Cash America International, Inc. Q3 2008 Earnings Call Transcript

 |  About: Cash America International, Inc. (CSH)
by: SA Transcripts

Welcome to the Cash America International Incorporated Q3 2008 earnings release conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, October 23, 2008. I would now like to turn the conference over to Mr. Daniel Feehan, President and Chief Executive Officer of Cash America International.

Daniel R. Feehan

Thanks for joining us and this early start of our third quarter 2008 conference call. As normal, joining me this morning is our Chief Financial Officer Tom Bessant who will report on our financial performance for the third quarter, provide updated guidance for the full year 2008 as well as our inaugural guidance for 2009.

Before beginning our comments, please bear with me while I read our Safe Harbor disclosure. While on this call comments made by Tom or me may contain forward-looking statements about the business, financial condition and prospects of Cash America International, Inc. and its subsidiaries.

The actual results of the company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including without limitation the risk and uncertainties contained in the company’s filings with the Securities & Exchange Commission. These risks and uncertainties are beyond the ability of the company to control, nor can the company predict in many cases all the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.

When used in this call terms such as believes, estimates, plans, expects, anticipates and similar expressions, as they relate to the company or its management are intended to identify forward-looking statements.

Hopefully most of you have had a chance to glance at our press release issued earlier this morning announcing the results of the third quarter ended September 30th. A quarter I would characterize as being anything but routine. In addition to joining every other company in the world in trying to assess the practical implications of the global economic turmoil and credit crisis for our business model and strategic outlook, we’ve also been dealing with a variety of items this quarter that fall outside the routine scope of our normal activities.

Some of these items have affected current reported earnings and some have implications for future earnings. As I believe most of you know we spent a tremendous amount of time and money in the third quarter in promoting a referendum in Ohio and a ballot initiative in Arizona. We’ve also dealt with Hurricane Ike which seriously disrupted operations in parts of Texas, Ohio and Kentucky.

In addition, we’ve also been dealing with respective regulatory changes in Pennsylvania and Minnesota that will likely affect our online business. Then finally, on a very positive note we’ve performed a significant amount of due diligence associated with the prospective acquisition of a large chain of pawn shops in Mexico, a potential transaction we first announced at the end of September.

Now, I’ll comment on all these items in greater detail following Tom’s financial report. Tom, let me turn it over to you.

Thomas A. Bessant, Jr.

I’d like to join Dan in welcoming you to our third quarter conference call. Q3 of 2008 for Cash America was a strong quarter in terms of a variety of business metrics which I’ll discuss in a few minutes. I believe the company is well positioned to move in to the final quarter of 2008.

Before I get in to the specific elements of the financial results, let me reconcile the reported EPS number of $0.63 per share for the third quarter of 2008 by pointing out that there were approximately $0.09 per share in unusual and non-recurring items impacting this number. These were not fully baked in to our guidance issued in July of 2008. These figures include non-tax deductable referendum costs of $2 million associated with our activities predominately in Ohio but also in Arizona which equates to approximately $0.07 per share.

Another factor that impacted the company during the quarter was the loss revenue associated with stores unable to open after Hurricane Ike which was about $1 million or $0.02 per share after taxes which would take pro forma EPS up to a total of $0.09 to $0.72 per share, up 31% from Q3 of 2007 excluding the one-time gain in the 2007 period.

As a reminder, in Q3 2007 the company recorded a $0.13 gain on a sale of notes receivable so the comparison figure of Q3 2007 is $0.55 per share. Therefore, on a consolidated basis, as reported Cash America posted a 15% increase in EPS for Q3 2008 versus Q3 2007 on a 6% increase in net revenue. Excluding the one-time items, EPS for Q3 2008 is $0.72 up 31% on a 6% increase in net revenue.

While these are the facts associated with the earnings per share calculations in the third quarter, I’m more excited about the overall performance of the company during the quarter and the metrics which will carry us through Q4 and in to 2009 particularly as it relates to our pawn lending activities which comprised about 75% of operating income in the third quarter. The third quarter results show a continuation in the trend of strong growth in service charges on pawn loans and the retail disposition of forfeited merchandise which were up 14% and 15% respectively.

