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World Acceptance Corp. (NASDAQ:WRLD)

Q3 2010 Earnings Call

October 26, 2010 10:00 am ET

Executives

Sandy McLean - Chairman & CEO

Kelly Malson - CFO

Analysts

David Burtzlaff - Stephens Financial

John Rowan - Sidoti Company

Henry Coffey - Sterne, Agee

Operator

Good morning and welcome to the World Acceptance Corporation sponsored second quarter press release conference call. This call has been recorded. At this time, all participants have been placed on listen-only mode. A question-and-answer session will follow the presentation by the Corporation CEO and its other 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 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 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.

At this time, it's my pleasure to turn the floor over to your host, Sandy McLean, Chairman and CEO.

Sandy McLean

Thank you Holly and welcome to the World Acceptance Corporation second quarter conference call. As Holly said, I'm Sandy McLean. With me are Mark Roland, our President and COO; and Kelly Malson, our Chief Financial Officer; along with other members of our management team. As is customary, I'll spend a few minutes reviewing the quarterly results and then we'll be happy to answer any questions.

I'm once again very pleased with our quarterly financial performance and am happy that operational improvements that we experienced during our first fiscal quarter have duly continued into the second quarter. Demand of our loan products remained stronger in the quarter and as expected, we have continued to experience improvement in our loan loss ratios. Net income for the second fiscal quarter was $20.2 million or $1.26 per diluted share compared to 14.6 million or $0.89 per diluted share for the prior year quarter.

This represents a 38.5% increase in net income and a 41.6% increase in net income per diluted share when comparing to two quarterly periods. For the first six months of the fiscal 2011, net income was 38.9 million or $2.40 per share representing a 33.2% and a 34.1% increase in net income and EPS respectively with the first six months of fiscal 2010.

Gross loan remained at the 868 million at September 30th, a 15% increase over the 755 million outstanding at September 30th, 2009, a 12.7% increase since the beginning of the fiscal New Year. This growth was fairly evenly distributed throughout the company with nine of our 11 state experienced in at least a 12% growth rate.

Additionally, a 15% year-over-year growth resulted from 8.5% increase in the number of accounts outstanding and a 6.5% increase in average balances. While acquisitions will always remain an important factor in the overall growth strategy of the company, it has been very little purchase activity during the first two quarters of fiscal year. Nine small offices consisting of 3,872 and 3 million in gross loans were purchased. Out of nine, four became new office locations five were merged into existing offices. For comparison purposes, during the first two quarters of fiscal 2010, the company acquired 1,132 accounts and 841 million in gross loan balances and two separate offices both of which were consolidated in two existing locations.

We remain on track with the expansion of our branch network during the first six months of the current fiscal year, which is as previously disclosed a little more aggressive than fiscal 2010. We began fiscal 2011 with 990 offices, opened 41 purchased four and closed one give us a total of 1,034 offices at September 30th, 2010.

Our plan for fiscal 2011 has opened 55 offices in the US and 15 in Mexico possible evaluate acquisitions and opportunities arise.

Total revenue for the quarter amounted to 118 million, a 13.3% increase over the 104 million during the second quarter of the prior fiscal year. This resulted from a 14.2% increase in average net loans when comparing the two quarterly periods. The company did see a slight decrease in yields due to a greater increase in larger loans outstanding when compared to the small installment loans. However this change in overall mix was not dramatic.

Revenues from the 937 offices throughout both quarterly periods increased by 11%. The company continued to see improvement in its delinquencies and charge-offs during the second quarter in spite the ongoing difficult economic environment. Accounts that were 61 plus days past decreased by 3.3% to 2.9% on a recently basis and from 4.6 to 4.2% on a contractual basis when comparing the two quarter end statistics.

Net charge-off as a percentage of average net loans decreased from 16.2% annualized during the prior year second quarter to 14.8% annualized during the most recent quarter. This is the sixth straight quarter that the charge off ratio has declined from the (inaudible) of the previous year and the current loss percentages are back in line with historical levels. Over the last ten years charge-off ratios during the second fiscal quarter have ranged from a 17% in fiscal 2008 through a low of 14% in fiscal 2006. The company remains focused on controlling operating expenses on an ongoing basis.

General and administrative expenses amounted to 56 million during the current fiscal quarter and 8.4 increase over 52 million in the prior year quarter primarily as a result of the 68 net new offices opened over the past 12 months. As a percentage of revenues our G&A decreased from 49.7% during the second quarter of fiscal 2010 to 47.5% during the current quarter. Now G&A per average opened office increased by 1.6% when comparing the two fiscal quarters.

