World Acceptance Corporation
Q4 2008 Earnings Call Transcript

Published: 5 May 2008

[Operator:]

Good morning and welcome to the World Acceptance Corporation sponsored fourth quarter press release conference call. At this time, all participants have been placed in a listen-only mode. A question-and-answer session will follow the presentations by the corporation's CEO and its officers. Before we begin, the corporation has requested that I make the following announcement. The comments made during this conference may contain certain forward-looking statements within the meaning of Section 27-A of the Securities and Exchange Act that represents the corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include changes in the timing and amounts of revenues that may be recognized by the corporation; changes in current revenue and expense trends; changes in the corporation's markets; and changes in the economy. Such factors are discussed in greater detail in the corporation's filings with the Securities and Exchange Commission. As a brief reminder, today's conference is being recorded. And at this time, it is my pleasure to turn the floor over to your host, Mr. Sandy McLean, CEO. Please go ahead, sir.

[Sandy McLean:]

Thank you, Tim. Welcome to the World Acceptance Corporation's fourth quarter conference call. I am Sandy McLean, as he said, the company's Chairman and CEO. With me is Mark Roland, our President and Chief Operating Officer; and Kelly Malson, our Chief Financial Officer; along with other members of our management team. I will spend just a few minutes reviewing the quarter results and then we will be happy to – and any of us will be happy to answer any questions. I am once again very pleased with our quarterly financial performance. Net income for the fourth quarter was $24.4 million or $1.44 per diluted share compared to $21 million or a $1.17 per diluted share for the forth quarter of fiscal 2007. This represents a 15.9% increase in net income and a 23.1% increase in net income per diluted share when compared to the two quarterly periods. The large difference between the net income and per share increases is due the 685,000 shares that the company repurchased during the fourth quarter under its stock repurchase plan for an aggregate purchase price of $20.6 million. For the year ended March 31, 2008, net income was $53 million or $3.05 per share compared to $47.9 million or $2.60 per share for the prior fiscal year. This represents a 10.6% and a 17.3% increase in net earnings and diluted EPS for the two fiscal years. As during the quarter, the difference in increases between the net income and diluted EPS is due to shares repurchased under the share repurchase program. During fiscal 2008, the company repurchased 1,375,000 shares for an aggregate purchase price of $41.9 million. Additionally, as previously reported, our net income and diluted earning per share for fiscal 2008 were affected by an unusual adjustment for potential state income tax assessment. I know we reviewed this at the end of the third quarter, but to remind – to go over it once again to fully review these tax issues, the company reorganized its subsidiary balance sheets in fiscal 1996 to more properly reflect each subsidiary's leverage to be in line with that of a consolidated entity. In the process, inter-company notes were issued. A side benefit of this reorganization was reduction of state income taxes on the interest expense associated with these notes. The state of South Carolina has become aggressive in challenging transactions involving inter-company notes due to a certain state tax case decided last year and has assessed the company for back taxes, interest and penalties on this inter-company interest. Our facts are not the same as in this case recently decided and the company believes that its position has good merit. However, in accordance with accounting guidelines, there is not enough precedence available to prevent the establishment of an additional tax reserve. Therefore, $1.5 million charge to income taxes was made during the third fiscal quarter. This charge resulted in a reduction of $0.09 per share to our reported third quarter and our fiscal year earnings per share. If the company does not prevail in this issue, it believes that the effect going forward will be approximately $150,000 per year in increased income taxes. Getting back to the current quarter, gross loans amounted to $599.5 million at March 31, 2008, an 18.5% increase over the $505.8 million outstanding at the beginning of the fiscal year. We are very pleased that the loan demand that we experienced during the third quarter, a busy holiday season, which is so important to overall annual growth continued through our fourth fiscal quarter. We are also pleased that our continuing growth is not concentrated in any specific area. Ten of the 11 states where we have offices had year-over-year growth rates exceeding 10%, with three of them exceeding a 20% growth rate. Additionally, the continued demand for our product is best indicated by the fact that of the 18.5% increase in year-over-year gross loans, approximately 13.5% is due to increases in the number of loans outstanding and approximately 5% is due to the increase in the average loan balance. Acquisitions were less important to the overall growth during the fiscal 2008 than in prior years. However, it remains an important part of our ongoing growth strategy. During the current fiscal year, the company acquired