World Acceptance Corp (WRLD) 2008 Q3 法說會逐字稿

Good morning and welcome to the World Acceptance Corporation sponsored third-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 presentations by the Corporation's CEO and its 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 the timing and amounts of revenues that maybe 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.

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. As she said, I am Sandy McLean, and with me is Mark Roland, our President and Chief Operating Officer; Kelly Malson, our Chief Financial Officer; along with other members of our management team. I would like to spend just a few minutes reviewing the quarterly results and then will be happy to answer any questions that you may have.

I am once again very pleased with our quarterly performance, although we did not meet the market's earnings expectations for the period. Net income for the third fiscal quarter was $7.3 million or $0.43 per diluted share, compared to $7 million or $0.39 per diluted share during the prior-year third quarter.

However, our pretax earnings for the current quarter were $14 million, which was a 22.3% increase over the $11.5 million in pretax earnings for the quarter ended December 31, 2006. The large discrepancy between the increase in pretax earnings and the slight increase in after-tax earnings is due to an unexpected unusual adjustment for potential state income tax assessment.

To elaborate more fully on the tax issue, the Company reorganized its subsidiary balance sheets in fiscal 1996 to more properly reflect each subsidiary's leverage to be in line with that of the consolidated entity. In the process, inter-company notes were issued. A side benefit of this reorganization was the reduction of state income taxes on the interest expense associated with these notes.

The state of South Carolina has become aggressive in challenging transactions involving inter-company notes due to a certain tax case decided last year, and assessed the Company for back taxes, interest, and penalties on this inter-company interest. Our facts are not the same as in the case recently decided, and the Company believes that its position has good merit. However, in accordance with accounting guidelines, there is not enough precedents available to prevent the establishment of a special tax reserve at this time.

Therefore, there was a special $1.5 million charge to income taxes during the quarter. This charge amounted to a reduction of $0.09 per share from our reported earnings per share. If the Company does not prevail in this issue, it believes that the net income effect going forward will be approximately $200,000 per year in increased income taxes.

For the nine months ended December 31, 2007, net income was $28.6 million or $1.63 per share, compared to $26.9 million or $1.45 per share for the prior-year nine-month period. This represented a 6.5% and a 12.8% increase in net earnings and earnings per share for the two year-to-date periods. The tax adjustment also had a $0.09 per share impact on the year-to-date earnings per share as well.

The higher increase in diluted earnings per share in the net income was due to the accretive effect of 803,000 shares repurchased during the prior 12-month period for an aggregate purchase price of $25.8 million. The Company repurchased 690,000 shares of its common stock for an aggregate purchase price of $21.3 million in the second quarter ended September 30, 2007.

While the Company did not repurchase shares during this third fiscal quarter, we continue to believe that our stock repurchase program is an excellent use of excess cash when available, especially at our current stock price levels.

Our gross loans amounted to $663.2 million at December 31, 2007, an 18.3% increase over the $560.7 million outstanding at December 31, 2006, and a 31.1% increase over the $505 million since the beginning of the fiscal year.

We are very pleased with the loan demand that we experienced during our busy holiday season, as this period so important to our overall annual growth. We are also pleased that our growth is not concentrated in any specific area. 10 of the 11 states where we have offices had year-over-year growth rates exceeding 10%, with five of them exceeding a 20% growth rate.

Additionally, the continued demand for our products is best indicated by the fact that of the 18.3% increase in year-over-year gross loans, approximately 14% is due to increases in the number of loans outstanding and approximately 4% due to increase in the average loan balances.

Acquisitions have been a less significant factor in our current-year growth as in that of the prior year. However, it remains an important part of our ongoing growth strategy. During the first nine months of the fiscal year, the Company has acquired approximately 8,000 accounts and $4.1 million in loan balances at 21 separate office transactions. Of the 21 offices acquired, 13 remain open, and the other eight were consolidated into existing locations.

During the nine months ended December 31, 2006, the Company purchased approximately 42,000 accounts and $20.2 million in loan balances in 84 offices. Of those, 45 remained open.

The difference between the $1.1 million purchased during the current quarter compared to the $7.5 million during the prior year third quarter, primarily due to the Titan acquisition, is the primary reason that our year-over-year growth rate dropped from 21.5% at the end of September to 18.3% at the end of the most recent quarter.

Total revenue for the quarter amounted to $88 million, which was an 18.8% increase over the $74.1 million during the third quarter of the prior fiscal year. This corresponds to an 18.2% increase in average net loans when comparing the two quarterly periods. Revenues from the 640 offices that were opened throughout both periods increased by 11%.

