World Acceptance Corp (WRLD) 2016 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. (Operator Instructions)

Before we begin, the Corporation has requested that I make the following announcement. The comments made during this conference call may contain forward-looking statements within the meaning of Section 21(e) of the Securities Exchange Act of 1934 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.

Additional information regarding forward-looking statements and any factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements, are included in the paragraph discussing forward-looking statements in today's earnings press release and in the Risk Factors section of the Corporation's most recent Form 10-K for the fiscal year ended March 31st, 2014 and subsequent reports filed with or furnished to the SEC from time to time. The Corporation does not undertake any obligation to update any forward-looking statement it makes.

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

Thank you, Leon.

Hopefully by now, everyone's had a chance to review the press release and the prepared narrative that was released at the same time. This is my 95th consecutive quarterly earnings call, I think. I believe we had one after we went public in 1991 for the first quarter, but I really can't remember back that long.

But it's also my last, too. I can honestly say I've enjoyed most of them over this period of time. But at this point, unless anybody has any specific questions for me, I'm going to turn it over to Janet and Johnny.

Thank you, Sandy. And welcome, everyone, to what is my fifth earnings call and the first that I intend to lead in terms of the Q&A section, along with Johnny Calmes, our CFO.

Before we begin, I thought it'd be helpful to share some of my observations in my past 18 months with World, and my experience in visiting many of our US states, and spending a lot of time with the VPOs and supervisors, as well as visiting as many branches as I can every time.

I've been to about half a dozen states already. I'm visiting another three within the next two weeks, and then the rest. And I've also spent a week in Mexico with our senior management team and our top performers.

And what I've found is that our people are incredibly motivated and enthusiastic about the Company. The family culture that's been created at World is very special. And [there are same] positive relationships between our employees and their customers and other members of the local community in which we have our branches.

Our employees truly understand the value of the work they provide, offering credit to folks who otherwise would have very limited choices and offering them credit when they need it, which helps them with their lives. And everywhere I go, I also find that folks are full of ideas and wanting to improve our performance in every way. Even folks who've been with the Company 20 or 30 years are excited about the change and using technology to deeper levels, and that we're not so fixed in our ways.

In fact, many have been waiting and hoping for some of the changes we've recently made, like debit cards, like a consumer-focused website with a starter app on it. There's tremendous appetite for change, improvement using technology. And it doesn't surprise me. Because I believed this was the case when I came to World.

And I came because the Company has a strong foundation and because there's so much opportunity for growth, by taking advantage of new technology, by using data analytics in a way we've never done before, by improving marketing and making it more segmented to appeal to different customer segments appropriately, and by taking action digitally on the internet and in a mobile manner. So it's great to see this enthusiasm in the branches. Because serving our customers is really what it's all about.

In fact, I'd like to point out that in the last five years we've served more than 1.8 million new unique customers. And in addition over the last five years, more than 800,000 former borrowers obtained a new loan from us, which is a great statement of satisfaction. The point is we serve a lot of unique people who without us don't get credit. And former borrowers come back as they had a happy experience.

Now, regulation is our biggest issue, as you all know. Even though we're heavily regulated in every state, we now have the CID from the CFPB. As you know, we believe the CFPB, along with all state regulators, recognize the important service we provide to folks who otherwise would have very limited access to credit. Just like our employees who are key parts of their local communities recognize this, too.

Without us, folks whose car breaks down or need an urgent housing repair, or have some other sudden need for money, would not have a good choice. Or if they just need tiding over for a short period with their utility bills. You can't get to work if your tires on your car burst and you need $400 to get new ones, and you don't have access to that $400. If you can't get to work, you lose your job, and so you end up in a very negative situation.

We are glad to help folks with credit. We feel a huge need in the marketplace. We're doing very short-term, extremely high-rate loans of a month or two, and, on the other side, traditional financing the customers with great credit can achieve. We're very pleased to fill this important gap. And we have extraordinary testimonials from our customers to really showcase the value of our products and the demand for them.

And I'd also like to talk a bit and point out our use of data analytics, which has increased enormously and is very much enjoyed by our folks leading the field. Everywhere I go, we discuss how that state is doing on multiple metrics and over multiple years, including the current one; how each district is doing, where the good, the weak, the erratic branches are. And we discuss the reasons for poor performance and how we can improve.

How can we do better is a happy and critical question at our company. And it always will be. And after every visit, it's amazing the positive feedback I get on how much the data has helped the team focus on their key issues. There's really nothing like pausing and looking at trends over time on key metrics.

Folks in the field are just too busy to look on a day-to-day basis. And they're looking at each and every branch separately, working to get the best performance possible, and they have many pent-up great ideas on how we can improve. And we're taking action on them.

