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World Acceptance Corp. (NASDAQ:WRLD)

F1Q11 (Qtr End 06/30/10) Earnings Call

July 27, 2010 10:00 a.m. ET

Executives

Sandy McLean - CEO

Kelly Malson - CFO

Mark Roland - President & COO

Analysts

John Rowan - Sidoti & Company

David Burtzlaff - Stephens Inc.

Henry Coffey - Sterne, Agee

Dan Bandi - Integrity Asset Management

Bill Dezellem - Tieton Capital Management

Charles Walters - World Acceptance

Operator

Good morning and welcome to the World Acceptance Corporation sponsored First Quarter Press Release Conference Call. Today's conference is being recorded. At this time all participants are in a listen-only mode. And question-and-answer session will follow the presentation's party, Corporation's CEO one of their officers. Before we begin, the Corporation has requested that I make the following announcements.

The comments made during this conference may contain certain forward-looking statements within the meaning of Section 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 include changes to 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, Chairman and CEO. Please go ahead.

Sandy McLean

Thank you, Anthony. Welcome to World Acceptance Corporation's first quarter conference call. As Anthony said I'm Sandy McLean, the Company's Chairman and CEO. With me is Kelly Malson, our CFO along with other members of our management team.

Mark Roland, our President and Chief Operating Officer is out of town but joining us by phone. As it is customary, I'll spend a few minutes reviewing the quarter results after which we will be happy to answer any questions.

Once again, I'm very pleased by the quarterly financial performance. Our results during the first quarter of fiscal 2011 continued the positive trends that we have experienced during the latter quarters of fiscal 2010.

We are glad to be able to report the ongoing expansion of our office network, excellent growth and our receivable portfolio, improved control of our operating expenses as well as continued improvement in our loan loss ratios. Net income for first fiscal quarter was $18.7 million, $1.14 per diluted share, compared to 14.6 million or $0.19 per diluted share for the first quarter of fiscal 2010.

This represents a 27.9% increase of net income, and a 26.7% increase of net income per diluted share when comparing the two quarterly periods. Additionally, the earnings for the first quarter of fiscal 2010 benefited from 2 million pre-tax gain from the early repayment of 10 million base amount of our convertible bond. This resulted in an increase of 1.5 million in net earnings, and $0.09 per diluted share during the prior year quarter that was not present during the current quarter.

Gross loans manage 824.9 million at June 30, 2010, a 13.6% increase over the 726.1 million outstanding to June 30, 2009 and a 7.1% increase since the beginning of the fiscal year. This growth was barely even distributed throughout the company with eight our eleven states experience and at least a 10% growth in gross loan.

While acquisitions continued to be an important part of our overall growth strategy, Company did not make any significant purchases during the first fiscal quarter. Four small offices consisting of approximately 1,000 account and 857,000 gross loans for purchase, two of which will emerge into existing offices; this was very similar to the acquisition activity during the first quarter of the prior year.

As planned the expansion of our branch network during the first fiscal quarter was increased from the prior year level. We began fiscal 2011 with 990 offices, opened 18 in purchase to given us the total of 1,010 offices at June 30, 2010.

Our plans for fiscal 2011, we have opened 55 offices in the U.S and 115 in Mexico plus evaluate acquisitions as opportunities arise. Total revenue for the quarter amounted to a $110.4 million, which is a 10.1% increase over the $100.2 million during the first quarter of the prior fiscal year.

Excluding the 2.4 million gain from the convertible notes repurchases during the prior year first quarter, the increase in total revenues would have been 12.8% on a quarter-over-quarter basis. This is more in line with the 14% increase of net loans when comparing the two quarterly periods.

Revenue from 935 offices opened throughout both quarterly periods increased by 8.8%. Delinquencies and charge-offs once again showed signs of improvement during the first quarter, a continuation of the trend that we experienced during the later quarters of fiscal 2010.

Accounts that were 61 days or more past due decreased slightly from 2.7% to 2.5% on a regency basis and from 4% to 3.6% on a contractual basis when comparing the two year quarter end statistics.

