World Acceptance Corporation (WRLD) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the World Acceptance Corporation’s Fourth Quarter Press Release Conference Call. [Operator Instructions]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 27A of the Securities and Exchange Act that represent the Corporation’s expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements includes changes in the timing, amount of revenues that may be recognized by the Corporation, changes in current revenue and expense trends, changes in the Corporation’s market, and changes in the economy. Such factors are discussed in greater detail in the Corporation’s filings with the Securities and Exchange Commission. At this time, it’s my pleasure to turn the floor over to your host, Sandy McLean, CEO.

Thank you, Jeremy. Welcome to the World Acceptance Corporation’s fourth quarter conference call. With me this morning are Mark Roland, our President and Chief Operating Officer, and Kelly Malson, our Chief Financial Officer, along with other members of our management team. I’ll spend a few minutes reviewing the quarterly and annual results, after which we’ll be happy to answer any questions. Throughout fiscal 2012, we have seen fairly consistent trends in our operating performance on a quarterly basis. These trends continued in the fourth quarter. We have experienced slightly lower growth rates in our loan volume and our outstanding ledger balances resulting in lower growth in revenue. We have also experienced slightly reduced charge-off ratios and level expense ratios when comparing the results from fiscal 2011. As a result, our fiscal 2012 net income to revenue margin was slightly higher than the prior fiscal year. Additionally, our per share earnings benefited from our ongoing share repurchase program. Net income for the fourth fiscal quarter was $37.6 million or $2.54 per diluted share compared to $34.2 million or $2.11 per diluted share for the fourth quarter of fiscal 2011. This represents a 9.9% increase to net income and a 20.4% increase in net income per diluted share when comparing the 2 quarterly periods. For the full fiscal year, net income was $100.7 million or $6.59 per diluted share, representing a 10.4% and a 17.1% increase in net income and EPS, respectively, over the $91.2 and $5.63 earned during fiscal 2011. Fiscal 2011 earnings and EPS benefited from a $900,000 state income tax settlement. Additionally, as previously mentioned, the company’s EPS continues to benefit from our ongoing share repurchase program. During the fourth quarter of fiscal 2011, the company repurchased over 1 million shares on the open market for an aggregate purchase price of $65.8 million. For the full fiscal 2012, the company repurchased 2,181,000 shares for an aggregate price of $139.8 million. While these repurchases have added to our per share earnings during fiscal 2012, they should also provide additional accretion in fiscal 2013 and beyond. Additionally, the company believes that future repurchases will continue to add to shareholder value and anticipates increasing its bank facility by approximately $100 million for that purpose in the near future. Gross loans amounted to $972.3 million at March 31, 2012, an 11.2% increase over the $875 million outstanding at March 31, 2011. The 11.2% increase in outstanding loans resulted from a 6.5% increase in the number of loans outstanding combined with a 4.7% increase in the average balances of those loans. During the year, we experienced a slight shift in the portfolio between what we consider larger and smaller installment loans. In fiscal 2012, the smaller loan portfolio grew by 4.9%, while the larger loan balances grew by 24.6%. As a result, at March 31, 2012, the portfolio mix consisted of 65.7% small and 32.7% larger loans. This compared to a mix of 69.3% small and 29.1% larger loans at the end of the previous fiscal year. Sales finance loans remained the same at 1.6%. While this change in mix is not necessarily planned, it occurs as many of our customers demonstrate excellent payment histories allowing them to qualify for a higher balance loan. This was especially true in Texas, where the larger loan program was first introduced at the end of the prior fiscal year. While this shift will result in a reduction to our loan yields, we do not believe that there has been a fundamental change to our business and there remains a great deal of demand for our small loan products. Additionally, the strengthening of the value of the U.S. dollar against the Mexican peso had an impact on overall growth and loan balances. If the exchange rate remain constant throughout 2012, the overall growth would have been 11.7% instead of 11.2% for the quarter. While acquisitions continue to be an important factor in our overall growth strategy, Company did not make any significant purchases during fiscal 2012. Through a numerous smaller purchases amounting to 5,937 accounts and $4.2 million in loan balances, these accounts were spread among 25 offices, 2 of which represented new locations. For comparison purposes, during fiscal 2011, the Company purchased 5,900 accounts and $4 million in gross loans in 20 offices. Of these, 6 came in new locations. We remained on track with the planned expansion of our branch network during the current fiscal year. We began fiscal 2012 with 1,067 offices, opened 69, merged 2, and we purchased 2 and merged 1, giving us the total of 1,137 offices at March 31, 2012. We now have 14 offices in Wisconsin, our newest state, and 105 offices in Mexico. We intend to open in 1 additional state during fiscal 2013, as well as expanding in our other U.S. states and Mexico. Total revenue for the current quarter amounted to $148.9 million, an 8.7% increase over the $136.9 million during the fourth quarter of fiscal 2011. For fiscal 2012, total revenue grew by 9.9%, to $540.2 million compared to $491.4 