World Acceptance Corp (WRLD) 2010 Q1 法說會逐字稿

Good morning and welcome to the World Acceptance Corporation's sponsored first-quarter press release conference call. At this time, all participants have been placed on 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 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.

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

Thank you, James, and welcome to the World Acceptance Corporation first quarter conference call. As he 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 will be happy to answer any questions.

I am once again very pleased with our quarterly financial performance, especially considering the ongoing economic difficulties that the country faces. We have seen an increase in demand for our loan products during the quarter, and as we have previously indicated, have experienced some improvement in our loan losses.

Net income for the first quarter was $14.6 million or $0.90 per diluted share compared to $11.3 million or $0.68 per diluted share for the first quarter of fiscal 2009. This represents a 29% increase in net income and a 32.4% increase in net income per diluted share when comparing those two quarterly periods.

In accordance with FASB Staff Position App. 2, accounting for convertible debt instrument, the prior year results have been restated to reflect an increase in interest expense and a reduction in income taxes. The impact of this restatement on the first quarter of last year amounted to a decrease of $709,000 in net income or $0.04 per diluted share, and the impact of this accounting change during the current quarter amounted to a decrease of $642,000 in net earnings or $0.04 per diluted share.

Additionally, our current quarterly results benefited from a $2.4 million pretax gain from the early repayment of $10 million face amount of our convertible bonds. This resulted in an increase of $1.5 million in net earnings, or $0.09 per diluted share during the current quarter.

Gross loans amount to $726 million at June the 30th, 2009, a 14.8% increase over the $632.7 million outstanding at June the 30th, 2008, an 8.2% increase since the beginning of the fiscal year. The increase in loan demand is reflected in a 20.8% increase in loans to new borrowers when comparing the two quarterly periods.

Addition to this growth was fairly evenly distributed throughout the Company with 9 of our 11 states experiencing at least 8% growth and 7 of the 11 states exceeding a 12% growth rate.

While acquisitions continue to be an important factor in our overall growth strategy, the Company did not make any significant purchases during the first fiscal quarter. One small office consisting of 358 accounts and $537,000 in gross loans was purchased, which was merged into an existing office.

For comparison purposes, during the first quarter of fiscal 2009, the Company acquired 4,375 accounts and $7.1 million in gross loan balances in 11 separate offices. Of the 11 offices, 7 remained open and 4 were consolidated into existing locations.

As planned, we continued the expansion of our branch network during the first fiscal quarter at a much more moderate rate. We began fiscal 2010 with 944 offices and opened 5, giving us a total of 949 offices at June the 30th, 2009. Our plans for fiscal 2010 are to open 30 offices in the U.S. and 15 in Mexico, plus evaluate any acquisitions as opportunities may arise.

Total revenue for the quarter amounted to $100.2 million, which is a 13.4% increase over the $88.4 million during the first quarter of the prior fiscal year. This corresponds to a 13.4% increase in average net loans when comparing the two quarterly periods. Revenues from the 835 offices open throughout both quarterly periods increased by 8.7%.

Delinquencies and charge-offs showed signs of improvement during the first quarter in spite of the ongoing difficult economic environment. Accounts that were 61 days or more past due decreased slightly from 2.9% to 2.8% on a recency basis and remained flat at 4% on a contractual basis when comparing the two quarter end statistics.

Net charge-offs as a percentage of average net loans decreased from 14.5% on an annualized basis during the prior year quarter to 13.8% annualized during the most recent quarter. The 13.8% is more in line with historical charge-off ratios for the first fiscal quarter. For instance, charge-off ratios were 13.9% in June of '05, 13.4% in June of '03, and 13.5% in June of '02.

General and administrative expenses amounted to $53.3 million in the first fiscal quarter, a 9.3% increase over the $48.8 million in the same quarter the prior fiscal year. As a percentage of revenues, our G&A decreased from 55.2% during the first quarter of fiscal 2009 to 53.2% during the current quarter. Our G&A for average open office decreased by 1.5% when comparing the two fiscal quarters.

Highlights of our expansion into Mexico include the following: 63 offices were open at June the 30th, 2009. No offices were opened during the current quarter. We now have approximately 66,000 accounts and approximately $26.1 million in gross loans outstanding. This represents a 74.3% increase in accounts and a 39.4% increase in ledger over the trailing 12 months.

We had net charge-offs of approximately $477,000 during the quarter, or 12.5% of average net loans on an annualized basis, and our 61-day delinquencies are 3.3% and 4.1% on a recency and contractual basis respectively. We have lost approximately $211,000 during the first quarter, which we feel is very good given the large number of new offices that have been opened during the last six months. Most of our mature offices are doing very well and we expect this subsidiary to provide a positive contribution to our overall profits during the current year.