Net charge offs is a percentage of average net loans decreased from 13.8% annualized during the prior first quarter to 12.5% annualized during the most recent quarter. This 12.5% is more in line with historical charge off ratios for the first fiscal quarter. From a historical basis charge off ratios were 12% in Q1 of '02 to 13.5% of Q1 of '03, 13.4 if you want to look in '04 and 12.5 in '05, 13.9 in '06, 11.6 in '07 and 12.7 in '08.

You can see that these are right in line with those historical numbers. General and administrative expenses amounted $57.3 million in the first fiscal quarter, a 7.4% increase over the $53.3 million in the same quarter of the prior fiscal year. As a percentage of revenues, our G&A decreased from 53.2% during the first quarter of fiscal 2010 to 51.9% during the current quarter. Our G&A for average open office increased 1.7% when comparing to two fiscal quarters.

We remain very excited with our expansion in the Mexico. At June 30, 2010 we have 80 offices, no offices were opened during the current quarter but we plan to open 50 new offices during the current fiscal year.

We now have approximately 85,000 accounts and approximately 36.7 million in gross loans outstanding. This represents a 28.7% increase in accounts and a 40.6% increase in ledgers from June 30, 2009 to June 30, 2010.

We had net charge offs which were approximately 900,000 during the quarter or 16.2% of average net loans on an annualized basis and our 61 delinquencies were 3.6 and 4.8% on a regency and contractual basis respectively.

We lost approximately 54,000 during the first quarter which we believe is very reasonable given the large number of new offices that have been opened over relatively short period of time.

Most of our mature offices are doing very well and we expect this subsidiary to provide a positive contribution to our profits during the current year. The company is trailing 12 month return on average assets of 13% and return on average equity of 22.3% continue the historical trend during the first quarter of fiscal 2010.

As you know the President signed the Wall Street Reform and Consumer Protection Act last week. While we do not anticipate any material adverse rulings from the newly created bureau of consumer protection. There remains a great deal that is unknown at this time is to the ultimate impact on industry of this massive reform bill.

We will continue to work closely by the trade organizations AFSA, American Financial Services Association and National Installment Lenders Association to promote our industry and to meet with regulators that this bureau is creating.

We will attempt to identify and quantify the consequences of any proposed restricted regulations, primarily the elimination of available credit to a large segment of the population that does not have ready access to bank and card forms of credit.

At this time any of us will be more than happy to try to answer any questions that you may have. Anthony?

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from John Rowan at Sidoti & Company.

John Rowan - Sidoti & Company

Good morning.

Kelly Malson

Good morning.

John Rowan - Sidoti & Company

Are you guys done with the repurchase authorization?

Kelly Malson

John, this is Kelly and as of today we have approximately $2 million remaining on the current authorization. But as you know the board historically has increased that authorization as needed.

John Rowan - Sidoti & Company

Okay, have you guys looked at Colorado at all with the change in the loan law and how that could work as an installment product?

Sandy McLean

No we believe not at this point in time.

John Rowan - Sidoti & Company

Okay and then just one last thing. Have you guys noticed any change in the income levels or kind of the consumer demographics of the people who are coming in for new loans, customers you haven't seen before?"

Sandy McLean

That would be very hard to answer but I doubt very seriously that there has been a dramatic change at this point. Mark, can you add anything to that? I don't really believe that will be the case.

Mark Roland

We are not seeing anything that would indicate that there is a shift in consumers that historically had not been our customer.

John Rowan - Sidoti & Company

Okay, thank you very much.

Operator

We'll take our next question from David Burtzlaff at Stephens Inc. Please go ahead.

David Burtzlaff - Stephens Inc.

Good morning guys and congratulations on a great quarter.

Sandy McLean

Thank you Dave.

David Burtzlaff - Stephens Inc.

Just a couple of questions here Sandy. In regards to Mexico it seems like, when do you start to make a profit there? I know you kind of expected it this year and the results seem a little better than the first quarter last year but are still trending down, are still negative.

Sandy McLean

I believe -- we anticipate and plan for this subsidiary to be profitable in fiscal 2011. We've accomplished a great deal down there to open 80 offices in the five years that we've been open. I believe it is a tremendous accomplishment.

