator of charge-offs in the short term is the current level of delinquencies. At the end of fiscal 2006, we had a lower level of delinquencies on a percentage basis at the end of fiscal 2005 which we said at the time was a good indicator for the first quarter charge-offs.

During the first quarter, the fiscal 2007, a net charge-off as a percentage of average loans on annualized basis decreased to 11.6% compared to 14.2% for the prior year first quarter ended June 30, 2005. At the end of the current quarter, delinquencies on both recencies and contractual basis declined slightly from June the 30, 2005 levels. Recency delinquency decreases from 2.6% to 2.4% and contractual delinquencies decreased from 3.7% to 3.6%. Another major influence-affecting loan losses was a dramatic increase in bankruptcy charge-offs which declined by 51% or approximately 1 million from the prior year.

As a percent of average loan annualized, bankrupt charge-offs decreased from 2.81% to 1.1% when comparing the two quarterly periods. The third major factor of earnings is our expense controls. During the current quarter our total G&A expenses were 34.8 million, 19.2% increase over the 29.2 million during the first quarter of fiscal 2006. As a percentage of revenues, this was 54.6%, a decrease from 56.5% during the prior year.

Another note worthy item is beginning in fiscal 2007, the company adopted FAS B statement 123R which deals with the expensing of stock options which resulted in an increase in compensation expense of approximately 700,000. Finally our G&A expenses for average open office when comparing the two quarterly periods increased by 10.1%. As we increase our De Novo office openings during the remaining of the fiscal year, we expect that our expense ratios to be negatively affected.

However, we believe that it will benefit our earnings growth in the long run. The fourth factor is our cost of funds; due to our low leverage ratios this has a smaller impact than other factors. During the quarter our interest expense increased by 45.5% to 1.9 million when compared to our first quarter fiscal 2006. This was due to an 11.5% increase in our average debt outstanding combined with the ongoing increase in short-term interest rates.

Highlights of our expansion into Mexico includes the following, at June the 30, 2006. We had 5 offices open in Juarez with another 10 expected to open during the remainder of fiscal 2007. There were 4953 accounts with the gross ledger balance of 2.6 million. Delinquency was 1.3% on a recency basis and 1.5% on contractual basis and total charge-offs were less than $10,000 for the quarter. We were pleased that our Mexican operations reported net income of approximately, 12,000 during the quarter and remain very optimistic with our opportunities in this new market.

At this point in time we will be more than happy to entertain any questions.

Thank you.

[OPERATORS INSTRUCTIONS] The first question comes from Dennis Telzrow of Stephens and Company.

That's Telzrow but she did a good job. Good morning, Sandy and the rest of you there. Great quarter needless to say. Just 2 quick questions. In the revenue line, insurance and other that was up a fair amount. Anything unusual going on there?

We had one unusual item. We have a swap transaction where we are hedging kind -- not hedging but a swap of $30 million that we have locked in. Because of the rise in rates and because we are not using hedge accounting, we actually had a gain. We had similar gain last quarter. Kelly, what was the amount?

This quarter the gain was 363,000.

That's primarily the only major difference in there.

Once, regard to Mexico, I'm not sure but refresh my memory. Are you going into another city down there with these 10 more that you are opening?

Were actually going into 3 more cities down there. I believe our next office opening is going to be -- Mark?

Matamoros and Reynosa are our next two opportunities that will come online in the next 45 days. And the answer after that is to shuffle to Monterrey which is about an hour and a half away by vehicle from Matamoros.

Thank you very much.

Okay.

Thank you. The next question comes from Bill Dezellon of Tieton Capital Management.

Let's follow up on Mexico. I'm curious, when that area first opened your delinquency levels were excellent and here again today you highlighted the credit quality is really good there. Do you feel like you are now at the ultimate run rate and so what we are seeing with the commentary for this quarter that you gave, Sandy, that is a good thought on the run rate going forward? Or is there more time to needed to really determine what the delinquency levels are going to be?

If you want an idea of the run rate you would need to look strictly at one of the older offices. That may be rising. Any new office will have lower delinquencies at the beginning than it will after a period of time and as we open so many offices and certainly this will be weighted lower than what you expect. I guess to answer your question on the basis, we would expect delinquencies to rise and resulting charge-offs which have been practically nothing to also rise.

So, Sandy, with the data that you have internally not with what you shared with us externally but on those initial new offices, do you feel like they have hit a normalized level of run rate? And if so, how would you characterize their level of delinquencies versus the typical mature office in the states?

I would say we have not hit the actual on going delinquency rate. Both of these offices are less than 1-year old. They are still growing. But even when they hit mature status and come up with a normalize loss delinquency rates there we would anticipate them being less than a typical office in the United States.

That's helpful. If you look at the rate of growth of those new locations there, and that's a rate of new loan growth, how does that curve, if we were to draw it out, compare to the rate of loan growth of a new office in the U.S.?

