World Acceptance Corp (WRLD) 2016 Q4 法說會逐字稿

Good morning and welcome to the World Acceptance Corporation's fourth quarter press release conference call. This call is being recorded. At this time, all participants have been placed on listen-only mode. Before we begin the corporation has requested that I make the following announcement. The comments made during this conference call may contain certain forward-looking statements within the meanings of Section 21-E of the Securities Exchange Act of 1934, that represents the corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risk and uncertainties, statements other than those historical facts 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 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 31, 2016, 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 statements it makes.

At this time, it's my pleasure to turn the floor over to your host, Janet Matricciani, CEO. Please, go ahead.

Good morning and welcome to our fourth quarter earnings call. As usual, I will add some color to the earnings release that you have all received. I will not repeat the information in that script, as I assume that everyone on this call has had a chance to read it. As the release described, our revenues are down in Q4 2016 versus Q4 2015, and are also down fiscal year 2016 versus fiscal year 2015 by 9%. Since our ledger throughout the year was lower than the year previously, it's not surprising that revenue and income are also lower and we recognize that our number one priority is bringing the Company back to continued growth.

We still believe we have a lot to do to increase the effectiveness of our direct marketing and expand our digital presence and increase our technological capabilities, all of which will be critical to our future growth. I would like to mention some of the actions that we have taken to get the Company back on the path to growth.

Firstly, we have a successful launch of our convenience checks product. This is a check that's sent to carefully selected customers that they may deposit in their bank account or cash it in another bank. We launched this product first in Tennessee in order to follow our test demand strategy that's infused throughout the Company and thus, to appropriately manage risk.

This product launched on April 1st. Results to date show almost a five times higher response and even the highest recent pre approval campaigns. Furthermore, the credit scores for this pilot of this product suggest the charge-offs will be within our expectations. But we cannot know for sure yet as the first payments are due during this month. Early indications suggest it will be a successful launch. We booked around 3,000 new loans from this offering. So we are pleased with the results of our pilot so far. And we expect to now expand this product into other states where legally allowed.

Secondly, on the topic of the growth, we have expanded our first payments extension program. This is a program that allows customers on the origination of a loan to select a preferred payment date, that is within specific criteria. We want to make it as easy as possible for our customers to pay us back. And we know that aligning due dates with pay dates for our customers' income helps them to make their payments. We have had this program only in Kentucky for many years. This quarter, we launched it smoothly in Alabama and early indications are that the implementation of this program was not difficult, and that customers appreciate this choice. We now expect to expand this program state by state to all states in which we operate as legally allowed.

Thirdly, we have improved our tax prep business. As per our earnings call script, our earnings release, we added more attractive loan products to our tax prep offering to benefit our customers' needs. This program proved very popular and we were able to increase the number of tracks preps versus last year by 12%. To give some context, fiscal year 2015 tax preps were only up 1% from the year before. So this is a significant increase this year.

Fourthly, we have improved our direct mail targeted marketing. And we saw the results in that loans to our former borrowers were higher this past growth season than the year before. We are working on optimizing the marking spend we have today such as improving the allocation of marketing dollars to focus on the right customer at the right time and expand into new segments.

The fifth topic is our underwriting. We still use the stability, ability and willingness to pay method of underwriting in our branches which is common in our industry space. However, we are layering on top certain constraints in order to eliminate bands of loans that are not profitable or marginally profitable and so do not justify their continuance. We also now require all large loans to new borrowers to go through one of our two large loan centers in order to ensure strong underwriting in this category. In recent months, looking at credit scores, we have seen an increase in the credit quality of our customers.

So although gross is down, we are tightening our underwriting capabilities and that's a positive. We stopped all [inaudible] across the Company in mid-December. As per the earnings release, we believe that the up tick in delinquencies and charge offs that we experienced at the beginning of the quarter has now passed through and currently delinquencies are back to normalized levels. The up tick in delinquencies may be due to the fact that we did not do field collecting at the end of December without having given our employees enough time to prepare for this change. So that month's delinquencies were unusually high and have now run off.

We also believe that by stopping field calls, first reaction of many of our branch managers was to tighten lending and thus missed the opportunity to make small, successful, loans. We believe this may have had an effect on our growth over the last few months. We have worked with our field managers to increase confidence in lending following our usual procedures, meaning continuing to make both small and large dollar loans and we believe this will enable growth.

Aside from our growth in our initiatives, our other areas we are working on were infusing data analytics into everything that we do. This includes branch moves, closures, renewals, and new branch locations. We are in the process of ensuring that every branch location is optimized and that we maximize long-term profitability, not number of branches per state or overall. You can therefore expect fewer branches to be opened in historic years with a focus on branch profitability and efficiency.

