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World Acceptance Corporation (NASDAQ:WRLD)

Q1 2015 Earnings Conference Call

July 22, 2014 10:00 a.m. ET

Executives

Sandy McLean - Chief Executive Officer

John Calmes, Jr. - VP, Chief Financial Officer and Treasurer

Janet Matricciani – Chief Operating Officer

Analysts

John Rowan - Sidoti & Company

Bob Ramsey - FBR Capital Markets

Henry Coffey - Sterne Agee & Leach

Brian Steck - Mangrove Partners

Operator

Good morning and welcome to the World Acceptance Corporation-Sponsored First Quarter Press Release Conference Call. This call is being recorded. At this time, all participants have been placed on listen-only mode

Before we begin, the Corporation has requested that I make the following announcement. The comments made during the conference call may contain certain forward-looking statements within the meaning of Section 21E 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. Statements other than those of historical fact, as well as those identified by the words anticipate, estimate, intend, plan, expect, believe, may, will and should or any variation of the foregoing and similar expressions are forward-looking statements. Additional information regarding forward-looking statements and any factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements are included in the paragraphs discussing forward-looking statements in today’s earnings press release and in the Risk Factors section of the Corporation’s most recent Form 10-K for the fiscal year ended March 31 2014 and subsequent reports filed or furnished to the SEC from time-to-time. The Corporation does not undertake any obligation to make an update to any forward-looking statements it makes.

At this time, it is my pleasure to turn the floor over to your host, Mr. Sandy McLean, CEO.

Sandy McLean

Thank you, Levi and good morning everybody. I hope you had a chance to review our press release and the narrative that we traditionally disclose. And at this point, I’d like to just get directly to questions. Levi, if you would.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll go to our first question from John Rowan with Sidoti & Company.

John Rowan - Sidoti & Company

How much of the loan growth that you reported here? Obviously I know accounts were flat year over year, but is there a component of that loan growth that’s basically just the new fees from Texas, North Carolina or Georgia rather and North Carolina?

Sandy McLean

Number one, we are not in North Carolina, but certainly we have had an impact from Texas and Georgia. But I’m not sure I understand the question.

John Rowan - Sidoti & Company

The loan growth, is that being bolstered by the new fees, right?

Sandy McLean

Actually if you look at the growth in the Texas portfolio on a year over year basis, it is in line with the company growth on a year over year basis. So I would not say that Texas is growing more or less that the company as a whole, which obviously is a lot less than it was a couple of years ago. The same could be stated for Georgia. Now at the same time obviously so a greater part of our revenue was being contributed by those States, which is offset. We are not getting the full impact because it’s offset because our renewal volume is down substantially as a result of the change that we put into place at the end of December and the beginning in January. So we continue to have a deterioration in yields because of the shift in mix, the reduced renewal volume, but that has been somewhat offset by the additional fees that we are getting in these two new States. Does that answer your question?

John Rowan - Sidoti & Company

Yeah. That’s fine. Any updates on the CID?

Sandy McLean

No, we have not heard anything from the CFPB at this point.

John Rowan - Sidoti & Company

Okay, you wouldn’t know when the expected resolution of that is going to be at this point, correct?

Sandy McLean

I don’t even know when we are going to hear from them initially and I don’t necessary believe that once we do hear from them that will be the resolution. That will certainly be nice, but we would anticipate possibly additional questions or clarifications or something else. I’ve been lead to believe that this process can take quite some time. But by the same token, we really don’t believe that we are doing anything wrong. It would be very nice if they would finish their review within the six months and go on to a different project.

John Rowan - Sidoti & Company

And then just the timing of the share repurchases during the quarter. I’m just trying to gauge how much of that is going to filter through into the diluted share count into the second quarter. Just kind of the timing, were they early, late in the quarter? That’s my last …

John Calmes

It was throughout the quarter, John.

John Rowan - Sidoti & Company

Okay, so there’s still some residual impact to hit the diluted share count next quarter then from purchases made in the first quarter.

John Calmes

It was throughout to the quarter to the extent we were not within blackout periods

Sandy McLean

That’s right. We started in May. So it was more in May and in June and not in April.

Operator

(Operator Instructions). We’ll go to our next question from Bob Ramsey with FBR Capital Markets.

Bob Ramsey - FBR Capital Markets

Hey, good morning. Just to follow up on that last question, remind me is the right way to think about the diluted share count as we head into next quarter that you all ended this quarter with 9.6 million shares outstanding and there’s a couple hundred thousand shares of dilution on top of that?

Sandy McLean

That’s correct.

Bob Ramsey - FBR Capital Markets

Okay, great. Just wanted to talk a little bit about loan growth, I know you all have talked a lot about growth being the greatest challenge that you all face. I guess it seemed a little bit encouraging to me that same store revenues while still slow did improve from last quarter and I guess year over year dropped and loan originations also improved from last quarter. Are you all seeing any signs of a little bit firmer demand out there?