The Company's annualized return on average assets was 10.8%, and an on-average equity of 19.2% continues our excellent historical trends during the first quarter of fiscal 2010.

As we have stated on many occasions, the primary risk factor facing our Company is of a regulatory and legislative nature. Historically this risk has been primarily limited to the state level, but during the past year has become a concern at the federal level as well. Currently there are discussions in two states, Illinois and New Mexico, regarding possible changes to the specific laws under which we operate. At this time there is no reason to believe that any proposed changes would result in our inability to operate profitably in those states. However, this is an ongoing challenge that we have successfully managed throughout our Company's history.

At the federal level there are several proposed bills that are pending in both the House and Senate calling for national rate caps. At the present time there does not appear to be sufficient support for these bills to move them out of committee. Additionally, the proposed Consumer Financial Protection Agency could result in additional regulation on our and other financial service industries. However, as currently proposed, there is specific language in the bill that would prohibit such an agency from establishing national usury rates.

Nonetheless, such an agency could impose other limitations on terms and product structure. It could have a negative impact on our ability to offer our products to the borrowers who need and deserve them. We will continue to work closely with our trade organizations, the American Financial Services Association and the National Installment Lenders Association to promote our industry and to educate legislators as to the consequences of such legislation, primarily the elimination of available credit to a large segment of the population that does not have access to more traditional forms of credit.

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

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question today from Rick Shane with Jefferies.

Hi guys. Thanks for taking my questions. A couple different things here. What was on an absolute dollar basis the gross loss number for the quarter? And the recoveries, if you have it, please.

The net charge-offs were $17.77 million, of which recoveries were $1.9 million.

Okay, perfect. What percentage of the loan volume for the quarter was renewals and refinances?

Combined renewals was 76.7%.

Okay. And just help us understand. I mean, credit was very good. It contravenes the trend that we've basically seen for any other consumer finance company out there at this point, and you have a big enough sample size in terms of your portfolio that it's hard to imagine that your customer base is that different from what's going on nationally. How do you -- when you look at this and sort of say, okay, great, we had a wonderful quarter in terms of credit, especially almost an extraordinary quarter in the context of everybody else, what do you think you guys are doing that's creating this differential?

Let me begin by saying our customer base is not generally the same as what you're seeing overall from a national standpoint, meaning credit cards and mortgage loans and so forth. Ours is kind of a specialized customer base that has difficulties all the time. But I don't know. Mark, could you add something to what --?

Maybe just a little bit. I mean, we did slow down a little bit on our office expansion which has given us the opportunity at the supervisory level to take a look at some of those branches that had struggled a bit with going from seasoned charge-offs over the past several months. I mean, if you look at individual branches, you see a wide disparity between the best and the worst. And when we have additional time to focus on those offices that have been struggling, those results are apparent.

The other thing is I think we've mentioned before when you see the trend in the general fuel cost and related costs of energy that dropped down significantly in the January/February/March/April timeframe, I mean, over time that being a significant portion of our customers' monthly budget, that helps. We've seen fuel prices trending back up recently, but I don't know how far that will go. But I think a lot of it is management, a lot of it is the fact that our customers perhaps are less stressed by fuel and energy prices, and that's about what we know about it.

Got it. And did you see any impact on a year-over-year basis with the lack of tax stimulus checks?

In terms of growth, I'm trying to remember what we had last year in the same period. We had a $500 individual rebate.

Yeah. I think it was even more than that. I want to say it was $1,700 or $1,800 a family.

Right.

I mean, again without stimulus checks this year, you would think that I guess that explains the loan growth.

Right. And the other thing was the -- this year the only recipients of any federal assistance in that form I believe were the Social Security dependent individuals who did receive a $500 check, and that certainly is a portion of our portfolio mix.

Okay. I've taken enough of your time. Thank you, guys.

We'll take our next question from John Rowan with Sidoti & Company.

Good morning. Maybe just a first question for I guess Kelly. Where was the one-time gain on the extinguishment of debt, and what was the gross before-tax number?

The gross on the extinguishment of debt was $2.4 million and it's included in other income.

Okay. Now, you guys restated the fiscal '09 numbers. Do you have the revised interest expense for September through March?

John, I don't have that with me. We are going to beef up or include some of those disclosures in the Q which will be filed within -- will be filed next week.

Okay. Well, do you just happen to have the fiscal 2009 number restated yet, or do you not have that either?