We also expect to continue closing a few branches in areas where we do not believe there is a path to profitability or where we believe a merger of branches creates an efficiency and increased profitability. In terms of technology, we have worked throughout fiscal year 2016, to upgrade the technology infrastructure at our branches. This effort has achieved the following; the roll out of a windows terminal server in each branch that allows users to run windows from every desktop computer. Immediately, we are allowing each desktop computer to access the Internet in order to be able to run tax prep activity and other web-based software from any desktop and very importantly, credit bureau data can be pulled from any terminal in any branch.

Previously these activities were only allowed from one standalone desktop in the branches resulting in inefficiencies in branch operations. So we now anticipate quicker service and more scalability for our branches for both servicing loans and servicing our tax customers. In addition, we have upgraded our connectivity to and from our branches giving the system quicker response times and more bandwidth. The completion of this initiative is important to the direction we are moving with our branches. The new infrastructure allows us to now look at other technology improvements that we can roll out, including communication applications, productivity applications, customer data tracking applications and other web applications.

In terms of the personnel news, as per our 8k of last Friday, our President of Mexico and SVP, Javier Sauza informed us that he would like to retire and his last day with the Company would be May 31. We intend to appoint Javier's designated successor Ricardo Cavasos to replace Javier on June 1st. Ricardo joined World six years ago and has been instrumental in our successes in Mexico. He's currently COO of our Mexican operations and well positioned to take over the rein's. So we expect an easy and smooth transition. We've hired a new VP of Strategic IT Solutions, Jason Childress started in April and he now heads up all of our IT operations and our tera-data business also reports to Jason. He will help us improve on our technological capabilities to support our vision and direction. We changed the structure of our branch manager bonuses for fiscal year 2017. This makes it much easier for branch managers to calculate and highlights the metrics on which we would like them to focus.

Making their financial rewards much more aligned with the performance we would like to achieve. Initial reaction in the field to this change, which we communicated already, has been very positive. In terms of head count, we have seen a reduction in head count despite growing the number of our branches. Head count in our US operations is down 6% year on year. And head count in the US is down 4.3% in quarter 4, 2016 versus quarter 3, 2016. Where as in quarter 4, 2015, it was basically flat in comparison to the quarter before. We believe this reduction in head count and increase in efficiency is due to a strong focus on increasing accounts per employee in branches and from the efficiency in personnel we have achieved from ceasing all field calls.

A couple of other initiatives that we have pay by phone is now up and running through our branch support center, but just for one district so ten branches in South Carolina. The success of this program has shown us that we need to move from live operators to a system that also offers online payments and IVR. So we will be focusing on selecting and launching this system as a priority before expanding our current pay by phone offerings to other districts in the state.

We also have a strong focus on increasing brand name and awareness. We believe there's great value in the brand name and are currently conducting research to determine how our current and potential customers view our Company. We are also rolling out a color scheme and optimized layout for our branches that we think is more aligned for the modern era and will allow us to create consistency across all branches and make it immediately apparent to any customer on entering a world branch they are indeed in a World branch.

Lastly, regarding the CFPB, I completely appreciate the fact that some folks on the phone would like further information but we have no further information to add. We do not plan to speculate on the CFPB's plans and until such time as we have definitive information as I said in the last few earnings calls, we will remain silent on this topic.

So to summarize, we are excited by the solid launch of several new product initiatives, as well as our actions to increase efficiencies, strengthen our management team and align rewards to our branch employees with the desired performance of the Company and we look in order to our future successes in growth. I would be happy to any questions at this time.

Thank you. (Operator instructions.) And we will take our first question from John Rowan, with Janney.

So you guys mentioned the fact that delinquencies have hit normalized level, that they were higher in January and February. Can you give us an idea of just how much higher the delinquencies were in January and February versus January and February of last year?

I don't have the exact numbers for January and February, but the important thing is that that's all cycled through, right? So now that we're back down to kind of normalized levels when we compare March 31st to last year, we feel good going forward. Also, you know, an update since March. So as of April, we have seen the 60 days past due continue to come down. So as of April, it was 4.3 versus 4 of last year and then for delinquencies, from one day past due up to 60 days past due, we have also seen that come down five basis point. So we feel like going forward, the majority of these field correlated charge off's are behind us.

Okay. Your revolving credit facility. Can you remind me again what the ceiling is on that as of the end of fiscal 2016?

It dropped to $500 million as of March 31st. As you see, we are down to around $375 million. So we still have plenty of availability to operate the business as normal for the next year.

And can you remind me again, when does it expire?

It will be June 2017.

