World Acceptance Corp (WRLD) 2012 Q2 法說會逐字稿

Please stand by. 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 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 announcements. 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 including changes in the timing of 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 sir.

Thank you, Katherine. As Katherine said, I'm Sandy McLean. And with me are Mark Roland, our President and Chief Operating Officer; and Kelly Malson, our Chief Financial Officer, along with other members of our management team. As is customary, I will spend a few minutes reviewing the quarter results, and then we'll be more than happy to try to answer any of your questions.

I'm once again very pleased that our quarterly financial performance has continued the positive trend that we have experienced over the last several quarters. Demand for our loan products remained strong during the quarter and as expected we have continued to maintain our loan loss ratios at prior year and historical levels.

Net income for the second quarter was $23.3 million or $1.52 per diluted share compared to $20.2 million or $1.26 per diluted share for the prior-year quarter. This represents a 15.2% in net income and a 20.6% increase in net income per diluted share when comparing the two quarterly periods.

For the first six months of fiscal 2012, net income was $43.5 million or $2.78 per diluted share, representing a 11.6% and 15.8% increase in net income and EPS respectively over the first six months of fiscal 2011. Gross loans amounted to $965 million at September 30, 2011, a 11.1% increase over the $868 million outstanding at September 30, 2010 and a 10.3% increase since the beginning of the fiscal year. This growth was fairly evenly distributed throughout the Company with six of our 12 states experiencing at least a 10% growth rate.

Additionally, the 11.1% year-over-year growth resulted from a 7.8% increase in the number of accounts outstanding and a 3.6% increase in average balance. While the 11.1% growth rate growth in year-over-year loan balances is less than the increases that we've seen in previous quarters we have not in general tightened our underwriting criteria and believe that consumers have become more conservative in accessing available credit.

Acquisitions will always remain an important factor in overall growth strategy of the Company. However, there have been very little purchase activity during the first two quarters of the fiscal year. 12 small offices consisting of 2061 accounts and $2.1 million in gross loans were purchased. Of the 12, one became a new office location and 11 were merged into existing offices. For comparison purposes, during the first two quarters of fiscal 2011, the Company acquired [3872] accounts and $3 million in gross loan balances in nine separate offices, five of which were consolidated into existing locations. We remain on track with our expansion of our branch network during the first six months of the current fiscal year, which is as previously disclosed about the same as fiscal 2011.

We began fiscal 2012 with 1067 offices, opened 41, purchased one, and closed one, giving us a total of 1108 offices at September 30, 2011. Our plan for fiscal 2012 is to open 63 offices in the U.S. and 10 in Mexico, plus evaluate acquisitions as opportunities arise.

Total revenue for the quarter amounted to $132 million, an 11.9% increase over the $118 million during the second quarter of the prior fiscal year. This resulted from a 12% increase in average net loans when comparing the two quarterly periods. Revenues from the 978 -- 987 offices opened throughout both quarterly periods increased [to 9%].

As expected, the Company's delinquencies and charge-offs have remained stable during the second quarter in spite of the ongoing difficult economic environment. Accounts that were 61 plus days past due increased slightly from 2.9% to 3.0% on a recency basis, and remained flat at 4.2% on a contractual basis when comparing the two quarter-end statistics.

The ratio of net charge-offs to average net loans were level during the [second] quarter of the current and prior fiscal quarters at 14.8% on an annualized basis. This is the second quarter in a row of stable charge-off ratios, which remain in line with historical levels. Over the last 10 years charge-off ratios during the second fiscal quarter have ranged from a high of 17.0% in fiscal 2008 to the low of 14% in fiscal 2006. The Company remains focused on controlling operating expenses on an ongoing basis.

General and administrative expenses amounted to $61 million during the current fiscal quarter, a 9.6% increase over the $56 million in the prior year -- in the prior quarter, primarily as a result of the 74 net offices opened over the past 12 months. As a percentage of revenue, our G&A decreased from 47.5% during the second quarter of fiscal 2011 to 46.5% during the current quarter.

Our G&A per average opened office increased by 1.9% when comparing the two fiscal quarters.

Also during the quarter the Company was successful in refinancing its balance sheet, enhancing its financing sources. In addition to expanding the maturities of its primary bank facility for another year, the Company received an additional $75 million in commitments from the bank that are part of its credit facility. This additional availability allow the Company to retire the $77 million in outstanding convertible notes shortly after quarter-end and will continue to allow the Company to continue to grow its loan portfolios as well as pursue its stock repurchase program.