million for fiscal 2011. This corresponds to 10.6% and 11.6% increases in average net loans that compare into 2 quarterly and annual periods, respectively. Revenues from the 988 offices opened throughout both annual periods increased by 6.8%. We were once again somewhat disappointed with the results of our tax preparation season. The transition towards the complete disappearance of the traditional refund anticipation loan product continues to have an impact in the marketplace. We completed approximately the same number of returns as during the prior fiscal year. Net [ph] revenues from this program amounted to approximately $7.9 million, a 1.7% increase over the $7.8 million earned during fiscal 2011. As expected, the Company’s delinquencies and charge-offs, it remained stable during the fourth quarter, as it has during the first 3 quarters of the fiscal year, in spite of the ongoing difficult economic environment. Accounts that were 61 plus days past due increase from 2.4% or 2.5% on a recency basis, and from 3.8% to 4% a contractual basis when comparing the 2 quarter-end statistics. Ratio of net charge-offs to average net loans decreased from 13.1% to 12.7% on an annualized basis, when comparing the fourth quarter of fiscal 2011 to 2012. This is the fourth quarter in a row of stable charge-off ratios, which remain in line with historical levels. Over the last 10 years, charge-off ratios during the fourth fiscal quarter have ranged from a high of 15.1% in fiscal 2009 to a low of 11.6% in fiscal 2006. For the full fiscal year, net charge-offs to average net loans decreased 14%; 30 basis points below fiscal 2011 levels. Company remains focused on controlling operating expenses. General and Administrative expenses amounted to $68.5 million during the current fiscal quarter, a 9.1% increase over the $62.7 million in the prior year quarter primarily as a result of the 70 net new offices opened over the past 12 months. As a percentage of revenues, our G&A increased slightly to 46.0% during the quarter from 45.8% during the prior year fourth quarter. During fiscal 2012, the G&A to revenue ratio remained level with the 2011 ratio at 48.3%. Our G&A per average opened office increased by 2.6%, when comparing the 2 fiscal years. We continue to be very pleased with the progress we have made in our Mexican operations. We have 105 offices opened as of March 31, 2012. 11 offices were opened and one was closed during the current fiscal year. We now have approximately 116,000 accounts of approximately $61 million in gross loans outstanding. This represents a 13.5% increase in accounts and 18.5% increased ledger over the trailing 12 months. During the past 12 months, there’s been a strengthening in the value of the dollar to the peso. The growth in the Mexican ledger balance would have been 27% in a constant exchange rate environment. Revenues in Mexico grew by 30.6% in U.S. dollars and 32.6% in Mexican pesos when comparing the 2 fiscal years. We had net charge-offs of approximately $6.2 million during the current fiscal year or 18.1% of average net loans on an annualized basis. Slightly less than the 18.2% ratio we had during fiscal 2011. We basically have 61-day delinquencies of 4% and 7% on a recency and contractual basis, respectively. This subsidiary has now grown to a size that we should see greatly enhanced profits going forward. During fiscal 2012 excluding an inter-company charge for tax purposes, pre-tax earnings amounted to $4.9 million, a 188% increase over the $1.7 million in pre-tax earnings during the fiscal 2011. This profitability to continue to improve as we grow our outstanding receivables in our existing office. Company’s return on average assets of 13.9%, return on average equity of 23.6% continued their excellent historical trend once again during fiscal 2012. Finally, I’d like to provide a brief update on the regulatory and legislative landscape, the company’s greatest risk factor. At the state level there is very little activity with no material legislation pending in any of the states where we currently operate. As mentioned previously, there is a ballot initiative in the State of Missouri that is proposing a 36% rate cap on all consumer credit products. I’d like to say, Missouri Circuit 4 Judge Daniel Green ruled against the proponents 5th initiative and that I would [indiscernible] say in his ruling, Judge Green found that the Secretary of State’s summary description of the proposal was unfair and misleading at the Missouri auditors' fiscal impact analysis of the effect that such law would have had on the state is insufficient, unfair and likely to deceive Missouri voters. Both the Secretary of State and the auditor appealed Judge Green’s ruling and the decision on that appeal is expected in early summer. If Judge Green ruling on either issue is upheld, the signatures gathered today by the proponents are invalid and the initiative is dead for the current election cycle. Nonetheless, there’s a good chance that the proponents will start this process all over again for the initiative in the 2014 election cycle. At a Federal level, the primary focus and concern is the ongoing developments of the Consumer Financial Protection Bureau. We will continue to work with our National Trade Associations, the American Financial Service Association, and the National Installment Lenders Association. We are meeting with fee regulators as this process moves forward and are providing comments and other input as new regulations are proposed and implemented. We continue to believe that the value of the vital service we provide, that is providing credit opportunities to so many individuals who have limited access to the credit markets, will continue to be recognized by this Bureau as it progresses and is oversight [ph] of the non-bank financial services. At this time, any of us would be glad to answer any of your questions.