In fact, at our World Leaders event earlier this month, where we celebrate our top performers, I brought all of the VPOs -- that's the vice presidents that run each state and the four regions in Texas -- I brought them in half a day early to take advantage of having them all in one place. And we worked for five hours on operational issues and how to improve them, and it was absolutely terrific.

Furthermore, we have just hired a Vice President of Operational Excellence, who will start on August the 3rd. And she'll be tasked with things like focusing on improving branch performance, efficiencies, best practices everywhere; optimizing local marketing activities, collections activities, physical branch layout; how we incentivize our folks to ensure it's aligned with our vision and growth, project management so our new initiatives implement successfully and on schedule, and overseeing all of our training efforts. And this will be a wonderful addition to us.

And also, finally I'll say, in my visits, I've seen this incredible close relationship we have with our customers, who know our employees by name, who have wonderful, positive relationships with them. And so we're going to take advantage of our strength in this industry space. We're going to move towards one branch to leverage our reputation and strong customer relationships. So every time we move the branch, it becomes a World Finance branch where it's legally possible, which is most areas. And we've already put stickers on all the doors in our branches that say that we've been established since 1962, and we're serving over one million customers. And we're very proud of that. Have a very exciting future ahead of us.

So I just wanted to give some kind of overview about my experiences in the last 18 months. And now we look forward to your questions.

Leon?

(Operator Instructions) Bob Ramsey, FBR Capital Markets.

This is actually Martin Terskin for Bob Ramsey.

Do you expect loan balances to [contract] to the rest of 2016?

I think it is too early to say at this stage. We have various initiatives in place that we believe will contribute to growth. But I think it wouldn't be appropriate for us to make some prediction on how we're going to perform through the rest of the year.

Got it. Thank you very much. And --

(Multiple speakers) important to point out that in the US, the loan growth is relatively flat. A lot of the decrease had to do with the [move] in exchange rates between the US dollar and the Mexican peso. Which obviously we have no control over.

Got it. Is it fair to add approximately $5.2 million back to expenses, looking into run rate in Q2 and beyond?

I'm sorry, can you repeat the question?

Is it fair to add approximately $5.2 million back to expenses looking at the run rate in Q2 and beyond?

No, not necessarily. So if you look at some of the things we reversed in the first quarter, including the third tranche of the Group B awards, some of those had a forward impact. So the third tranche, we had been accruing around $450,000 a quarter for that tranche. And we were also recording around $100,000 a quarter for Sandy's B2, so the second tranche of that Group B (technical difficulty) plan.

Got it. So do you expect the expenses to move back into the $47 million range going forward, then?

I'm not sure, off the top of my head.

Got it.

And I guess finally, before I jump back into the queue -- could you give me some color on how you're accessing the NCO collection, and kind of just color around the conversation that you had with the buyers? And maybe if you have other avenues for selling NCOs if there's some problem with that relationship?

Yes. As we stated in our release, we're -- it's early stages. We're having some conversations with the buyer. It's really too early to say much more than what we've said already. We've said already that -- we're in conversations with them -- that forward flow sales may be affected. I think it's reasonable to make the general assumption that our charge-offs have value, and there are folks who are interested in buying them. And that makes us feel very good about our future cash flows from our charged-off accounts.

Got it. Thank you very much for the color.

(Operator Instructions) John Hecht, Jeffries.

First of all, Sandy, it's been great working with you. And wish you the best of luck. And Janet and John, look forward to working with you guys.

So moving on to questions that -- in terms of growth, Janet, I wonder if you can give us an update on kind of the mobile strategy, when you think you'll be live with that and what the kind of activities are around the mobile and technology strategy; and then at the branch level, if you could tell us kind of what were the same-store receivables trends and other endeavors you might take upon to increase the foot traffic at the branch level.

Certainly.

So taking the first topic around mobile and technology -- let's talk about that, our digital activities. First of all, more than half of our customers are already signed up for texting. And we believe that number will absolutely grow. The texting we use for friendly payment reminders, for marketing in our tax prep time, and for letting customers know when they have the ability to refinance the loan. So we're very pleased with that. Course, every customer opts in for the texting option who we send texts to.

We have debit cards in every branch. And we've started emailing as a new form of marketing. We've found that emailing gives a lift to direct mail. It's not expensive, so we're going to probably do more on that front; as well as increasing our advertising spend on the internet. So we have more than, on a typical day, 300 apps. And we believe we can grow that very significantly.