Delinquencies and chargeoffs had similar increases during the third quarter that we experienced during the first two quarters of the fiscal year. Accounts that were 61 days or more past due increased from 2.6% to 2.7% on a recency basis and from 3.7% to 3.9% on a contractual basis when comparing the two quarter-end statistics.

Net charge-offs as a percentage of average net loans increased from 15.6% annualized during the prior year third quarter to 16.7% annualized during the most recent quarter. The 1.1% increase in quarter over prior year corresponding quarter is a continuation of the trend that we saw during the first two quarters of the fiscal year.

While we had hoped to see this trend begin to level off during the current quarter, the 16.7% is not too far out of line with the historical loss ratios. Net charge-offs to average loans were 17.4%, 15.9%, and 15.7%, all annualized, for the quarters ending December 31, 2005, 2004, and 2003, respectively.

Our general and administrative expenses amounted to $47.5 million during the third quarter, a 14.5% increase over the $41.5 million during the prior-year quarter. As a percentage of revenues, it was 53.9% during the current quarter compared to 55.9% during the prior-year quarter.

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 opened office decreased by 0.6% when comparing the two quarterly periods.

Highlights of our expansion in Mexico include the following. 14 offices have been opened during the first nine months of the fiscal year, giving us a total of 29 offices at quarter end. We now have approximately 24,600 accounts and approximately $10.4 million in gross loans. We had had total chargeoffs of approximately $210,000 so far this year or 5.4% of average net loans. Our 61-day delinquencies are 0.4% and 1% on a recency and contractual basis, respectively. We lost approximately $287,000 during the first nine months of the year, which we feel is excellent in a new and rapidly expanding market.

Finally, the Company's annualized returns on average assets of 8.3% and returns on equity of 17.1% continue their [excellent] historical trend during the first nine months of the year.

As far as our tax preparation season, we are off to what we feel is a pretty good start. We had a delay in the opening compared to last year, but we were right in line which we believe to -- should be -- have a very successful tax year.

At this point in time, I think any of us would be more than happy to answer any questions that you may have. Katie?

(OPERATOR INSTRUCTIONS) Rick Shane with Jefferies.

Thanks, Sandy, for taking my question. I apologize; I'm losing my voice a little bit here. You know, it's on the tape right now that President Bush is continuing to push through a stimulus program. Can you talk to us about what happened in 2001 the last time we got these tax refunds? How it impacted loan balances and how it impacted credit performance?

I don't specifically remember, but I know that in 2001 we had excellent operating performance. I don't know that we had a tremendous decrease in balances.

You know, our customers are getting a lot of money this time of year, regardless, because of their tax refunds and so forth. We experience this with our customer base, like I say, on an annual basis, probably more so than the general population because of the earned-income credit. So we are used to our customers receiving large one-time cash inflows.

As a matter-of-fact, it is generally the largest cash inflow from the net refunds during the entire year. Their average refunds, they amount to $3,500. So I don't believe that this particular special refund is going to have that much more of an impact than what we normally see on a quarterly basis during our fourth quarter.

Okay, you know, it is interesting that you say that. You look back and you don't even really remember the impact. I think that is probably the most telling it. It just wasn't that big a deal.

That could be an indication of my memory, also.

Okay. I won't chalk it off to that, but thank you very much. Appreciate your time.

Joe Gagan with Atlantic Equity.

How are you? I have a question. It said that your loan-loss provision increased 26% year-over-year. Is that correct?

The provision or the allowance, or --?

The provision for loan losses.

Okay, that is probably correct. That is correct.

Okay, and it increased 33% in the third calendar quarter; and I think like around 28% in the second calendar quarter. Right?

I would have to take your work for that.

Okay, yes, it did. So my question is that -- so you are showing better collections in the fourth quarter than the two previous quarters. Right? Most banks are reporting worse collections in the fourth calendar quarter than the two previous quarters. Right? Matter-of-fact, they're talking about significantly worse collections in the fourth quarter.

So how are you, is your Company, having better collection efforts in the fourth quarter when it seems like every other bank in America is having worse? Are your customers somehow getting better? What is going on with this?

Actually, I don't want to contradict what you are saying. But in reality, I think our biggest indicator of our collection efforts is our percent chargeoffs. That is the one most consistent thing that you can see.

