World Acceptance Corp (WRLD) 2008 Q2 法說會逐字稿

Good day and welcome to the World Acceptance Corporation's sponsored second quarter press release conference call. At this time, all participants have been placed in a listen-only mode. A question-and-answer session will follow the presentation by the Corporation's CEO and other officers. 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 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 risk 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 amount of revenues that may be recognized by the Corporation; changes in corporate 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.

At this time, it is my pleasure to turn the floor over to your host, Sandy McLean. Please go ahead, sir.

Thank you. Welcome to the World Acceptance Corporation second quarter conference call. I am Sandy McLean, as he said, CEO. With me is Mark Roland, our President and Chief Operating Officer; Kelly Malson, our Chief Financial Officer; and other members of our management team.

I'd like to spend just a few minutes reviewing some of the quarter results, and then we'll be happy to answer any questions.

I'm once again very pleased with our quarterly performance. Net income for the second fiscal quarter was $10.5 million or $0.60 per diluted share compared to $9.9 million or $0.52 per diluted share during the prior year's second quarter. This was a 6.1% increase in net income and a 15.4% increase in earnings per share.

For the six months ended September 30, 2007, net income was $21.3 million or $1.20 per share compared to $19.8 million or $1.05 per share for the prior year's six month period. This represented a 7.4% and 14.3% increase in net earnings and earnings per share respectively for the two year-to-date periods.

The higher increase in diluted earnings per share that in net income was due to the accretive effect of the 1.8 million shares repurchased during the prior 12 month period for the aggregate purchase price of $73.4 million. The Company repurchased 690,000 shares of its common stock for an aggregate purchase price of $21.3 million in the second fiscal quarter ended September 30, 2007. We continue to believe our stock repurchase program is an excellent use of excess cash when available, especially at our recent stock price levels.

Gross loans amounted to $571.3 million at September 30, 2007; a 21.5% increase over the $470.3 million outstanding the previous year end -- for year end. We are very pleased that we have been able to sustain this year-over-year growth rate in our loan portfolio that we have experienced during the prior fiscal year and during the first quarter of this fiscal year. We are also pleased that our growth is not concentrated in any specific area. Eight of the 11 states where we have offices had year-over-year growth rates exceeding 15%, with four of them exceeding the 30% growth rate.

Acquisitions continue to be an important part of our overall growth strategy. While we had very little activity during the most recent quarter, we have acquired the loans from 17 offices for a total of $3 million in gross balances during the first six months of this fiscal year. 12 of these offices remain open and the other five will merge into existing World offices.

Our growth is also supported by the new offices that we continue to open. At September 30, 2006, we have opened or acquired 139 net new offices. Of this total, 73 net new offices were opened during the first two quarters of the current fiscal year. This compares to 55 offices opened during the first two quarters of fiscal 2007. As we have previously stated, we made a strategic decision to accelerate our office openings, which has negatively affected earnings in the short term. However, we believe that this strategy will greatly enhance earnings in the future. We plan to open a total of 75 new offices in the United States, excluding acquisitions, and a total of 20 new offices in Mexico during fiscal 2008.

Total revenue for the most recent quarter amounted to $80.2 million, which is a 19.3% increase over the $67.2 million during the second quarter of the prior fiscal year. This is close to the 20.3% increase in average net loans when comparing the two quarterly periods. Revenues for the 615 offices opened throughout both periods increased by 8.5%.

The major [factors] affecting the quarterly's profitability was an increase in delinquencies and charge-offs. Accounts that were 61 days or more past due increased from 2.8% to 2.9% on a recency basis and from 4.1% to 4.2% on a contractual basis when comparing the two quarter end statistics.

Net charge-offs as a percentage of average net loans increased from 14% annualized during the prior year second quarter to 15.3% annualized during the most recent quarter. While this is a fairly large increase from the prior year quarter, it compares favorably to the 16.1%, 15.4%, and [16.0%] ratios all annualized for the quarters ended September 30, 2005, 2004, and 2003, respectively.

We have expected charge-off ratios to return to more historical levels now that the benefit from the changes of bankruptcy regulations has completed its cycle.