approximately 8,700 accounts and $4.5 million in loan balances in 25 separate offices. Of the 25 offices acquired, 13 remain open and the other 12 were consolidated in existing locations. For comparison purposes, during fiscal 2007, the company purchased approximately 42,000 accounts and $20.5 million in loan balances in 86 offices. Of the 86, 45 remained open. Our primary goal – our primary growth was achieved for new office openings. In fiscal 2008 we began with 732 offices. We opened 95, acquired 13 and merged 2, giving us a total of 838 offices at March 31, 2008. Of the 95 de novo offices, 75 were in the U.S. and 20 were in Mexico. Our plans for fiscal 2009 are to open 70 offices in the United States and 25 in Mexico plus evaluate acquisitions as opportunities arise. Total revenue for the quarter amounted to $101.4 million, which is a 16.3% increase over the $87.2 million during the fourth of the prior fiscal year. This corresponds to the 17.6% increase in average net loans when compared to the two quarterly periods. Total revenues were $346 million in fiscal 2008, an 18.4% increase over $292.3 million during fiscal 2007. Revenues from the 640 offices open throughout both annual periods increased by 8.9%. Revenues from our tax preparation business also grew nicely during the fourth quarter of fiscal 2008. During the quarter, we prepared approximately 65,000 returns compared to approximately 60,000 returns during the prior-year fourth quarter. Net fees generated from our tax preparation amounted to $9.1 million during the recent quarter, an 18.1% increase over the $7.7 million during the prior year quarter. One item of special note, total revenues for the quarter and for the fiscal year were negatively affected by the mark-to-market adjustments on our $30 million interest rate swap. This adjustment amounted to $933,000 in the fourth quarter and $1.8 million during the fiscal year. Delinquencies and charge-off had similar increases during the fourth quarter that we have been experiencing during the first three quarters of the fiscal year. Accounts that were 61 days or more past due increased from 2.2% to 2.6% on (inaudible) basis and from 3.5% to 4.0% on a contractual basis, when comparing the two quarter end statistics. Net charge-offs as a percentage of average net loans increased from 11.8% on an annualized basis during the prior year fourth quarter to 13% during the most recent quarter. The 1.2% increase in quarter over prior year corresponding quarter is a continuation of the trend that we have seen during the first three quarters of the fiscal year. While we had hoped to see this trend begin to level off during the current quarter, 13% is not far out of line with historical loss ratios. Net charge-offs to average loans were the following during the most recent fourth quarters; 11.8% in fiscal 2007, 11.6% in fiscal 2006, 13.9% in fiscal 2005, 13.6% in fiscal 2004, and 14.4% in fiscal 2003. For the year, net charge offs to average loans were higher than the prior year as expected, but also remain within historical ranges. The following were the charge-off ratios for the last five fiscal years; 14.5% in fiscal 2008, 13.3% in fiscal 2007, 14.8% in fiscal 2006, 14.6% in fiscal 2005, and 14.7% in fiscal 2004. Given the trend that we experienced during fiscal 2008, especially in the fourth quarter and the current economic environment, we do not believe that we will see reduced charge-off ratios for several more quarters. General and administrative expenses amounted to $47.6 million in the fourth fiscal quarter, a 13.3% increase over the $42 million in the same quarter of the prior fiscal year. As a percentage of revenues, it was 47% during the current quarter compared to 48.2% during the prior year quarter. Even though we have accelerated our new office openings, out expense ratios are beginning to fall back in line with historical levels. For the full fiscal year, our ratio of G&A to revenues fell from 52.6% in 2007 to 51.8% in 2008. Our G&A per average open office decreased by 0.6% when comparing the two fiscal years. Highlights of our expansion into Mexico included the following; 20 offices were opened during fiscal 2008 as expected giving us a total of 35 open offices in March 31, 2008. We now have approximately 30,300 accounts and approximately $14.1 million in gross loans. We had total charge-offs of approximately $314,000 during the year or 5.4% of average net loans. And our 61 day delinquencies are 2.2% and 2.8% on a (inaudible) and contractual basis respectively. We lost approximately $700,000 after tax during the fiscal year, which we feel is very good in our view in the rapidly expanding market. Finally, the company's annual return on average assets of 11.4% and our return on average equity of 23.6% continued their excellent historical trend during the fiscal year. At this time, any of us will be more than happy to answer any questions that you may have.

[Operator:]

Thank you, sir. (Operator instructions) And our first question today will come from Mr. Joe Gagan from the Atlantic Equity Research. Please go ahead.

[Joe Gagan:]

How are you doing, guys?

[Sandy McLean:]

Great.

[Joe Gagan:]

I have a question. I know that you refinance some loans where the people are delinquent. Did that go up at all like this quarter compared to a year ago?

[Kelly Malson:]

This is Kelly, and no, that percentage is consistent between the prior years and it is at 1.9%, which is exactly the same as it was in the prior year.