And given that the economy down there suffered as much as or more than the U.S. economy, then I think that we've been very successful this past year and up through this first quarter although as you say, we have not actually started making money.

But things were improving. We have made a lot of progress on the middle management and supervisor and VPO level and we're really exited to believe that we'll see some very positive financial results this year.

David Burtzlaff - Stephens Inc.

Okay, and then regarding the charges and losses, now that they've kind of comeback into historical ranges and over the last what four quarters you've really benefitted from improving loss rates and charge-offs, how do you see that kind of continuing and do you think you can still get the same benefit, or as you start to cycle through the improvements of last year?

Sandy McLean

I think that in the loop, we certainly can continuously 1.3% reductions in our annualized charge-off rates that's obvious, and at some point this cycles continues if you look over the long history, and it goes up and down depending upon a lot of different factors, but I believe that once the -- those ratios level off then it will be more driven by our revenue growth in our expense control, and which is -- what the case has been for quite -- history, the history of the company.

David Burtzlaff - Stephens Inc.

Okay and then lastly, in South Carolina has there been any movement on the bill to close the loophole, the payday lending loophole of shifting towards the supervised lenders?

Sandy McLean

I have something. The governor I believe rejected it. I haven't seen any business. I don't think there has been a whole lot of movement. I'm sorry, I can't tell you exactly. I know that there has been a lot of discussions and a lot of things that have been brought before the legislature and something was passed that the governor did in fact vito and I'm not sure the latest status of that.

David Burtzlaff - Stephens Inc.

Okay, all right, thank you very much.

Sandy McLean

Okay.

Operator

And we'll take our next question from Henry Coffey at Sterne, Agee. Please go ahead.

Henry Coffey - Sterne, Agee

Hey good morning everyone, I was wondering if you could just help me out on Mexico. What were the growth figures on gross loans again, year-over-year?

Sandy McLean

Give us one second. The 40% in ledger from June to last year, this year is 28.7% in accounts.

Henry Coffey - Sterne, Agee

28 point what percent?

Sandy McLean

7.

Henry Coffey - Sterne, Agee

And have you -- you've been adjusting that product. How has that change been working for you all?

Sandy McLean

Very well. We are very pleased with all of them down there.

Henry Coffey - Sterne, Agee

And I know we got the provision figure. I was wondering Kelly if you could give me -- what was the exact net charge-off figure during the quarter?

Kelly Malson

Dollar amount of the net charge?

Henry Coffey - Sterne, Agee

Yeah, dollars, yeah.

Kelly Malson

Net charge of dollar was 18.4 million.

Henry Coffey - Sterne, Agee

And the delinquency figure went contractual, went from 4 to 3.6?

Kelly Malson

Correct.

Henry Coffey - Sterne, Agee

And regency went from 2.8 to 2.5.

Kelly Malson

Correct.

Henry Coffey - Sterne, Agee

Thank you. And on your buyback, are we sort of in the season where you'll keep buying back loans or -- I'm sorry buying back stock, or are we heading into the growth cycle now, and it's as you are more likely to be using cash for new business?

Sandy McLean

We certainly -- we certainly will continue to look at the stock repurchase program as a viable part of our overall strategy on a ongoing basis, and I think it will have during the process of working with the bank and increase in our availability of funding, which should be finalized within the next couple of weeks or so, or maybe even less, not too long, but I think we'll be doing all those things.

Henry Coffey - Sterne, Agee

So you're still able to buyback stock over the next few months.

Sandy McLean

Absolutely.

Henry Coffey - Sterne, Agee

Thank you.

Operator

(Operators Instruction). We'll go next to Dan Bandi at Integrity Asset Management. Please go ahead.

Dan Bandi - Integrity Asset Management

Thanks. Hey, Sandy I was just wondering on the insurance increase, it was -- is anything different there, or it's just a matter of the mix within the growth within the states of why it was up more than your revenue?

Sandy McLean

It's primarily a mix shift. There have not been any new products added to any of the state, but strictly like you said the mix here.