We're actually in the final review stages of launching our completely redesigned website. We'll have a clean, crisp, customer-friendly focus that can be easily viewed on all devices, including mobile, tablet and desktop. And these changes will comply with the recent Google requirements to allow top-of-page placement and improved organic search if you do these activities. So we're very focused on that and excited about it.

The website, of course, will still include our branch locator and will still allow prospects and former borrowers to start their application online, as well as we're adding enhanced tracking of all contracts derived from the website. And it will also have our informational video in the loan section on how to apply for a loan. We're on schedule to launch that within the next month or so. So we feel very good about that on the mobile and technology front.

You asked about the branches and what we're doing locally, and same-store receivables. I don't have the numbers for same-store receivables right in front of me. But luckily, we have a strong push to give branches autonomy to do what they think is right in their local areas. Branches are able to send refinancing mailings out to the local customers they know as they think appropriate. They also have a sales and business development manual, which is new, which goes through all their different choices of local marketing activities to help them grow. And we found, and it won't surprise you, that the branches who do more in their local community are the ones that grow more. So we're focused on that area, too.

Great. Thanks very much for that.

And then [finals] -- can you tell us what's going on in terms of Mexico volumes or balances x the currency impact?

I can, to a certain degree. So the volumes are down in Mexico as well. If you assumed the exchange rate in Mexico for gross loans was the same as it was at June 30, 2014, that leg would've been up $17.6 million in US dollars.

Did you say $17.6 million there?

That's right.

Okay, great. Thanks very much.

Vincent Caintic, Macquarie.

I have a couple of questions, first on the credit. Seems like delinquencies perhaps ticked up a bit. And I was just wondering broadly -- does the rate of loan growth have any implications for how your credit behaves?

I'm not sure I understood the second question.

Just, I guess, with maybe your loan growth having moderated a bit, I just wonder if with your -- does that have an impact for your charge-offs -- just probably, is there a relationship between the amount that you originate relative to how you think about delinquencies and charge-offs?

No. I don't think so.

Okay. Got that.

And then, just on liquidity -- we had a lot of things going on in the quarter. I was just wondering if you can address that broadly. Are you satisfied with your liquidity? Are there more actions that you expect to take, such as the postponement of the debt raise, maybe reviving that? And then, how -- maybe a view on how your existing credit facility providers kind of view the current situation.

Sure. So the most important thing to point out here is that we have more than enough capital to operate the business as usual. The only thing that we've really lost through the amendment is the ability to buy shares back. And the Bank's view is, with all of the uncertainty around the CID and the CFPB, that [they decide the CSD] leverage at least with them until there's a little more clarity. So obviously, they're making sure and have made sure that we have plenty of capital to continue to operate the business.

If at some point in the future we felt like we could get appropriate pricing to buy shares back, we believe the bank group would be open and would consent to us using those funds to purchase shares back, or to purchase shares.

Got it. But in terms of timing, is there any thoughts on that? Plus, if I understand correctly -- so this doesn't have an impact for, say, the loan growth side of the balance sheet?

It doesn't.

Okay.

So we believe we can grow as fast as we would like with our current facility. As far as timing -- it wouldn't make sense until we had some more clarity. In [the event] that could provide that is a more clear and rational proposed rules from the CFPB or the resolution of CID -- until one of those two things happens, and we feel like it adds that clarity, then we likely wouldn't do anything.

Got it. (Multiple speakers) I'll get back into queue. Thank you.

Henry Coffey, Sterne, Agee.

Sterne, Agee CRT.

Sandy, it's going to be sad not having you to talk to from now on. But --

(Multiple speakers).

Congratulations. Old Henry will just have to sit around. Maybe we could buy a Cracker Barrel someplace or something.

(Laughter)

But no, congratulations.

Thank you.

And it's been a -- you've been a good man for a long time.

Looking at the overhead numbers -- in simple math, if you add up all the one-time items, I get $4.2 million. Is that correct?

It's close to that. I had around $4 million.

Well, it's $5.6 million of cost, and then $1.4 million of -- $5.6 million of lower-cost, right? $1 million plus $1.2 million plus $3 million, minus $0.4 million and minus $0.1 million related to the deal. Or is that -- what am I missing there? Did I skip a beat or something?

(Multiple speakers) we'll go with $4.2 million. We'll go with your math.

Okay. So you add that back to expenses, and you subtract $500,000 to kind of get to a run rate? Is that accurate?

That should be about right, yes.

Okay, so we're talking about a run rate of $71.1 million going forward, (multiple speakers) on the existing business -- okay, great.

Getting into the second thing, in terms of where you stand with your debt facility, the increased borrowing cost -- only a small portion of that was captured in the June quarter, right?

That's correct, yes.