General and administrative expenses amounted to $41.9 million during the second fiscal quarter; an 18.8% increase over the $35.3 million during the prior year quarter. As a percentage of revenues, it was 52.3% during the current quarter, down from 52.5% during the corresponding quarter of the prior year. Even though we have accelerated our new office openings, our expense ratios are beginning to fall back in line with historical levels. Our G&A per average open office decreased by 1.9% when comparing the two quarterly periods.

Highlights of our expansion into Mexico include the following. Eight offices have been opened during the first six months of the fiscal year, giving us a total of 23 offices at the end of the quarter. We now have approximately 20,000 accounts, or approximately $8.7 million in gross loans. We have had total charge-offs of approximately $90,000 so far this year and our 61-day delinquency is 1.7% and 2.4% on a recency and contractual basis, respectively. We've lost approximately $220,000 pretax, which we feel is very good in this new and rapidly expanding market. We now have offices in Juarez, Matamoros, Reynosa and Monterey.

Finally, the Company's annualized returns on average assets of 9.7%, a return on equity of 19.3%, continue their excellent historical trend during the first six months of the current year.

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

(OPERATOR INSTRUCTIONS). Dan Fannon, Jefferies & Company.

Thanks for taking my questions. You guys have opened a fair amount of stores in the first two quarters this year and are expecting that ramp to continue going forward. Can you talk about how those stores are ramping in terms of contribution versus historical levels and, you know, the way you guys have opened stores historically? Just want to see if there's been any change in the profitability metrics.

Well, certainly there are the costs associated with this many offices. We know, for instance, that the offices that we have opened during the first six months of this fiscal year have actually generated a $3.3 million pre-tax loss. For the last year de novos -- it certainly was substantially less than that. But given the fact that we get these things open that much quicker, we think that it will benefit as we get to the more -- the profitability level.

And just on the normalized basis, what is the path to profitability for just a single stand-alone store?

It is just so unpredictable and it's dependent upon so many different factors. A lot of times it depends on the managers you're putting in there, the location -- obviously, the key is the number of our customers that you can attract and the time it takes to do so. The only real predictability that we have established is in Mexico, where we have consistently been able to generate -- Mark, how many new accounts [are a] month?

In Mexico, we're able to get basically to breakeven profitability on a monthly basis in three to five months and recoup all of our expenditure in five, six or seven, which is approximately double or three times quicker than we can in the United States. All I know for certain is that the branches that are being opened in the United States are right on budget to where we had established for that group of offices and they're opening on time.

It's -- obviously some of them are getting to profitable levels much quicker than others.

Okay. That's helpful. And then if you could quantify the bankruptcy impact this quarter on a dollar basis versus last year, to help us understand the difference in the rising charge-offs related to that?

Okay, the number of actual bankruptcies that flowed through the P&L this quarter was 1.8 million compared to 1.2 million. So it's a 47% increase in bankruptcies per se but it's only 570,000 of the overall increase. So, it's partially due to the bankruptcies but certainly it's due to overall trends also.

Okay. And then if you could just give some overall commentary [about] to the consumer. If you're seeing any signs of strain or any trends that you can take out of pockets of the market that you're seeing whether things are good or bad.

Well, I mean, they're -- with the rise in the charge-off ratios, which -- partially due to the bankruptcy but certainly due to the other reasons also, we are experiencing higher loss levels. Can we specifically attribute that to any one thing? I don't believe I can. And I don't know, you know, like -- but by the same token, these off-ratios are not unfamiliar with us. They're still very much in line with what we have seen, as I mentioned in the call, the previous three years prior to last fiscal year.

Okay. That's helpful. Thank you very much.

Bill Dezellem, Tieton Capital Management.

We have a group of questions. First of all, the charge-off increase sequentially, I'm thinking from the 12.7% last quarter to the 15.3% this quarter. I believe you referenced in the press release that you are now comfortable that this is going to be stabilizing at the current level. We'd like to get some understanding of what gives you that comfort, please.

I don't really think we said that they are stabilizing. I said that they are returning to more historical levels. We do anticipate -- I mean, a lot of these charge-off ratios are very seasonal in nature. And historically, if you go back, we always have a fairly large pickup in our charge-off ratios between the June quarter and the September quarter. And historically they rise again in the December quarter. And we would expect -- we expect that to see the same type increase between the September quarter and the December quarter as we've seen. But I think we'll see the year-over-year increase beginning to shrink a little bit as opposed to what we saw this year -- this particular quarter.