John Calmes

If you remember, quite a few quarters last year we reported that the actual number of new and former borrowers was down on a year over year basis, I am happy to report that for the first quarter in the U.S, the number of new borrowers -- loans to new borrowers is up 2.6%. The loans to former borrowers were 0.6%, but our renewals were down 14.1% for an overall decrease in our loan volume. But we are encouraged that we are now beginning to see an increase in that category which is so crucial to our long term success. In Mexico on the other hand the number of new borrowers is actually down. There are some -- have been some real competitive forces going on down there with some products and so forth. But the number of former borrowers was up substantially, but obviously the renewals were down there also.

So company that wide, our new borrowers was pretty much flat. Our former borrowers was up about 2.5% and our renewals were down about 14%. Plus Janet has got quite a few initiatives going on that we believe will helpfully drive additional people into -- potential customers in our offices and you’ll be hearing more about those things as we go forward.

Bob Ramsey - FBR Capital Markets

Is there any detail you can share with us so far on some of Janet’s efforts?

John Calmes

I will let Janet do so herself, but keep it short.

Janet Matricciani

Okay. Hi Bob. Yes, I don’t know if you’ve all seen but we have our new consumer focused website out there, very exciting. Previously it was more of an investor focused website and we have a branch locator up and running on that. It’s terrific and of course as we’ve mentioned in the past, we will be bringing the ability to fill in apps online not for decisioning, but to fill in apps online. And that is very much work in progress at the moment and we expect to have some news on that with a bit of more time. We’ve also are in the final stages of creating text messaging. This will be first for renewal mail and then for collections for reminders, friendly reminders. And actually you even had people calling the office here to say, you have to opt in for a text message but saying hey, when are you starting, I’m so excited.

We are also piloting debit cards payment by customers in two branches at the moment and we iron out any small hitches in activities and make sure our training is good. We’ll then roll that out in a month or so to eight branches and then further on. I’ll mention two other things. We’ve increased our referral fees. We believe that makes us more competitive in the marketplace. We offer a great product and service that we like word of mouth referrals. And we are putting together a sales and business development manual to help us to get much more involved in our local community and increase brand awareness for the great products that we offer.

Sandy McLean

And I’ll add too that in Mexico we believe that there’s a tremendous opportunity in the union payroll deduct loans and we are in the process of signing quite a few additional unions that will allow us to participate in those programs and are excited about the possibilities there. So growth is still way lower that what we have traditionally experienced and it’s a lot lower than what we would like to see .But I think we are doing all the right things that hopefully will get us back on track to see something closer to something better than what we’ve shown the last 18 months.

Bob Ramsey - FBR Capital Markets

No, that’s good. It’s good to hear about those steps to effect some changes. I’m curious too though. You mentioned renewals are down 14% across the company. How much of that is related to the small dollar renewal changes that you all made? And then is it your sense that that is timing or some of that is timing or is it simply with the changes you’ve made is that more of a structural change?

Sandy McLean

I believe almost it’s 100% due to that. I think that we will continue to see reduced renewal volumes. We started these initiatives back when this problem was identified a year ago, but then we’ve made some formal system changes at the beginning of the calendar year. So until we actually lap those formalized changes, you’ll probably see that drop in year over year renewal volume. But by the same tokens, we will still make those loans under those cases where the customer wants to. We’re just no longer soliciting directly if you remember.

Bob Ramsey - FBR Capital Markets

Yes, okay. Then last question and I’ll hop back out, but your all’s debt to equity now is pushing up close to two times debt to equity. Does that suggest that the pace of share repurchases could slow from here and be closer to matching the free cash flow that you all generate internally or just how you’re thinking about the appetite given where the balance sheet sits today?

Sandy McLean

I believe that that is a correct assumption of the current time. I don’t think that now would necessary be the timing to go out and do any type of restructuring of the balance sheet given the couple of issues we have still unresolved like the CFPB and the class action law suit and so forth. But that’s something that we evaluate on an ongoing basis, but we have to maintain a certain amount of free availability under the borrowing base rules knowing that we have a growth season that comes into play during the third fiscal quarter. So yes, I think what you stated would be a correct assumption for the time being.

Bob Ramsey - FBR Capital Markets

Okay. And is it still though the idea that with most of the free cash flow that you guys generate annually that that would be put into share repurchases?

Sandy McLean

We prefer putting them into small loans, but part of the borrowing small loans that that would a primary use of any excess funds.

Bob Ramsey - FBR Capital Markets

Okay, great. And what is the remaining repurchase authorization at the end of the current quarter, at the end of the June quarter?

John Calmes

It’s around $2 million at the end of June.

Operator

And we’ll go to our next question from Henry Coffey with Sterne Agee.