The increase in year-over-year cash advance revenue was not large however, cash advance fees net of loan losses were up $3 million or 6% during the quarter due to a continuation of improved loss rates. I’ll elaborate further on the cash advance business when I talk about that segment.

Consolidated net revenue was up 6% as I said to $184 million and operating income rose 18% to $36.2 million in the quarter, once again demonstrating strong leverage on a revenue growth and higher marginally profitability in the business even with these one-time items included. The pawn lending business posted a 12% increase in total revenue to $162 million on the strength of higher pawn service charges and proceeds from the sale of merchandise.

This 12% increase in total revenue led to a 32% increase in income from operations and an improvement in marginally profitability to 29% compared to 23% in the prior year. Same store net revenue in the pawn business was up 8% and same store pawn loans increased 15% year-over-year on very healthy demand for pawn loans during the period. Aggregate pawn loan balances finished the quarter at $158.2 million up 16% year-over-year.

These pawn loan balances will continue to drive higher pawn service charges through Q4 and in to 2009. The pawn business started the third quarter with an increase in merchandise available for disposition of 16% year-over-year but the company emphasized the sale of merchandise in Q3 as evidenced by the strong sales figure and the 134 point decrease in gross profit margin to 35.5% from 36.9% last year.

Inventory turnover however increased to 2.6 times compared to 2.5 times last year. The lower gross profit margin during the quarter was attributable to softness in the prevailing market price for gold during the quarter which caused the margin on sprout gold to fall to 27.6% compared to 29.5% in the third quarter of 2007. Retail sales in Q3 excluding refine build increased 2% and gross profit margin increased to 41% compared to 40.4% in Q3 of 2007.

These efforts led to inventory levels finishing the quarter up only 12% compared to up 16% at the beginning of the quarter. Even though the inventory levels are positioned well for the fourth quarter with aged merchandise at all times lows, I would expect continued discounting during the fourth quarter due to the challenges at the consumer appetite for goods during the quarter.

Historically, pre-owned merchandise as a value oriented proposition does well in difficult economic times however, I can assure you our management team will stay focused in their efforts to make sure our merchandise moves through the system in Q4 or as showed in the first quarter during the tax refund season which also carries heavy retail activity.

Now, moving on to the cash advance segment, this is a tale of two different product delivery channels. The online business continued to post strong results with a 22% increase in revenue during the quarter. Even with the early stages of phase out of markets in preparation for 2009 the online cash advance business increased loans written 24% in Q3 2008 compared to the prior year.

In addition, loss rates on the online portfolio eased to 52% of fees compared to 54% in the prior year and fees net of loan losses for the quarter were up 27% to $29 million. Operating expenses did increase as the online business has placed continued emphasis on ancillary product development and collections activities which left a 21% increase in operating income for the online business in Q3 of 2008 or $9.6 million compared to $7.9 million in the prior year.

The Cash America store front location performance was burdened by a significant expenditure of approximately $1.9 million out of the $2 million associated with referendum costs in the quarter. As a result the loss in income from operations of $300,000 should be adjusted for the $1.9 million non-recurring item. In essence, the heavy spend for activities in Ohio moved the entire store front portion of the cash advance business in to an operating loss position.

With the add back, the operating income for the store front cash advance business would have been down slightly from $2.4 million last year to $1.6 million this year. As we discussed on the Q2 call, the adjusted year-over-year decrease in store front operating income was anticipated as we started Q3 with 20% less cash advance balances in these locations than last year. This decrease was the direct result of tightening underwriting in 2007.

On the positive side, losses as a percentage of fees in store front were down to 24% compared to 34% in the prior year but not enough to offset the Ohio referendum spend. The unfortunate thing about these referendum expenditures is that they are not deductable for tax purposes meaning the loss position in the store front business was further exacerbated by taxes which were payable even though the reported pre-tax earnings figure is negative.

