World Acceptance Corp (WRLD) 2012 Q1 法說會逐字稿

Good morning and welcome to the World Acceptance Corporation sponsored first quarter press release conference call. This call is being recorded. At this time all participants have been placed on 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 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, CEO. Please go ahead.

Thank you, Jennifer and welcome to the World Acceptance Corporation's fiscal 2012 first quarter conference call. As Jennifer said, I'm Sandy McLean and with me is Mark Roland, my President and Chief Operating Officer, Kelly Malson, our Chief Financial Officer, and other members of the management team. As is customary I will spend a few minutes reviewing the quarterly results, after which we will be happy to answer any questions.

To begin, I was pleased to be able to report what I thought was another very good quarter for the Company. Apparently the early indications are that the market doesn't necessarily feel the same way. But anyway our results during the first quarter of fiscal 2012 continued many of the positive trends we experienced during the latter quarters of fiscal 2010 and most of 2011.

We are glad to be able to report the ongoing expansion of our office network, excellent growth in our receivable portfolio, ongoing control of our operating expenses as well as maintaining our improved level of loan loss ratios.

Net income for our first fiscal quarter was $20.2 million or $1.27 per diluted share compared to $18.7 million or $1.14 per diluted share for the first quarter of fiscal 2011. This represents a 7.8% increase in net income and an 11.4% increase in net income per diluted share when comparing the two quarterly periods.

Gross loans amounted to $939 million at June 30, 2011, a 13.8% increase over the $824.9 million outstanding at June 30, 2010. And a 7.3% increase since the beginning of the fiscal year. This growth was fairly evenly distributed throughout the company with nine of our 12 states experiencing at least a 10% growth in gross loans.

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. Seven small offices consisting of approximately 1,500 accounts and $1.7 million in gross loans were purchased. Four of these were merged into existing offices. This is slightly greater than the acquisition activity during the first quarter of the prior year where we purchased four offices with a thousand accounts and approximately $857,000 in balances.

The expansion of our branch network during the first quarter was right in line with our projection. Once again, fiscal 2012 with 1,067 offices, opened 17 and purchased 3, giving us the total of 1,087 offices at June 30, 2011. Our plans for this fiscal 2012 are to open 63 offices in the United States and 10 in Mexico, plus evaluate acquisitions as the opportunities arise. Total revenue for the quarter amounted to $123.2 million which is an 11.6% increase over the $110 million during the first quarter of the prior fiscal year. Interest and fee income increased by 11.7% which is a little less than the 13.1% increase in average net loans when comparing the two quarterly periods.

However, the relationship is very similar to the results of the first quarter of fiscal 2011 when interest and fees increased by 12.9% and average net loans grew by 14.1%.

Revenues from the 987 offices open throughout both quarterly periods increased by 9%.

Delinquencies and charge-offs remained relatively flat during the first quarter of fiscal 2012. Accounts that were 61 days or more past due increased slightly from 2.5% to 2.6% on a recency basis and from 3.6% to 3.7% on a contractual basis in comparing the two quarter-end statistics.

Net charge-offs as a percentage of average net loans were flat at 12.5% annualized during the two first quarters. As previously indicated, we did not expect our charge-off ratios to continue to decline further on a year-over-year basis that we had seen in the prior eight quarters.

General and administrative expenses amounted to $64.5 million in the first quarter, a 12.6% increase over the $57.3 million in the same quarter of the prior fiscal year. As a percentage of revenues, our G&A increased from 51.9% during the first quarter of fiscal 2011 to 52.4% during the current quarter. Our G&A for average open office increased by 4.4% when comparing the two fiscal quarters.

We remain very excited with our expansion into Mexico. At June 20, 2011 we have 95 offices. Those offices were opened during the current quarter but we plan to open ten offices during the current fiscal year. We now have approximately 107,000 accounts and approximately $56 million in gross loans outstanding. This represents a 27% increase in accounts and a 52.5% increase in ledger from June 30, 2010 to June 30, 2011.

