World Acceptance Corp (WRLD) 2010 Q2 法說會逐字稿

Good morning and welcome to the World Acceptance Corporation sponsored second 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 statement. 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 Miranda, and welcome to the World Acceptance Corporation second quarter conference call. As Miranda said, I am 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. As is customary, I will 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 and am happy that the operational improvements that we experienced during our first fiscal quarter have generally continued into the second quarter. Demand for our loan products remained strong during the quarter and as expected, we have experienced some improvement in our loan losses.

Net income for the second quarter was $14.6 million or $0.89 per diluted share compared to $9.9 million or $0.60 per diluted share for the second quarter of fiscal 2009. This represents a 46.9% increase in net income and a 48.3% increase in net income per diluted share when comparing the two quarterly periods.

For the first six-months of the current fiscal year, net income was $29.2 million or $1.79 per diluted share, representing a 37.4% and 38.8% increase over net income and EPS respectively over the first two quarters of fiscal 2009.

Net income for the quarter ended September 30, 2008 was originally reported as $10.7 million or $0.65 per share and was subsequently restated due to a change in accounting principle for the company's convertible notes. Net income for the six months ended September 30, 2008 was originally reported as $22.7 million or $1.37 per share and was reduced by $1.4 million or $0.08 per share as a result of this accounting change.

Gross loans amounted to $754.8 million at September 30, 2009, a 13.18% increase over the $667.2 million outstanding at September 30, 2008, and a 12.5% increase since the beginning of the fiscal year. Additionally, this growth was fairly evenly distributed throughout the Company with 7 of our 11 states experiencing at least an 11% growth rate.

While acquisitions continue to be an important factor in our overall growth strategy, the Company has not made any significant purchases during the first two quarters of the fiscal year. [Two small offices] consisting of roughly 1,000 accounts and $841,000 in gross loans were purchased; both were merged into existing offices.

For comparison purposes, during the first two quarters of fiscal 2009, the Company acquired 7,300 accounts and $9.1 million in gross loan balances in 18 separate offices. Of the 18 offices acquired, 8 remained open and the other 10 were consolidated into existing locations.

As planned, we continued the expansion of our branch network during the second fiscal quarter at a much more moderate rate. We began fiscal 2010 with 944 offices and opened 23 and merged 1, giving us a total of 966 offices at September 30, 2009. Our plans, as we've previously stated, for fiscal 2010 are to open 30 offices in the US and 15 in Mexico, plus evaluate acquisitions as any opportunities may arise.

Total revenue for the quarter amounted to $104.2 million, which is a 13.6% increase over the $91.7 million during the second quarter of the prior fiscal year. This corresponds to a 13.6% increase in average net loans when comparing the two quarterly periods. Revenues from the 834 offices open throughout both quarterly periods increased by 9.2%.

Delinquencies and charge-offs remained stable during the second quarter in spite of the ongoing difficult economic environment. Accounts that were 61-plus days past due remained flat at 3.3% on a recency basis and increased slightly to 4.6% on a contractual basis when comparing the two quarter end statistics.

Net charge-offs as a percentage of average net loans decreased from 17% annualized during the prior year second quarter, to 16.2% annualized during the most recent quarter. The 16.2% is more in line with historical charge-off ratios for the second fiscal quarter. Charge-off ratios were 16.1% in September 2005 and 16.0% in September of 2003.

General and administrative expenses amounted to $51.8 million in the second fiscal quarter, a 7% increase over the $48.4 million in the same quarter the prior fiscal year. As a percentage of revenues, our G&A decreased from 52.7% during the second quarter of fiscal 2009 to 49.7% during the current quarter. Our G&A for average open office decreased by 0.5% when comparing the two fiscal quarters.

Our expense ratios have benefited from our more moderate office expanding during the current year. We have opened 23 new offices during the first six months of the fiscal year compared to 62 offices during the same period of fiscal 2009.