If you look, and as we said in the call, our actual net charge-offs on a annualized basis are up 1.1% compared to the prior fiscal quarter. So we are showing some deterioration in our loss ratios.

Oh, I know you are. But the provision for loan losses is a big part of your expenses, right? So all I'm saying is that it really doesn't make sense to me why you are having, showing better collections when every other bank in America is showing worse? (multiple speakers)

Okay, let me rephrase that thing. I am glad you brought that up, because that is something that we have been trying to emphasize now for quite sometime. That we are not a bank and we are not a financial services company that is really associated with subprime mortgages. We have been disappointed to be considered as such during the last six months to a year.

Right.

And we have been extremely disappointed that our stock has reflected the anticipations that other financial services have done. It is nice that hopefully we can segregate ourselves from that, because we're dealing with an entirely different customer base.

Okay, so you are saying that your customer base, right? Which I think the figures are like 40% of them don't have checking accounts. So that customer base has got -- their personal financial situations has improved compared to the rest of Americans. Right?

I don't think they have improved, they just haven't gotten that much worse.

Oh, okay.

I mean our customers, unfortunately, live in very difficult economic circumstances all the time. They are coming to us for an average loan of $700 or $800. So they are not -- we believe they are not generally impacted by major economic trend changes that some other segments of the economy might be changed.

Okay. Then I want to get it straight on the delinquency rates. So you are saying that -- can you go over those again, please?

Sure, I can. What we report is our 61-day-plus delinquencies.

Right.

We report that on both a recency and a contractual basis. So a recency basis this year they were 2.7% versus 2.6% at the end of December of last year.

Okay.

On a contractual basis, they were 3.9% versus 3.7%.

Okay, so you aren't seeing -- right, okay. So you are presented to the public that your delinquency rate is really not going up at all in the fourth quarter this year compared to last year.

Well, we have a -- if you looked at our history for a long period of time, we maintain very level delinquency rates because we have very aggressive chargeoff policies. Once our accounts get to the point our operations -- or the managers and so forth believe they can't collect it, it is to their benefit to go ahead and charge those off. So we keep relatively stable delinquency rates.

Okay. Now one other question, the first guy was saying that -- asking what happened with, in '01, when President Bush gave the tax rebates. Right? Now, the tax rebates proposed right now are only for people who pay federal income taxes. Right? And that is generally speaking people that make over $40,000 a year. Right?

So what is on the table now, right? I just want to get a yes are no answer from you. What is on the table now would lead me to believe that your customers who as you say are in dire economic straits, they probably most of them make less than $40,000 a year. So what they are preparing proposing now is that those people will not receive one penny in rebates? Do you agree to that?

I can't even comment on that, because I don't know the specifics of the law. Certainly our average customer -- I mean, that is pretty much a cutoff from where -- I mean I would say a large percent of our customers make more than $40,000, and certainly a large percent make less than $40,000.

They do, all of our customers, generally all of our customers do pay income taxes, otherwise they wouldn't be coming in and doing tax returns with us. It just so happens through the earned-income credit quite often they receive more back than they paid in originally, because of the way the earned-income credit works.

Right, but I guess what I'm --.

(multiple speakers) question, but I can't answer that yes or no.

I guess what I'm saying is that the facts are -- is that people -- the facts are if you don't pay federal income taxes, what is proposed now, and that could change, is that you will not receive one penny of rebate.

Then it is estimated -- I have read things where it is estimated that if you don't make $40,000 a year you are really not paying a lot in federal income taxes. Right? So I guess the question is, do you expect your customers to get rebates back based on what you are looking at?

Based on what I know, I do not. Based on my current knowledge, I cannot answer that question. I do not know.

All right. That's it. Thank you.

Dennis Telzrow with Stephens Inc.

Good morning, Sandy and Mark, Kelly. Just a question. I assume this tax issue with South Carolina will take its time, given it is probably going to be in the courts. Or where does it sit right now as far as a challenge?

We have gotten the original assessment letter, and we're in the process of using our accountants to respond to that letter. Then we will let our tax accountants advise us as to the next steps as they take place.

Okay. Second question is, is there anything -- I know it is early in the legislative sessions on a state-by-state level. But is there any state that looks like it could be proposing or sponsoring legislation which would be positive for your product?

(inaudible) debating stuff.

The positive -- actually, I am not aware of anything positive or negative at this point in time.

Okay, thank you.

Okay?

Bill Dezellem with Tieton Capital.