For the year it's $0.16, so it's roughly $0.04 a quarter.

$0.16 or $0.04 per quarter. Okay. Now Sandy, I know you mentioned it in your comments. Can you just go over the guidance on store count again for the year?

On store count?

Yes.

Yes. The intention is to open 30 offices in the U.S. and 15 in Mexico.

Okay.

And that's what we had -- that was our plan all along and that's what we had previously disclosed.

Okay. And just --?

John?

Yeah.

This is Kelly. The $0.16 that I gave you was the change for the FY '08. For FY '09 it's $0.26 because you also have to remember we bought back some of the debt in the third and fourth quarter, which is also going to have an impact.

Okay. So you --

I apologize. I picked up the wrong year.

No problem. But your -- so your -- that number was $3.69 for the year, and I would take $0.26 cents off of that to get to a restated --

$3.43.

$3.43, okay. And then also just again on credit, I don't want to spend too much time here, but the net charge-off rate was certainly below what I was looking for, and just can you give us an idea of how sustainable that is? I mean, obviously we've seen the rate of growth and that charge-off rate come down quite a bit. How sustainable do you think it is for the rest of the year?

It's very difficult to say, and I think one impact, if you look at the -- and Mark mentioned this just a minute ago. If you look at what has happened to gas prices, which we think really does have an impact, they seem to be drifting up over the last couple of months. And if that continues, then certainly I don't think that we'll see continuing reductions like we did this quarter. But bar that, there is no reason to believe at this point in time that we shouldn't be close to at least last year's levels, but that's about as much as we can say at this point.

Okay. Thank you very much.

Next we'll hear from David Burtzloff with Stephens, Incorporated.

Good morning, guys. Couple questions. Sandy, was the loan growth pretty even throughout the quarter, or how should we look at that, or was it more later in the quarter?

I mean, I think it was fairly even throughout the quarter. We rose from a year-over-year growth rate of 12% to a year-over-year growth rate of about 14.8% I believe. And it was -- as we mentioned, there was no real acquisitions, so all three months were fairly good from a growth standpoint.

Okay. And how -- are you seeing the same trends so far in July?

I mean, yeah. I mean, certainly it's up, but it's hard to say where it's gone up and down at any point. I don't know whether this -- I don't know if we are increasing our year-over-year growth rate or not or maintaining kind of where we are.

Okay. All right. And then advertising expense came in a little lower than where I was looking at, and lower than last year. Are you just -- is that just a timing issue or are you not advertising as much?

Actually we've changed our advertising strategy slightly and we're being more focused on who we're sending direct mail to. And because of that we haven't been able to reduce our advertising costs.

Okay. And Kelly, what should we look at for the tax rate for the year?

Approximately 37.5%.

Okay.

Give or take just a little bit.

Okay. Thank you very much.

Next we'll hear from Henry Coffey with Sterne, Agee.

Yeah, good morning, everyone. Obviously a great quarter so congratulations. When you look at some of the challenged branches that you've been working with, do they fall under any specific state, and are you continuing -- do you think you will continue to see sort of progressive improvements there?

No. They don't fall into any -- in a specific state. They're just -- it's the 80/20 rule. Almost at any given time, 20% of the -- or 80% of the problems are in 20% of the branches. And as long as we've got the time and the manpower to focus on those, then I would hope that we would continue to see improvement. However, in our industry and the industry in general, there is turnover in employees, and as managers leave for whatever reason, new challenges are presented. So it's not a cycle where you can just hit them all and be done. There is always a new one cropping up.

And if we were to interpret your comments correctly, Sandy, your basic view is that charge-offs stay about where they were last year or do we see continued improvement?

Well, at the end of the fiscal year we said we thought for sure we would definitely see a decrease in the increases on a year-over-year basis. As it turned out we ended up with an actual decrease from the last -- as you know, from 14.5% to 13.8%, and we were extremely pleased. I'm not sure that kind of improvement can continue, but certainly it should not be so far out the current range, kind of where we are right now. But it's really hard to tell, Henry.

And then there is always the issue of renewals and delinquencies. I know it's a relatively small part of the pie of, quote, delinquent loans that get renewed, but do you have those numbers?

I don't have the exact number, Henry. It's generally roughly about 2%.

But there certainly hasn't been change in policy or anything in that and of that nature.

And you were building reserves in the June quarter. Do you think you will continue with that process as you grow the book of business or is there an opportunity at some point as these charge-offs come down that you could actually release some reserves into earnings?