Highlights of our Mexican operation include the following; 65 offices were open at September 30, 2009; 2 offices were opened during the current quarter. We now have approximately 72,000 accounts and approximately $27.1 million in gross loans outstanding. This represents a 70.3% increase in accounts and a 40.1% increase in ledger over the trailing 12 months.

We had net charge-offs of approximately $654,000 during the quarter, or 14.7% of average net loans on an annualized basis, and our 61-day delinquencies are 4.7% and 5.8% on a recency and contractual basis. We lost approximately $68,000 during the second quarter, which we feel is still very good, given the large number of offices that opened during the last fiscal year. Most of our mature offices are doing very well and we expect the subsidiary to provide a positive contribution to our overall profits during the remaining part of the year.

The Company's annualized return on average assets was 10.3% and our average equity of 18.2% continued their excellent historical trend during the second quarter of fiscal 2010.

Finally I'd like to give you a brief update of the regulatory and legislative landscape, our greatest risk factor. 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 very little activity in resolving these discussions and there is no reason to believe that any proposed changes would result in our inability to operate profitably in these states. However, this is an ongoing challenge that we have successfully managed throughout our company's history.

At the federal level the proposed Consumer Financial Protection Agency, which has been passed out of the House Financial Services Committee recently, if passed could result in additional regulations on our and other financial services 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 that 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 associations; 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 a lot of other forms of credit.

At this point in time any of us will be more than happy to address any of your questions.

(Operator instructions) Our first question is from David Burtzloff with Stephens.

Great quarter. So, the loan demand was strong during the quarter; has that kind of stayed the same since quarter end -- in October?

Well, once again, we don't like to get into making any type of forward projections or guidance or whatever, but the 1st of October started a little bit on the slow basis but it did the same last year. It appears at the end of October that our loan growth will be ahead of where it was last year, but less than where it was two or three years ago. So we're still having some impact on the demand for new customers.

I think our new customers are more conservative as far as taking out new loans, but our loan volume for the second quarter was at 14% plus or minus was still pretty strong. So, we're still optimistic, but we're certainly seeing some of the same type of demand trends that we saw for the third quarter of last year. But it's kind of early to say. We just began dropping our mail for growth season and we have a lot of hopes.

Okay. And on the charge-off side, obviously they've come down nicely this quarter. Is that something that you kind of foresee being the case going forward as well or was there anything different in that number here?

You know, we've been optimistic on what charge-offs are going to be throughout the first two quarters and have said so at the beginning of each quarter and we don't believe that they will certainly get to or exceed prior year levels. There may be some improvement in the third quarter but it's just really difficult to say. We're not talking about real large percentage amounts here. So I would think that the trend that we've seen the first couple of quarters would not change dramatically in the near future.

Okay. And then finally, the credit in Mexico, at least on the delinquency side seems to have gotten worse. Did you say 4.7 and 5.8 on contractual?

I did.

That seems to be higher than where we have been. Is there anything different there?

Yes, as we said, we've struggled a little bit with our middle management down there. Mark Roland spent a week in Mexico just a couple of weeks ago and he's identified some issues that he is going to be addressing. There is a policy there that they don't charge-off accounts quite as quickly as they do in the US, so that would have an impact on the timing of delinquencies and so forth. But we still have some issues to address but we're extremely excited about the opportunities there and the amount of potential business there. Mark, can you add anything to that?

That's exactly what we see.

Your next question is from Henry Coffey with Sterne.

Let me add my congratulations; that was a great quarter. As you look at your growth opportunities I know people don't come walking into the offices with t-shirts on, but how many of your new customers are that higher quality, used to be bankable, but they've been squeezed too hard by the credit card company or they used to own a home but now they have to rent, I mean how many customers that are sort of walking in the store are high-end, used to be very, very bankable and now they're "going to be your best customers?" Can you get a sense of the profile of the new borrower?