[Joe Gagan:]

Okay. Good. All right, thank you very much.

[Operator:]

And our next question today will come from Henry Coffey from Ferris, Baker, Watts. Please go ahead.

[Henry Coffey:]

Hey, good morning, guys. Obviously, congratulations on another phenomenal quarter, it's the second one. Mexico, can you go over those statistics for me again in terms of where it is and where it was last year and how many stores you have? I caught some of that during the call but not all of it.

[Sandy McLean:]

Okay, we began the year with 15 offices and we ended the year with 35, which – basically, we opened 20 offices. Bear with me one minute.

[Henry Coffey:]

And you are going to open 20 …

[Kelly Malson:]

25.

[Sandy McLean:]

It's been 25 this year, that's correct.

[Henry Coffey:]

Okay.

[Sandy McLean:]

As far as gross loans outstanding, we began the year with $5.5 million and we ended with $14.1 million. We started out with 12,000 accounts and ended up with about 30,000 accounts. And our delinquency on the 60 to 1 day has gone up a little bit. It's gone from 1% to 2.2% and 1.6% to 2.8%

[Henry Coffey:]

And you said it's – you are still – you got a modest loss in that operation right now?

[Sandy McLean:]

Our charge-offs to average loans were 5.4% for the year. As you know, it's 14.5% at the …

[Henry Coffey:]

Right. But what about operating profits in that group, is it profitable yet or is it …

[Sandy McLean:]

No, it's not. We lost a little bit of money but certainly given the number of new offices that we opened, we are pretty pleased with the progress.

[Henry Coffey:]

Great. Well, thank you very much.

[Sandy McLean:]

Okay, Henry.

[Operator:]

And moving on, we will hear from Jefferies and Company, Rick Shane for our next question. Please go ahead.

[Rick Shane:]

Good morning, guys. Thanks for taking my question. It's been an interesting day. We have had a number of companies report and I think the same cast of characters is listening to a lot of these calls. One place where there was a little bit of a cross current, some companies have talked about the fact that they didn't see the normal and expected benefit from tax refunds and other companies said that there was no change in historical behavior. What did you guys see and what do you think is going to happen as we move into the tax stimulus checks in the next quarter?

[Mark Roland:]

We haven't gotten updated results in a couple of days, but I think we prepared 2,500 or 3,000 or so tax returns on individuals who normally would not have prepared a return, simply to be in line for the tax stimulus check. We don't know what to expect from our customer base when those checks begin to hit. We assume that that's in late May or June. Given the nominal amount, I would suspect that our customer base would use those for day to day needs rather than paying down substantially on any consumer debt. But, we are really not sure. We haven't seen this type of a stimulus return since, what, 2002 or '03, I forget what year that was.

[Rick Shane:]

Okay, thank you. The second question is this. In listening to previous conference calls with the mortgage lenders and some of the credit card lenders, they – many of them described that during the last six weeks of the quarter they saw a fairly significant shift in consumer behavior. It almost feels like the consumer that had been stretched and stretched finally started to snap or break over the last six weeks. Did you see that in your customer base, do you see any behavioral changes?

[Sandy McLean:]

Well, obviously, as I said in my remarks earlier, that we were hoping to see our charge-off ratios decline from a previous year and we didn't see that. However, if the percentage that we are looking at this year is not the highest by any means that we have seen in the last four or five years. When you cut it down to a six week period, we have seen a slight increase in the charge-offs in the month of March and a little bit of increase as far as delinquencies, but certainly nothing that's alarming at this point. So, while we'd – as I said, while we don't necessarily expect the year-over-year charge-off ratios to decline in the next few quarters, we certainly are not concerned that they are going to get out of hand.

[Rick Shane:]

Great, I really appreciate you taking to that level of granularity too. Thank you very much.

[Sandy McLean:]

Okay.

[Operator:]

(Operator Instructions) Moving on we will now hear from Bill Dezellem from Titan Capital. Please go ahead.

[Bill Dezellem:]

Thank you. We had a group of questions. First of all, relative to the split of locations being opened or planned to be opened in fiscal '09, it looks like you have moved down the U.S. by five locations and moved Mexico up by five locations from what the prior split was anticipated to be. Would you please share your insights into those changes?