[Operator Instructions] And we’ll take our first question from Ryan Stevens from Philadelphia Financial.

It seems that the European Union has put in place a consumer directive whereby the consumer, I guess, is being refunded an early settlement rate or I guess the full interest that didn’t accrue. And so I’m just wondering if there has been any discussion about this in the U.S. with the CFPB or states and how it may affect maybe the Rule of 78s?

I’m sorry, I’m not aware of what you’re referring to and I’ve not heard anything about it at this point and I’m not in a position to comment on that.

And our next question comes from Bob Ramsey from FBR.

I might have missed it in the intro comments, but did you give us the same-store revenue growth?

I did, in the 2 -- 988 offices opened throughout both fiscal periods, our same-store revenue grew by 6.8%.

Okay, great. And as you think about loan growth heading into fiscal 2013, do you think that the pace that we saw in this quarter is sort of a good way to think about the year ahead or how are you thinking about loan growth potential looking forward?

Yes, this is Mark Roland. When you look at it short, the peso exchange rate issue, approximately 12%, we’ve had much higher quarters and years when large acquisitions were in play. But somewhere in the 12% to 14% range is probably reasonable given the number of branches that we anticipate opening, and the fact that, I mean, let’s face facts, we’re still on a very volatile economic cycle right now. And I think, unemployment and underemployment play a large role in the quantity and quality of the applications that we’re receiving. And as Sandy mentioned, we will enter another new state this year with tremendous growth opportunities, but I don’t see it deviating a lot from where we’re at right now. But 1% or 2% doesn’t really amount to a lot of money.

Okay. That's fair. And as you think about credit, you all did highlight the trends recently have certainly been below historical averages and showing improvement. I was just wondering if you could share any thoughts on maybe what’s driving that and is there any possibility that maybe you could do some underwriting just slightly, so that you could get back just sort of a normal historical level of losses?

Well, I think there’s a couple of things going on. As you know, historically when gas prices started rising, we saw an almost a fairly immediate impact on the increase of net charge-offs. But as we also alluded to in the beginning in the comments, we can’t hit kind of a change in there [ph] the mix. And in that change in mix from the our larger, what we would consider as our smaller consumer loans to larger consumer loans, they are slow with [ph] lower yields, but at the same time you anticipate lower losses. So, we may in fact having a couple of dynamics going on where we might be experiencing some slight increase in the smaller loans that’s hidden by reduction as we move into more larger loans. On the second point, as far as reducing our underwriting criteria, we make every effort to make every loan that we can. Most of our customers have some sort of flawed credit, if we go through a very thorough process to determine whether or not we believe that this will be a valid loan, but we make every effort to make every possible good loan we can.

To add to that, there really hasn’t been any change in our underwriting procedures in at least the 17 years that I’ve been here, we look at the same three fundamental things every time, ability, stability, and willingness to repay. And it’s a manager decision as to that particular credit, and we just don’t change that.