And then, there's a high credit issue every December. So a year from now, the high credit will be $500,000? Is that how we should understand the facility?

That's correct.

And then the next year, that, quote, high credit will be $400,000. And that's what you would be planning the business around?

That's correct.

In other words, it's like -- based on not March balances, but the real governor is going to be what occurs in December.

That's right.

And then, Janet, this is sort of for you, but two or three questions on the big data front. I think it would be fair to say that in today's world, you can underwrite a small loan accurately with big data. You don't -- or some variation on credit scoring. Is it probable that the branches are going to evolve in that direction, or are you still going to kind of continue with the manual process?

All right. So let me address that.

A lot of our customers are in the thin file, right? And what that wording means is customers who don't have a credit score (multiple speakers) --

Correct.

-- debit or credit for a long enough time. And that is a very difficult thing to model out. There are very different specific situations. And we believe that knowing our customers so well, and knowing the situation they're in in the branches, and having that relationship, is something that a model can't replicate. Could you use various different constraint techniques with new managers to help them on their way as they are learning, and so on and so forth? That could be possible. But I don't think we want to miss the opportunity to understand the customer in our ability to make specific lending decisions based on their specific situations. It doesn't necessarily have a numeric value attached.

Have you had any real dialog with the CFPB in the last 90 days?

A dialog with them? So we have --

I mean, their approach to this whole process seems to be apolitical. And if you read any of their press releases, they have a propensity towards pejorative language. Or they obviously didn't learn their manners in high school, or something. So it's very bombastic press releases, et cetera, et cetera. I was wondering what the real dialog is like with them as they start to review these issues with you.

Don't think we can say anymore then that they've requested information from us. And in many of their public statements, they have said how much they appreciate that a small-loan customer, customer with a difficult credit situation, needs access to credit. And they do not want to take away the credit from that kind of customer, which is our kind of customer. So we feel that as a positive statement toward what our industry provides.

The hot point seems to be around ancillary products. There's probably no proof the credit insurance or auto club are real products; they seem to be more -- they were originally presented, back in the ancient days, as sort of intended to be yield enhancers. Is it possible, or is there any move afoot, to go into those states where you are heavily dependent on ancillary products to make the numbers work, to get the rates changed to a real rate? In Texas, you charge a series of fees and rates that are just based on the cost of the loan that work very well for you. But you can't do that in the state of Georgia. Is there any movement afoot to correct that?

That's not a focus as far as we know. So I think we'll continue to run our business in the manner that we feel is most appropriate and provides value for our customers.

Well, I'm just saying that -- the CFPB objects to the ancillary products. Has anyone at the state level begun the thought process of saying -- let's alter their equation, so that we'll charge -- in the state of Georgia, we'll allow customers -- will allow lenders to charge the actual rate required, and we'll simplify the borrowing equation for the customer?

These kind of things have been discussed in various states. But so far, nothing has actually been done or taken place on these topics.

And anything afoot like what we saw in Texas, where you were able to dramatically increase rates?

Not as far as we know. We don't know anything about increasing rates in other states.

Great. Thank you. And congratulations in taking over the reins.

Thank you very much.

(Operator Instructions) John Rowan.

I'll echo everyone else's appreciation for standing on the calls over these many years and ensuring great work [in the field].

As far as just kind of get back to the run rate in G&A -- obviously, there's a [fort] netted out for -- so for Henry -- $4.2 million in add-backs. But I also wanted to kind of point out and get your take on seasonally how those will ramp. Because it doesn't seem like you should kind of straight-line the G&A. Because there are, if I'm not mistaken, some programs that hit in June and December that you have to accrue for. It would be annual employee appreciation programs. Do you guys still run those? And are those still a contributor in the June and the December quarter?

We still do have a appreciation day. I believe it's called the World Leaders event now. But that happened in July of this year. It's not a significant amount of calls. And it's slightly less than it would've been in the past.

Obviously, in the December quarter, you will have additional marketing expense as we ramp up our campaigns going into the Christmas season.

Okay.

And then, just to be clear on the $1.2 million of expense that you flagged for the debt expense -- I just want to make sure -- that was a one-time item. That's not the amortization of the origination expense. I assume that's all coming through -- is going to be accreted into the interest expense line. Correct?

That's correct. The $1.2 million is accounting fees and legal fees and the rating agency fees that were incurred as a part of the bond offering.

Okay.

And then, just kind of the timing, to kind of hit on someone else's question -- the timing of the deleveraging, right -- did I hear you right to say that you view $500 million as basically the ceiling for the December quarter, meaning that -- is that contractually that you have to be --

No, no, sorry. So for this December -- I thought he was talking about next December. So this December, the ceiling is $600 million.