[Sandy McLean:]

Certainly. Let's take each side, each country separately. We are being as aggressively as we possibly can in Mexico to open offices as quickly as we possibly can. But, the limit that – we just cannot move people from the U.S. to Mexico because of so many differences, as far as salaries and payments and everything else. So, we are having to train a significant number of people in Mexico, so it's going to be quite a challenge. This year's opening of 20 offices was a challenge and next year's opening of 25 will also be a challenge. But, we are really excited about what's going on and we think we can do that on a sound basis. The drop from 75 to 70 offices in the U.S. certainly does mean anything of any real significance. That is just the result of our recent planning, that's what we are currently planning to do, that we look at as more of a minimum. We may in fact add a couple to that, we are not real sure. But these are locations that we have identified where we believe that we have people ready to move into those spots and so forth. Plus, last year, we did not really have any acquisitions and we would hope to see more of those opportunities this year. It's not really a change in our strategy as far as the U.S. is concerned. It certainly is not an indication that we don't believe we can grow as rapidly. It's just that's just what our plans are at this point in time.

[Bill Dezellem:]

That is helpful. And then, relative to the opening of new locations given the changes in the real estate environment, including the commercial real estate, have you found an improvement in the type of new locations or in lease rates – really I am thinking more in just being able to get better locations than you previously would have been able to find.

[Mark Roland:]

One thing we have noticed. We are in the leasing phase right now of a number of offices, part of the 70 in the U.S. and those lease negotiations seem to be going smoother with less – I guess less negotiation on the lease rate. And so to that extent, it's helpful that perhaps there's more commercial real estate available. In Mexico, it's quite the opposite. We have to fight for every location that we can find down there because there are so many businesses opening in the cities that we are opening in and commercial real estate is difficult to find there.

[Bill Dezellem:]

Thank you. And shifting now to the growth that you had, two thirds of your growth was from an increased number of loans, and is that an indication that high gas prices or other economic pressures are pushing new customers to you or are we reading those tea leaves incorrectly?

[Sandy McLean:]

I think you are – I don't think that's exactly correct. I believe it's more a result of the fact that we are opening so many new offices. And we certainly – the more offices that you open each year, then it takes several years for those offices to become mature, so we have got a pretty good base of offices that are not mature at this point in time. So I think that's more the reason for the growth in the new customers and so forth. Certainly, the impact of gas is probably having an impact on our – well, gas and the rest of the economy is probably having an impact on our delinquencies and charge-offs to a certain extent. But hopefully we can keep it at a manageable level.

[Bill Dezellem:]

And then, on your tax preparation business, the rate of growth there was higher than in prior years?

[Sandy McLean:]

It – I am sorry, go ahead and finish.

[Bill Dezellem:]

I was simply going to ask what your insights were into that growth.

[Sandy McLean:]

Well, we are kind of disappointed in that growth anyway. When we have got over 700,000 customers and we only did 65,000 returns, we are disappointed every year as far as the number that we are generating. Be that as it may, it's a very competitive environment. But this year, we went from 60,000 to 65,000 returns. But as Mark said, about 2,500 of those returns were returns for people that were not actually paying or getting refunds. Most of the growth this year was an increase in the average amount that we see per return. So going forward, we have seen the same type of growth rates year after year and as we add locations and so forth, I would anticipate it continuing to grow at similar levels.

[Mark Roland:]

This is Mark. One other point on the tax refund business is that the IRS has made great inroads in leveling the playing field for all the participants in the refund anticipation business. This year, the start date I believe was the 14th of January. There were no early filings as we had last year actually on January 1. They have pretty well wiped out the business of filing on last pay stubs, which allowed certain of our competitors kind of an advantage over us because those – while the IRS prohibits those, many businesses were still filing on final pay stubs and then amending when the W-2s came in. We have never participated in that business and the IRS has cracked down significantly on that. So I think as the playing field becomes more level for all competitors that we may well be in a good position to capture some of that market.

[Bill Dezellem:]

Great, thank you. That's helpful.

[Operator:]

Are there any further questions from this location?

[Bill Dezellem:]

None now, thank you.

[Operator:]

Certainly. (Operator instructions) Next we will hear from Miller Tabak Roberts, James Hom. Please go ahead.

[James Hom:]

Good morning and congrats on the good quarter. Can you tell me, for fiscal '08, what was the percentage of loan originations that were refinancing of existing loans?

[Sandy McLean:]

I can't give off the top of my head, but I certainly have that information available if you'll bear with me one second.

[James Hom:]

Okay.

[Kelly Malson:]

This is Kelly, the percentage of renewals was 79.5% and the percent to former borrowers was 9.2%, so the combined was 88.6%.

[James Hom:]

Okay. It looks like for '07, there was 74.8%. Is that a – it looks like it's significantly higher. Is that net net, is that good or bad, how should we look at that?