That's helpful, Sandy.

Okay. Does that answer the question?

It does answer part of it but I would like a little bit of clarification on the release. There was the reference to the current quarter loss ratios returned to the more historical levels as expected due to the prior year benefit realized in the bankruptcy reform. And became effective -- or that which became effective in 2005 but appears to have since stabilized. Was that really -- would the appears to have since stabilized more specifically to the bankruptcy related losses?

I think what we were referring to -- and I'm sorry if there's some confusion -- is the overall charge-off ratios of more -- when you compare them to the -- as I said earlier -- to the three years prior to the last fiscal year quarter.

And as I just told Dan, I mean that certainly bankruptcy -- we have a large increase in our bankruptcy amounts, but overall bankruptcy is not that great of a percentage of the total charge-offs anyway. So it's a multitude of factors. But we have been saying beginning at the end of the prior fiscal year, at the end of the first quarter, that we believe that these charge-off ratios were going to be increasing this year. And that has, in fact, been the case.

We believe they will also increase in the December quarter as we've stated in the past. But we do still believe that they will be in line with the historical numbers that we referred to. We're not seen anything -- our underwriting has not changed at all at the office level. Our collection procedures are more or less the same. We just don't really know of any type of -- anything that's going to make these charge-off ratios accelerate any faster.

Great. That is helpful. And then would you provide whatever insights you can behind the type of customers where you're the biggest increase in the charge-offs? Does it tend to be the new customers? Is it customers that have been with you awhile and are now having troubles? Is it younger customers? Do they tend to be older age? What are the dynamics there?

I don't think that we're seeing a change to that structure. And as part of our annual reporting in our 10-K, we actually disclose information that deals with the percentage of charge-offs that arise from new customers, former customers and renewal customers. And obviously the highest percent charge-off comes from new customers. The highest percentage of that class comes from new customers. Because you have the least amount of prior history with that customer.

But by far, the highest percentage of the charge-offs come from our renewals just because of there's so much -- 80% -- 75% of our total loan volume is renewal. So, and we're not seeing that change at this point in time. Plus we really don't look at charge-offs based on ages and other demographic information.

So really just what you've done is just in another way said that the charge-offs are returning to a more normal level. And even when we look kind of behind the scenes, it's still again at a normal -- normal levels?

And we don't really anticipate things dramatically changing.

Thank you. And then one additional question, if I may, please. The office openings, the accelerated office openings I should say, when would you anticipate that those will shift to be an income benefit rather than an income drain?

Well, I think that normally in our U.S. offices, some of them take more than a year to become profitable. So the $3.3 million that we've lost in 2008 de novos could in fact be $1 million loss during the first quarter or so next year. But you know that this is typical of office openings. So, the following -- once it goes through two growth seasons, I would anticipate that this entire block of new offices would be contributing a great deal.

Great. Thank you.

(OPERATOR INSTRUCTIONS). Dan Bandi, Integrity Asset Management.

Hey, Sandy, just a quick question for you on the personnel expense line. Just that it dropped sequentially from the last quarter and with all the new offices opened, what was behind that?

This is Kelly. And part of it related to restricted stock that was granted to the directors. And then the other piece is with FAS 123R, which is the expensing of the options, that expense is heavily weighted when it's first issued, but then that expense kind of levels off in each of the following quarters. And we didn't do any grants during the second quarter -- or we did very few grants during the second quarter of stock options. So that was part of it.

The other thing is in regards to the openings, most of the individuals that were hired to run or manage those offices were already on the payroll in the first quarter.

Okay. And then at the risk of beating a dead horse, Sandy, can I go back to the prior person's question, on the sentence they appear to have since stabilized? And I just want to clarify -- because I'm still not clear in my own head -- is -- so are you saying that the impact of the bankruptcy sort of recatch-up has stabilized as opposed to credit itself has stabilized?