Dan Bandi - Integrity Asset Management

Okay, and then I'm you know I'm curious you got us out around, you know right around probably what 40 branches in Louisiana, 40 in Alabama, are you guys seeing any impact at all credit wise from the aftereffects of the oil spill down there?

Mark Roland

Dan, this is Mark. We really don't have a lot of branches in Louisiana that are all the way down to the Gulf. We're in Oman and a couple of other places down there, but a very insignificant amount of the branches in Louisiana we're concentrated farther North; Alabama, we've got a couple of offices near mobile, but really again in Alabama, we're concentrated farther North.

Dan Bandi - Integrity Asset Management

Okay, well Mark, do you know in those offices where you are closer, have you guys seen any impact there?

Mark Roland

I've talked to our Vice President of Operations in Louisiana last week ,and his indication was that really they're not seeing anything jump out in fact there's money flowing to some of those folks either through BP or PMR whatever so, he's not seeing an immediate impact that that doesn't mean there wouldn't be one later.

Dan Bandi - Integrity Asset Management

Okay, and for the quarter for the officers that you guys opened, were they pretty much spread throughout the quarter or more towards the end?

Mark Roland

Dan, those leases are signed as they come in and negotiate to date. I believe we began opening offices as early as mid-April, and continued straight through there, there wasn't any rush towards the end of the quarter. They were pretty well spaced throughout the period.

Sandy McLean

We just opened, probably opened three in April, eight in May, and the remainder in June. So it has been pretty much spread throughout.

Dan Bandi - Integrity Asset Management

So then when you look at your G&A expansion, then I guess that's pretty fairly reflected we would necessarily as you start to ramp this expansions, and you wouldn't certainly expect to see that G&A go up as a percentage of the revenues then?

Mark Roland

At some point I believe we will. I think what we're getting this year has benefited the fewer offices we opened last year.

Dan Bandi - Integrity Asset Management

Got you, okay. And then Kelly, did you just talk about what is the actual net number of shares that were, the net reduction in shares for the period.

Kelly Malson

Net reduction?

Dan Bandi - Integrity Asset Management

Yeah, it's quarter end as opposed to the average number.

Kelly Malson

Yes. When you're looking at absolute shares its roughly -- we bought back roughly 900,000 shares during the quarter.

Dan Bandi - Integrity Asset Management

Okay.

Kelly Malson

Yeah, we bought back roughly 900.

Dan Bandi - Integrity Asset Management

Okay, great. Thanks a lot again, another great quarter. The market doesn't seem the same so, but it looks like a really, really great quarter. Thanks guys.

Operator:

(Operators Instruction). We'll next to you Bill Dezellem at Tieton Capital Management. Please go ahead.

Bill Dezellem - Tieton Capital Management

Thank you. A group of questions here. First of all, given the charge-offs as a comeback into your normal range now, what is the historical pattern, do you often then continue on down and basically undershoot norm and that's how you get an average or does it often times come in to the normal range and then just stay there until we end up with another credit cycle?

Sandy McLean

Well, I mean, if you look at it -- or if you look at our annualized charge-off ratios over the last seven or eight years, they've been real close to 14.5%, except for one year when they had the bankruptcy reform and then of course the two years with what's being going on. So, I would like to think that they would be rather stable. But certainly they will vary on a quarter-by-quarter basis just depending upon a lot of different factors.

Bill Dezellem - Tieton Capital Management

And then shifting to Mexico and the charge-offs down there, I guess I've got a couple parts to the question. First one is just in general, what's your view of the charge-off levels, given that they're now higher than the -- and the delinquency levels are higher than what they are here in the U.S. And when you initially entered Mexico it was just the opposite. So, I guess, the first question is what's your view? And then the second question related to Mexico and the charge-offs is what are you seeing from a trend perspective down there, please?

Sandy McLean

Well, first of all if you enter in a new state or new country or new office for that matter, as you're adding loans and your charge-off ratios generally will be less because you're building your book of business. That was certainly a case just to a certain extent in Mexico.