Okay. So -- but how -- okay.

The following December, it would be $500 million.

So you can obviously go over $500 million in the December quarter and then use the seasonal pay-downs to reduce your facility to $500 million at the end of March, correct?

Absolutely, yes. Sorry, yes. So if I wasn't clear, yes. So in December of 2015, the ceiling is $600 million. And then it would be $500 million in December of 2016.

Okay. And in conjunction with that question, John, I just want to know -- what funding options do you think you have available to you? And how close do you want to fly to that flame? Right? I mean, if you look -- obviously, I think you have plenty of cash flow to fund the business. But there are step-downs. And it's heavily dependent on tax refund season and the timing of it. God forbid Congress delays tax refunds for whatever reason it might be.

I just want to know your comfort level with flying above that step-down at the end of March in the December quarter, and just relying on the typical seasonal pay-down that would come. And what option do you think you have as a lateral move should there be something that changes that's outside of your control?

Right. So we've obviously done projections for the next three years to make sure that we feel like we have enough availability under that facility. And we've also built in a lot of cushion above just normal operating -- the normal operations of the business including growth.

So within that, when I say we have enough capital to run the business, that includes any kind of unknown event that may happen, whether it be a fine of some sort or anything else. Within reason. Right?

So based on our projections, I still feel we probably have a $50 million to $60 million cushion above our projected growth.

Okay.

And then, just last question -- you talked about it obviously -- the CFPB likes to find some type of finable offense. And if something were to come down, is it by default a consent order? And how do your lenders use a consent order vis-a-vis the level-one or level-two event under your covenants?

It would certainly be at the level-one event, which would require us to notify the banks. A key part of the level-two regulatory event is it has to have an impact -- or a material adverse change on our business. So it would depend on the consent order and what it does to our business.

Okay. But a consent order by definition. It's not like it's an injunction or a stay, which were listed in the debt covenants. That would be -- it's below those types of notifications.

I believe all those would be at a level-one regulatory event, which would require notification. If those things also caused a material adverse change in our business, it would be a level-two regulatory event. All that really does is it gives the bank group a voice, before -- if for whatever reason we had to materially change our business, it gives them a voice on the path forward, versus having to wait until we broke a covenant or defaulted on a payment. So that's all that's doing.

Okay. And just what other funding options are you looking for? I mean, are you waiting for the clarity on the CID, in order to tap the debt markets? Or are you looking at any other alternative vehicles when and if you'll need capital?

Right. So once there's more clarity, there is a possibility we would go back to the high-yield market, as well as keeping the bank facility. There's also the option of going for the private market, which typically carries higher rates with it. We have options out there. In the short term, next 12 months, we don't anticipate doing anything at the moment. But that could always change.

Fair enough. Thanks for answering my questions.

(Operator Instructions) J.R. Bizzell, Stephens.

Janet, I was interested -- your US tour of the stores -- I'm wondering if you could kind of point out maybe the most common issues you saw and noticed while you were on the road, and kind of the complaints or recommendations by the regional directors as well as the store managers. Kind of what was the resounding issue that you saw out on the road?

That's a good question. I think a lot of folks have realized they can do more in their local community through our wonderful customer relationships regarding things like referrals and relationships with local businesses. And I think that's going to become a very strong push for us, just by looking at the branches that do more of that and the results they get.

I can tell you that our folks are absolutely thrilled to have the debit card option to provide to customers. And part of our mission is to provide the best possible customer service. And for customers who want to pay on a debit card, offering that service makes a real difference.

So those are a couple of the things that come up. Also, it is really around increasing -- I would say, increasing our visibility in our local communities in a variety of different ways. And we are helping with techniques on how to do that and sharing what works in the branches.

But one of the things I was most excited about is that people who have been with the Company even 20, 30 years, you might think, were set in their ways and want to do things the same way; they are huge proponents of bringing in new technology and making changes that help the business grow and that appeal to customers.

Great.

And switching gears, and last one for me -- the yields appeared to kind of sequentially drop. And just wondering, John, maybe if you could talk around what was kind of the driver there, and then how you all are thinking about yields moving for the remainder of the year.

Sure.

So the yields will be driven by, to a large extent, the volumes and the size of loan portfolio. But also, when you compare year over year, and you look at the average earning assets -- it's down around 3% compared to the prior year. As you know, once alone goes past 60 days contractually past due in the US, and the traditional portfolio in Mexico, we've stopped accruing interest on those. So because we're carrying a higher level of the 90-day past-due accounts, that's had an impact on the average earning assets.

Great. Well guys, thanks for taking my questions.