We had net charge-offs of approximately $1.4 million during the quarter or 16.3% of average net loans on an annualized basis and a 61-day delinquencies or 4.3% and 4.6% on a recency and contractual basis respectively. While we were marginally profitable in Mexico during the quarter, we expect this to grow substantially during the remainder of the fiscal year.

The Company's trailing 12-month return on average assets of 13.7% and return on average equity of 22.7% continues the excellent historical trend during the first quarter of fiscal 2012. On the political front the transfer of authority to the CFPB took place on the 21st and Richard Cordray has been nominated to become the first director. There is still a lot of uncertainty and controversy surrounding this new agency but we will continue to work through the American Financial Services Association and the National Installment Lenders Association to ensure the benefits of our installment lending industry are understood and recognized.

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

Thank you, sir. (Operator Instructions). And our first question comes from David Burtzlaff with Stephens.

Good morning, Sandy.

Hi David.

Hi. A few questions here. So, if I look at your -- loan balances were up this quarter. It looks like the revenue yield continues to decline a little bit year-over-year. I think that is probably due to mix changes in states and maybe in terms of larger loans or something. Am I correct there?

There are several things. Number one, as our first quarter for timing reasons and so forth is generally our yields are not as high as they are during the remainder of the year, but if you go back and look, you know as I said in 2012 our interest and fee income increased by 11.7% compared to average loans increased to 13.1%. And '11 is 12.9% versus 14.1%. And '10 it was 11.4% versus 13.4%. So, we have seen this trend during the first quarter for many years. But it is not just that.

In addition we know that our mix in loans for those loans over $1,500 is relative year-over-year from 26% of the total portfolio to 27.8%. So we did have some slight mix change but that is not necessarily a change in strategy at all. We are still a small loan company. And from a loan growth standpoint we grew our accounts by 9.1% and our averages [fell] up to about 4.7%. So that shows a little bit of a mix change there.

And finally our loan volume was a little bit off during the first quarter. If you take our actual loan volume divided by average gross loans during the quarter, our loan volume dropped from 78.8% last year to 77.5%. So that is another 1%. So we have a lot of minor things going on but we don't believe that this is any major trend to expect going forward, but we will see.

Okay. And then in terms of the loss provision, charge-offs are flat year-over-year. Provisions are up about 70 basis points. Is there anything there -- are you looking at maybe delinquencies are up or why is the provision up I guess?

Well the provisions will be a function of the general reserve. It is a percent basically of your gross loans. So as your gross loans grow you won't have that part there. And also it is a direct relationship to the charge-offs. So where there has been no change in methodology or the way we are looking at booking and so forth and as you know we do reserve 100% of all 90-day accounts and there could be some slight change in that. But there is no real change in what is going on from the allowance provision and charge-offs.

Okay. And then finally, you said you were marginally profitable in Mexico. Do you kind of have what that number is?

Sure do. Bear with me one second, I'm sorry. I should know that right off the bat. Our net income was $133,000 but that was slightly misstated from the standpoint. We had a tax correction that we had to make of $400,000. If you look just at Mexico, without that tax correction it would have been a little over $0.5 million versus a slight loss last year. So we are really excited about the direction we are going down there.

Okay. All right, thank you very much.

You are welcome.

We will go next to Sidoti & Company's John Rowan.

Good morning.

Hi John, how are you?

Good. With the share repurchases, obviously the diluted share count didn't come down as much as you repurchased. Is that a timing issue? Was there some type of dilution offset with the hedges or some other dilutive impact and maybe if you can answer it pretty simply just give me the diluted share count for the end of the quarter?

The diluted share count at the end of the quarter? Well, I mean diluted shares is a during-the-quarter thing. And so we may have bought 700,000 but it's timing of when it is bought during the quarter. Kelly, you want to add anything to that?

Yes. The majority of it was the timing at the end of the quarter, but our basic share count at the end of the quarter was approximately 15 million.