A new office in the U.S., it can vary all over the board as far as what you would see in the first year. Depending on the manage, the locations and things like that, it can grow rapidly or sometimes it takes as much as a year and a half to 2-years for them to become profitable. Obviously the main factor in profitability is the number of accounts that you have in the office. What we have seen in the first two offices in Mexico is they have grown very rapidly. Both of those offices are approaching 1700 accounts, thereabouts, which is phenomenal for about a typical office in the states. And we would hope to see similar type results in these new offices as we go forward.

And then the last question for now is relative to acquisitions, I think you mentioned you did one acquisition in the quarter that comprised one office. How would you characterize the acquisition landscape today?

I believe I said that we had one new office that was open as a result of acquisitions. We may have had 2 or 3 small acquisitions in total. As far as -- we had less opportunities last year, but that's not necessary an indicator of what to expect in the future.

And just circling back to those lower opportunities, has that been a function of price? Or has that been a function of just not a lot of sales taking place?

It's just been primarily a function of not a lot of sales taking place or sales that met our criteria in places that we were interested. Never been a function of prices.

Thank you.

The next question comes from Dan Fannon of Jefferies.

Good morning, guys. Questions with regards to your store growth, you mentioned you were going to add, I want to double-check this, 45 during the remainder of '07, that's in addition to the 21 that was open this quarter?

That's correct.

Okay and can you talk about the states that you anticipate growing outside of Mexico?

Our existing states. We have no plans to enter any new states, at this point in time.

Okay and did you sell any bad debt in the period or any charge-offs? I know this is something you haven't historically done but the market for that type of paper continues to be pretty robust.

We did not. We have analyzed it and looked into it. But based on our recoveries and so forth, we believe currently that we are better off keeping these past old charge-offs.

Okay. Were recoveries in the period stronger than expected? Or stronger than historical trends?

Up a little bit but not necessarily -- I wouldn't say they were unusually large.

Okay, and lastly, were there any changes to your underwriting standards to your credit, underwriting for your loans in the period either loosening or tightening?

No.

Okay. Thank you very much.

Okay.

Thank you. The next question comes from Henry Coffey of Ferris, Baker Watts.

Good morning. Sandy this is just been absolutely phenomenal having watched you guys all these years, put your business plan in place. I know a lot of congratulations are in order. This is terrific. One of the best quarters I seen you put together. But I will stop. Couple of questions. If I want to understand the bankruptcy number correctly, you had 11.6% charge-offs and you are saying that 1.1% of that was due to bankruptcies. Is that how to read that number.

Annualized basis.

Exactly, yes. But sort of -- okay, and so you -- not all of the improvement came from --

The reduction in bankruptcy.

Some of it came from that, but that's only about half of the it. Can you give us some sense what's going on with your customer that you are seeing easier payments? Or people are just more willing to borrow and more willing to repay? Is either anecdotal or statistical data that gives you a sense of what's happening here?

I will let Mark answer that.

How is brother doing?

I'm good.

You, your customer.

This is Charles Walters; I can help Mark answer that if you need me. Go ahead.

We went into the quarter with slightly lower 60 and 90-day delinquencies than we had reported in prior periods. And our business that stuff all flows through. Now, whether that's a trend that's going to hold up is a different issue all together, but we do believe that the bankruptcy number will come back closer to annualized norms that we have seen in the past. There is just a hole in that number where the bankruptcy federal law change made it more difficult for customers at one period of time to file. I think that will come back and you will see more of a historical norm there than what we had in the past. Whether or not we can maintain delinquency at the levels we came in at the end of Q3 and Q4 remains to be seen.

Historically, this is the summer months are our most difficult months to collect for whatever reason our customers use money for normal things, vacations and travel, gas prices are going up. There are a number of factors there. We would like to see that trend hold but there is certainly, no guarantee.

Charlie, you said you want to throw your $0.02 in there?

We get better as we get older and we can attribute to delinquency control and the success of the company to some degree and an outstanding job management has done in retaining our people and the level of personnel turnover is terrific levels -- goodness gracious, last couple of years. That bodes well for a successful operation. Certainly bodes well for delinquency control because your customers and employees know each other. And that helps a great deal.

I got two more questions and I apologize for taking up so much time. Sandy, you give us delinquency data for '06 and '07? I didn't see that in the release. I might have missed it.

You want numbers or a percent?

Percent, please.

On a recency basis. It was 2.6% last year versus 2.4% this year. Contractual was 3.7 versus 3.6. As you know, these are the 61-day accounts and over.

And finally you made a comment about Texas. What about other states such as Illinois where you saw a lot of growth in March? Do you want to throw some numbers of a couple other states?

If you like, I could give you all 11 of them.

Just 1 or 2 would do.

Georgia is 16.5%. South Carolina 15.9. Louisiana 23. You asked specifically about Illinois, 21.3%. Like I said, 7 of the remaining 10 were graded 15%.

Great quarter and sorry for taking up so much time.

No problem. Thank you.

Thank you. Again, if you like to ask a question, please press the one key on your touch-tone telephone. Our next question comes from Brent Jackson of South Port Capital.

Good morning and congratulations on a great quarter.

Thank you.

I just got one quick question. Are there any updates worth commenting on with state legislation issues in Texas or anywhere else domestically?