During the first half of fiscal 2012, we have repurchased 1,153,200 shares for approximately $73 million, which has bee and should continue to be very accretive to per share earnings in the future.

We're also very pleased with the progress being made in our Mexican operations. We now have 98 offices opened as of September 30, four offices have been opened during the current fiscal year with an additional six effective before the end of the year. We now have approximately 112,000 accounts and approximately $53.1 million in gross loans outstanding. This represents the 21.4% increase in accounts and a 22.5% increase in ledger over the trailing 12 months. But that's without a dramatic change in the exchange rates between the Mexican peso and the US dollar, which increased from $12.49 at September 30, 2010 to $13.52 at September 30, 2011. Our growth in outstanding loan balances would have been 33.6%.

We had net charge-off of approximately $3 million during the first two quarters of the fiscal year of 17.7% of average net loans on an annualized basis. And our 61 day delinquencies were 4.6% and 5.1% on a recency and contractual basis respectively. (inaudible) $1.8 million in pre-tax earnings for the first six month of the current year versus $203,000 for the prior year six month period, which should only improve as we continue to grow our outstanding receivables. The Company's trailing fourth quarter return on average assets of 13.7%, return on average equity of 23% continue their excellent historical trend as we pass the mid-point of fiscal 2012.

Finally, I'd like to provide a brief update on the regulatory and legislative landscape, the Company's greatest risk factor. Currently, there is very little activity at the state level with no material legislation pending in any of the states where we operate. However, this is an ongoing challenge that we have successfully managed throughout our Company's history. At the federal level, we continue to actively monitor the development of the Consumer Financial Protection Bureau. Through our national trade associations, the American Financial Services Association and the National Installment Lenders Association, we are meeting with key regulators to participate in the process, as new regulations are created and implemented.

We continue to believe that the value of our vital service will provide -- we provide, that is providing credit opportunities for many individuals that have limited access to other credit markets will continue to be appreciated as this Bureaus are being developed.

At this point in time any of us will be glad to answer any questions. Operator?

(Operator Instructions). David Burtzlaff, Stephens.

Good morning, Sandy.

Hello, Dave.

Great quarter.

Thank you.

Couple of questions. So, I mean one of the things you mentioned was your loan growth was a little bit slower than you have been. Can you give anymore anecdotal color besides as you take your customer just being a little more prudent now?

I really can't, David, it's very difficult, we are -- we know that consumer debt is down in a lot of different industries across the country. We know that we are, we've just gotten through with our divisional meetings and one of the key topics in those meetings is always growth and the need to make loans that are -- good loans go through the underwriting processes if anyway we can possibly make the loan we try to, but we certainly haven't tightened any underwriting standards and our year-over-year growth rate is a little lower than it had been for some time. However, we're not, we don't look at this as a long-term plan, we're seeing a little bit of an uptick early in October that will make up some of this. And I know it's really hard to say exactly what is going to be the timing difference, this is a fundamental strength, we certainly don't believe that to be the case. So it's hard to kind of have a lot of details to that.

Okay. Have you -- kind of to go with that, I mean, when you look at that increase this quarter almost 8% of it comes from new accounts. How has that kind of trended in terms of new customer growth? I mean I can go back and look at some of these numbers, but is that -- that seems to be running about where you've been, isn't it?

It is. I can't remember, but unlike you, I can't remember specifically quarter-after-quarter (inaudible). But throughout the past 10 years a certain amount of growth has come from the -- I mean not acquisition but bringing new customers in and a certain amount has improved the growth in average balances outstanding. Every year, our average original loan [NAV] is going up by a small percent and that will continue to be the case. So, I don't think there is a mix change there at all. It's just other factors taking place within the economy. And I think our outlook and prospects are very good.

Okay. And what's the percentage of small loans to larger loans?

It's about the same, but exactly at this point in time, Kelly probably can answer best better than I can. Larger loans are based on balances, they're like 23% and that's up slightly from 22%. It's pretty much stable but maybe up slightly.

Okay. And in Mexico, are you seeing any signs of slowdown for your customers or maybe the competition is affecting your business at all? I mean obviously your losses seem to be trending a little bit higher than they have been?

They are trending a little higher than in the US, that has always been the case. Of course their yields are down. They are more than -- higher than -- more than offset that increase. And no, I don't really believe that we aren't seeing any dramatic increase in competition. It's just strictly a matter of us having the time necessary to get some of these newer offices up to a more mature status.

Okay.

I mean the cost structure is in place, so as these offices move to the profitable number of accounts then it should be net earnings accretive pretty quick.

Okay. And then finally, your personnel expenses to me seemed really low this quarter, I mean, just if I look back the last few years I'd say the normal sequential drop between June and September, there seem to be a much greater increase. Is there anything that you did differently personnel wise or that would cause those numbers to go down and do you think that may be sustainable at that level?

I'm looking at Kelly, (inaudible), we've certainly not done anything differently, I mean it's just the timing of paying out bonuses, maybe it's a little different assumption but we have not changed any of our accounting or there has been no real change. So -- or maybe the timing of opening offices has contributed to that. But it's -- I know that we for the first time in quite some time we had an uptick in our G&A to revenue in the first quarter and we thought possibly that to be a timing issue and it proved out that it was in fact having issues. So, I guess I'm sounding like I'm mumbling and kind of bouncing around, but really there is no real specific explanation at this moment.

All right. Well, thank you.

Okay.

Jordan Hymowitz, Philadelphia Financial.

Well, hey guys. Two things. One, based on the Payday lending side, which you are not in, there is a number of cities in Dallas that are trying to crack down Payday lending and the Federal Trade Commission has filed a lawsuit against [Internt] Payday lenders in violation of Reg E to shut them down. If they are successful, do you think there would be a big benefit to you guys? What type of a crossover customer does that have if the Payday lending industry is substantially reduced in the US?

(technical difficulty) I mean, number one, since they did not report to the credit bureau, we do not know the extent to which there is overlap between our customer base and their customer base. And number two, we -- the generally -- the only time we know for sure when there may be more multiple Payday loans (inaudible) when we get a bankruptcy notice, and it has a listing of all their outstanding debts. I guess the biggest empirical evidence is that the only state, one of the few states where the state has been successful and completely eliminating the Payday industry was in Georgia about five, six years ago. And we did see a reduction in our charge-off in Georgia after that transition took place. So, I guess, to answer your question is if in fact there was something done to reduce the presence of the Payday lending industry in Texas then it would be beneficial to our customers and, well, I won't say that, well, I don't know about our customers, but generally speaking I would say there would be a benefit to World and other installment lenders.

And just a follow-up, the FTC is rolling out to these guys is a violation of the Electronic Fund Transfer Act it says they require them to have a bank account to be withdrawn from the condition of the loan. You guys don't do that correct?

That's correct we did not.

Okay. So there is no potential that you guys could be snagged in that?

Not in what you are referring to, that's correct.

Okay, thank you.

All right.

Thank you. We'll take our next question from Bill Dezellem with Tieton Capital.

Thank you. Couple of questions. First of all just to make sure that I'm clear the restricted cash of $77 million that's tied to the payoff of the convert, is that right?

That's correct. We're required to put that in escrow on the 30 -- Friday, 31st and the payment to the bondholders took place on Monday, 3rd.

Great. Thank you. And then want to [strickle] back to Mexico. You some time ago and I forgot exactly when it was, had some management challenges down there. And now this quarter you highlighted how number of things really seem to be going quite well and including profitability et cetera. Would you please discuss what you did in response to those management issues and what's different today versus at that time please?

Well, I think, number one is we continue to have some management challenges in Mexico because we opened our first office in September of '05 and we've grown to 98 offices in six years. As a result of that and as a result of the size of these offices the number of individuals, for every five or six offices we need a supervisor. So, we've only moved two or three individuals from the US to Mexico. Therefore, the most experience that any employee in Mexico can have would be five years. Our average experience of supervisors in the US is seven, eight or nine years. I mean so therefore, we still don't have anywhere near the experience level at the supervisor or the manager level in Mexico. However, what you're referring to was a specific problem that we had in Monterrey about two or three years ago and that was just a case where we grew in that city a little faster and we had some supervision issues. And those were specifically at risk because at that time it represented a pretty large share of our presence in Mexico and when those problems developed in Monterrey specifically where the competition was greater than in most of our other locations, then it did have a bigger impact on the overall performance. But, generally speaking, we're seeing improved performance throughout Mexico and we're very encouraged. But, obviously our limited growth will continue to be having good trained managers, supervisors and so forth. But every year we're getting that much more experience and we're doing it through more and more offices.

And as a result of that, that last comment, that every year you're getting more experience and in essence you have more people with more years with World to understand the process et cetera, et cetera. Would it be appropriate to maybe not necessarily totally model in but conceptually in our mind believe that the operations there should continue to get better and whether that's charge-off rates or profitability et cetera, et cetera and is specifically tied to the experience factor not just the fact that you're growing?

I'm going to ask Mark to respond to that. He is certainly more familiar with the details going on in Mexico than I am, but what do you think Mark?

Bill, profitability wise, it's really a geometric function of how many accounts are in the branch and when they turn profitable and is charge-off being monitored and all that kind of stuff. But more specifically to the question about management, what happens in Mexico, I mean, you think of it just being like a state in the US, but it's not. It's a very big place.

And every time we open in a new territory, we're picking up new employees that are very new to the business or maybe have no experience in the business and we're moving a supervisor that has some experience in that area to try to develop a grouping of branches in a particular locale. And similar to the US, individuals in Mexico don't really move very easily in the income ranges that we're paying our managerial staff and supervisors.

So, there's always a challenge as we move to new geographic areas within Mexico just as we would have a challenge in the US if we were to open our next series of offices in California as an example, not that we would. So, there is geography involved in addition to the idea that the tenure of the employees takes a while to get us to where we feel very comfortable that we've got well trained, well versed employees in those locations.

Thank you both.

Henry Coffey, Sterne Agee.

Hi. Good morning. And let me add my congratulations. And maybe through now on if you could arrange to do these earnings calls (inaudible) you are up twice that today.

We'll do our best, Henry.

I know. Just an update it would be wonderful. Couple of things about the quarter and I know you talked about it a little bit. If you take out depreciation and amortization, we did see a modest decline in overhead between the June quarter and the September quarter. And am I correct in just you are saying that that was more just a seasonal fluctuation and things like travel and accruals? But, the year-over-year trend is the relevant one to focus on?

Yes, it is. That's correct.

And then, Kelly, you converted your convert in October, correct?

October. It matured October 1, which is a Saturday, so the bondholders paid or was paid out on October 3. However none of the bondholders converted. Therefore they were just paid maturity.

Yes. Basically it was cash out the door?

Correct.

Because GAAP requires us high -- high accrual rate on that note, it's been costing you like $0.03 to $0.05 a quarter, is that correct -- $0.03 a quarter, is that correct or --?

It's actually closer to $0.02.

And now that this has gone away and it's fairly refinanced, what is the EPS impact, assuming everything gets fixed?

Henry, currently, (technical difficulty) and 4%. You got a 5% interest rate, GAAP interest rate difference [on] $77 million so -- on a pretax basis. So, I can't tell you [right now]. But, 5% of the $77 million after tax divided by the shares outstanding should be the impact.

Thank you, thank you. And then on the buyback subject I heard the number, but I didn't get it written down fast, so --.

1,153,200

1,153,200 shares.

1,153,200 shares. And $73 million.

And of course, now that you are in the growth season, are you likely to keep buying back stock or is that something that [happened now in] February?

It's very unlikely for that to happen until after the -- I mean -- I should almost tell you that will not happen unless something dramatic takes place as we're not anticipating before we get out of the blackout period after the third quarter conference call.

Now Mark went over some of the dynamics in Mexico and it really sounds like it's a real specific growth opportunity for you and I can get it as your managers mature, you're building up this momentum. Is there a way to look through that and give us a feeling for how Mexico was working for some of the more mature companies in that market? I know we heard negative comments from some of the [pawn shops] that are there, they showed a lot of outward migration into their Southern Texas store. I'm trying to figure out what the driving dynamic was, but I know you are seeing a lot of growth but I was wondering if you look around the regions you operate in and the economy is better, stronger, how would you -- how [well] would be your overall read Mark?

Basically, Henry, all I have to look at is the fact that our most mature stores or our older stores and they are performing at levels that compete with the US in every respect. And so, to me it's very clear that the single thing to look at in Mexico was how long have your people been employees, are we training them well, when the office is good to size with a well trained staff and charge-offs and delinquencies are maintained at or near the kind of levels that we need down there, those offices are extraordinarily profitable.

So that's kind of what's happened in the US, it's all really driven by the manager and the experience of the manager?

Exactly, I mean if you wanted to look at specifically the idea of say [Vores] versus Houston, you would suspect that Vores is a more troubled area. We're not experiencing nearly the levels of difficulty in Vores and in fact all of our most profitable stores, the top ten in the country are in Mexico, are all there in Vores and it's because they're the oldest, the largest with a better trained and longest term managers.

Thank you.

(Operator Instructions). John Rowan, Sidoti & Company.

Good morning.

Good morning, John.

Just a quick question, you guys said you bought back 1.9 million shares, but that's the first six months, correct?

1.153 Million.

What did you buyback just in the quarter?

I don't remember off the top of my head.

Well, what I'm trying to figure out is does the diluted share count continue to trend down, did you buyback a lot late in the quarter? Obviously, last quarter on the conference call you said the diluted share count could go down to 15.5 million and slightly below that, I'm trying to get a gauge of where it's going to go next quarter largely based on the timing of repurchases in this quarter.

(Multiple speakers) shares outstanding.

Yes. As of September 30, John, our shares outstanding were 14.6 million.

So add 300,000 plus for the diluted -- 300,000 to 400,000, so it's only down to less than 15 million.

Okay.

It will be right around 15 million.

Right around 15 million. And with the tax rate it seemed a little low, does that go back to the 38%?

It should be pretty much flat with where we are right now.

Okay. And then also, Sandy, you touched on at the average loan size, you said it was up, I think it was 6% in your prepared remarks. Can you give me the actual numbers and I assume that's on a year-over-year basis?

(Technical difficulty). First, let me give you that exact number (inaudible) 7.8% from the number of accounts and 3.4% increase in the average balance outstanding. Do you want anything in addition to that?

No, I just wanted the average balance number, that's 3.4% year-over-year, right, on the average balance?

Average balance number is basically [1056] this year versus close to [1022] last year.

Great. Thank you.

Bill Armstrong, C.L. King & Associates.

Hello. And good morning. You discussed a little bit of competition in Mexico. In the US, has there been any new developments in a competitive landscape either with other installment lenders or anything in potential substitute products versus Payday loans?

There is always giong to be increased -- there has always been increased competition from existing installment loans, installment lenders that are out there. They are going through -- they are -- growth they're trying to achieve certain levels of growth also but nothing dramatic. I think the market is growing, so to accommodate this type of growth plus they're going into additional locations. We keep hearing that there is a possibility that the Payday lending industry is going to move into the installment lending industry and that is not a concern of ours because it's a lot different making a Payday loan, it's (inaudible) you have checking account and do you have a job as opposed to go through a very thorough underwriting process with an installment loan and work with the customers because they do in fact have difficulties in time and you've got to be -- you got to work with them through the collection process. We have to establish a pretty good relationship with our customers as an installment lender and that will know that that's the case with the Payday lender.

[First of all], are you seeing any indication of banks maybe getting more interested in the installment loan product?

I do not believe that number one that the banks would encourage our customers to come into their lobbies to make these loans of less than $1,000. And I don't believe that they are equipped to have the type of relationships and the continuous contact necessary to collect these loans. And I don't believe that that they are equipped to serve this market at all.

Okay. (inaudible)?

I mean, I think you've got more as the same thing. They're not -- the cost of these loans, the cost of actually -- these are really small loans, so the cost associated with them are not only making them to collect them on pretty high for that reason. And they are pretty risky and for that reason we have certainly higher yields than bank related products. And I just don't believe without some kind of subsidy of the bank and their cost structure is such that they can't make these loans profitable.

Understood, thank you.

(Operator Instructions). Jordan Hymowitz, Philadelphia Financial.

Hey guys. You guys don't disclose the Mexican loan balances year-over-year, do you?

We firmly do and I -- (inaudible) bear with me a minute, I don't -- this is in dollars, so at 09/30 we had $52.1 million outstanding, and last year we had $42.6 million outstanding and of course there was an exchange rate change, a pretty dramatic exchange rate change between the two years, so the growth is not indicative of the growth that we had [in Texas].

Okay. So it's actually probably 20%, 30% more given [rates, there is no] change.

I believe and our growth rate would have been closer to -- I said in the script and I don't remember exactly but I believe the growth rate would have been closer to 34%, 35% as compared to the mid 20%. So, it did have an impact this particular quarter on a year-over-year basis.

And when you [listen to a] Mexican consumer finance company (inaudible), talked a lot about slowing growth rates in Mexico, do you think you are taking a lot of share from the Mexican companies, trying to make small balance loans?

I don't believe that -- I mean given the size of that market, I don't believe that our presence would have even a slight impact on what's going on in some of those larger consumer finance companies in Mexico. At least I believe the market is just so large that we, our presence does not have any type of material impact whatsoever.

Okay. Thank you.

Thank you. Ladies and gentlemen, there are no additional questions. I would like to turn the floor back over to our speakers for any additional or closing remarks.

Well, we don't have any other except -- other than to say we appreciate your interest in World Acceptance Corporation and have a good day.

Thank you for your participation. Before concluding this afternoon's conference, the Corporation has asked again to remind you that the comments made during this conference may contain 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.

Such factors are discussed in greater detail in the Corporation's filing with the Securities and Exchange Commission. Thank you for your participation and have a good afternoon.