Okay. So the diluted share count can still come down into the second quarter just based on the timing of the repurchases this quarter?

Yes. Because John, when we are in the process of doing our stock buybacks, we block ourselves out at the beginning of the quarter until after an earnings release. And so there is always going to be a timing difference with our repurchases. They are generally going to happen in the second two months of a quarter.

And I assume there weren't any gap dilution numbers into the shares outstanding because of the hedges?

There was, from the standpoint of the convertible, from a GAAP EPS standpoint, once the average share price is above $62.42 we have to include some fractional shares in the diluted EPS numbers. And that rounded was approximately 27,600 shares. So it was a very immaterial number of shares.

Okay.

To follow up on that John, once the convertible is paid off and we do have to issue some shares, whatever that number is, those shares, the hedge will take care of the issuance of those shares so there won't be any impact from the convert at all going forward. From a share standpoint.

Any idea how much we can see the share count come down into the second quarter though, just based on the timing issue?

If I had to guess and you took a look at the difference between the 15.4 million of basic and the 15.9 million of diluted, there is about $0.5 million of dilution coming, I mean a half a million shares worth of dilution. So given the number of shares outstanding at the end of the quarter were 15, wasn't it 15 million? It should be somewhere around 15.5 million if that trend continues.

Okay. And how much is left under the repurchase?

A little over $3 million.

$3 million?

Okay. Any idea how the net charge-offs are trending in July?

We would anticipate, as we have been saying we can't continue the decreasing, but with gas continuing like it is, we anticipate a slight increase in charge-off ratios for the second quarter but it is too early to tell exactly what that would be.

Okay. And have you guys provided any comment back to the CFPB relating to the comment that they asked for on what constitutes a large or part that is spent in the installment loan space? Or are you doing all of that through your trade association?

We are currently doing all of that though our trade associations but we are very actively involved in that process.

Okay. And just one last question. Any concern about some of the pawn shops getting into the installment loan space? I know Easy Corp and Cash America are testing an installment loan product. Are you seeing any competition around from those companies?

I mean it is hard to quantify if that is the case and I'm not saying they can or can't do it. There is a whole lot difference the product, the underwriting and the collection process and so forth, it's a whole lot different from a pawn operation and/or a Payday type of operation. But at this point are we overly concerned as a free market? No, that is not an issue. But we could not quantify at this point how much of an impact this has.

Okay. Thank you very much.

We will move next to Henry Coffey with Sterne Agee.

Yes, good morning everyone. I think John was onto something in the earlier part of his call. When you convert the convert, like you said Kelly it is only about 25,000 shares. You have a very high sort of GAAP cost of funding there. How does that work its way through the numbers when your GAAP cost of funding is north of 7. Your borrowing cost is, I'm going to assume, closer to 5. Will [FB] EPS impact of reversing that convert when you do intend to do that this fall, assuming everything is frozen where it is today.

Yes. Assuming everything is frozen as of June 30, then that impact would be approximately $0.02 per share in the third and the fourth quarters.

So that $0.02 to the quarter, when we look at the other dynamics of the business, net charge-offs are at historic lows and expected to stay pretty stable. Is it fair to assume that EPS growth essentially equals loan growth plus that $0.02 or are there other levers that could push the numbers a little higher?

Wow. I mean historically we have experienced some -- the loan growth is a base of which we like to work, we believe if we can maintain flat charge-off ratios, that would encourage that EPS to be about the same. Hopefully, although we did not see that this first quarter, but normally we can see some leverage of our G&A to the overall revenue and normally we can expect some slight benefit there.

Plus we continue to deleverage because of the cash flows. I think normally some kind of interest savings there. And hopefully we can continue to repurchase shares. So there are a lot of factors that bleed into this, so hopefully time will tell. And that certainly wasn't the case in the first quarter where we (multiple speakers).

In the first quarter the reason that we didn't see that positive leveraging of overhead was because of store openings or what other factors?

