World Acceptance Corp (WRLD) 2009 Q2 法說會逐字稿

Good morning and welcome to the World Acceptance Corporation sponsored second quarter press release conference call. This call is being recorded. 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 its other Officers.

Before we begin, the Corporation has requested that I make the following announcement. The comments made during the conference may contain certain forward-looking statements within the meaning of Section 27A of the Securities & Exchange Act that represent the Corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to 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 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 & Exchange Commission.

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

Thank you, Matt. Welcome to the World Acceptance Corporation's second quarter conference call. As Matt said, I'm Sandy McLean, the Company's Chairman and 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'll spend just a few minutes reviewing the quarterly results, and then we'll be happy to answer any questions.

I'm, once again, pleased by the quarterly financial performance, especially in light of the current economic environment. Being a financial institution during this period of financial turmoil produces numerous challenges. Although we've failed to meet certain analyst expectations, we are pleased with the continued expansion of our office network, the growth in our receivable portfolios, and the increase in our earnings.

Net income for the second quarter was at $10.7 million or $0.65 per diluted share compared to $10.5 million or $0.60 per diluted share for the second quarter of fiscal 2008. This represents a 1.9% increase in net income and an 8.3% increase in net income per diluted share when comparing the two quarterly periods.

For the six month period ended September 30th, 2008 net income was $22.7 million or $1.37 per share compared to $21.3 million or $1.20 per share for the prior year's six month period. This represented a 6.6% and a 14.2% increase in net income and diluted earnings per share, respectively.

The large difference between the net income and the per share increases is due to the large number of shares that the company repurchased during the current and prior fiscal year under its stock repurchase plan.

During fiscal 2008 the Company repurchased 1,375,000 shares for an aggregate purchase price of $41.9 million. During the most recent quarter the Company repurchased 182,700 shares for a total purchase price of $6.2 million.

Going forward the Company considers share repurchases to be an important part of its long-term strategy but will be cautious in its short-term repurchases to ensure the availability of adequate funding for its loan portfolio as we enter our busiest loan production period.

Gross loans amounted to $667.2 million at September 30th, 2008, a 16.8% increase over the $571.3 million outstanding at September 30th, 2007, an 11.3% increase since the beginning of the fiscal year. Demand for our loan products increased during the quarter as expected and represented a 15.6% increase over the prior year corresponding quarter.

As previously indicated, we believe our loan demand was reduced during the first quarter as a result of the many stimulus checks that were distributed during that period. Additionally, the growth is evenly distributed throughout the Company, with 10 of the 11 states having growth rates exceeding 10% and six of the 11 states exceeding a 15% growth rate.

Acquisitions continued to be an important factor in our overall growth during the first half of fiscal 2009 as the Company acquired 7,271 accounts and $9.1 million in gross loan balances in 18 separate office transactions. Of the 18 offices acquired, eight remained open and the rest were consolidated into existing locations.

For comparison purposes, during the first six months of fiscal 2008 the Company purchased 6,867 accounts and $3.1 million in gross loans at 17 offices. Of the 17, 12 offices remained open.

As expected, we continued the expansion of our branch network during the second fiscal quarter. We began fiscal 2009 with 838 offices. We opened 62 offices, acquired eight, and merged one into another office, giving us a total of 907 offices at September 30th.

Of the 62 de novo offices, 51 were in the United States and 11 were in Mexico. Our plans for the fiscal year are to open 70 offices in the U.S. and 25 in Mexico, plus evaluate acquisitions as opportunities arise.

Total revenue for the quarter amounted to $91.7 million, a 14.4% increase over the $80.2 million during the second quarter of the prior fiscal year. For the six months total revenue grew by 15% to $180 million compared to $156.6 million for the same period of fiscal 2008. This corresponds to the 16.3% and 16.4% increases in average net loans when comparing the two quarterly and six month periods, respectively. Revenues from the 730 offices opened throughout both quarterly periods increased by 10.8%.

Delinquencies and charge-offs remain a primary concern and Management focus. Accounts that were 61 days or more past due increased from 2.9% to 3.3% on a recency basis and from 4.2% to 4.5% on a contractual basis when comparing the two quarter end specifics. The impact of Hurricane Ike contributed to the rise in our delinquent accounts, but we expect these offices to return to normal in the near future.

The increase in our loss ratios that we disposed and discussed at the end of the first quarter continued into the second quarter, as well. Net charge-offs as a percentage of average net loans increased from 15.3% on an annualized basis during the prior year's second quarter to 17% annualized during the most recent quarter.