Well, we did not -- well, you say we've built reserves. On a percentage basis it's only -- it's a very minor difference from last quarter. It was up primarily because of the increase in the portfolio. But we were hesitant to increase the allowance last year as the losses rose because the model still seemed that they were getting kind of up again but not quite to the point that we needed to do that. By the same token, this model works within a range, and I would -- it would have to be a substantial improvement before we would go and change our models and actually take a reduction to the percent allowance outstanding.

Thank you all. Great quarter.

Thank you.

Andrew Shapiro with Lawndale Capital Management has our next question.

Hi, good morning. Legislatively you have been able to avoid the rate caps it sounds like, but given the high percentage of loans that are refinancing, two questions on this major portion of your business. On a loan that refinances based on the timing and the life of these refinance loans and your Rule of 78 interest method, is the loan principal balance on these loans rising? That's the first question. And the second is are either the interest rate method or the refinancing practices the target of prospective federal or state increased regulation or legislation?

I mean, we'll have to address the second one in just a minute to make sure I understand the question. But the first one, bear with me one second. Our average loan made this quarter was $1,060. The average loan made the same quarter of last year was $997, so these loans are not growing in size per se. I mean, that's a slight growth in the average loan amounts on an average loan made, but that's pretty indicative of what's taken place over a pretty long period of time.

And I'll try to answer your second question from the standpoint that the Rule of 78s approximates the interest method. I mean, there is some slight -- there is a slight increase in the amount that you recognize in the first two or three months, but it's not a substantial difference because of the way the interest (technical difficulty) all together. So even if there were for some reason a change from the Rule of 78s to the interest method, I do not think it would have a dramatic impact on our overall financials.

And if there was a substantial difference, and if you look in our disclosures and so forth, we acknowledge and we recognize earnings on the -- in that Rule of 78s cash basis, but it does approximate what you would get under the interest method. So even if they for some reason some legislative body chose to disallow the Rule of 78s or whatnot, then I think it certainly would not impact our ability to be profitable going forward. If that -- I hope I tried to answer your question.

You actually partially answered both. If I could just do a quick follow-up on each just to get a little bit more clarification.

Okay.

Regarding the state or federal regulation legislation, so the Rule of 78s may or may not be targeted, but if it is it's not a big deal. But with so much of your business refinancing prior loans, is that a practice that the feds or the states are looking at or wanting to increase regulation of?

It is certainly topic of conversation, especially in light of some discussions surrounding the payday lending industry where a person comes in and makes a loan and two weeks later pays a certain fee and takes out another loan and that practice continues. And during discussions with certain regulators and legislators in a couple of states, there has been suggestions to limit the number of refinancings.

But generally speaking in all of those conversations the legislators recognize the benefit to the Company in being able to re-access their available -- I'm sorry, these customers are able to benefit from their ability to re-access any available credit they may have. And generally the proposals being made are something that we can certainly live with on a very easy basis. So to come in and eliminate all renewals would certainly have a major impact on our Company, but it would also have a tremendous impact on the availability of credit, so I don't think anybody is headed in that direction.

Okay. And then on the partial answer or follow-up on question number one, you mentioned how the loan principal balance has risen but not -- not a lot but about 10% or so, maybe a little bit more. Is there a particularly larger increase in that overall average on your loans that refinance which you said are about 3/4 or so of your loans and that average is just kept down because the average initial loan on first-time borrowing is so low that that's keeping the average down?

Because I'm more interested or concerned about the average loan balance of the refinancing debtor to understand whether the refinancing debtor is becoming worse off in a vicious cycle of debt where they become a lower quality credit as time passes by, meaning your loan balance credit quality may be deteriorating and at a faster pace than maybe the reserve balances properly indicate.

Certainly. I mean, that's something that has been suggested, but that certainly is not what our history indicates. To answer your question directly, does our renewal customers generally get increases more than some others? Probably the answer to that is yes because after several loans, either from a renewal or paying us out in full and coming back, they demonstrate their ability and willingness to pay, and therefore we may be willing to increase our exposure to that given customer over time.

But if it's a problem customer who is having difficulty making payments, we are certainly not going to renew at a higher balance. If he doesn't have what we call equity in the loan, then we are certainly not going to renew him at all, and that's against Company policy. That's just throwing good money after bad so I don't --

The vast majority of our refinances are for same term, same balance as the prior loan.

Okay.

Loans that are increased go through a complete credit reinvestigation, new application, new credit bureau, new analysis of free income, job and residence verification and so on. So straight refinances by definition, the balance is going to remain the same. Loans increased go through a re-underwriting process.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) We'll hear from Bill Dezellem with Tieton Capital Management.