(Operator Instructions) Randy Heck, Goodnow.

Can you hear me? John?

Morning, Randy.

Sorry. Can you hear me now?

We can hear you, yes.

Yes.

Okay. Sorry about that.

So the question of liquidity and the cushion -- it says right in your annual report that fiscal year 2015, of the last 12 months, you generated $138 million of free cash flow. Now, some of that can be considered one-time, because I think in that number you sold -- the charged-off loans, I think, you took in $10 million or something like that. So let's call it $128 million. Assuming you're not growing your loan base, your overall loan base for the next 12 months, is there any reason why free cash flow would be any less, materially less than that number?

Under normal conditions, we would expect the same level of free cash flow.

Right. So this idea that you may have an issue with your liquidity, given that March of 2016, your line of credit is $500 million, your debt right now is $488 million, you did $125 million in free cash flow -- you have a very large cushion.

We believe so.

All right. Just wanted to clarify that. Thank you.

Thanks.

Bob Ramsey, FBR Capital Markets.

Hello. Just one quick -- two quick follow-ups. Do you have any thoughts on the Military Lending Act rules that came out this week?

Well, in truth, the Military Lending Act has very little effect on our business. Because such a tiny portion of our customers are part of the military as determined by this Military Act. So we think it has very limited effect.

Now, if the database comes out -- that was one of the parts of this, that there will be a database on which you have to check every single customer -- obviously, we shall have to hope that the database is quick, expedient and works perfectly, as well every single other company in this industry. But for the actual military loans that we make, it is an insignificant percentage of what we do.

Thank you for the color.

And lastly, Janet, what's your outlook for World in the next three years? And what do you plan to do differently at the helm?

Well, I think a lot of it is building on our strong foundation that's bringing more in the use of data and more in the use of new technology -- I think there's a lot more we can do on the internet and digitally. Some companies have a much higher percentage of applications coming through in that method then we are at the moment. And that's not surprising, because we've really only been doing this hardly even a year.

And I think also you can look to us -- we'll be using data to really hone down on where we have branches that aren't performing as well is they can and specific ideas for where the issues are and how we can do better. So I think this will allow us to significantly improve performance in our existing branches as well as to have better means of locating new de novos where we grow.

As state regulations change and other states become attractive, you can expect to see us enter new states. This is something we monitor regularly. And so to be good to expand as our products allow. And I think you'll see us get a lot more into looking at the profitability of different loan segments to allow us to improve our underwriting decisions and understand, for each of the different segments of loans we provide -- from the very small to the largest size -- how we can grow them successfully.

Thank you very much for all the color.

Welcome.

(Operator Instructions) Paul [Aribero], BMO Capital Markets.

I'm sorry if you already answered my question, but I keep getting dropped out of the webcast.

But my question in relation to the sale of previously charged-off loans -- I couldn't find in your release any specific comments on that, other than you had some problems with the buyer. But is it safe to assume that the $1 million in net income, that you told us last quarter that you were going to have per month for the next 18 months, is still in place? Did you have it this quarter, and you expect to have it for the following 15 months?

So let me clarify on the $1 million, and then I'll hand it over to Janet.

Yes.

We didn't say it was $1 million in net income; we said it was $1 million in gross sales per month, just to clarify.

Right.

And I'll let Janet answer from there.

Yes, Paul. What I think you missed, we said before, is that this is recent conversations with the buyer. And it's really too early to say more than that we're in conversations with them. The forward flow sales may be affected. But we don't know more at this moment, so we can't really add much more color to that at the moment.

But this quarter, then, you had $1 million in gross sales.

As it says in the releases, $1.8 million in gross sales.

Okay.

Actually, net sales. But not net income.

And how much was in gains, then? So --

It'd be 63% of that, approximately.

Yes. Right. Perfect. Great, thank you.

Clifford Sosin, CAS Investment Partners.

Sandy, thank you very much for steering the business for all these years. And I wish you all the best going forward.

And Janet, I guess one thing that you guys got set up earlier this year was your new, improved customer database. And I was wondering if it might be possible for you to share some insights about customer profiles in terms of typical customer behavior, customer lifetime value; also obviously, questions like how many times a customer renews alone over their life and [other] -- difficult to tease out from the aggregate [statistics] we have. And now that you guys have some better data, you might be able -- I wonder if you could share some observations there.

Our use of our customer database does indeed help us on several of these different fronts. And we track various characteristics by customer, including age and behavior and number of refinancings. But we don't traditionally disclose this kind of information. We use it internally to help us improve our performance. And that's what we're doing.

Fair enough.

And new customer counts weren't in the release this quarter. Is that something you guys can still share?