If you'll recall, I believe it was last quarter we had done some kind of bad of the envelope surveying of some of our branches or actually all of them and compiled a good bit of kind of indirect evidence that indicated that yes, to some extent we are seeing some borrowers who may not have used the services of World Acceptance previously, but it was a very small number and I believe that that's exactly what we're seeing now. Certainly there are some individuals due to the capping of credit card balances or the elimination of access to credit cards that we may see during the course of the coming growth season, but I would not look at that as some enormous change in our demographic at all.

I also know, Mark, that you put a lot more -- you put a whole new level of sophisticated data mining into the company and then are using that principally right now for marketing. How do you think that impacts your marketing spend during the growth season?

Yes, we are doing a considerably larger amount of looking at prescreened, preapproved small loan direct mail. But even having said that, it still winds up on a quantity basis being probably a third or right around a third of the total mail quantity that we'll be sending out. So while it's a change, it's not a change dramatically over last year's level of prescreened, preapproved, however, we get better every time we mail that type of product by using the after-the-fact analysis of what applications are received and what their profile looked like so that we can refine that better. And yes, over time that will show as a reduction in our overall marketing expense with presumably the same or better results in terms of attracting qualified applicants.

And finally, on the regulatory front, Sandy, obviously it's something that you know how to manage because of the size of your staff. Is this pushing companies your way in terms of acquisition opportunities or is everybody just still on the sidelines?

Based on the opportunities that we've looked at this year, I wouldn't say there's a mass exodus in the industry at all. We've certainly had more opportunities than we've actually purchased this year, but we've been more conservative in those acquisitions because we wanted to make sure that we had adequate funding as we go into our growth season, which brings up another point.

You know, when we closed our loan, our bank line, when we extended it and renewed it back in July, there was a provision left in there for an accordion feature to allow us to expand that by up to $25 million without having to go back to the bank group and it appears that we've found banks that are interested in taking that and we hope to get that closed in the first of November. So we really don't have as many concerns about liquidity. Not that we weren't greatly concerned before, but we are less concerned now as we go through hopefully what will be a strong growth season.

Now it's normal to expect that you're not buying any new converts and you're not buying in your stock now, but when are you likely to start doing that again?

I would say we've really got to see how this growth season goes. As you know, our liquidity grows greatly in the fourth quarter. A lot depends on what happens to the stock price or the bond prices, but all of those strategies are continuously evaluated and it would certainly be the beginning of the fourth quarter before anything like that is done, unless something dramatic happens in the meantime.

Well congratulations on a great quarter and thank you for taking my questions.

Your next question is from Rick Shane with Jefferies.

Obviously the credit quality has improved. Are you seeing that as a function of gross charge-offs or are you seeing improvements on the recovery side as well?

That's primarily a reduction in the gross charge-offs. As we get larger, our recoveries also get larger because we charge-off a substantial amount of loans every year, so the base out there is that much greater. But I'm not looking at the numbers exactly, but I would not think that there's a big significant change in our percent recovery to our charge-off ration, so it's pretty much the same as it's been.

Great. And would you expect that as employment stabilizes that there could be improvement on the recovery side? It seems like you haven't seen that. What's the normal cycle; is there any cyclicality to that and what drives it?

Certainly our highest recovery period every year is in our March quarter. We do some things during the March quarter to advise recently charged off individuals that they have the ability to come in and often settle that for somewhat less than the face amount of the remaining debt. We do that because in the March quarter obviously our customers are probably at their best-off period due to tax refunds, earned income tax credits and the like. And so you're right, seasonality does play; the fourth quarter is always the highest, but without the numbers in front of me, I believe what we're seeing is an increase in recoveries that roughly is equivalent to the increase in gross balances year-over-year.

Your next question is from Dan Bandi with Integrity Asset Management.

Sandy, as credit seems to be normalizing a little bit here, any plans at all as we get towards the end of the year to reaccelerate branch growth?