Thank you. Good morning. We have a couple of questions. First of all, relative to the credit crunch that the American public basically above your customer has been experiencing, have you seen that bringing some of those folks and essentially new customers coming to you as they get kicked down the credit ladder? Or do you have any way of measuring that?

I do not believe that has been the case. But it would be very difficult for me to give a real accurate answer to that. I'm just looking around the room to some of the operations folks, and I don't really think that there is a massive trend in that direction at this point.

If you look one notch kind of above our customer, you are really looking at a larger consumer finance company that specializes in loans from say $3,000 to $10,000. Those guys are still in play. I don't see anybody -- lines marching into our office of folks that are used to slightly larger loans, coming to us at this point.

That's helpful. Then, secondarily, an area that we have not historically focused on is advertising expense. It grew, I believe, it was about 28% versus the year-ago Q3. Would you provide some perspective as to what is going on there, and why we are seeing such significant growth in advertising?

Sure. Most of our advertising expense surrounds our direct-mail program. You would expect it to be up quite a bit, anyway, because of the number of offices we opened and the increase in the number of accounts and so forth.

But in addition to that, we have tried some additional things this year above and beyond what we have done in the past, as some experiments and so forth. That contributed to the overall increase. I don't anticipate you would see that type of year-over-year growth on an ongoing basis.

Would you care to comment on how those experiments developed for you?

We are in the process of analyzing that. Suffice it to say that we're very pleased with our growth season as it turned out. But like I say, we have not gotten all the data back to determine which of our strategies were more beneficial.

Thank you. Then one additional question. You had mentioned the tax preparation process that you -- or service that you provide for your customers. But if we understand correctly, the refund acceleration loans, I think is what they are called, you do not do those.

Would you please share with us why that is the case and if you are considering adding that as an additional way to grow the business?

Yes, they are called refund anticipation loans. We do offer those through a third-party bank. There are just a few banks in the country that offer that product. It requires a great deal of systems to interact between the service bureaus and the IRS to get certain key indicators, whether or not to anticipate these refunds being paid. We do not have the sophisticated systems to offer that product, and we have a very good relationship with those third-party banks.

Great, thank you.

(OPERATOR INSTRUCTIONS) Henry Coffey with Ferris, Baker Watts.

Yes, good morning, everyone. Great quarter, obviously. The higher revenue growth that you're seeing, except to point to the different states, can you drill a little deeper and give us some sense of why certain states are growing so well, and why revenue is actually growing faster than loan balance has increased?

Well, I think your revenue growth is just only slightly greater than our average net loan growth. I think that is the primary indicator, Henry.

As far as states are concerned, hold on one second; let's look at these states. You know, our states that are growing at the highest percentages are those newer states, Illinois, Missouri, Louisiana.

Georgia had an extremely good year, but a lot of that was a result of some of those Titan offices that once we got into place, they were in a position to grow a lot better. There is no real magic that I -- I really can't -- I don't know. I don't know how to explain.

You know, it is not new customers coming in that used to be bankable customers. It is --?

As we have said previously, we don't really believe that there has been a whole -- I mean, it certainly could be some of that. But that is not what is driving our success at this point in time.

Do you have any way of tracking? Are you picking up a lot of payday loan customers that are looking for a better deal?

The only way we see payday loan customers are generally through bankruptcy, because payday loan companies are not reporting to the credit bureau, as you know. Unless the customer volunteers that information -- which they don't always do -- then we do not know whether or not we have an overlap with that customer.

The last time if I remember correctly when they started sort of changing the tax rebate equation, it occurred early in the tax season. It did result in some earlier repayments of loans, and then you had the adoption of the online product. Have you had any sense of how your loan payments are coming in this year versus past periods?

Over the last few years, as the systems have become better and people have gotten their refunds quicker, they have in fact accelerated. As you know, we have anywhere from a 10% to 12% decrease --

Right, right.

(multiple speakers) loan balances. That used to take place fairly -- it really began towards the latter part of January and went through March. And now we are seeing that a great deal of it takes place in January and even more so in February.

We actually the last couple years have grown in March, so that certainly has accelerated that process. But overall, the decline between December and March has been very consistent.

Have you had any insight into how this tax season is working versus others? It is pretty early, I know.

I will let Mark address that.

Henry, the big difference this year is that the tax filing season began on the 14th. The IRS was not going to accept returns earlier than that. Last year, we actually began the filing season -- the IRS accepted returns at the 2nd of the month. And the IRS was allowing tax returns to be prepared based on a last pay stub, which they have outlawed this year.