So the new customer volume and (inaudible) was down around 4.8% quarter over quarter.

And that's number or dollars?

That's number of customers. That's correct.

Okay.

Right. Which is why this is one of our highest focuses -- to grow our new customers.

Sure. Although that seems to be an improvement in the year-on-year performance versus the fourth quarter, if I'm not mistaken.

I don't have the fourth quarter in front of me, but it may be.

Okay.

And lastly, I'll just take one stab at this, because I know you don't even attempt to answer it in a public forum. Obviously, it's difficult to figure out what the CFPB is thinking with regards to CID, and you're limited in what you can share. But based on the conversations you've had with them, the information that they have requested, do you have any sense as to their primary areas of focus or what sorts of -- what they may be asking of you at some point as the investigation wraps up, or the timing, or anything else that you might be able to share?

We really don't. We don't know what their focus is. All the questions from the very beginning were very general. So it's very hard for us to say. Based on our counsel, CFPB guidelines are 1.5 to two years. So you could say we expect to hear back in the next six months. But these are just guidelines. We cannot know for sure what their focus is or when they intend to get back in touch with us.

So anything else we said on this topic would just be guessing, as much as anyone reading news about the CFPB is guessing.

Great. Thank you guys very much.

John Rowan.

I just have two quick questions.

I was under the impression that the forward flow with the debt buyer was more of a contract and not necessarily subject to change. Could you just clarify if you actually have a contract to sell, or if it's more at will?

There is a contract in place.

So if they stop buying, do they have to pay any type of termination penalty?

Again, it's too early to discuss that and speculate.

Okay.

And then, not to harp on it, but just to kind of understand again how seasonal expenses move into the second quarter -- obviously, we talked about the employee appreciation program. But also, isn't there -- don't you give out restricted stock units to managers in the first quarter as well? Because there's always been a little bit of a seasonality and a drop-off from the run rate in G&A between the first and the second quarter. I'm trying to understand if that's still in place.

The annual grant typically happens in the fiscal third quarter.

Okay.

So I'm not 100% sure.

Okay. Thank you.

Henry Coffey, Sterne, Agee CRT.

A couple of questions.

Historically, you had people buy your charged-off receivables. And to quote one of your former executives, they've done it once; they don't intend to do it twice. We actually are very good at collecting charged-off receivables. Or we're very -- we work our accounts very, very hard. And I was surprised that you were able to bring a buyer in this time.

Is there something different about the current arrangement that's different than historical results? Or is this just a repeat of what we've seen in the past -- that you guys do a great job of collecting your own accounts, and the residual value in the charged-off receivables is good, but not good enough to warrant an aggressive purchase program?

We believe there is value in our charged-off receivables. I can't speak to the past, because I'm not familiar with any previous contact done in the history of the Company and the details therein or not. But we believe there's absolutely value in the charged-off account. There's a whole industry that buys charged-off receivables. And it's extremely complex with the use of technology and analytics and deep experience of people involved in that industry (technical difficulty) there is value in the charged-off receivables of companies in our industry space. So the market is there, and it happens.

They're certainly more interested in installment loans now than perhaps they have been in the past. But I think the use of data analytics in that industry has changed. While it is not our expertise on how to manage charge-offs of receivables after a period of time, think it's certainly in the expertise of many other companies. So --

And then, going back to some of John's earlier questions -- I think there's only one other public company in the auto/installment, small loan area that is only using bank debt. So at this point -- and I know you're interested in diversifying your funding sources.

So regardless of the outcome with the banks, regardless of the outcome with the CFPB, what are the viable options that you'll be looking at to move away from bank-based financing? I know none of the pawn shops use it, none of the small -- none of the public installment lenders use it. It's almost like not -- as you've experienced, not a great source of permanent capital. What's on the to-do list when it comes to generating new sources of funding? And whether you have a capital issue or not -- and I don't think you do; I think anybody with a hand calculator knows you can pay off this debt and continue to grow the business. But having said that, what are the options that you would be exploring?

Sure. So obviously, one option is the high-yield market --

Right.

-- the [144A] market. There's also the private market, which typically carries a higher interest rate with that. But it is an option.

And then, of course, there's the securitization. I think we're a little ways off from that, but it may be something we can explore in the future.

Great, thank you.

Vincent Caintic, Macquarie.

Just two more from me. So one on the commentary of the buyer of the charge-off, the loans -- I understand you can't talk in too much detail. But I guess I'm just kind of surprised that the early performance hasn't matched the projections when it's only been less than six months. If there's any color on what that might be, that would be helpful.

And then, just on the text about -- could potentially impact the amounts received -- does that imply the gains from last quarter is also under question? Or is that all said?