As with the first quarter, the 17% loss ratio is the highest charge-off percentage that the Company has ever experienced during a second fiscal quarter period. Previous high charge-off ratios for the second fiscal quarters were 16.1% in September of 2005, 15.4% in September 2004, and 16% in September of '03.

While we had hoped to see an improvement in our charge-off ratios during the quarter, the 17% is not so out of line with the Company's expectations given the current economic environment. Additionally, we do not believe that we will see reduced ratios for the remainder of the current fiscal year.

General and administrative expenses amounted to $48.4 million in the second fiscal quarter, a 15.4% increase over the $41.9 million in the same quarter of the prior fiscal year.

As a percentage of revenues they increased slightly to 52.7% during the current quarter from 52.3% for the prior period. For the six months our G&A increased by 15.5% to $97.2 million, from $84.1 million during the prior year. As a percent of revenues they also increased slightly to 53.9% from 53.7% over the two periods. Our G&A for average open office increased by 3.5% when comparing the two six-month periods.

Highlights of our expansion into Mexico include the following -- 46 offices were open at September 30th, an increase of eight during the current quarter, and 11 during the first six months of the fiscal year. We now have approximately 42,000 accounts and approximately $19.3 million in gross loans outstanding in Mexico. We had net charge-offs of approximately $489,000 during the quarter or 15.2% of average net loans on an annualized basis.

The unexpected increase in our net charge-offs during the quarter is due to a management issue resulting from our rapid expansion, primarily in the Monterrey region. Steps have been taken to relieve these issues, and we expect our charge-off ratios to return to more historical levels in the next couple of quarters.

Our 61-day delinquencies were 3.7% and 4.3% on a recency and contractual basis, respectively. During the first six months of the fiscal year the Mexican subsidiary lost approximately $225,000, which we believe is still reasonable in a rapidly expanding market.

Finally, the Company's annualized return on average assets of 9% and its annualized return on equity of 18.4% remained at excellent levels during the first six months of the fiscal year.

At this time, any of us will be more than happy to answer any of your questions.

(OPERATOR INSTRUCTIONS.)

We'll go first to David Burtzlaff with Stephens Inc.

Good morning, guys.

Good morning, David.

I have a couple of quick questions here. First is on -- in the SG&A expenses, the other category seemed to be up pretty large, especially over the last year and even over the first quarter. Is there something in there on why that increase was so large?

Yes, approximately $1 million of it is a reclass. We've changed our policy regarding mileage, and previously we were giving an auto allowance to our branch managers, and now we're actually reimbursing them for their mileage. And so in the prior year that would have been included in the personnel expense, where in the current year that's being included in other. So it's just a reclass between the two.

Okay.

If you noticed, the personnel expense went down.

Right. Okay. So the auto allowance used to be in personnel and now it's -- or the reimbursement is now in other?

Correct.

Okay. And then the other question is on the losses and charge-offs, Sandy, that 17% is that what -- is your -- are you saying that you don't expect it to come down from that level or are you just saying that you expect it to be higher than previous quarters, you know, on a year-over-year basis?

Whenever we talk about charge-offs we try to compare it to the comparable quarter of the prior year because of the seasonality.

Right.

We would actually expect if historical data stands going forward, we would actually expect our charge-off rates to be up in the third quarter and then down substantially into the fourth. But what we're looking at is what is the increase from the prior year levels.

Okay.

And it's been consistent in the first and second quarter. Hopefully, we'll see that increased amount begin to level off, but it's just difficult to say at what point that's going to take place.

Okay. All right. That's all I had. Thank you.

Okay.

We'll go next to Rick Shane with Jefferies & Company.

Thanks, guys. A couple of questions here. What was on a dollar basis the net charge-off number? And could you actually give us the gross charge-offs and the recoveries for the quarter at this point, as well?

The net charge-offs for the quarter were $20.488 million, and the recoveries were $1,627,000 which would mean, obviously, the gross net charge-offs would be $22,115,000.

Terrific. Thank you very much. Let's see, the last question, my last question was addressed -- I mean I guess given what we're -- oh, here's my other question -- what was the percentage of loans that were refinanced or renewed during the quarter, what was that ratio?

Oh, it's pretty consistent. Renewals were -- combined it was, let's see, 74.3%, which was exactly the same as last year.

Okay. Great. Are you seeing anything different? I mean, obviously, we've been through a pretty traumatic time economically, and it strikes me that your consumer or your customer may or may not be more vulnerable to that, that that's another issue, but probably experiences this much more quickly. The rise in fuel prices probably impacted them a lot faster than a higher tier customer and the decline in fuel prices.