To our knowledge there are no negative legislation pending in any of the states that we operate or in other states. However, there are positive legislation that is being considered. That doesn't necessarily mean it will be positive action from that, but there is positive legislation being considered in several states. North Carolina, specifically. Kentucky, Kansas, and Arizona are 3 or 4, I can name right now. Like I say, just because it's being considered doesn't mean there is -- the likelihood it will pass in the near term is not great.

Okay. Is there anything in Mexico that we should be aware of on the same issue?

It's very -- it's a very unregulated environment from that standpoint.

Okay, great. Thank you.

Okay.

We have a follow-up question from Bill Dezellon of Tieton Capital Management.

I wanted to follow-up on the regulatory front. The 4 states that you had mentioned the possibility of some positive legislation, would any of those be significant to World? I'm presuming that North Carolina and Kentucky there very well could be, but I would like to get your perspective on that, please.

This is Charles. Let me answer that. I think from what I can see on that landscape, those are works in progress and in my view they are probably long-term projects. You never know. And that kind of legislation, you know that would mirror the kind of rates that we enjoy like in Texas and Tennessee and Oklahoma and other states would be a new deal, sort to speak, for those particular states. And it takes some time to work through all of the advocates, the current administrations and the general assemblies to put that in effect. We have a presence in those states that will continue to monitor our ability to be successful.

It's a work in progress and some of the North Carolina, for example, I believe will come to pass, but it won't come to pass any time soon. It's a work in progress and more or less a long-term project. I don't think we can expect any significant positive changes on the legislative front in the near-term. Not to say we will continue to work in those states that do not have currently legislation that will authorize the kind of rates on the loans that we make.

And Charlie, following-up on that, granted it would not, as you point out, be near-term. That it appears the positive legislation would take place, if it did. But if the legislation as it appears as though it may ultimately come out, what is the degree of importance that that would be to World or maybe to said another way the degree of materiality?

It would be significant, absolutely significant. I can characterize it by talking about North Carolina in my view would be an outstanding market for our product to give you an example, we have offices in South Carolina along the border of North Carolina and just in our company and one other competitor we know of at least 6 or 7000 customers that cross the border from North Carolina into South Carolina to obtain small loans because they aren't available in North Carolina. And that's our agenda is to get that message across to the administration and the general assembly up there.

In any state where we would have new legislation where there has not been authorizing legislation for the kind of rates we charge would be significantly material, I believe to the company and to the industry.

And would you say the same degree of materiality for Kentucky, Kansas and Arizona? Or given their geographic locations maybe not as significant as North Carolina?

I'm more familiar with North Carolina than -- but Kentucky would probably be as significant as the rate change would have been in Tennessee. Arizona would have been a new state. You have population issue there probably. Kansas City would be -- or Kansas would be a big state, too. It takes a long time to mature the business. As you can see what we are doing in Mexico with the beginning of 2 offices and hopefully expanding 10 this year. So it takes a while for it to become material or significantly material to the company. But in my view the opportunity is certainly there.

That is that helpful, and 1 additional question on the regulatory front, are there other states that are considering laws to increase the size of small loans where we might see a benefit similar to what we had in Texas?

Not that I'm aware of.

Great. Thank you.

Thank you. At this time -- pardon me, we do have another question from Henry Coffey of Ferris Baker Watts.

I want to keep focus on the issue because I think there are other markets that see very favorable changes. Can you focus in on Illinois for us? That is not a new market for you. You have been there for a long time and now we were seeing 21% growth. While I was doing my channel checks in southern Illinois I saw a lot of new branches in the state. Can you give us a sense of what's going on there?

We haven't really increased our De Novo opening rate in Illinois significantly. I don't have the numbers in front of me but I believe we are projecting 5 or 6 for the year, which is probably similar to last year. It's a de-regulated state. We were not impeded from a rate and term standpoint at all. So it really isn't getting more focussed than it ever has. It just -- it's a relatively new state from World's perspective. We have been there for 7 or 8 years. And there are certainly -- we started in the south end of the state and moved to the middle and now are kind of inching our way up. There is still plenty of towns with sufficient populations size to grow there, but behave to -- we have to grow our management team and our ability to promote managers before we can entertain a lot more markets than what we are entering right now.

If I can add to that. We have 38 offices in Illinois, and we opened one since the beginning of the year.

So that the changes in the payday loan bill, you don't think will push business your way?

That's hard to quantify.

Thank you. Again, great quarter. Just keep it up.

Thank you.

Thank you. Again, ladies and gentlemen, you would like to ask a question, please press the one key. One moment, please.

If there are no other questions. Thank you very much. We appreciate your tuning in today. At this point I would like Jud to go over that statement one more sometime.

Thank you very much. This press release may have contained various forward-looking statements within the meaning of section 27A of the Securities and Exchange Act of 1934 as amended. That represented the company's expectations or beliefs concerning future events, such forward-looking statements are about matters inherently suggest to risks and uncertainties, factors that could cause actual results or performance to differ from 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 markets and changes in the economy particularly in the market served by the company. Such factors are discussed in greater detail in the company's filings with the Securities and Exchange Commission. Thank you all very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. Everyone have a great day.