[Sandy McLean:]

I don't really – it's not a whole lot different, 74% or 75% or whatever the numbers, I am not looking at them exactly, but they vary 1% or 0.5% from year to year or quarter to quarter, it's really stayed right in line with those same general percentages for many years. So, I don't really look at that as a trend one way or the other.

[James Hom:]

Okay great. And just a couple of admin questions, could you tell me what the depreciation and CapEx was for the quarter?

[Sandy McLean:]

I am sorry, I can't understand the question.

[James Hom:]

What is your depreciation and the CapEx level for fiscal fourth quarter, and also what was availability on your credit facility at quarter end, please?

[Kelly Malson:]

The credit facility's availability was $112 million approximately. But that also included the $30 million seasonal line that we had which runs from November through the end of March.

[James Hom:]

Okay. And I am sorry, also depreciation and CapEx, do you have the numbers for that?

[Sandy McLean:]

Depreciation was right at $3.7 million. I don't about CapEx, I don't know what the cap expenditures were. And I don't have the cash flow statement in front of me, I am sorry.

[James Hom:]

Okay, thank you.

[Operator:]

And at this time we do have one question remaining. (Operator instructions) We will now hear from David Burtzloff from Stephens Incorporated. Please go ahead.

[David Burtzloff:]

Good morning guys, great quarter. Question on Mexico, the 25 stores that you are going to open, are any of those into new markets or just in existing markets?

[Sandy McLean:]

Yes. There'll be three or four new markets, Guadalajara is one. I don't have the sheet exactly in front of me, but they are a continuation of kind of a march south from the border. Again, the area that we think we are going to stay clear of for some time will be the Mexico City proper area. Although the population there is extreme, there are just other issues with moving into that area. But it includes additional offices as well in the existing markets of Juarez, Chihuahua, Monterrey, Reynosa, Matamoros, Saltillo, again adding Guadalajara. I have got a map here if you can bear with me one second. Here it is. Tampico, which is on the Gulf Coast and Torreon which is if you were in Juarez is – again we moved south to Chihuahua with several offices, Torreon is another couple of hours south of Chihuahua.

[David Burtzloff:]

Okay. And then, seeing there was an installment loan bill, not real sure how far it's gotten in Arizona, I believe the rate is like 4% a month. Is that something that you could make money at?

[Sandy McLean:]

It's really the identical as that we operate within Texas and we are following that bill and it has not been passed.

[David Burtzloff:]

Okay. All right, that's all I have. Thank you.

[Operator:]

And at this time, we do have a follow up question from Bill Dezellem from Titan Capital. Please go ahead.

[Bill Dezellem:]

Thank you. I'd like to circle back around to your increase in number of loans and your discussion about that largely coming from the number of offices that are not yet mature. And given that in fiscal 2008, your offices opened were primarily on a de novo basis rather than acquisitioned, the implication would be then that you continue to have many offices that are not mature, which should continue to lead to good growth in the number of loans. Is that a correct interpretation of your business at this point?

[Sandy McLean:]

We believe that to be the case and hope that to be the case.

[Bill Dezellem:]

And do you have a number of the percentage of your locations that you would consider immature or some other metric that would help quantify that situation?

[Sandy McLean:]

We have access to that information, but I couldn't begin to tell you it off the top of my head.

[Mark Roland:]

This is Mark. I can give you a basic idea. We don't believe that more than 30% or 35% of our offices have truly matured in that market. In other words that's there's not room for growth left. That leaves 55% or 60% of our offices that certainly can continue to grow at some rate, and those offices that have been opened less than three year including to a great extent the purchase from Titan a few years ago, those offices were reasonably small in terms of their account load when we acquired them. All of those offices, the recently acquired Titan as well as the last few years where the de novo offices certainly have a tremendous room for account growth.

[Bill Dezellem:]

Thank you.

[Operator:]

And at this time, there appear to be no further questions. I'd like to turn the floor back to you briefly, Mr. McLean, for any additional or closing remarks.

[Sandy McLean:]

I just want to say we appreciate you joining us today and we are real happy with the results and hope that we can move forward in the same light. Thank you for being here.

[Operator:]

Thank you for your participation. Before concluding today's conference, the corporation has asked me again to remind you that the comments made during this conference may contain certain forward-looking statements within the meaning of Section 27-A of the Securities and Exchange Act that represents the corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include changes in the timing, amounts of revenues that may be recognized by the corporation; changes in current revenue and expense trends; changes in the corporation's markets; and changes in the economy. Such factors are discussed in greater detail in the corporation's filings with the Securities and Exchange Commission. This concludes the World Acceptance quarterly teleconference. Thank you for your participation and have a great day.