Now the second thing is that I believe we will have very good experience down there. But we have a higher yield there. So we can certainly afford higher loss ratios and have the same type of margins as here.

And so, I don't know that we have completely stabilized in all the areas. We don't know exactly what to expect. But generally speaking, in our established offices where we've got a kind of grown to maturity, clearly we're seeing a fairly similar loss ratio that we've seen in the U.S. and Mark, you make an add to that.

Mark Roland

Only to the extent that we've got many areas in Mexico where the -- that are more established, that have been around since the first and second year of operation, where our charge-off levels are running again, at or below U.S. levels. Some areas are higher, moderated regions and some other places continue to be higher than the Mexico norm.

So, I think it's important to think about Mexico geographically in pieces rather than on the whole. And I guess, as Sandy mentioned the other thing that's important to know is that the Mexico economy was hit much harder than U.S. economy and those individuals down there don't have the kind of safety net that many workers in the U.S. do.

There is no unemployment insurance or other better provided benefits for those individuals and when they're told that the factory is closed for three weeks, they're simply out of income. So, I think when the economy improves, that -- those ratios will improve.

Bill Dezellem - Tieton Capital Management

And a couple of follow-on's to that number. One, you mentioned the various regions. Does that continue to be largely a function of different managements in those different regions and so?

Mark Roland

I think it's more a function Bill of the availability of credit in Monterey. There are certainly more players in the industry for whatever reason that seemed to be the point of origin for a lot of the consumer credit expansion in Mexico.

So, I think there is that. I think there is the fact that those employees in that area are on the whole, two or three years less seasoned than some of our employees along the border and towards the Juarez reason. So I think there is a number of factors in play there.

Bill Dezellem - Tieton Capital Management

And then the next question is, when you folks first entered -- if I recall there were some other players that were already there, maybe even parts of some of the larger international banks. And given the credit cycle or crisis that we just went through, have you seen folks -- competitors pulling out of Mexico and closing those locations or?

Mark Roland

Well certainly AIG jettisoned there. They are an entity of 80 or 100 branches. It was bought by an individual. They are in Monterey. Wells is closing or has closed their offices there and Citi has contracted to some extent. But those were the three big players when we entered and for the most part. Again AIG is still there branded differently and Citi is contracted to some extent.

Bill Dezellem - Tieton Capital Management

And my final question and I'll get of the line here. In the past and I'm thinking a few years ago, there has been a discussion that the Mexican population simply had a greater appreciation for credit and therefore it was almost a point of honor to pay that credit back and given what you said about the lack of safety net and how quickly you charge off loans, have you been finding that your recovery rates are greater in Mexico than what you are accustomed to and I'm thinking about the scenario where the plant closes for three weeks. You charge off somebody's loan but after they are working again for another six or eight weeks, they come and get that loan paid off.

Mark Roland

In fact recoveries build over time and our recovery level is a percentage of charge offs over a trailing period of probably significantly less in Monterey than they are in U.S. In the U.S. one of the reasons why recoveries tend to be better and are more predictable is that, credit reporting agencies will continue to report our bad credit for a period of time and there is some incentive for individuals in the U.S. that are trying to recover from a prior bad period to repay those debts. Again it's too early to tell right now, but no the recovery levels in Mexico are not as high as the U.S.

Bill Dezellem - Tieton Capital Management

Alright thank you.

Operator

(Operator Instructions)

Sandy McLean

And I just to want a clarification that David Burtzlaff asked and I did say that the governor overrode -- I mean vetoed the payday legislation in South Carolina and that vito was overridden by the legislature and that has -- that law is there -- it didn't come along.

Operator

We did have question from Charles Walters at World Acceptance.

Charles Walters - World Acceptance

I don't have any questions now. But great job everybody.

Mark Roland

Thanks Charles.

Operator

And with that it would appear that we have no further questions in the queue. I would like to thank everyone for their participation. Before concluding this mornings teleconference the Corporation has asked again to remind you that the comments made during his conference may contain certain forward looking statements within the meaning the meaning of Section 27A of the Securities and Exchange Act that represents the Corporation's expectations and the leads 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 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 quarterly teleconference. Thank you.

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