Okay, great. And then maybe one last question, if you could talk a little bit about repurchase activity. You guys have obviously been very active lately, could you remind me what your remaining repurchase authorization is today? And then also, how much of it just has to do with sort of the seasonal nature of when you guys are getting cash flows and how are you thinking about buybacks looking forward from here. Obviously, the current market price is well below where you all are recently buying?

Right. Certainly, we do have a very large seasonal piece in our debt that we have to keep, make sure we have as we go through our November, December, January season. But that being said, we do believe that our current leverage is extremely conservative. And certainly, I think we can better leverage the Company. And one of the ways that we have been doing that, because of the excess cash flow, has been through share repurchases and increasing our debt. And as I mentioned, we are in the process of adding -- it had not been official so I guess this is our official announcement. But we expect very shortly to increase our revolver by an additional $100 million and it's our intent to use those funds going forward in the next few months to continue that repurchase program. Our current authorization is zero, because we completed the last Board authorization in the right priority [ph] to blackout in March. But it’s our intent to continue with that program fairly aggressively for some time to come.

And our next question comes from the Bill Dezellem from Tieton Capital Management.

I have a group of questions. First of all, I missed the new state that you are entering in fiscal 2013 that you think has great opportunity. Would you please repeat that?

I didn’t say, you didn’t miss it, because we didn’t say. We’re not announcing that at that point, but it should be announced in the near future.

And let’s shift to Mexico, if we may. You mentioned in your comments that you anticipate some pretty significant improvement in profits in Mexico, just given your size and you’re now hitting that critical mass area where you may be hitting the favorable part of the hockey stick in terms of profitability. Would you please discuss that further and kind of what you see and possibly help us understand the magnitude of that profitability increase and the degree to which it might impact the overall results?

Well, that goal's still a fairly small part of the overall company with $61 million in gross outstanding loans of almost $904 million. So whatever large impact it has on that market itself is not going to currently have as much of an impact to the overall company. But however, we went from $1.7 million and $1.9 million in pre-tax last year to $4.9 million in pre-tax this year. And we have a base of 105 offices there that we can add up substantial loans and hopefully increase profitability without having a substantial increase in costs. So, I’m not in a position to quantify what we anticipate out of that subsidiary next year, but just logically, within a same expense structure and a substantial increase in loan balance is either I would certainly believe that we should see similar type increases that we had this year.

That’s helpful. And you also referenced the larger loan growth and the slight shifting in the mix. Would you please remind me, was there a regulatory change in one or some of your states and that you operate in that made the larger loans more beneficial or a bigger opportunity for you?

Not really, we have had the opportunity to offer those product mixes for quite some time. But just things expanded there and just to give our customers additional opportunities for higher credit. They are –- over time there has been several changes, but nothing more. Real recently, there was a law passed in Tennessee that’ll take place this June, it will make loans in that state from $1,000 to $2,000 more profitable for us. But, nothing during the past current year that would reflect that slight change in mix that we were talking about.

And so given that it’s not been a regulatory shift, what other characteristics would you say contributed to that opportunity for you?

Bill, this is Mark. It’s -- 90% of it is Texas. We got some clarification 1.5 years or so ago about loans in excess of the small loan statute in Texas, did some analysis internally, looked that it for quite some time and went into that market in approximately November of the prior fiscal year to this last year. And so everything that was growing [ph], in our larger loan book of business in Texas was on top of what we already have. And I think that accounts for the majority of the change although it was not the direct result of a regulatory change, it was the direct result of us looking at our ability to make those larger loans and pursuing that opportunity.

All right. And then two additional questions if you don’t object. Your loan volume this quarter was up about 10.5%, but whereas in the December quarter, it was up 7.2% and I am curious if, from your perspective, you view that as irrelevant indication of a little bit more health for activity with your customer base that could be relevant to the growth of World and to shareholders?

I do not think that that is necessarily a very good indicator. The loan volume that takes place in the fourth quarter, to a certain extent, depends upon the timing of tax refunds and how often our customers will come in and pay us down [ph] and then they may need to come back even borrow additional funds later in the quarter. And there was a delay last year in this some of the refunds. We didn't experience quite the same kinds of delays. I don’t believe that the timing of any one quarter is indicative of what we should anticipate over the next year.

