World Acceptance Corp (WRLD) 2007 Q3 法說會逐字稿

Good day, and welcome to the World Acceptance Corporation-sponsored third quarter press release conference call. [OPERATOR INSTRUCTIONS] A question-and-answer session will follow the presentation by the Corporation's president and other officers.

Before we begin, the Corporation has requested that I make the following announcement. The comments made during this conference may contain certain forward-looking statements within the meaning of Section 27A of the Securities and 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 timing, amount of revenues that may be recognized by the Corporation, changes in current revenue and expense trends, changes in the Corporation's market and changes in the economy. Such factors are discussed in greater detail in the Corporation's filings with the Securities and Exchange Commission.

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

Good morning, and welcome to the World Acceptance Corporation third quarter conference call. I am Sandy McLean. With me is Mark Roland, our President and Chief Operating Officer; Kelly Snape, our Vice President and Chief Financial Officer; as well as other members of our management team. I'll spend a few minutes reviewing the quarter results, after which any of us will be happy to answer any questions.

I am very pleased to be able to report another excellent quarter for your Company. The good results that we achieved in the first two quarters have continued into the third, primarily due to many of the same reasons -- continued strong loan demand, reduction in charge-off ratios and continued control over our expense ratios.

As a result, net income increased by 23.3% when comparing the two quarterly periods. For the current quarter, net income was $7 million, or $0.39 per diluted share, compared to $5.7 million, or $0.30 per diluted share, for the quarter ended December 31, 2005. For the first three quarters, net income was $26.9 million, or $1.45 per diluted share, a 31.5% increase over the $20.4 million, or $1.07 per share, for the corresponding nine months for the prior fiscal year.

Our gross loans outstanding amounted to $561 million at December 31, 2006. This represents a 20.7% increase over the $464 million at December 31, 2005 and a 34.7% increase since the beginning of the fiscal year. Average net loans increased by 20.3%, when comparing the two quarterly periods, and by 19.9% over the two corresponding nine-month periods.

As has been the case for several periods, a great deal of this growth has come from internal demand. Four of our eleven states had loan growth exceeding 30%; two of the four benefited from the Titan purchase; and five of the eleven states exceeded a 15% growth rate. Of greater importance, the 20.7% increase in gross loans for the current year had a corresponding 14.5% increase in the number of accounts outstanding. As of December 31, 2005, the 20.5% increase in gross loans had a 6.7% increase in accounts.

Acquisition activity, which has been very slow during the last year and half, picked up considerably during the most recent quarter with the purchase of Titan Finance. For the first six months of the current fiscal year, we acquired nine offices and $2.8 million in gross loans. Four of the nine offices were merged into existing offices. For the most recent quarter, we acquired 75 offices and $17.5 million in loans, and 34 of the 75 will merge into existing offices. These offices have been fully integrated into our systems or -- and are currently running very smoothly.

Our office network has also been expanding on an accelerated basis. During the first nine months of the current fiscal year, we have opened 68 offices, purchased 46 new offices and closed four non-performing offices, which gives us a total of 731 offices at December 31, 2006.

Primarily due to the excellent loan growth, total revenues have been increasing at a similar manner. For the most recent quarter, total revenues amounted to $74.1 million, a 20.9% increase over the $61.3 million during the third quarter of fiscal 2006. For the first nine months of the current year, total revenues were $205 million, a 20.8% increase over the $170 million for the previous fiscal year. Revenues from the 568 offices opened throughout both year-to-date fiscal periods rose by 14%.

While we experienced a slight decrease -- increase in loan delinquencies, we did benefit from continued improvement in our charge-off ratios. Delinquencies on 61-plus-day accounts increased from 2.5 to 2.6 on a recency basis and remained level at 3.7% on the contractual basis when comparing the two period-end dates. However, net charge-offs, as a percentage of average net loans, decreased from 17.4% to 15.8% on an annualized basis when comparing the two fiscal quarters and from 15.8% to 13.8% annualized when comparing the two nine-month periods. These decreases were primarily due to a decrease in bankruptcies of 49.9% over the two corresponding nine-month periods. About 1.9% of the 2% decrease in charge-off percentages for the nine-month periods was due to a reduction in bankruptcies.

It's now been over a year since the revised bankruptcy regulations have been in place, so we do not expect to see the continued declines in our charge-off ratios going forward as we have during the last four quarters.