Also during the quarter the company was successful in restructuring its balance sheet providing more flexibility that's financing sources. In addition to the extent of the maturities its primary bank facility for another year the company received an additional 75 million subordinated commitment from one of its primary banks This additional availability has allowed and will continue to allow the company to aggressively pursue its stock repurchase program as well as meet its obligation to retire its remaining outstanding convertible notes a year from now. During the first half of fiscal 2011 we have repurchased almost 1 million shares or approximately 34 million which should be very accretive to per share earnings in the future.

Expect in the 30th, there remained approximately 20 million in Board authorization to repurchase additional shares or stocks. We are also very pleased with the progress we have made in our Mexican operations. We now have 83offices opened as of September 30th 2010, three offices have been opened during the current fiscal with an additional 12 expected before the end of the year. We now have approximately 92,000 accounts and approximately 42.6 million in gross loans outstanding.

This represents a 28.2% increase in accounts or 57.2% increase in ledger over the trailing 12 months. We had net charge-offs of approximately 1.9 million during the first two quarter for the fiscal year or 16.1% of average net loans or annualized basis. And a 61 day delinquencies of 4.2 and 5.4% on a regency and contractual basis respectively. The subsidiary became profitable during the quarter which should only improve as we continue to grow (inaudible) and receivables.

The company's trailing four quarter return on average assets of 13.4% and return on equity of 22.9% continue their excellent historical trend as we passed the midpoint of fiscal 2011. Finally I would like to provide a brief update on the regulatory and legislative landscape, the company greatest real aspect. Currently there is very little activity in the state level with no material legislation pending in any of the states where we operate. However this is an ongoing challenge that we have successfully managed throughout our company's history. The federal level we are actively monitoring the development of The Consumer Financial Protection Bureau. Throughout National Trade Associations and American Financial Services Association, the National Installment Lenders Association, we're meeting with key regulators who participate in the process as new regulations are created and implemented.

We continue to believe that the value of the vital service we provide, that is providing credit opportunities for so many individuals with limited access to the credit markets will continually recognize that [indiscernible].

At this point in time, we'll be more than happy to try to answer any questions that you may have. Holly?

Question-and-Answer Session

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). At this time, we'll pause for a moment to assemble the queue. And we'll take our first question from David Burtzlaff with Stephens Financial.

David Burtzlaff - Stephens Financial

In the past you've kind of given the profitability of Mexico, how much it's lost. How much did it make this quarter?

Sandy McLean

It's a 685,000, however on a pre-tax basis it made 279,000 we did have a 400,000 tax benefit in Mexico as a result of some changes in the way we're recognizing our tax expenses. Historically it's been more on a cash basis and this is to get it more in line with GAAP procedures.

David Burtzlaff - Stephens Financial

Okay, so nice ramp there during that quarter. So right now, the way I look at it, your business seems to be performing very well, loan growth, it has been really good. Credit metrics are improving, expenses are well controlled. What concerns you right now about the business?

Sandy McLean

Well I mean, we're very, very pleased with all of the operational metrics and I think as always the biggest concern it represents a legislative and regulatory nature. That's not the belief that we think that this first trip to the existence of the company, but there's so much unknown as this bureau was developed and I'm sure, its going to have some impact on the way we do business but I believe because of the service we provide, that we'll continue to be able to provide that service but we're just not sure how things they change as we go forward. So from an operation standpoint, we're sticking to what we know best and we believe we continue to this and the slice of opportunities for expansion going forward but the uncertainty from what's currently going on a federal level is certainly something that we are monitoring very closely.

Operator

(Operator Instructions) Next we'll have from John Rowan with Sidoti Company.

John Rowan - Sidoti Company

Quickly on the allowance ratio, it's seemed to have kicked up this quarter versus last, anything specifically driving that. Is it something that you would see continuing to move up in future periods?

Sandy McLean

If it's moved up a noticeable amount and we have not really changed the metrics on how we look at the allowance and or the provision, so, no I would not anticipate any substantial change there. The biggest change you should have seen it in the provision as we have seen the reduction in charge-off ratios.

John Rowan - Sidoti Company

Yes obviously but it looks like you probably provisioned a little bit more versus the charge-offs then if you were to just kept the allowance ratio flat versus last quarter. So, I just wanted to see if there was a change in how you were calculating the allowance or if that was going to continue. But you answered my question, thank you.