As you pointed out, in fact, it's been a very short period of time; it's actually been about three months. So it's very early stages. And we've only just started having conversations with the buyer. So we really can't say more than these are early conversations. I think there may be an impact on forward flow, but will be able to give more information when we have had further conversations with the buyer.

Got it.

And then, for the prior flow, for the last quarter's -- is that also potentially an impact?

We don't expect it to have an impact on the prior sales.

Okay. Got it.

And then, on the operational issues -- I think that was very helpful to talk about your room for improvement than to -- I was just wondering where, Janet, you see yourself -- or you see the Company now, and where you see the upside in terms of the improvement. And then, on collections and credit specifically, any action items you plan to do there? Thank you.

Yes. On the operational issues, there's a lot that we can do to get more efficient and more effective, even things as precise as looking at to overtime hours and branch opening and closing hours, and aligning them better with our busiest times, so that we use less overtime, for example.

And on collections, looking at what we collect back, for example, from field calls, versus the cost of doing field calls and mileage reimbursements. So we're looking at all kinds of things to that level of detail that have not been looked at before, to make sure that our activities are aligned with profit maximization at the same time as serving the customer.

Got it.

And anything on credit specifically?

Well, our underwriting practices have served us well since 1962 based on knowing the customer and the stability, ability and willingness to pay. Can we help in areas, for example, where there is a new manager who has less experience? Yes, I think we can help, providing some guidelines that are clear there to help them as they get comfortable making the right levels of risk. Not too much, not too little, but the right levels. We're certainly looking at things we can do in that kind of situation.

But branches that have been around for a long time -- the managers know their local community, and they know the folks there, and they know customer behavior.

Got it. Thanks very much.

Welcome.

Clifford Sosin, CAS Investment Partners.

On two topics -- first, on the charged-off receivable sales -- can you help us think about the magnitude, I suppose, of the ongoing $12 million of annual sales that's at risk? Is this that the buyer is saying -- look, we might not be up to $12 million, or it might be $10 million? Or is the buyer saying -- this might not be $12 million, it might be zero? If you could just give me a sense of kind of what they think? And not so much with regards to the 18-contract window, but with regards to the value of the charge-off receivables on a longer-term basis?

Again, it's just too early. We've [been on] this for days. So it's too early to speculate.

Got it.

And then secondly, I think there have been some experiments with branch manager incentives and the impact of those experiments on volume growth. And I guess I was wondering if you might share with us and some of your thoughts there, and the impact that that has had where it's been rolled out, and the potential impact on the business.

Sure. The biggest change in incentives is that we now allow branch managers to keep accounts in the branch at 90-plus days without having that affect their performance metrics. So whereas before, the branch manager might have desired to charge-off an account at 90-plus days that they think they can collect before 180 days have passed, because it affected their metrics; now they can work those accounts for longer.

And so, to your question earlier -- as an example of something we can do also with a customer database, we looked at, for these 90-plus buckets, are we rehabilitating -- bringing back into the fold, if you like -- more of these 90-plus accounts? And the answer is we are. For these 90-plus accounts now, our analysis has shown us that the rehab rate -- meaning the number of accounts that are making at least one payment from this pool of 90-plus late -- has doubled.

Now, it's not a huge number, obviously. Because as you go through the different buckets -- 30, 60, 90 -- you have fewer accounts you're going to rehab from each as time passes. But nevertheless, the accounts making one payment or more has doubled compared to where it was a year ago. So we're pleased about that.

That's wonderful. But I actually -- my question had more to do with volume growth. Are there new account acquisitions encouraging may be managers who've become somewhat comfortable to work harder to find more new customers, things of that nature?

Yes, I think we have the right incentives there. Because what we have done with our branch manager is say that part of their incentives are based on account growth. And that is account growth based on the month before, not the year before; so that if you are a branch manager who happens to be quite a bit lower than the year before, you're still incentivized if you can grow your number of accounts by one or two accounts. Any form of growth in the next month, you're rewarded rather than looking at a year ago. So not feeling you [had worth your] 20 accounts down from a year ago you have to add a whole 20, you only have to add it based on your number of accounts in the previous month. And we believe that is a positive. Because you want incentives that can be achieved every month.

Thank you.

Henry Coffey, Sterne, Agee CRT.

Yes, I apologize -- I forget to ask this earlier -- what percentage of your accounts are actually with the military? I remember it's small. But what is the percentage?

It's less than 1%.

Yes.

Thank you.

Very small number.

There are no further questions at this time.

Thank you very much for participating in our earnings call, and wish everyone a great day.

Thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference.