World Acceptance Corp (WRLD) 2014 Q2 法說會逐字稿

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

At this time, all participants have been placed 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 21-E 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. Statements other than those of historical fact as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will, and should, or any variation of the foregoing and similar expressions, are forward-looking statements. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include the factors discussed in today's earnings press release and in the Risk Factors section of the Corporation's most recent Form 10-Ka and other reports filed with or furnished to the SEC from time to time. The Corporation does not undertake any obligation to update any forward-looking statements it makes.

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

Thanks and good morning everybody. By now, hopefully you have had a chance to see our press release and have had a chance to review the summary of our prepared remarks. And I'd just like to say that the Company is disappointed with the results of the quarter, but we remain extremely optimistic about our prospects and opportunities going forward. But after saying that, we are happy to open it up to questions.

(Operator Instructions). Bob Ramsey, FBR.

Good morning. My first question for you guys had to do with fee structure changes, I guess most notably in Texas. And I was wondering if you could comment on whether you all have already implemented changes in the fees that you all charge in Texas, and if so, sort of what that looks like.

I'd be happy to. And for the benefit of everybody on the call, I'll just review some of the changes that have taken place over the last year. The first one is in Texas. Texas historically has had a $10 acquisition fee. That law was changed recently such that each loan, instead of $10, can have a 10% acquisition fee. This change was to compensate the Company for its rising costs and they have not really changed this law in many years. And because World's costs are greater on new and former borrowers, we will in fact charge that 10% fee on renewals, as World has established a policy whereby we will be charging a 5% fee.

On a larger loan, Texas previously provided for a $25 acquisition fee, and that has changed to a $100 acquisition fee that you are allowed to charge once per year. We implemented these changes on September 16, so it was out there for a couple of weeks during the current quarter.

In Georgia, there was a -- for the same reasons, the state changed the law under which we operate and now allows a 4% fee on the face amount of the loan up to a maximum of $50. And in Indiana, there was just a change in the rate band such that they just said a shift in the rate band did slightly increase the rates, and there's not a real major anticipated impact from that.

Now, what should -- how should that -- what should we expect the impact of that being on World during the current quarter? I mean the current fiscal year?

Kelly has prepared a schedule, and basically because these fees are not earned at the time of the loans but they are accrued over the life of the loans, we anticipate that the impact on the third fiscal quarter will be somewhere between $1 million and $2 million. The impact on the fourth fiscal quarter will be somewhere between $3 million and $4 million. So, the impacts for the current fiscal year will be somewhere between $5 million and $6 million is what we estimate.

Now, on a go-forward basis, because we have -- and once again, this is kind of a guess because we don't know what the impact on volumes, losses, and so forth will be because obviously there may be a reduction in the band because of increases in fees, or it may have an increase in losses. These are things we don't know. But based on what we did during fiscal 2012 and the number of loans we made, we anticipate on a full-year rolling basis that the impact in Texas could be somewhere around $20 million to $23 million. The impact to Georgia could be somewhere around $10 million. So we believe that this impact on an annual basis, on a go-forward basis, could be in the $30 million to $35 million range. Does that answer your question?

Yes. That's actually very helpful detail. That's obviously a significant increase in revenues that you guys are going to have.

I know you said there are some pieces you don't know about how this could affect I guess maybe the pace of renewals or credit. But there are no direct costs associated with this, right? It's really pure revenues where most of it should drop straight to the bottom line -- or straight to the pretax income, right?

That is correct.

Okay. That's very helpful. I wanted to ask you -- obviously you guys highlighted in your prepared remarks that loan growth has slowed to sort of the slowest pace ever at World Acceptance. And it's been trending down, so I guess, directionally, it's consistent with recent quarters. But it seemed to drop by a much more significant amount this quarter than it has in recent quarters. I'm just curious if you have any thoughts around is there anything unusual this quarter. Why is it that we are seeing the pace of deceleration sort of increase?