And then, do you had, for the March quarter, 14.8 million shares outstanding on average. What was the number at March 31?

I'm going get Kelly to look that up. I'm not 100% sure.

Bill, it’s Kelly. And as of March 31, we had 13.9 million shares outstanding.

That’s not diluted. That will be...

Non-diluted, yes.

And then what would be the diluted number as of March 31?

And I don’t look at the diluted number on a one day, but to kind of give you an average for the year, our dilution has run about 375,000 shares?

And our next question comes from John Rowan of Sidoti & Company.

I was just want talked about the credit facility? If I’m not mistaken, is this a little bit off cycle for you guys in typically renewing your credit facility? If I’m not mistaken, this usually happens in fall?

Well, generally this process starts in May, and it's our goal to get it completed by the end of December. And yes, it is a little sooner because of our desire to continue to adjust the leverage of the balance sheet, as well as continue the repurchase program with what we think is very favorable share prices.

Okay. So, without divulging too much, I just wanted to understand, I mean, another $100 million, where is that put the revolver at in aggregate? If there is - also there’s an accordion feature and is it going to be at comparable rates to where it is. Obviously a $100 million share buyback could be pretty accretive going forward?

I mean, well, whether or not we'll use the entire $100 million, and it depends. We’ve got to make sure we have built in at least $100 million to cover the December period, but we currently have quite a bit of availability, so that should not be a problem. But yes, this will take - we will be rolling in the second lien not that we have into this in the entire facility. If we close this as anticipated, it should be around $480 million plus. The pricing is very similar to what we have today.

Okay. Is that, I mean, is this just, obviously being a little bit early cycle, is it opportunistic? Are you being courted by banks to increase this facility? I just want to understand, why the timing of it, obviously the share repurchases are going to be lumped in March during a heavy tax, or heavy cash inflow season and how would you also look at kind of the rate of buybacks throughout fiscal 2013? Is that going to lumped into the March quarter as well?

I would anticipate after closing that, depending upon the performance of the stock and so forth, we would be aggressive buyers throughout the year, to the extent possible with the funding.

At this time, we have one question remaining in the queue. [Operator Instructions] And we’ll take our next question from Henry Coffey of Sterne, Agee.

First I apologize, Kelly, but could you give me the share count, the end of period share count right now?

13.9 million.

13.9 million?

Correct.

Can you give the trailing numbers, because that affects the book value calculation?

375,000 is roughly what the average dilution has been.

No, no, no. I just a 13.9 million, but I meant nine - 800,000 we’re trying to use it for the book value calculation?

Give me one moment please.

And while you're doing that, in terms of this change in mix to in Texas, can you give us some sense of what the Texas product looks like in terms of rates and fees? And is there a credit related insurance product tied to it or is it just done under the Texas Small Loan Act.

It’s not done under the Texas Small Loan Act. It looks a lot more like, for example Kentucky, which is a tier grade starting at 36 and dropping down plus ancillary products life, disability, personal property.

And what is the penetration rate on the ancillary products? I mean, what was it in the March quarter?

I don’t have that number in front of me, Henry. We saw it - we offer to every eligible borrower and they accept it when they accept it.

Then in terms of charge-offs, can you give us a sense of the difference between the charge offs on this product and the charge offs on...

I can, but it doesn’t reflect what’s going to happen in the future. We’ve been offering this product for a year and didn’t charge-off –- or a little over a year, year and three months, and didn’t charge-off our first loan in that book until 2 months ago. So the charge-off rate is 0.00 something, it will not stay at that level.

Henry, this is Kelly, your exact number is 13,898,265.

[Operator Instructions] It appears there are no further questions at this time. I would like to turn the conference back over to you Mr. McLean.

Yes. Thank you for being with us today and have a good day.

Thank you for your participation. Before concluding this morning’s teleconference, the corporation has asked to again remind you that the comments made during the conference may contain forward-looking statements within the meaning of Section 27-A of the Securities and Exchange Act that represent the corporation’s expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements include changes in the timing amount of revenues that may be recognized by the corporation, changes in current revenue and expense trends, changes in the Corporation’s market, 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 Corporation’s quarterly teleconference. Thank you for your participation.