We do expect to spend approximately $500,000 in the fourth quarter but this is significantly lower than the nearly $2 million spent in the third quarter. I would also point out that third quarter spend was higher than we expected initially due to our interest in a successful referendum. As a result, when we issued guidance for the third quarter we expected a lower expense figure and did not expect that the full amount of these costs to be non-tax deductable.

Of course, this issue can be observed by the 41% effective tax rate on our consolidated financial results for the quarter compared to the more routine 38%. The combined cash advance segment which includes the online distribution channel as well as store front channel posted a decrease in operating income from $10.3 million to $9.3 million but once again, adding back the referendum costs of $2 million would have brought the operating income for the cash advance segment to about $11.2 million, up 10% compared to $10.3 million reported in Q3 of 2007.

Losses as a percent of fees were lower than the prior year but the change was not as strong as the year-over-year decrease experienced in the second quarter. The Q3 losses as a percentage of fees for the combined cash advance segment was 44% in 2008 compared to 46% for the third quarter of 2007. Many of you remember that in the second quarter the aggregate losses were 38% of fees compared to 50% in the prior year. At the time we explained that we expected a sequential quarterly increase year-over-year in to the third quarter which is a typical trend in loss activity associated with this product.

In addition, the second quarter loss figures were favorably impacted by the tax stimulus checks that we discussed on the call. In summary, the third quarter of 2008 presented the company with a variety of headwinds, however I believe we emerged well positioned as we enter the important fourth quarter selling season. Loan balances for the pawn businesses are up 16% year-over-year in an environment where customers are seeking short term liquidity solutions.

You will see in our press release that we have provided fourth quarter 2008 earnings per share guidance of $0.91 to $0.95 per share compared to $0.88 per share in the prior year. We expect retail activity to be challenging during the quarter but anticipate that we will aggressively meet the need for value priced merchandise and do have the support for higher pawn service charges.

Store front PDA once again does not include the current Ohio model beyond the November 4th referendum date.

As we mentioned in the past, the company is prepared to provide alternative solutions in a much lower yield than the current cash advance product in Ohio. However, we do not anticipate much incremental profit from the last two months of the year if the Ohio referendum is not successful. Of course, if the Ohio referendum does pass, store front cash advance business will be helped by the continuation of offering the product in Ohio throughout the remainder of the year.

I would also point out that our expected guidance for 2009 fiscal year does not include a successful referendum but does assume we offer a lower yield product in about two thirds of our Ohio locations. In addition, we have eliminated the states of Pennsylvania and Minnesota from our guidance in 2009 and have curtailed lending activities in our online business in those two states during the third quarter of 2008.

As a result, the fourth quarter of 2008 guidance has little contribution from Pennsylvania and Minnesota and 2009 has virtually no contribution for those two markets. With those underpinnings I’ll reiterate the published expectations for 2009 are between $3.35 and $3.55 per share. To provide you with a little additional color on the expected quarterly trend in 2009, the business will be without certain markets for the cash advance product in the first and second quarters which were part of our 2008 first and second quarter’s earnings.

Specifically, that would be Pennsylvania, Minnesota and a higher yielding more robust product in Florida. We do not currently anticipate another tax stimulus check to consumers in the second quarter which will mean that this quarter will return to its typical trend of the lowest levels of earnings of the four quarters and will be below the 2008 Q2.

In summary, the first half of the year comps will be impacted by the losses of revenue and will likely comp lower than the prior year as the increase in earnings from the pawn business is not expected to be sufficient to lift the consolidated results based on what we see today. The overall business will return to an uptrend in Q3 and Q4 and will lead us to management’s anticipated range for 2009 of $3.35 to $3.55.

Finally, these figures do not include any potential accretion associated with our announced intention to acquire a large chain of pawn locations based in Mexico. Now, I’d like to turn the call back over to Dan.