Henry Coffey - Sterne Agee & Leach

As you look at your small loan product and your installment loan product, could you comment on a couple of things? One, do you have any sense of how much product intrusion you’re getting from the longer term installment lenders like Pioneer and LEAP and OneMain? And two, what are the marketing opportunities in terms of really getting consumers to look at your product versus the cost of an installment loan through one of the payday lenders? And then finally, has the whole idea of buying any of the assets of OneMain crossed your thinking?

Sandy McLean

I believe that we are in a very competitive environment. I don’t believe that we’re necessarily running head to head on this OneMain or Springleaf. But I certainly think there’s probably some overlap there. Let’s start with this. It’s a competitive environment for the smaller installment loans but also the growth in some of the players there. But I still think there’s plenty of opportunities. We have signed our first lease and are waiting to get our first license in the State of Idaho which will be another new State for us. I think there’s still plenty of opportunities for us going forward. Second question is we continue – we believe that our product is substantially different than our payday product. We don’t know what the impact is on our ability to attract new customers because of what the payday lenders are doing because we don’t necessarily see those products during the application process. Because I don’t believe that they report to the same type CRAs that we do. So I really can’t answer that question very well. And no, we’re not currently planning to look at any available assets that OneMain may be in process of selling, at least not currently.

Henry Coffey - Sterne Agee & Leach

Thank you.

Sandy McLean

I hope that answers your question?

Henry Coffey - Sterne Agee

Yes. Thank you very much.

Operator

(Operator Instructions). We’ll go to our next question from Brian Steck with Mangrove Partners.

Brian Steck - Mangrove Partners

I had a follow on question related to the first question on Texas. I understand from your comments that loan balances in Texas and Georgia have grown at a similar rate as the rest of the company. I was hoping to get a little bit more granularity in terms of demand from new customers, the frequency with which refinancing is done by existing customers. Has there been changes on those metrics in Texas?

Sandy McLean

We have access to that information I just don’t know what that is at this point in time. I’m sorry. It’s available in the system. I did not anticipate the question, so I don’t know the answer, but we could certainly find that answer.

Brian Steck - Mangrove Partners

That was okay, I’ll follow up on. And that was my only ...

Sandy McLean

That was -- certainly I would think it may – no, really I can’t – anything I say at this point will be pure speculation.

Operator

(Operator Instructions). We’ll go to a question from Bob Ramsey with FBR Capital Markets.

Bob Ramsey - FBR Capital Markets

Hey, thanks for taking the follow up. I just wanted to touch on credit and the uptick in the 61 plus day past due delinquencies. It looks like a lot of that came out of Mexico and I know sometimes there are timing issues in the payroll deduct business. Just curious on whether that was a factor this quarter or what you attribute the increase and delinquencies in Mexico to? Or elsewhere for that matter, just comments on credit. .

Sandy McLean

What we call the payroll deduct loan portfolio in Mexico has grown from like $28 million to $42 million. So it’s a much bigger part of the Mexican portfolio. And the good thing about it is that the collection efforts for that are zero. As long as these customers remain employees of these teaching unions and so forth, then we will get our payments and that’s the good thing. The bad thing is we are subject to the unions forwarding those payments to us and unfortunately during the summers they are closed for a month or possibly as much as two months. So there has been a dramatic increase in those late – in those loan payments that we had received, but we feel very certain that we will be receiving those in due course.

Bob Ramsey - FBR Capital Markets

Okay. No, that’s helpful. And then in terms of if you take Mexico out of the equation, what were the trends on the 61 day delinquencies in the United States?

Sandy McLean

I think they were up a little bit. Also John do you remember right off?

John Calmes

They were up a little bit. They’ve been consistent with the previous years. On a trend basis for March 31, June 31 and September 30 they are fairly consistent. They are up from June 30 of last year.

Bob Ramsey - FBR Capital Markets

And then I guess normally when I see the 61 plus day delinquencies go up, I expect charge-off to be a little bit higher the next quarter when those hit 90 plus days. But if it really is timing out of Mexico that’s most of this I guess that wouldn’t necessarily be the case because you still expect to be paid in full. Is that fair?

Sandy McLean

For the piece that’s Mexico that is fair. For the rise in the US portion of it, whenever those 60s and 90s start reversing if it impacts those down then there would be an impact. I’d like to think that our offices are collecting them better, but generally speaking from a trend standpoint you may see an uptick. It may be the offset of the down -- the decrease we had during the quarter offset that somewhat, hard to quantify.

Operator

And we have no further questions at this time.

Sandy McLean

Well I appreciate -- thank you for your interest in World and I appreciate your interest in joining us today on today’s call. I’ll turn it over to you Levi.

Operator

Thank you for your participation. This concludes the World Acceptance Corporation quarterly teleconference.

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Source: World Acceptance's (WRLD) CEO Sandy McLean on Q1 2015 Results - Earnings Call Transcript

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