Are you seeing any behaviors changes, recently? When we talk to companies we've seen, I mean we've heard commentary that August and September really turned sort of horrific. Have -- did you see the same thing within your own portfolio? And have you seen any sort of behavioral shifts even in October?

I would, you know, given -- we've been seeing pretty consistent trends through the first and second quarter. I don't believe, I mean given that it's -- our increase in charge-off ratios for the first quarter was 1.8% from the prior year first quarter, and it's 1.7% increase for the second quarter versus the prior year's second quarter.

It's early, too early to tell what's going to happen in the third quarter, but if you look at just gross charge-offs through today versus last year, they're up but they're not quite as up as much as that, but that certainly doesn't mean that it's going to change the trend.

You said that you think -- thought maybe our customers would be impacted earlier. I don't know that I agree with that, because our customers, you know, as we've said numerous times, live in difficult economic times all the time. And we have believed and we've said in the past that generally make -- overall macroeconomic trends don't necessarily affect us as much as they do other customers.

However, the nature of what we're seeing now with the increase in gas and so forth, it does have a serious impact on our customers because it affects their disposable income. And, hopefully, as we see gas prices reduce then hopefully we'll see a benefit from that, but it's early, too early to say.

Great. Thank you very much.

And we'll go next to Dan Bandi with Integrity Asset Management.

Oh, thank you, and thanks for taking my questions, guys. And, first, let me say, Sandy, as you pointed out in the beginning, I'll reiterate that it's a nice looking quarter in a pretty tough environment for all financials, to put in the returns that you did is something to be commended for.

And let me just ask you, in terms of the charge-offs, are you seeing any difference in the geographic, you know, within your markets of the charge-offs, I mean given some of the markets in Texas which tend to have stronger economies, are you seeing better charge-off numbers there relative to anywhere else?

What we're -- what is really baffling to us to a certain extent is that we have more than half of our offices are running better than standard in all areas, so it's isolated offices that are causing us the problem. You know, those long-term managers are really not having a problem during these -- this period of time. But these -- Mark, can you add anything to this as far as -- I don't really believe it's any geographical concentration, at all?

If you look at that 1.7% quarter over quarter net charge-off increase, and you took it down to the state level, really almost nothing would stick out with the exception of potentially Louisiana and New Mexico, and we have had senior level managerial changes there, just kind of regrouping forces. Those are both smaller states for us in terms of number of offices, number of employees, number of customers and assets employed.

But those are really the only two areas that I would say would stick out a tiny bit from that general trend of up 1.7%. The remainder are kind of evenly distributed of that amount.

And when your managers are out there talking to the folks, as they're not paying, are you getting any change in the reason that they're not paying? I know for awhile the up tick seemed like it was bankruptcy related, are you getting a little bit of a different answer this time on why they're not paying?

You know, I don't -- I talk to a lot of customers, typically resulting from customer service related kind of issues, and but I'm not seeing anything different. Our customers always will have difficulties in making their paycheck stretch across all of their obligations. So the issue is always the same, there isn't enough money to go around, and our customers have historically had that problem.

It's the manner in which we deal with those customers during difficult times for them that sets us apart from other small loan consumer finance companies, and to some extent I guess maybe I'm not doing as well of a job communicating that strategy to some of our newer managers as perhaps we've done in the past. We're bigger. But the customers are having the exact same problem that they've always had, there simply isn't enough money to cover all obligations, and that hasn't changed in this business for 40 years.

And from the, you know, from the standpoint of credit becoming harder to get for people and maybe somewhat of a follow-up on the previous person's question, but in terms of your typical customer profile, are you seeing any, maybe any creep down from folks who maybe necessarily wouldn't have been a World Acceptance customer but now you're getting some since maybe credit cards and home equity lines are being shut-off?

We don't have any direct evidence of that, at all, at this point, but we are entering our most busy period of time, where we'll receive the most applications for credit, make the most loans of any other time of the year.

And were that to happen, I suspect that we would be able to discern that from some of the credit score issues and other things that we see as we go through growth season. So perhaps in the -- during the fiscal fourth quarter, as we talk about what happened in the December quarter, we might have a better idea of that.

And just in terms of the quarter, itself, was there any oddities in terms of when the quarter ends or collection days, anything like that, that is not comparable to the year-ago period?

Every quarter is going to end on different scenarios, different days, different days of the week and whatever. And over the course of the year it all blends out. You could certainly point fingers here and there, but it's really not a useful exercise.

Okay. And then, and just, finally, I know you guys mentioned about maybe slowing down the repurchase to have money available, to make sure that you have money available to meet your loan demand. Can you guys just give us an update on the lending syndicate, the health of the people in there, and when it comes due, and just kind of what you're hearing from your lenders these days?