Thank you. A couple of questions. First of all, circling back to the branches that are challenged on the credit front, does it tend to be that those branches with newer managers would be the ones with credit challenges, or is there another common thread that would fit that 20% of the branches I think that Mark had mentioned?

Yeah. I think there is two common threads. One, certainly the younger or less-experienced managers have more difficulty in managing the whole process. It's a skill that's learned. But another problem is also in additional staffing in the branch. If we've got other turnover in the branch office with an empty seat and a 3.5 person office, then there is going to be some level of suffering of the overall work process. So I think the common thread that you would find is understaffing, new staffing, new manager, younger individuals that have not learned the total process of managing a World office.

Thank you. That is helpful. And then you had really highlighted last quarter, and specifically in your -- I don't know if it was the annual report or 10-K that you felt your charge-offs were peaking. What was it that you saw at that time that gave you the confidence to state that? And then clearly your assessment was accurate.

Well, it wasn't accurate exactly. I mean, it was very -- extremely difficult to be, quote, accurate at this, but we did see trends from the standpoint of the number of accounts, one that we call our slow file that's one day or more past due. As far as the delinquencies in all categories and so forth, there did appear to be some improvement as of the end of the fiscal year and as we got into the very first part of this quarter that at least led us to believe that we would not see those ongoing type increase in our charge-offs. Can you add anything to that, Mark?

I mean, it's relatively mathematic. I mean, accounts move from one stage of delinquency to the next, from mispaid to potential 30 to 30 to 60 to charge-off, and as you see reductions in those earlier levels of delinquency, that trend tends to move through. It's not an exact science but you do see a trend.

That's helpful, and if we've interpreted your comments correctly on the call here today, you are seeing a stabilization of those trends.

At least when you look at the last same quarter, Quarter 2, I think Sandy's comment is correct that you certainly wouldn't expect to see an increase over that prior year quarter level.

Right. Okay. May see an increase versus this quarter, but certainly nothing out of the realm of normal.

I think historically we do see an increase from Q1 to Q2. It's not as noticeable as the Q2 to Q3 movement, but yeah, it does go up a little bit.

That's helpful. And then in the press release you mentioned that you were sensing that some of your customers' other loan sources are now not available. And I don't mean to be facetious here, but clearly Bear Stearns and Lehman Brothers were not sources of capital for your customers. And so I'm essentially highlighting my ignorance here. What really are some of the other sources of capital that seem to be limited or have gone away?

Some of the other larger, more traditional consumer finance companies. If you think about the old days, the Household Financials and Beneficials and those guys, those were absorbed into various entities over time. Most recently the two I mentioned became HSBC. HSBC is one example of a 1,000-branch consumer financed branch network that closed its doors during the last -- or the -- I think either the end of the -- somewhere in February or March, in that range, and they closed them immediately. It wasn't a gradual exit.

In addition, some of our customers live in small towns with community banks and whatever that do do small loan financings, and I believe that the evidence is that some of those entities are also pulling back on moderate sized smaller consumer finance transactions, not making credit available in those smaller towns. And there are other examples of larger consumer finance companies that aren't there anymore. I think certainly Citi and their network of consumer finance branches has pulled back significantly, as well, and they've moved that entity into their bad bank or whatever they're referring to it as, their for sale asset pool.

That is helpful. And then the loan growth being so strong this quarter, I mean, I think the December quarter you had 8% loan growth. Last quarter, or the March quarter I should say, was up 13% and then jumping up to 20% this quarter. Are you feeling that the lack of credit or the credit availability disappearing as you've just highlighted, that that's what's driving the loan growth that you are experiencing here this quarter or are --

I think that's some of it, but the other portion is that there is -- the consumer confidence level has increased. People that were not borrowing money for things like minor home repairs or whatever, a small trip, a vacation, things like that, we saw in this last quarter that they were more willing to come back and do those kinds of transactions with more confidence.

Well, anytime you see a reduction in your charge-off ratios, that inadvertently or as a result kind of adds to your -- I mean, it can add to your growth.

That's helpful. Thank you both.

Our next question will come from Andrew Mathis with Mathis Capital Management.

Yeah, hi. Good morning, guys. One quick question. What was the gross loan volume during the quarter and what was it last year in the same quarter?

This year it was $553 million versus $460 million the prior year quarter.

Okay. Thank you very much.

Okay.

(OPERATOR INSTRUCTIONS)

There doesn't appear to be any more questions. We certainly appreciate your interest and participation in the call today. Thank you very much.

Thank you for your participation. Before concluding this morning'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 and 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 and Exchange Commission.

This concludes the World Acceptance Corporation quarterly teleconference.