Another area of great importance to our continued financial success is our expense control. Our G&A expenses increased by 21 -- 24.1% when comparing the two quarterly periods and by 20.3% when comparing the two nine-month periods. This is primarily due to the 112 net new offices opened between December of 2005 and December of 2006. Total G&A expenses as a percent of revenues increased from 54.5% to 55.9% over the two quarters but declined from 54.6% to 54.4% over the two nine-month periods.

The quarterly increase was partially due to the increase in compensation expense due to the adoption of FASB 123R during the current fiscal year. This additional expense amounted to $1.7 million during the most recent quarter and $3.1 million during the nine-month period just ending. Our G&A per average open office increased by 7.1% over the two nine-month periods.

Other ratios also improved over two fiscal periods. Our return on assets annualized increased from 8.5% to 9.5% over the nine-month periods, and our annualized return on equity increased from 14.4% to 16.6%.

We continue to be very pleased with our progress in Mexico. At the end of the current quarter, we had 12 open offices with 9,020 accounts and approximately $4.1 million in gross loans outstanding. We have had approximately 95,000 charge-offs during the current year, which amounts to a 4.2% of average net loans, and furthermore, there's a 61-plus delinquencies of 1.5% and 2.1% on a recency and contractual basis, respectively.

During the first three quarters of the fiscal year, we made approximately $180,000 from our Mexican operations, which we consider excellent given the cost of opening new offices.

Finally, we are very pleased with the success of our convertible debt offering, which closed during the third quarter. We raised $110 million at an interest rate of 3% and repurchased 1.03 million shares of common stock for $47.7 million. Remaining funds were used to pay the fees of the transaction, enter into [Inaudible] options to pay down existing debt. This transaction should be accretive to earnings per share for several periods in the future.

At this time, we'd be more than happy to answer any questions that you may have.

[OPERATOR INSTRUCTIONS]

Operator, this is [Inaudible] at the home office. We're being told externally that some members trying to call in are not being allowed on the call at this time. Can you verify that?

We have not been turning any participants away.

Okay, thank you.

Are you ready for phone questions at this time?

Yes, we are. Please continue.

[OPERATOR INSTRUCTIONS] And our first question will come from Dennis Telzrow with Stephens, Inc.

Good morning, Sandy and Mark, great quarter. I wonder if you could talk a little bit about your store growth plans for next year and also in Mexico for next year, next fiscal year.

Dennis, as you know, we don't really get into specific guidance and details. I would anticipate -- well, I mean, as we've said in the past, we hope to open at least 50 offices internally, and we should be expanding at a similar rate in Mexico next year.

Okay. Any particular trends -- you mentioned the various state growth. Is Texas still probably the fastest growing because of the change in the size of the loan?

Actually, it's not. I mean, we certainly are continuing to benefit from that change in that law, which has been in place over a year now. If you remember last year, Texas growth was about 40%. This year, I think our Texas year-over-year growth is about 18%.

So as you mentioned, the growth in the other states is still pretty healthy.

Yes, it is. As I said, two of -- four of our eleven states had growth rates exceeding 30%, and as I mentioned, South Carolina and Georgia, as a result of the Titan acquisition, were two of those.

And advertising was a little higher in the quarter. Is that just a function of, maybe, these acquisitions? Or anything unusual there?

Nothing unusual. I mean, most of our advertising expense, as you know, is through direct mail, and we sent out a great deal of mail this year.

Thank you very much.

Okay, Dennis.

We'll move next to Dan Fannon of Jefferies.

Good morning. Thanks for taking my question. Are there any one-time items in the other income line or the expenses which related to the acquisition in the quarter?

Related to the acquisition, no. I believe we had a small gain from our swap -- didn't we this quarter, Kelly, of --

For the quarter, the gain was less than $25,000.

Okay, so the -- of the -- from a one-time -- as I mentioned, the 123R is not a one-time, but it is certainly -- and obviously that's in the expense -- to answer your question, no.

Okay, and then you mentioned on the stock-based compensation about $1.7 million from this quarter. That seems to be an acceleration from what you posted in the first two quarters of the year. Can you give me a little color there?

Sure, that -- we actually issue options once a year, and it's generally -- and it is during this quarter. So the -- obviously, this quarter is the largest, and additionally, there was some restricted shares issued for the first time, in lieu of options, to certain senior management, and they had a different vesting schedule, so there's a little difference in the expense calculation. But overall, it's very similar to what we've done in the past.