Yes, I'd be happy to address that. We have an excellent bank group, and we have an excellent relationship with that bank group. It's led by the Bank of Montreal, and it consists of JPMorgan Chase, Bank of America, Wells Fargo, Carolina First here in Greenville, and then Capital One.

So it's a good, you know, it's a good bank group, and I think we're very safe from our funding standpoint. And it just renewed a couple of months ago, I mean extended the maturity date, and I believe it's in September of '10 when it's -- when it matures.

Great. Hey, thanks a lot. And, again, a nice quarter in a tough environment.

Thank you, Dan.

(OPERATOR INSTRUCTIONS.)

We'll go to Bill Dezellem with Tieton Capital Management.

Thank you. A group of questions. First of all, following up on the last question relative to charge-offs, and you referenced that geographic really was not a determiner. However, I thought maybe we picked up that there might be an issue with the tenure of your branch managers. And so are you finding that your newer branch managers are the ones that are having the bigger charge-off challenges, if you were to make a broad generalization?

If you were going to make a broad generalization our longer term managers are certainly more adept at dealing with trying circumstances than our newer managers. But having said that, when we talked about the idea that the -- in general terms the states are reacting kind of the same as each other comparatively to the prior year same quarter, but what you do see is branches across town, across the street, or within limited geographic distances from one another perform very differently.

And, again, that is a management issue of us teaching and training World's philosophy as to how to deal with a past due customer in a trying circumstance. And for that reason we firmly believe that we've got some managerial challenges out there in training, more so than some kind of macroeconomic deal, when you can see branches, like I said, within miles of each other performing very differently in exactly the same circumstances.

With that in mind, given the rate of growth that you all have had, does that imply that there may be some logic to slowing the rate of growth and essentially catching up on that training, or are we not thinking about that correctly?

It's too early to tell. I mean we'll continue to expand our branch office network. It's just whether or not we'll do so next year at a 10% rate or an 11% or a 7%, it's really we'll be evaluating that in -- during the fourth quarter.

That's helpful. And then relative to Mexico, since no one asked -- has brought up the elephant in the room, it sounds like you had some employees or an employee that was stealing from you and --

No, that's not it, at all. You know, we now have, as I said, 46 branches in Mexico, and we've been there a little less, right at three years I think now. And we had zero employees in Mexico. So normally you'd expect a supervisor in the United States to have managed with us at least five years. Well, with -- and given that we need a supervisor in Mexico for every five or six offices, that means we need roughly seven or eight supervisors.

Well, we don't have any managers in Mexico that have five years' experience. The most we have are two years. So we really have a shortage of upper management there, but we, but they're doing a great job considering the timeframe that they've been there.

And one of the areas where we've struggled the most, as I said, was in Monterrey, and we have just recently promoted a vice president from Texas to the Monterrey area that I think is going to help that region significantly.

But there was no theft, no defalcation. The losses that we -- that Sandy discussed are normal credit losses. They are, however, concentrated in the Monterrey area. If you look at some of the other earlier areas that we entered, where we have more seasoned employees, where we entered a little more slowly in terms of number of offices, those branches continue to perform at excellent levels.

That's helpful. Thank you very much. And then circling back to the issue of trying to understand your customer and the dynamics that your customer is experiencing, I'm going to take another slice at it. Have you or do you measure the percentage of applications that are denied? And, if so, what trends have you seen within that? And is it even a question that's relevant and useful?

Over a long period of time we believe, although we do not track applications to made loans on a systemic, systematic basis, we know when we go in and count applications per se that the average is about 50%, maybe out of 100% of all applications we'll make between 40% and 50% of those loans. I am not hearing any evidence from the field that that dynamic has changed.

Although it would be normal to expect a manager in a tight economic circumstance to look more closely at the underwriting guidelines and perhaps be a little more cautious. So it wouldn't surprise me if they were down slightly, but to any great extent that would bother the general growth of the Company, I don't believe that that's the case.

And if I could add to that, Mark, we would actually expect to see that ratio of decline, decrease in the growth season because we'll be thinning out quite a bit of guaranteed offers through our solicitations. And, obviously, any guaranteed offer that results in an application will result in a loan.

That's helpful, also. And then relative to acquisitions, do you have any insight into whether the opportunities for acquisitions will be increasing given the more challenging environment or is it really the just out of the blue, the phone call, you make the decision that week it's done or it's not done and just wait for the next phone call, and really have no perspective at all on what level of pain your competitors, smaller competitors, might be feeling?

It's more of the second, the latter than the former. It's still a matter of a call out of the blue from a friend or a competitor in the business that we've known for a long time that's exiting for one reason or another, age, health, nobody to turn the business over to.