The plan was the beginning of the year to reaccelerate branch growth but it would not be feasible to do so as we enter our busy season. Now, in Mexico where the goal has been to open 15, they will be opening more than they have had prior in the first six months. But as is normally our case, the fourth quarter of the fiscal year, Mark and myself and his Senior Vice Presidents get together, take a look at where we want to expand and I would anticipate us getting back close to the level of office growth that we had prior to this year. And as we said all along that this was a time to catch our breath and I think it turned out to be an appropriate time, given what's going on. But our long-term plans haven't changed.

Okay. Can you maybe give a little more color on your comment in the press release, while we do not expect quarter-over-quarter net income gains in coming quarters to be as high as this quarter and then you go on to talk about some other things? I'm curious, when you're looking at that quarter-over-quarter net income gain - and I'm not really asking you to forecast next quarter for us, but when we look at next quarter and particularly the comparable for next quarter on a year-over-year basis, last year includes that debt extinguishment gain if I remember right. Are you speaking about growth year-over-year including that gain or excluding that gain?

I think, as you know, the company generally does not offer guidance and we feel like that's a pretty good policy, but having a 45% net income and 48% earnings per share growth on a quarter-over-quarter basis, we didn't want anybody to get ahead of themselves. And you hit right on; one of the most important facts is that last year we had, I believe - Kelly, you can correct me if I'm wrong. But I believe it was like $2 million in gross gains from the extinguishment of debt, there's $1.5 million in gains that we had from an FX option that was offset by somewhere around $800,000 in a swap loss, so these are pretty significant numbers that we don't anticipate having in the fourth quarter. But by the same token, we don't really mean for that statement to say that we're pessimistic about our outlook.

Okay. Because I'm just thinking on a very broad basis, if you assume, and again, I'm not putting words in your mouth, but if you assume that credit normalizes back to historical levels as it has in the previous two quarters as you go out to the next two quarters and some form of loan growth continues at a reasonable pace and you keep expenses under control, if you don't reaccelerate branch growth, you would somewhat be hard pressed not to turn in some pretty solid earnings growth as the year goes on, excluding those items.

Well, we are certainly benefiting, and once again, I'm not trying to take away anything from this quarter, we're certainly benefiting from the improvement in our G&A margins as a result of the moderate growth that we've had. So that benefit is going to continue into the third and fourth quarter. And then when we start accelerating that office growth next year, then we'll have those first time losses in new offices to absorb, but it will be done on a bigger base. So, I'm still extremely optimistic.

And could you also just talk a little bit about your personnel expense line which was actually down sequentially, it looks like maybe there's some seasonality there from Q1 to Q2, but could you just talk a little bit about why that personnel expense was down sequentially?

Bear with me a minute. I think you caught me a little bit off guard. There's no real reason from a sequential basis that it should be down unless maybe it was the timing of some bonus payments to the managers that are paid on a monthly basis. And probably one other item that was fairly significant is we historically are pretty conservative in our accrual for our medical benefits and it appeared at the end of the quarter that we were over-accrued and so we had a reversal of somewhere close to $1 million, but it wasn't any type of major onetime type of item, but it just was the timing of recognizing that INBR on our benefits program. Certainly we hadn't had any reduction in pay. As far as employees are concerned, everybody has basically increases as appropriate, as usual and we just hadn't grown as much. I'm kind of babbling, but I hope that kind of addresses some of the item.

Because it was down I think it was $36.3 million last quarter and it was $33.9 this quarter. I was just curious if anything changed and I was afraid maybe you clawed back Mark's compensation or something for the last few years.

Well you know, we discussed it but he didn't go along with it.

Well thanks Sandy and great quarter, appreciate it.

(Operator instructions)

There doesn't appear to be anymore questions. We appreciate you all joining us today on this conference call and look forward to talking with you in the future. Thank you.

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

Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include changes in 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.