It was not necessarily store openings because when our store openings matched pretty much the same as they were last year. I think last year we opened 18 and purchased two. This year we opened 17 and purchased three. It was a matter of a lot of different factors that took place. There is no one place that you can point to but certainly our travel cost is up a little bit because of our own reimbursement for gas and so forth, our stock-based compensation was up a little bit because of the impact of the share price. But there is no single factor.

But by the same token we don't necessarily believe that this is a trend because I think watching our costs is something this company has historically always done a good job of .

And finally on the share repurchase issue, once you get out of the quiet period is there anything to prevent you from buying new shares or do you have to wait for the convert or can you just get back to business as usual?

Well, right now we are in the process of talking with our banks and increasing our line so that we know that we have sufficient funds to pay off the covert as well as meet our normal expected growth season. Because as we get larger, the amount of funds we need to take us from mid-November or the end of November through December is dramatic, but then it's the payoffs that we have been December and March is also dramatic. So there is a big spike in our need of funding this company faces every year. And that spike gets larger as we get larger.

But, until we actually finalize things with the banks which we hope we will do in the next month, we have got to be very conservative at this point.

These details are very helpful an congratulations on such solid moving forward.

Thank you, Henry.

(Operator Instructions). We will move next to Bill Dezellem with Tieton Capital Management.

Thank you. Just following up on your last comment there, Sandy. Isn't it also your history that you slow your pace of repurchases basically from this point through your growth season?

Historically that has been the case. If we have the available funding and depending on the continued reaction of the market in the short period of time, it may be a good buying opportunity for us. So, if we know we have adequate funding to take care of that December need in funding then we would certainly move forward with the stock repurchase because we think it is an excellent investment for our shareholders.

Great. Thank you. And then relative to Mexico, what was the same location or same store loan growth in Mexico this quarter?

Same store loan growth.

28%.

Well I'm trying to figure out how to answer that.

I have it on these sheets. 28%.

28% in the same stores open throughout both years.

They were open at June in both years.

28% we believe is the number. I don't have that number ready to label but Mark has, if it deals with operations he has a number in his head somewhere.

And that 28%, is that a typical sort of number that you have been experiencing on a same store basis or has that growth accelerated?

That growth is going to decline as -- we had a tremendous base of brand new offices there and relatively speaking when we open 10 on the base of 95, that is a lot less than when we started opening 10 on the base of 15. So that same store growth with decline over time as expected.

Understood. And then you referenced earlier in your comments relative to Mexico that you believe that the profitability is going to improve dramatically there for the remainder of the year. I was hoping that you could share with us why it is that you believe that will be the case and is that off of the $100,000 or so that you made this quarter or the more ongoing number of say $0.5 million that you made this quarter when you exclude that extra tax?

Well I hope we will see substantial growth off of both of them, but when I was talking about dramatic increases I was referring to the small amount of growth we had this year. But overall as we meet a critical mass in more and more offices down there and as I just said we are opening less offices on a relative basis, then the profitability is just a matter of time -- it's going to be extremely profitable.

The yields and the charge-offs and the cost structure and stuff that has touched it, we just believe it is going to be a very good investment for us.

So basically you are at the point now that you believe you hit really that curve in the hockey stick where you have got the critical mass and now profitability is going to start growing much more dramatically than the top line of that business?

I don't necessarily agree it is a 90% turn that you would see in a hockey stick, but certainly we are getting a lot closer than we have been for the last four or five years.

Great. Thank you.

(Operator Instructions). Mr. McLean, with no further questions in the queue I will turn the call back to you for any closing or additional remarks.

Thank you. I appreciate you all joining us today and we will look forward to talking with you next quarter. Thank you Jennifer.

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 the Section 27A of the Securities and Exchange Act that represents the corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties.

Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements including 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 market, and changes in the economy. Such factors are discussed in greater detail in the corporation's filings with the Securities and Exchange Commission.

That concludes the World Acceptance Corporation's quarterly teleconference.