Sandy McLean

Okay.

Operator

And our next question comes from Henry Coffey with Sterne, Agee.

Henry Coffey - Sterne, Agee

I just had one quick question regarding the Mexican loan growth. I know you mentioned the growth number, but what would that be on a same-store basis?

Sandy McLean

We have both of so many, it's a big number of course we have so many of our offices that have been opened within the last two years, Kelly can give us that number but its not really…

Kelly Malson

Its roughly 30%.

Henry Coffey - Sterne, Agee

Okay. That's the only question I had. Thank you.

Operator

(Operator Instructions). Next, we'll hear from (inaudible).

Unidentified Analyst

In your remark you mentioned the creation of the Bureau of Consumer Financial Protection working with your industry groups to be involved in the process. Elizabeth Warren has been pretty vocal in saying that she's focused on disclosure. So, I guess my first question is when you look at your business model and the disclosures that any of your documents in the US, I guess what do you think the focus is going to be on with regards to disclosures? I know I am just wondering because it seems like its disclosed right, so I don't understand where the focus could be.

Sandy McLean

Well if you look at some of your credit cards statements or you read some of your mortgage loans documents, there's some pretty extensive disclosure there and it's a lot of fine print. A lot of that's required by the federal government and they have thought me to address that because if you look at our documentation, it is very straight forward. I don't know how it could be much more straight forward and simple so, I don't really believe that she is referring to the installment loan product when she's talking about the disclosure issue.

Unidentified Analyst

Okay, but she highlighted several times that payday lenders are on her agenda upcoming of additional regulation.

Sandy McLean

Right and we're well aware of that and as you know, we're certainly not in that industry and do not offer that product.

Unidentified Analyst

Okay, but your products are subject to regulation.

Sandy McLean

As our financial products are currently subject to regulation at the state level but they certainly will also be within the realm of this new bureau, that's correct.

Unidentified Analyst

Okay, and then this is (inaudible) a tougher question. But the team said you know in her writings she seems to think that this industry has a bad reputation and mistreats consumers. How do you address those kind of issues?

Sandy McLean

It's definitely (inaudible) never seen her pacifically address installment loan industry in a negative way. I am not aware of those. We have mentioned in any of the directors from congress as an industry that they looked at initially. Now that's not to say I am sure we'll not be reviewed just like all financial services products we reviewed.

Unidentified Analyst

Right. Okay. And then when you talk about your industry groups working with the regulators, are there issues that you are focused with in helping to formulate the policies?

Sandy McLean

No but as is standard practice with all regulations, these regulations are proposed; they will be request the comments. For a lot of different industry then as is our responsibility we want to be in a position to respond to those comments to make sure that our certain regulations don't invertible do things that I do not anticipate, as often it happens.

Operator

And next we'll hear from Matt (inaudible) Titan Capital Management.

Unidentified Analyst

Great, thank you. You mentioned the larger loans picked up in the quarter and I believe they've been trending up over time. Is that a correct impression and how should we be viewing the larger loans growth.

Sandy McLean

As I ended the statement, it is not a significant change and as you look over a period of time then you would recognize that a percent of the larger loan portfolio has been running roughly 26 to 27% and we did see a slight increase in debt less than a percent which could account maybe for some of the slight increase in yield but is not an intentional direction of the company, but as we move in the bureau markets where the larger loans make more cent then they become slightly more important product, but we are focused, we'll always continue to be on the small loan product.

Operator

(Operator Instructions) And at this time we have no further questions in the queue, I'll turn the conference back over to our speakers for any additional closing remarks.

Sandy McLean

That we have none, we appreciate your interest in World and appreciate you joining us today. Thank you Holly.

Operator

You're very welcome and we thank you for your participation. Before concluding this teleconference, Corporation has asked me to again remind you that the comments made during this conference may contain certain forward-looking statements within the meaning of section 27A at the Securities and Exchange Act that represents the Corporation's expectations and beliefs concerning future events.

Such forward statements are about matters that are inherently subject to risks and uncertainties. Factors that could cause actual results or performance differ from the expectations expressed or implied in such forward-looking statements, include changes in the timing and now are revenues that may be recognized by the Corporation. Changes in current revenue and expense trends can use more Corporation's markets and changes in the economy. Such factors are discussed in great detail on the Corporation's filings with the Securities and Exchange Commission. This concludes the World Acceptance Corporation teleconference.

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