Daniel R. Feehan

Before moving on to the non-operating items I mentioned at the outset of the call, I’d like to take a moment to add my perspective on our operating performance and outlook. As I examine the fundamental metrics of the quarter I am most pleased with the ongoing growth and execution of our pawn lending segment.

We are clearly seeing strong demand for pawn loans and our challenge in meeting that demand in this current economic climate is to maintain equilibrium between our loans and inventory balances while managing loan yields and gross profit margins in a way that optimizes cash income. The biggest challenge in this environment is making sure we are not getting too long in categories that are difficult to liquidate.

Our bias is obviously skewed towards jewelry given the liquid markets for gold and diamonds. We’ll continue our current gold hedging strategy to help mitigate any short term swings in the price of gold. Before we get to the Q&A and you ask, I cannot provide you any reliable view on where the price of gold is heading. Our outlook assumes that prices hang around the range of $700 to $800 an ounce but given the volatility we’ve seen over the past 12 months and even over the last 30 days prices could certainly move above or below that range.

I’m also keeping my eye [inaudible] the count of retail activity at our pawn shops. We have to be aware that our traditional retail customers might be pinched if the economy slows dramatically as many are predicting. But, we can also count on some cross over traffic from non-traditional retail customers who will be moving out of the new goods retailers in an effort to stretch their dollars with bargains on pre-owned merchandise.

Our over the counter retail activity has held up well this year although we did see some contraction in September like every other retail outlet in the nation. I’ve got to conclude that the psychological impact of the news reports on the economic crisis and government bailouts resulted in nobody really wanting to spend much of anything in the month of September. While our October numbers are rebounding a bit it is still too early to have perfect clarity on where our retail business is headed.

As Tom mentioned, we are in great position from an inventory perspective for the holiday season and I’ve got to believe that falling gasoline prices and the moderation of the inflationary pressures on food prices should help the retail outlook which in turn helps our overall business model. I’m also pleased with the continued progress of our online business. This channel continues to grow revenue in a difficult environment while reducing loss rates.

We have seen good organic growth in revenue despite intentionally lowering our volume of business in Ohio, Pennsylvania and Minnesota and absorbing the impact of changes in Florida we discussed on last quarter’s call. Loss rates continue to come down on a year-over-year basis and we would expect to see continued improvement in Q4. You may also be [inaudible] by the growth in administrative expenses for the online business that Tom referenced in this comments.

We have intentionally added new resources in Chicago to work on new product development and geographic expansion and we view this as investment spending designed to expand our geographic region and evolve our product offering. I fully expect this investment to yield new revenue opportunities within the next six to nine months.

The most challenging part of our consolidated business model continues to be the store front cash advance channel. Loss rates have improved significantly in our store fronts but not nearly enough to offset the lower revenue. Revenues have been impacted by our own underwriting decisions, by the disruption in Ohio and by store closures in California.

I think I mentioned on last quarter’s call in response to a question that I was beginning to worry about being too tight with underwriting standards in both our store front cash advance units and our pawn shops. But, given what has developed in the economy since that call with new predictions of negative GDP growth and significantly rising unemployment I’m still not willing to significantly loosen the reins on our underwriting.

Let me move on to the few issues I mentioned at the outset of the call and I’ll begin with Ohio and Arizona. As I reported to you last quarter Cash America has joined other short term cash advance providers in Ohio in support of a referendum on the November ballot asking the citizens of Ohio to reject Section 3 of House Bill 545. House Bill 545 is a bill passed by the legislature in May and signed by the governor in June that threatens the viability of the short term cash advance business in Ohio.

Specifically Section 3 of that bill is the section that repeals the current Ohio check cashing lending law which is a law we have operated under for years. If the referendum is successful, as Tom indicated, we would intend to continue operating under the Ohio check cashing lender law. If it is unsuccessful we would likely close a portion of our 139 shops and convert our product offering in the remaining shops to an alternative product authorized by the existing Ohio mortgage loan act.