Anecdotally, in the last few weeks we have had a couple of very small instances where the credit squeeze may have played a part in the rationale for a seller to sell rather than to liquidate the business or stay in the business through some other fashion. But it's certainly not enough to indicate that there's a trend, and if there were one we would tell you.

But, again, a couple of very small instances of sellers selling ostensibly for the reason that their credit facility was becoming more expensive or more constrictive than what they were comfortable with.

Thank you. And then, finally, just for clarification, the seasonality with the December quarter, if we remember it correctly that you have a large amount of loans that you make, and as a result you take a very high loan provision which negatively impacts your earnings per share.

But then when we roll into the March quarter you end up actually having a high level of income off of those loans that are then repaid, but because you're not making a large relative amount of loans your provision is much lower and, therefore, the net income or earnings per share rebounds dramatically.

And so assuming that that's correct, basically the better your loaning season is, the worse your earnings would be in the December quarter, is that the correct way to be thinking about this?

I don't think I could have said it much better.

Great. Thank you.

(OPERATOR INSTRUCTIONS.)

We'll go to Joe Gagan with Atlantic Equity Research.

Yes, hi, how are you?

Good.

Just had a question as far as the planned growth in new offices. I guess through the first two quarters of the fiscal year you opened about 60, right? And, now, do you know what you plan on opening say over the next four quarters?

Over the next four -- I know what we'll open over the next two, and as I said we will evaluate during our fourth quarter our plans for fiscal 2010.

Okay. But I'm saying over this quarter and the next quarter, do you know what you're planning? I mean, like I said, why don't we say the next two quarters, do you know how many you're going to be opening?

We expect to have -- open 95 this year in total, and we have opened so far this year 62, so we should be opening somewhere around 30 offices.

Okay. And as far as the normal process you go through when somebody goes to get a loan, as far as I understood you do not do a credit check, you just find out whether they have a job or not? Is that accurate?

That is not accurate.

Okay. So you do do a credit check?

We do a very thorough application process. We verify income, we verify place of residence, and then if it gets to the point that we feel like we can make this loan we'll pull a credit bureau report. That's on all new customers, on every renewal we will not necessarily go through that entire process.

Okay. So you do pull their credit ratings?

That is correct.

Oh, you do? Okay. All right. Because I was under the understanding that like, say, 40% to 50% of your customers don't have checking accounts, right?

Well, that's correct.

Right.

I don't know exactly, but certainly a large percentage of them, yes.

Okay. And so I would assume that so given that data I would assume, you know, I would assume that most of them have pretty low credit ratings, beneath 620, right?

That's correct.

Okay. Yes, I'm just wondering given that I would assume that most of your customers work in construction, retail, or restaurant work, right? And given the unemployment numbers that were given out by the government, so I would assume that -- I'm just trying to figure out if you -- given the unemployment situation, and these people obviously probably don't have a lot of money saved in the bank, that I'm trying to like figure out how you can plan on maintaining the same amount of growth in offices when there's less people with jobs? Have you thought about that, at all, or?

Our customer base, as we've said, it lives in very difficult economic times all the time.

Right.

They're very good at -- if they get laid off at one place, it's not -- they can generally go find another job elsewhere. It's not like a middle income banker who gets laid off along with other thousands of people, and can go across the street and necessarily get another banking job. But there's certainly a lot of service related jobs available generally everywhere.

Right. So you're thinking that regardless of what happens in the economy or regardless of the unemployment figures, your business, it just simply won't matter?

Historically that has been the case. It certainly will have some impact but it generally does not have the type of impact that it does on other segments of the economy.

Okay. So but I just want to make sure I understand that right, so no matter how many -- what percentage of people do not have jobs and do not have paychecks coming in it really doesn't matter about the growth of your business?

Certainly at some point it would matter, but at this point I believe the unemployment statistics that are out are showing a level that isn't that far off what it was four years ago. And we had excellent growth in that period, as well.

Okay. Good. All right. Thank you very much.

Okay.

And with no other questions on the call, I'd like to turn the call back to Mr. McLean for any additional or closing comments.

I do not have any. I appreciate you all joining us today.

Thank you for your participation. Before concluding this morning's teleconference, the Corporation has asked again that I remind you that the comments made during this conference may contain forward-looking statements within the meaning of Section 27 of the Securities & Exchange Act that represent the Corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties.

Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include changes in the timing and amount of revenues that may be recognized by the 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 & Exchange Commission.

This concludes the World Acceptance Corporation quarterly teleconference. Thank you for your participation. Have a good day.