Yes. There's two impacts that took place when the bankruptcy reform came into place. Obviously there was less people going through the bankruptcy process because the bankruptcy attorneys had to get familiar with the new rules and regulations. But in addition to that, there was kind of a buildup ahead of last fiscal year of people declaring bankruptcy in anticipation of this law taking effect.

So to answer your question, the bankruptcy portion is up compared to last year and this year. But what I guess I'm referring to overall is that the overall level of charge-offs is what's really become more stabilized.

Okay. Great. That's helpful. And then just one last question. Any changes out there that you're seeing either on a competitive or regulatory front?

Competitive, there are always changes because there's so many independent operators and so forth. But not really; there's really nothing there and I'm happy to say that from a regulatory standpoint, it's been very quiet this quarter.

Great. Thanks a lot.

Jordan Hymowitz, Philadelphia Financial.

Hey, guys. Most of my questions have been answered. My only remaining question is -- your provision has remained much higher than your charge-offs the past couple of quarters. That's even though charge-offs have been coming up, the provisions more than covered it. How much do you intend to cover your charge-offs with your provision buy? Is it 20%? 30%? I mean, at what point would the charge-offs go high enough that you said, gee, we should look at the provision number, which has been pretty steady?

I think the way to best look at that is to look at the allowance number on the balance sheet. It's our goal to maintain an allowance to net loans of somewhere between 5% and 6%. So obviously, if our portfolio is growing, then to keep that allowance at the same level, it's necessary to run more through the current provision. What you'll actually see in the fourth quarter is you'll see a dramatic drop in -- I mean, if you look at just the fourth quarter, because our balances will drop significantly between December and March, you'll actually see a provision that will be slightly less than our net charge-offs. So, I think what's controlling the -- what's going through the provision is the actual charge-offs plus what's happening with the change in the general allowance.

Now, we believe that the allowance at these levels are satisfactory, given that the number of times the portfolio turns over and so forth. And if, in fact, for some reason charge-offs did pass historical levels substantially, then we would have to take a look at that allowance for adequacy and so forth. But given where we are in our trend during the last three or four years, we believe that that allowance is sufficient.

Okay. So, that's a good answer. So it's between 5% and 6% and it's running at like 5%, 6% now, which is right in the middle of that range. And your charge-offs are clearly running actually below the historical level that you guys have run at over a number of years at this point.

At what point is that cut-off point or that [parade] line? Is it 15% charge-offs, which seems to be a little bit above the average? Is it 16%, 17%? Do you say we should think about raising that allowance level above 6%?

That is our most significant estimate that we make as a company on an ongoing basis. And obviously, it's something that Kelly and myself look at on an ongoing basis. It's certainly something that KPMG, our outside auditors, are extremely interested in. I don't know that there is a -- because our charge-offs have fluctuated over the years within a pretty tight band, I don't know that there is a magic number at which boom, all of a sudden this means that we should go to a 6.5% allowance versus a 5.5%.

But as I said, should the trend for some reason trend substantially higher than these levels, then we would have to evaluate and determine at what point and what amount we would need as an additional allowance.

Okay. Because -- but even that this point, even with the increase, it's still below the median of where you guys have been. So you seem to still have quite a bit of cushion.

And we didn't believe -- because we did not believe that the downward trend that we experienced in fiscal 2007 was going to be a consistent and ongoing trend, we did not believe it prudent to reduce the allowance at that time.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Bill Dezellem, Tieton Capital Management.

Again, a couple of follow-ups here. The loan growth -- how would you characterize that across your system? You mentioned the various states. I don't know if there's another way that you would like to dice it that might provide additional insights into loan growth. We would be interested in further detail if you've got it.

That's really the best way, I guess, one other way you potentially could look at it is rather than looking at it by state, you can look at it by our internal designation of small loans, large loans, and our sales finance. And our small loan portfolio on a year-over-year basis has grown by 21.7%. Our large loan portfolio has grown by 17%. And our sales finance ratio, which is a very small part of it, has grown by like 25%. So that will give you one other way of looking at it.

But it's pretty consistent across the board. Now, I will remind you of two of the four states that we referred to as having over 30% growth was a total -- was certainly benefited by the tightened purchase that was put online last November. So as we lap that, that's going to be a hurdle that we will have to face in this fourth quarter. But hopefully we can make up for that with a good growth season.

That is helpful. And in that vein of the good growth season and trying to understand the loss provision and the impact on earnings, if, in fact, during the fourth -- sorry, it's the third fiscal quarter -- the December quarter, that you have very strong loan growth there for the Christmas season, would it be correct to say or to assume that the loss provision will then be high because the loan growth is high? And that will therefore decrease your net income. And then in your fourth fiscal quarter or the March quarter, then the income from that substantial loan growth would then flow through. So next quarter if we happen to have high provision and lower earnings than what we might otherwise think, that actually could be a very positive sign for the future, assuming that it's generated as a result of high loan growth?

Bill, that is exactly right and that is one of the leading contributors to the seasonality of our earnings. Our third fiscal quarter is always our worse quarter, primarily due to what you were just saying but also that is the quarter in which we incur a great deal of our annual advertising budget, because of the number of direct pieces of direct-mail that we send out during this quarter.

But you're exactly right. By the same token, our fourth quarter has always been our most profitable, not only due to the reduction in the provision -- due to the reduction in the balances -- but because of the tax prep fees and the earnings on our largest loan balances. And just a number of reasons. But you're exactly right. There is that seasonality that's driven by loan growth in the provision change.

So oddly enough, we may almost hope for low earnings next quarter if it comes about because of high loan growth leading to a high provision.

We hope that every year.

Okay, thank you. And then relative to Mexico, does it exhibit the same seasonality that we were just talking about in the U.S.? Or is that not the case?

I'm going to let Mark answer that, but the answer is no, but --

It's almost a complete hedge against the United States. Almost all employees in Mexico receive a 13th payroll, a 13th full monthly paycheck at the beginning of December. And most use it to travel during the Christmas season. So we see low loan demand in December in Mexico and the antithesis where we see runoff in the U.S. during January and February due to tax refunds and whatever, we see a higher demand for loans in Mexico in January and February. Now granted, we've only been down there for a couple of years and there's not a lot of historical data there, but that seems to be the case.

That is interesting. Thank you very much. And then actually circling back to the loan growth in the U.S., the newer offices presumably that's where you end up with a lot of loan growth from and older offices -- I'm presuming older being more than five years in existence -- that the loan growth is very low. Is that accurate?

Yes. It is. There's only a certain size that most offices can reach as far as number of customers because of the traffic in the offices and the amount of collection efforts and so forth. But even our older offices can experience growth through an increase in the average balance outstanding; even if you have the same number of customers from one year to the next. We do experience some kind of increase through those increases in the balances outstanding.

And Sandy, I maybe have just answered my next question, but the two states that did not grow -- actually I think it's three states, because didn't you say eight of the 11 had grown more than 15%? So I've got to get my math right here. Those three states that grew at less than 15%, I guess my question is, why did they grow at less than 15%? And maybe, like I said, the answer already was there with just the average age of the offices.

Well, one of the states that did not meet that 15% target was Texas. It grew at 14%. So, Texas is an extremely large state with a lot of locations with a limit to the maximum loan size. And that state has grown substantially over the last year or so because of the change in state law that allows us to make a larger loan in that state. So a lot of that pent-up demand has been satisfied. So therefore, it's to keep that level of growth going over that number of offices and so forth.

The other two states -- Missouri is at 12% and then Kentucky -- I don't really know why Missouri is a little bit less. I mean, there's just not as many offices there and we hadn't opened, percentage-wise, as many offices in Missouri. And then finally in Kentucky at 7%, there was just some internal reasons why we've seen a decline there. But all of these states are very healthy.

Great. Thank you for indulging all the questions.

Not a problem.

At this time, we have no further questions but we'd like everybody to have a opportunity to signal one last time. (OPERATOR INSTRUCTIONS).

Doesn't appear to be any questions. Thank you very much for joining us today.

Again, thank you for your participation. Before we conclude today's teleconference, the Corporation asked me to again remind you that the comments made during this conference may contain certain forward-looking statements within the meaning of the Section 27A of the Securities and 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 amounts of revenue that may be recognized by the Corporation; changes in the 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.

This concludes the World Acceptance Corporation's quarterly teleconference. Again, thank you for your participation and have a good day.