You obviously have always renegotiated that facility, a year ahead of time. Would you look to do the same where you are renegotiating it at least a year before, the termination of that facility? I don't want to speculate it, hopefully you get the CFPB matter behind you and try to use that to get a better deal with your lenders. But I'm trying to understand the timeline as to when you do go back and maybe adjust that facility?

Sure. We plan to move forward with the normal timeline. If anything significant comes up and we'll take that into light. Right now the plan is to move forward with the normal timeline.

Thank you.

And we'll go next to Lance Estes, with CAS Investment Partners.

Hi, guys. I just had a question on the advertising expense that seems to be down about 30% year over year, if you could just comment on that in the context of the strong tax outcome and, mixed kind of with mediocre volumes and I guess start with why you would lower the advertising?

Advertising spend is down $600,000 for the quarter. But the reason our advertising spend this year was lower than in the past is that we are very interested in targeting our marketing dollars to the right customer at the right time. We felt that we were over spending in some areas to customers that were getting just repetitive amounts of mail without success and so we have been testing in various different specific segments to understand response rates so that we can better then allocate marketing dollars as opposed to just throwing large sums of money in different directions before you know what kind of response you will get. This is a rethink of how we do our direct marking.

And just one more question, any idea of the effect on volumes from the tax advance offering? Do you believe there was much cannibalization there?

Well, there may have been some cannibalization in terms of customers that would have taken out a different loan product if they hadn't got a tax loan and then paid it back when their tax loan came through, but we believe that issuing this tax loan product gives us a large potential field of new customers no which we can now market.

Okay. Thank you.

(Operator Instructions). We'll go next to Bill Armstrong with CL King and Associates.

So you mentioned that you think the impact of the cessation of in-person visits is behind you. I want to drill down a little bit as to why you think that. You did you mention that some of your store managers are maybe being a little more rigid on are their underwriting standards, but you also indicated that maybe they were leaving some money on the table. How are your collection practices changing then with phone calls to make up for the absence of the in-person visits which obviously had a positive effect on collections previously.

So, yes. Now our only means of collection, if you like, letters and phone calls in accordance with our policies and procedures and we are doing some phone calls later in the evening to find our customers at a time that is convenient for them. But we weren't lending before on the basis that we don't think the customer will pay us back but a field call will help. We were lending them on the base that's we believe the customer would pay us back. As our CFO just said, we think the initial reaction from perhaps this change has passed through our delinquencies and charge-offs and we are now back at normalized levels and therefore, I'm focusing on correctly carrying out our phone collections and correctly carrying out our underwriting and not having a sort of sudden reaction to reduce small loans which is not necessary would allow us to carry on growing and moving forward.

Okay. You mentioned that you will be opening fewer new branches going forward. What sort of numbers should we kind of be thinking about as we model the new year? And maybe any closures or mergers of branches?

Sure. So as far as opening new branches in the US, we are kind of planning to open around 15 branches and then maybe in the 5 to 10 range in Mexico. As far as the number of closures, we don't have a set number of closures. We are just monitoring several branches and trying to work on a plan for those branches. Hopefully we can turn those branches around and not close them. But, if we feel hike in the end that based on where they are, or their specific situation, we can't turn those branches around. We may close them but there's no set number of what that might be.

Correct and to build on what Johnny is saying, our first initiative with the branch where we feel performance can be proven is not the right level. We have a specific template and performance plan we require and we want to track and to monitor and aim for improvement.

And then last question, the convenience check product, the pilot launch, could you remind us? I missed it earlier. What state is that in and are these live checks that you are mailing to customers?

Yes, that's correct. The state that we piloted this in is Tennessee. So our launch was in Tennessee, with the mailing going out on April 1st. Some in the industry call it convenience checks and some call it live checks. To be frank, we're not sure which name is more accepted so either one is the same product. The customer receives a check which they can take to their bank or a bank and cash it and receive the money from that check.

And how do you determine who to send these checks to? Are these former customers? Or how do you vet? Obviously, you don't want to just send checks out to anybody. How do you kind of go about deciding who to send these checks to?

So a couple of things here, first of all, convenience or live checks, either way, have been around in the industry for a very long time and frankly in some ways we are late to the table on this product. And we think it is attractive if mailed to the right segments. We have data analytics working an a variety of models so that we can ensure that what we do in this segment has a very carefully managed risk. Obviously if you mail to the wrong segment, you will find a very high response rate and very low collection rate, if you like and we don't want to put ourselves in that situation.

So that's why we operate on a test and learn basis. It was piloted in Tennessee to a specific segment as determined from our data analytics department to be the right segment to test. As I mentioned in my speech, we have seen if we look at the credit scores for this pilot, that they are within our expectation and we expect a good response an charge-off rate that is also within our expectations.