So what everybody is waiting on this year is the receipt of their W-2s. So although our tax numbers this year are reasonably equated to last year, what we are seeing is some delay from the beginning. Nobody filed anything until the 14th.

So that should help loan balances a little bit?

No. I mean, in the quarter all of these folks are going to file, regardless whether it is before or -- they are all going to file.

Giants or Patriots, Sandy?

I will leave that alone.

Thank you very much. Great quarter.

Okay.

Randy Bassett with Value Investments.

Good morning, guys. You indicated that there were no repurchases in the third quarter of your stock. I think the average you were paying for the first two quarters was in about the $30 a share range. I wonder if you could comment on why you haven't been buying stock at these much lower prices and what your plans are for the fourth quarter.

Based on where we are today, I think we made a serious mistake. But that being said, we generally do not purchase stock during our third quarter because that is the time that we're making a tremendous amount of loans. We need to make sure we have plenty of cash available for our loans. And in the event that acquisition opportunities present themselves, then we are in a position to close those on a very timely basis.

So, that being said, that is kind of an internal policy that we have followed. While we ended up the year with quite a bit of excess cash, we did not know how that was going to turn out until the latter part of the third quarter. We figured that we could restart the process as soon as this blackout period in this quarterly period is over.

So I would anticipate repurchasing going forward, but it appears that it would be at a higher price.

Thanks very much.

(OPERATOR INSTRUCTIONS) Bill Dezellem with Tieton Capital Management.

Thank you. A couple of follow-up questions. I believe, Sandy, in your opening remarks you made reference to fewer acquisitions than you have historically had. Would you share your perspective as to why that has been the case?

I think the biggest reason is we had such a tremendous successful year last year on acquisitions through the Titan acquisition. And those types of opportunities don't present themselves very often.

You know, we still had -- we were still active in the acquisition market as we indicated. But what determines the acquisitions that we make are the opportunities that present themselves.

As we have stated in the past, we do not target companies. We just can't pay enough to purchase these companies from independent operators that are running successfully and happy and so forth. They have to make a determination and come to a conclusion that they want to get out of the business, whether they are ready to retire, or they are having problems with their own financing, or whatever their reason. At that point, they will generally approach us as an exit strategy, and they know that we will give them a fair price and take care of their employees and so forth.

So it is a matter of when the opportunities present themselves.

It is also very rare that we do an acquisition in the third or growing quarter of the year. Because balances become inflated and you wind up paying premiums on loans that we know are going to run off in the first three months of the new calendar year.

It was an unusual opportunity last year in the third quarter when Titan presented itself, because of the nature of that sale through the bankruptcy trustee. But there was no setting the timing; it was just what it was. We were either going to act or not.

But under normal circumstances, the third quarter is not the appropriate time to make acquisitions.

That is helpful. Thank you. Then, I believe in the opening remarks, there was a comment that Mexico -- that the chargeoff rate there was 5.4%. Would it be correct that that is comparable to the 15.0% number for the full Company for the first nine months of the year? Or am I mixing apples and oranges?

That is calculated the exact same way. However, it is not really fair to make that comparison because all of these offices in Mexico are new offices that are growing; and you have new accounts and so forth. Although we do have some fairly mature offices. So we believe in the long term we will see better loss ratios in Mexico than we experience in the States.

So given that the newer offices do have better chargeoff rates, if we look at the oldest offices that you do have in Mexico, which we realize they are not that old, but what would you say the typical chargeoff rate is for those more mature offices?

I can't answer that question, but it will be substantially lower than what we are experiencing in a corresponding office in the States.

That is helpful. Thank you again.

Jim Moncrief with Southport.

Great quarter, guys.

Thank you.

The minimum wage laws, the minimum wage, I guess, was increased this year and is scheduled to increase (technical difficulty) couple years. It seems to me that (technical difficulty) your customers (technical difficulty) looked at that at all?

We have not. We have not tried to analyze that. That has taken periodically over the years, and it is just kind of absorbed into things. No, I don't know that we could quantify any type of expectation there.

Okay, and all your stores -- all the locations (technical difficulty) offer the tax service?

All of them except a few where lease agreements prohibit us doing so because maybe an H&R Block has an exclusive type arrangement.

Okay, great. Thanks.

Thank you. With no additional questions in our queue, I would like to thank you for your presentation. Before concluding this afternoon's teleconference, the Corporation has asked again to 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 the 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, amounts of revenues that may be recognized by the Corporation; changes in current revenue and expected 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 quarterly teleconference.