Okay. And then, any update on the regulatory environment? Any states that you are looking at this year from either a positive legislative change or a potential one that might be more restrictive on your business?

We do not know of anything specific on a positive standpoint. We know that there's laws out there in those states, but I cannot give you an update at this point as far as the status. You know of the regulation in the -- from a national standpoint regarding the military laws that are -- we don't really know how that's ultimately going to affect us, and we do know of a law that's been introduced very recently in Oklahoma that would have a negative impact on us. But we've seen that type of activity in Oklahoma on numerous occasions in the past, so we don't really feel -- we hope and certainly believe that we can manage that risk also.

Okay, great. And then if you could just refresh me on when the implementation of the military law is.

I believe it's November --

October.

October of this year.

Great.

Of 2007.

Thank you very much.

Okay.

Our next question comes from Henry Coffey of FBW.

Hey, Sandy, Henry. The guy that couldn't get on was me. It wasn't -- they weren't turning us away. We just waited ten minutes before they let us on the call.

That was by design, Henry. We told them to not let you on.

Well, I -- I'm sure there are many, many people that would pay for the privilege.

You know we wouldn't do that.

No, no, but I just wanted to make sure that no one thought people were being turned away. It was just -- we should have dialed in earlier. It was Jason's fault. He's being fired. But I did miss a lot of your comments, so I apologize for some of these questions. You said stock-based compensation in the quarter was $1.7 million.

That's correct.

What was it year-to-date?

$3.1 million.

$3.1 -- were there other related charges -- I mean, costs, kind of a 123 nature? Or was that it?

That's it.

Okay. The second issue -- you did a -- you mentioned that 4 of your 11 states grew at over 30%, that two of those were South Carolina and Georgia, which is the Titan acquisition. Can you talk about the other sort of four or five top-growth states? We've got Texas at 18%. You've done this in the past, and it's been very helpful.

Alabama had like a 31% growth rate, and that's primarily -- that's a new state for us. We opened several new offices. Louisiana had a 31%, 32% growth rate, and neither of those were really impacted by acquisitions.

What about Illinois? I know you had a lot of interesting -- very strong growth there last year.

It had a 20% growth rate this year, so we're still very pleased with the results there.

You mentioned the military issue. I know you and I have talked about this in the past. It's only 1% or 2% of your business, but the [open] -- the question is that nobody really knows how the rules are going to be applied. Is that kind of what's here?

It appears to us at this point in time that there's a -- the way the law reads now is going to cause a lot of problems as far as the way we've been operating and the way we'll be operating going forward, not only us but everybody in the financial services industry. So obviously we're very interested in how these rules and regulations will be applied, and we'd certainly like to see them confine the legislation more to what it was originally intended, but we certainly don't know if that's going to take place.

But -- meaning you don't know what a military family is? What -- can you give us some sense of what the open issues are?

Well, the calculation of APR has historically been a certain calculation looking at certain fees and charges, and now all the sudden, late charges, for instance, may have an impact on that, and that's on a -- late charges -- but that's a monthly charge --

For people who don't pay.

I mean, that's also considered from an APR calculation, more -- and that's -- the inclusion of other products historically has been a use of proceeds, and now it has to be considered some type of finance charge, which historically has never been the case.

So you just don't know how the Department of Defense is going to --

Implement these rules.

-- do the math.

And plus, there are other concerns. You've always had confidentiality issues. You're not really supposed to ask a potential borrower what their spouse does or anything else, and now it's against the -- it will be against the law to lend to a dependent or spouse of an active military person, but how are you supposed to know these things?

Right. And if you were to guess, what is your sort of military -- what percentage of your customers are active military?

It would be a guess as you know, but just based on the offices that have a presence primarily near a base, we believe it's somewhere around 1%.

Right. So it's more the uncertainty than the financial impact --

Yes.

-- is what I keep hearing you say. The other question is, of course, I've always noticed a pattern. All the negative bills come out first, and the positive bills slip out later -- and then I have just one more set of questions, and again, I apologize for taking up a lot of time, but we missed most of the call. Any favorable rules on the books that you know of akin to what happened in Texas for you?

Not at this time. We do not know of anything specific.

On a marketing basis -- we were doing some analysis of the new product that's been introduced by a lot of the payday loan companies in Illinois, and it's about five times as expensive as your product. Can you -- from a marketing point of view, have you developed any strategies to attack that point? Or --?

I'm -- I mean, I can answer that, but I'm going to let Mark address that just so he can stop drawing pictures and stuff.

We have never created advertising pieces that specifically target the payday loan industry expenses as a comparison to ours. Our advertising is positive from the viewpoint that it indicates to our potential customers that our loans are fully amortized in equal monthly installments, and those installments are low enough to be affordable and to pay off the debt, and they indicate relatively clearly in the advertising that our credit underwriting is fast and efficient and somewhat easy to obtain a loan, and that's pretty much been the basis of our advertising for years and years. We obviously color it up with graphics and various other things, but we've never picked on a particular industry with regards to our advertising.

Maybe it's an opportunity for the future since you are the low-cost alternative. And finally, Sandy, I know you made some comments about charge-offs just as we got on the call. I was wondering if you could share those with me.

Sure. Our charge-off rates dropped from --

They dropped 160 basis points. I saw --

Of which we primarily attribute that to the reduction in our bankruptcies. And this is following the trend that we've seen over the last four quarters, and we would anticipate these -- this flattening out as we go forward.

You're looking for stability there at -- this is kind of where you've been before. What about trends in delinquencies?

As I said, our recency 60-day-plus delinquencies were up one basis point or something. It was very little. But, so they're being -- they have remained very steady, as they have done historically.

Thank you very much. Great quarter, and I'm very excited about what's going on in Mexico as well.

Thank you.

Moving next to [Guy Regal] of Ingalls and Snyder.

Hi. I don't have any questions at this time.

[OPERATOR INSTRUCTIONS] We'll move on to [Adam Goldstein of Cedar Hill].

Hi, yes. Thank you for taking my question. I just had a follow-up on regulation. I understand that there are some bills out there that are targeting the payday lenders, but because some of the bills have proposed 36% rate caps, I would assume that this would affect your business as well. I believe South Carolina and Missouri are a couple of the states that have bills that have been proposed at 36% caps, and it looks like there are some more bills that could be filed in Tennessee and Alabama.

The ones that have specifically been filed at this point that I'm very aware of is the South Carolina bill, and it does not at this point in time affect our industry at all. It is specifically targeted to the payday lending industry.

Okay. And can you explain that a little bit because from what I understood, it was a 36% cap, and I thought that --

It is a 36% cap on a deferred-presentment product, basically a payday product. It is targeted toward that specific product.

Okay. So in Missouri also, it doesn't affect you?

I don't believe -- I'm not as familiar with that law that you're referring to, and if it's that, but I do not believe so because certainly I would be very aware of it.

The bills that we've seen have identified the law under which the payday lenders are operating in the states that we've seen adverse proposed legislation, and they specifically avoid the loan charter or license that we operate under.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] We'll take a follow up from Henry Coffey of FBW.

Mark, this -- I assume that was Mark, right?

Yes.

This is Henry Coffey again. Maybe you could expand on that a little bit. We've been looking into this. You operate under sort of the equivalent of a carve out, and you're saying that none of the bills that have been sponsored to date have attacked that carve out.

Right, this -- in South Carolina, as an example, the payday industry operates under a deferred presentment bill, which is a completely separate body of regulation from what we operate under, and the bill that's been proposed in South Carolina is specific to that piece of legislation under which they operate.

Thank you, sir.

[OPERATOR INSTRUCTIONS] And we'll hear from [Bill Lee] of Palisade Capital.

Hi, guys. Great quarter. I was just wondering, from a stock buyback standpoint, what do you guys have outstanding? And what's the plan going forward? Thank you.

In conjunction with the convertible bond offering that we issued in the first of this past quarter, we were authorized by the Board to have a $55 million buyback program, and as you know, during that process, we purchased -- repurchased between $47 and $48 million, so there is a remaining portion out there. We -- I can't say we haven't ordered a buy, but we've certainly -- it's something we'll be discussing internally, and it's something we're always looking at. So it's certainly a possibility, but I wouldn't want to get into specifics at this point in time.

And we have no further questions at this time.

Thank you very much for joining.

Thank you for your participation. Before concluding this afternoon's teleconference, the Corporation has asked me to again remind you that the comments made during this conference may contain certain forward-looking statements within the meaning of Section 27A of the Securities and 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 timing, amount of revenues that may be recognized by the Corporation, 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 Securities and Exchange Commission.

That concludes the World Acceptance Corporation quarterly teleconference.