Okay. And just last question on that. So you are in 15 states right now. How many of those states is this convenience check product permitted?

To be honest with you, we have not looked across all 15 states yet, because we don't plan based on this one pilot to launch in all 15 states at the same time. We plan to continue to test and learn and move into individual states based on optimizing our approach and we also plan to expand our test in Tennessee seeing that it appears successful. It is the majority of our states that do allow convenience checks.

And would collections be done centrally or from a branch near the consumer?

So when the consumer receives the live check with the information of the address of the nearest branch, and they are expected to mail in or come into that local branch to make their payments the vast majority will come into the local branch and that allows us to build up a relationship with that customer.

Got it. Okay. Thank you.

You're welcome.

And we'll go next to Gregory Macosko, with Montrose Advisors.

Mexico did quite well. Perhaps could you give us some more color on that. I understand this will be a transition there. I know that one of the things that you did in the past was you would visit the homes and get more background on people. Is the methodology of managing Mexico remain somewhat different than the US and what kind of changes are happening there?

So in Mexico, we have two businesses, a little bit different. We have our traditional installment loan business, which is similar to our US business. But yes, we do visit the homes of potential customers to determine whether we are going to originate the loan, something we don't do in the US. But in Mexico it can be harder to find customers by telephone and we believe it is a strong factor in our underwriting to visit the home and have that experience before making the loan.

In our Viva business, this is our union business where we make loans to union members and its payroll deductible and so it's taken out of the union members payroll and so that business is a much lower charge-off business because it's pay roll deductible and operates through building up relationships with unions that allow you to market to their members. They tend to have smaller offices that manage that kind of business.

And you are optimistic that the kind of growth that we are seeing this should continue for at least the foreseeable, the near term?

I am optimistic because we are a tiny, tiny fragment of the market in Mexico. So there's a lot of opportunity for us to grow and expand.

And then finally, I know that you were in something called the world class buying club, which was, I guess, rent to own or something like. Are you still in that business, and what is happening with that, if so?

No, we began not offering those products further sometime ago. I forget the exact date. We can look it up and see if we can find it but we have been running down that loan portfolio. We determined that that was not our most attractive opportunity and we were better off focusing on being in the small and medium sized loan business rather than having these products that you then have in your branches that people can touch and so on and so forth. It added a layer of complexity that we felt the reward did not justify the effort and we're pleased with our decision to no longer offer that product.

We stopped offering the product March 31, of 2015, and we have been winding down the portfolio of the existing loans since then. At March 31, 2015 there was $9.2 million outstanding and as of the end of this year, there's $1.4 million left. So by the end of this first fiscal year of 2016 that portfolio will more or less be gone.

With regard to head count, it's down about 6%, you said and yet branches are up. Is the restructuring, or the sort of the personnel side of things, is that a kind of one-time thing or should we expect the head count to continue to creep down or stabilize? Give us some color on the personnel, the head count?

So we will keep looking at efficiency in our head count because it's relatively new with the succession of field calls. Without the need for folks and the time and effort spent doing field calls, we believe we can be much more efficient in our offices. It's something we will absolutely continue to work on.

Thank you very much.

You're welcome.

And we'll take a follow-up from Lance Estes, with CAS Investment Partners.

Any evidence from kind of monthly volume of business if the branch managers have returned to kind of a normalized approval rates given that maybe they have gotten more comfortable with in-person collections?

For approval rates, we really have evidence based on only visiting our branches and talking to our supervisors because we don't have all of our applications online so we cannot easily see turn down rates across the Company. That's something we would like to have. But I think we are working towards having normalized approval rates and especially the understanding that we should continue making small loans even without field calls because we have very good small loan customers and collection calls by phone are sufficient for those customers if you make the right underwriting decisions and follow our stability, ability and willingness to pay procedures.

Okay. Thank you.

And we'll go next to John Rowan, with Janney.

Hi, just a follow-up. On the stock based comp, let me try to understand, there was a $1.7 million credit in personnel expense for the quarter, correct?

That's correct, yes.

How much is left of accrued expenses for that group B performance based restricted stock awards, if anything?

Nothing to speak of. So there could be a little bit left, for one officer, but the vast majority, that's already been released.

Okay. Thank you.

And there are no other questions at this time. I would like to turn the conference over to our speakers for any closing remarks.

Well thank you very much, everybody for attending. We appreciate the questions and we appreciate your interest in the Company. Wishing everyone a great day.

Thank you for your participation. This concludes the World Acceptance Corporation's quarterly teleconference. You may now disconnect.