Obviously, that's been a discussion we've had extensively within the Company as well as during this quarter, and in fact in the month of September, we have our divisional meetings. And attending those meetings we have all the supervisors and above come in for discussions about where we are and where we are going and what we hope to accomplish. And a great deal of that meeting surrounded what's going on with -- as far as the number of new borrowers, which is the lifeblood of this company. And as I indicated in the remarks, our new loans to new borrowers is down about 7%.

It's very difficult to say exactly what's going on, and if you ask different people, you get different responses. So the honest answer is we are not 100% sure. I don't know if it's from an economic standpoint or whether increased competition, but we have certain information that indicates that, based on the number of credit reports we are pulling and other things, the number of applications that we are taking are slightly up on a year-over-year basis but the number of new loans we are making is down. So obviously our approval rates have declined somewhat.

And we have not changed our underwriting, so therefore the quality of the applications that we are taking has obviously declined.

So, I wish I could tell you that there is a specific thing that is driving this. Like I said, I don't know if it's more competition or whether it's -- you know, there's a lot of articles out there that indicate that those people in the lower part of the spectrum, their disposable income is growing at a slower pace. I don't know. I don't think, fundamentally, our business has changed, nor have our opportunities changed, but we are just experiencing kind of a abnormal demand situation. I wish I could be more specific, but that's about as close as I can get.

So, seeing nothing to the contrary, is it reasonable to assume that this will continue sort of along at this pace until the economy or whatever it is that is affecting the consumer changes?

I think this quarter will be a very big indicator of what we should expect because this, as you know, is our quarter of greatest loan demand because of the holiday season and so forth. And I think it will certainly -- I don't know whether the results of this quarter will be indicative of what to expect over the next year or whether it's what to expect over the next four or five years. But I think this quarter will be very important for us.

Great. That's very helpful, Sandy. I'll hop back out into the queue. Thank you for your time.

John Rowan, Sidoti and Company.

Good morning, everyone. Just to be clear, so $30 million to $35 million, that's revenue, right? That's not incremental net income?

Well, in this case, as Bob pointed out, that is revenue, but the costs are already incurred. So --

We still have to adjust for taxes is what I'm saying.

That's correct.

Okay. Loan growth this year obviously slowed down quite a bit on a sequential basis. How much of that do you kind of attribute to what was actually a very strong second quarter of last year? And can you remind me if there was anything in the second quarter of last year where you had almost 13% year-over-year growth that made that specific quarter a lot stronger than what we've seen over the last couple of years?

We had -- to a certain extent, I don't know. The only slight possibility that it would have a little bit of impact is the way that days fell last year, so a lot of payments came in right after the beginning of the third quarter. So that would have had a slight impact.

But Mark, do you know of any -- I don't really think there's any --

Unless it was a peso exchange.

The peso definitely has had an impact as of September 12 the peso to the US dollar was MXN12.86 and this year it's MXN13.13. And last year, we had a spread that went the other way. But that's not a major part because obviously Mexico only represents about 10% of our total portfolio.

Okay. As loan growth slows, does that change your appetite or actually increase your appetite for share repurchases?

I mean we've been fairly aggressive in our share repurchases anyway, and we intend to continue to do so whether or not the forward loan growth -- we own an asset based facility, so we only get a certain percent of the outstanding loans. So that made be a limiting factor at some point but it has not been thus far.

Okay. And then just lastly, why do think charge-offs are trending higher? Is there something specific that's putting pressure on your customer?

Again, it's very difficult to answer from the standpoint that we continue with the same underwriting guidelines and policies and we have the same correction procedures. This is the third quarter where we have seen the increasing charge-offs. And as a result of that, we actually added the additional $1.5 million to our allowance, which was unusual but we felt was, based on all the circumstances, we felt was the proper thing to do.

And it looks like the current trend is going to continue at least into the third quarter. But as to exactly why, it's kind of like explaining why our growth rates are declining. It's a very difficult thing to put your hands on. We have not generally changed the way we do business.

All right, thank you.

John Hecht, Stephens.

Thanks for taking my questions. And I guess not to beat a dead horse, but just on the loan demand, one final question I have on that topic is, is it possible that some of the high-end customers are getting -- or regaining access to more traditional sources of credit? Are you seeing any shift where like the large loan customers might be moving out into some different opportunities?

That certainly could be, but our mix is continuing to shift slightly towards the larger loan portfolio, but that is to be anticipated as we move into states like Indiana and Mississippi and so forth. But can I sit here and say that previously possible customers are no longer coming to us because they have access to credit at lower rates or different facilities? I can't answer that.

Okay. And then moving on to credit, you mentioned some of the credit trends. I'm wondering. Maybe I interpreted this incorrectly from the last public conference calls. You mentioned some of the changes in underwriting for small balance loan renewals based on the audit, kind of the auditing change you went through last year. Is there any of the delinquency changes and the charge-off change is potentially related to that or is it really just the customer credit trends?

I mean you bring up a good point, so let's address it now because it will probably be answered anyway. Currently, as a result of the material weakness that was identified during last year surrounding the less than 10% loans, we have implemented procedures to monitor that much more closely. And we have actually taken into consideration the impact from an accounting standpoint of the way we should defer those fees and so forth.

But generally speaking, we are not the ones that initiate a renewal type transaction or refinancing. Generally, that's the customer who may need that $25 or $35 or so forth, and so we have not at this point eliminated those type of loans. We are monitoring them and looking at those very closely. We are doing some things systematically to improve our monitoring over those, and so it may have a slight impact on our volume. But I do not necessarily believe that it's a direct major contributing factor towards the increased losses.

Okay. I really appreciate that color. And last question, the insurance and other revenues, it is still a good component of income, but the growth is declining. Is there not as much usage of this? Is there different usage of this in different new geographies or how should we think about that?

No, it is still a very important part of our revenue stream. And to a certain extent, we had a change in the law in Tennessee whereby the alternate rates posted do not allow the sale of ancillary products alone between $1000 and $2000. It used to be the cap was $1000; it moved to $2000. So those loans that we made in that $1000 to $2000 previously had ancillary products sold. Now it no longer do. It should be somewhat offset in the revenue -- it should be revenue-neutral. But it does reflect as a decrease in interest and fees, and that -- I mean in the insurance. And that's the biggest cause of that drop. But otherwise, going forward, it's still basically a very important part of our revenue stream and will probably continue to be even more so as we expand into these larger law states.

Okay. That's helpful. So the way to think about it is you've fully gone through the adjustment in Tennessee, and so we should see -- I guess we should see the trend in terms of percentages revenue mix or growth rates kind of revert to normal levels after this quarter?

We would believe. As far as total mix of revenue that -- I'm not really sure how that's going to play out. But certainly in terms of growth in the insurance and other income, it should return to a more normal track. (multiple speakers)

(multiple speakers) thanks a lot for the color, Sandy.

Henry Coffey, Sterne Agee.

When we look at the quarter, you had workable gross loan volume growth. And the biggest offset to positive net income growth appeared to be personnel costs. You've had a big uptick. I'm assuming some of it is because of the bonus, the stock related -- accruing for stock related costs, probably other things, healthcare, etc. Is it fair to say that, when we look into 2014, that the growth in personnel costs will moderate and become more a smaller fraction of total volume growth, or what's the outlook in terms of personnel costs?

There are three components contributing to this larger-than-normal increase. The first one is you hit on is exactly because of the five-year plan that the board put into place that was implemented roughly a year ago. It was back actually in December 2012. And certainly we are accruing our -- we are expensing that plan under the assumption that we will hit certain of those targets and so forth. We may or may not hit them, so depending on how that happens, that expense may or may not be reversed.

But the second biggest component is in our insurance. That has been the largest single growth item, and I am talking about our group health insurance. And a lot of that is -- we put some of the changes to our plans in place at the beginning of the calendar year. But anyway, and then the third thing is the growth in our normal personnel costs because of the opening of new offices and so forth.

But I guess to finally answer your question, yes. We should see a more normal growth rate in our personnel costs in 2014.

But the first two items should flatline, and then future growth would be a function of --

I would say the bonus aspect and the growth in number of people and so forth certainly should. I don't know what to expect in the health insurance.

How much slicing and dicing can you actually do in your application and charge-off experience on the profile what's going in?

You mean --

The data is there (multiple speakers)

We can determine where it's coming from and so forth? We have limited capabilities on doing those type of analyses at the current time because the data is there, but we -- I would just leave it at that. We have somewhat limited capabilities to do that.

All right, thank you.

(Operator Instructions). Bill Dezellem, Tieton Capital Management.

Thank you. I have actually quite a group of questions. First of all, in response to the first questioner, you made reference -- or I heard that the combined benefit between Texas and Georgia will be $30 million to $35 million on a full-year basis to revenue. But earlier in the answer, I also heard that the regulatory changes would benefit you to the tune of $5 million to $6 million. And I can't quite place exactly what it was that you were referring to there, or whether I just simply misheard. Would you please clarify for me?

You heard that correct. The $5 million to $6 million is the rough estimate on the impact of fiscal 2014. And the other much larger number is what you possibly could expect on a full-year basis after this has been completely rolled out. And I'm not going to say it will fiscal 2015. It may be some time, some point in the future because these fees, while they are charged at the time the loan is made, they are not earned until those loans are paid out. They're earned over the life of the loan. So that's just what you could potentially expect over a full year once this has been in place for quite some time.

Thanks, Sandy. And yet you said it wouldn't necessarily be next year, but your loans are short enough in maturity that shouldn't it pretty well be fully rolled out in fiscal 2015?

Not necessarily 100% because we do have some larger loans in the state of Texas that may or may not renew. And whatever we charge, any loans that we charge, larger loans or whatever that we charge during the course of fiscal 2015 may not be completely earned during that year because it will overlap the end of that year. But you are right. Because of the portfolio turnover and the shorter term nature of these loans, I would anticipate a substantial portion of that being reflected.

Okay. So to make the math easy for me, if $35 million was the fully implemented benefit, $5 million of that happens this year. The remaining $30 million, most of it would happen in fiscal 2015 next year, but a little bit might dribble into the following year.

No, that's not exactly the way you look at it because this is not a one-time benefit. This is an ongoing rate increase. And once it's fully implemented and assuming -- this is based on fiscal 2013 numbers, so please bear in mind that we could have a change in loan demand and/or charge-offs. But assuming that we do not, you would expect the $30 million to $35 million impact to be repeated continuously into the future unless they change the law again for some other reason.

Understood. I was thinking more from an incremental standpoint as I was describing the $5 million this year mum.

That'd be fine.

Okay, great. Thank you. And then you did mention here in the call the cost relative to your stock option program. And the question is at what point do you start to reevaluate whether you hit your targets and that we might see expense reductions taking place as a result?

We evaluate that on an ongoing basis. It's just part of our normal quarterly and annual estimates. We especially do it during the budgeting process and during the forecast and so forth. But this is an estimate that has got to continuously be evaluated. And we may come to the conclusion that we are not going to hit one of those -- one or more of those four quartile tranches or whatever, but then a year later we may come to a different conclusion and its expense impact would change based on the estimates at that point in time.

And right now, you're accruing assuming that you hit the highest level, is that correct?

That is not correct.

What level are you accruing at?

We are not accruing the fourth tranche in the Plan B or the Grant B, so the $18 market -- mark.

But everything else you are accruing for?

Currently, correct.

Great, thank you. Then the next question is you mentioned in the press release the extra provision that you flowed through this quarter. Would you discuss that in a bit more detail than you have up to this point?

I have addressed it in detail, but I will do so again. When we were talking about the impact of the charge-offs and so forth, I went through this. But again, I will try to do so again.

We look at many factors on an ongoing basis as charge-offs, what's happening with our portfolios, what's happening with our delinquencies and so forth. And based on those factors and the current trends and so forth, we have to evaluate and estimate what the allowance should be.

Kelly goes through this. It's probably the most important estimate that we make on an ongoing basis, because our biggest asset is our loans. And based on her analysis and the trends and so forth, it was her recommendation that we do add this to the allowance. And after she showed me all the facts, I agreed with her. So if in fact the trends level off and/or return, then we may reverse that $1.5 million. But if they continue on on a greater basis, then we may have to increase it. It's a judgment. It is an estimate that she spends a great deal of time on every quarter, and that was her recommendation.

And then finally, would you discuss what, if any, regional differences you're seeing in terms of loan demand and/or credit quality?

Regional -- I can tell you Mexico is doing a whole lot better than the US. But we are experiencing some of the same issues in all three divisions as far as reduced number of new borrowers.

Charge-offs, I cannot tell you right now specifically which states are doing worse than others, but I suspect those trends are similar across all divisions.

Thank you both.

Brian Speck, Mangrove Partners.

Thanks for taking my questions. I've got a couple related to the new fees in Texas and Georgia, and then one of the regulatory front.

First, in Texas, can you talk a little bit about what you're seeing from competitors and the way they are implementing the change? Thank you for being so specific about how you are planning on implementing this or have implemented this. What's (multiple speakers)

I hesitate to do so, but you can't get to an answer and you all really can get an idea of what impact it might have unless we just be completely open about what we are doing. But I cannot answer that question. It's prohibited for us to discuss what we are doing with our competitors, and at this point, I have -- I don't know whether they're charging 10% on every loan. I honestly do not know.

And then in Georgia with regard to the new fees that are permitted there, is that something that you anticipate new loans, new loans and renewals, or is it like Texas where you expect to take all of it on new loans and a portion of it on renewals?

This is -- it's a smaller fee, and we anticipate taking the entire 4% up to a maximum of $50. But it's on every loan. But due to the size of the loans, it takes us a little larger than in other loans.

And then with regard to both Texas and Georgia, how should we be thinking about the potential impact on loan growth, charge-offs, those types of things?

I don't think that you really should -- I don't know what impact the fees will have. I do not think that it will have a major impact, but that's yet to be determined. So, I would think that you would look at the expected loan growth in those states similar to what we experience elsewhere.

And then with regard to regulatory in the last quarter as part of your regulatory update, you had mentioned that you wouldn't be surprised if the CFPB had come to visit the Company in the not too distant future. Can you give us an update on that? Have they been? Is it still your expectation that they do so in that time frame?

I don't know what the time frame is. I believe -- we just had our national trade association. There was a lot of discussion surrounding the CFPB and what it may or may not do and so forth. I do not believe that it will be in the near future. We just don't know. But I'd say it might even -- the issue would be large market participant at this point for the installment loan industry. So I just said that -- we probably expect at some point in time when they do start looking at the installment industry, it will grow based on its size. We'll probably be visited and audited and so forth. But the timing of that, I have no idea. I don't think it's going to be -- I certainly don't believe it's going to be in fiscal 2014 and it may or may not be in fiscal 2015 or beyond.

Thank you.

Henry Coffey.

I was wondering if we could revisit this. I know you don't like to give guidance, but if we revisit the situation in Texas and Georgia, you're talking about $30 million of potential revenue assuming 85% of that gets realized in 2014 at your current tax rate. That's about $16 million worth of earnings or $1.36 per share. That's like 15% to 20% of what you earn now. So, this is a dramatic source of upside. Is that the correct way to really be thinking of it?

I certainly believe it's a material item. And we've got about 300,000 loans in Texas, and we made about 600,000 loans last year. We've got a lot of locations in Texas. So the math would indicate the numbers that I referred to. But the reality may be somewhat different because we don't know what the overall impact will be. But I think you're right. I don't like giving guidance, but this is just a mathematical calculation based on the impact that that would've been generated based on the loan volume in fiscal 2012. And I realize I'm dancing around in circles, but I can't be more specific than I have been.

I think you're pretty focused. Nice dance.

On the share buyback front, where exactly are you in terms of authorization and actual resources, and how likely are you to be doing something during the December growth quarter?

We have remaining $52 million under the current authorization. We will, in all likelihood, be buying back stock during growth season this year. We have not in the past, but we will likely be doing so this year because we have access to credit, additional access.

And how much can you --

I don't know. A lot of that will depend upon the success of the growth season and other factors.

All right. Thank you.

Bob Ramsey. (Operator Instructions).

Thanks for taking the follow-up. I just wanted to ask if you could provide any updates on the CFO search.

We have had a lot of great candidates, and we are in the process of evaluating those candidates. And I would like to think that a decision will be made in the very not-too-distant future.

Okay. Great, thank you.

Clifford Sosin, CAS Investment Partners.

Hi. Thank you for taking my question. You mentioned earlier that you don't expect to see a meaningful improvement in the charge-off environment in the near future. I assume you are saying that based on some metrics that you're looking at, be it more recent delinquencies or (inaudible). Do you mind just elaborating on why you expect the charge-off environment to remain challenged for a while and help me understand how long you think that is based on what you're looking at?

I could tell you that we went 16 quarters with a decline in our year-over-year charge-off ratios. The last three -- this is the third quarter in a row where we have seen an increase in those annualized charge-off ratios.

I don't have -- give a prediction of what's going to take place next year, but just based on our current delinquency levels and so forth at Mark Roland's advisement. Mark studies the portfolio on a daily basis and knows as much about anything. But he has indicated that he expects the third fiscal quarter to be similar to what we've experienced over the last three. But he has not indicated beyond this whether or not we have -- if this is an ongoing trend or not. Mark, can you add anything to that?

The crystal ball only goes out so far. We are halfway, or more than halfway through the current first month of the new quarter, so I've realistically got a good feel for what's happening in October and probably November. December is foggier. But the trend looks very similar to where we were for the prior quarter in terms of the increase in year-over-year charge-offs. Farther than that is I have no idea.

Got it. That's very helpful. And then in terms of the impact of pricing changes on loan demand, maybe since you've made the changes in Texas that have been in place now for four weeks, five weeks it sounds like, have you seen any impact on loan demand in that period of time as a consequence of the changes?

Not at all. And realistically, for the first time in Texas, for example, there will be a competitive advantage to those companies that perhaps do not utilize all the fee. We obviously haven't gotten to the point of renewing a loan in Texas under the new law, so any reduction in fee that we might have on that loan compared with anyone else is an unknown. But certainly, it brings into play a little bit of competitive pricing. And that's yet to play out in terms of what that does. But loan volumes that occurred during the second half of September and the first half of October are very consistent with where we have been.

Okay, great. Thank you.

John Rowan.

Hi guys. Just one quick question. The stores that you opened, it looked like you were up about 20 sequentially. Is that kind of a fair run rate to go forward? I'm not sure if you guys addressed kind of the store opening plans for the remainder of the year.

There is a plan and it should be in the information that was disclosed. I believe the plan for fiscal 2014 is to open 60 offices in the US, and I believe either 16 or 17 in Mexico. Mexico, they won't even start -- generally don't start opening until the first of the calendar year, but we should be well along on the US openings.

Very good. Thank you.

Thank you. It appears we have no further questions. I'll turn the conference back over to you for any additional or closing remarks.

I just want to thank everybody for taking the time today and your interest in World Acceptance Corporation. And everybody have a nice day. Thank you. Thank you, Casey.

Thank you. And 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 21-E of the Securities and Exchange Acts 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. Statements other than those of historical fact as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will, and should, or any variations of the foregoing and similar expressions, are forward-looking statements. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include the factors discussed in today's earnings press release and in the Risk Factors section of the Corporation's most recent Form 10-Ka and other reports filed with or furnished to the SEC from time to time. The Corporation does not undertake any obligation to update any forward-looking statements it makes.

This does conclude the World Acceptance Corporation quarterly teleconference.