In my opinion, the economic viability of this alternative product is seriously in question. But, I believe we should give it a try since we already have the sunk cost investment in our Ohio bricks and mortar locations and we promised our team in Ohio that we would do everything within our power to try and save their jobs. As Tom mentioned, the limited profitability of this alternative product is reflected in our 2009 guidance.

We have also joined industry participants in Arizona in support of a ballot initiative that would amend the current statute to remove the existing provisions that terminate Arizona’s deferred presentment licensing program and make changes to Arizona’s payday lending regulations. We operate 11 pawn shops in Arizona that offer payday loans and we also offer loans online in Arizona.

Regardless of the outcome of the Arizona ballot initiative we do not expect any material changes in our 2008 or 2009 consolidated earnings as a result of the initiative. As Tom indicated in his comments we have incurred significant expenses in the third quarter relating to the combined efforts in Ohio and Arizona and we expect to incur additional expenses in the fourth quarter although at a much reduced rate.

All of the companies associated with this effort have contributed their fair share and collectively are determined to do everything possible to deliver a victory for our customers and co-workers. We should have the results of both the Ohio referendum and the Arizona ballot initiatives immediately following the election on November 4th. If I could take just a minute to plug our cause, I would urge anyone who’s on this call who is a registered voter in Ohio to vote no on Issue 5 and Arizona registered voters to vote yes on Proposition 200.

Again, Ohio is vote no on Issue 5 and Arizona vote yes on Proposition 200. If any of you need buttons or bumper stickers or yard signs, I’d be happy to send them your way. Let me also comment on two other regulatory issues that we first mentioned in a press release on September 29th. That release indicated that the Department of Banking in Pennsylvania had announced a policy change with respect to online offering of cash advanced products in Pennsylvania.

A change in policy that would likely lead to the discontinuation of our offering of that product in Pennsylvania in early 2009. The online lending industry has held discussions with the Department of Banking since that announcement in an attempt to find a viable means for continuing to offer online cash advance products in that state. Unfortunately, little progress has been made with this discussions to date.

In the absence of some alternative agreement we would expect to cease offering the online product in Pennsylvania by the end of January 2009. We have already begun reducing new customer activity in anticipation of that outcome. The state of Minnesota through its Department of Commerce has also announced a policy shift that will adversely impact the profitability of online lending in that state beginning on December 1st of this year.

We intend to apply for a new license with the Department of Commerce in Minnesota and adjust our short term cash advance product in accordance with the Department’s direction. Our expectations for all these states have been reflected in our updated guidance for 2008 and the inaugural guidance for 2009. Tom also mentioned the impact of Hurricane Ike on our financial statements. Fortunately, this storm which landed in the second week of September was not as devastating for us as Hurricanes Katrina and Rita and 2005.

We did not suffer significant property damage with Ike but we did loss approximately 550 store days as a result of being closed during the storm or without power for extended periods following the storm. Our standard practice is to continue regular pay for our co-workers in these shops even though the shops were not open. Consequently, any loss in net revenue falls directly to the pre-tax line.

On a final and much more positive note I would like to emphasize just how excited we are about our perspective acquisition of an 80% ownership position in Prenda Facil. Prenda Facil which is based in Mexico City is one of the largest privately owned chains of pawn shops in Mexico. They currently operate approximately 107 stores in 16 Mexican states throughout central and southern Mexico. Approximately one quarter of their shops are in Mexico City.

Cash America signed a letter of intent in late September to acquire an 80% ownership interest in Prenda Facil and we have been working on the definitive agreement, due diligence and financing during the entire month of October. Although none of this work is yet to be completed, we would hope to close the acquisition before the end of the year. With respect to financing this transaction we are optimistic that we would be able to secure satisfactory financing in order to complete the acquisition in 2008. But, given the current state of the credit markets this is by no means a certainty.

The initial considerations for the 80% interest is estimated at $90 to $95 million and the deal includes a potential supplemental payment based upon future performance after a period of two and a half years from closing. The other 20% ownership will be held by the two current owners who are currently responsible for the management of the business and will remain as the key managers going forward. Both are Mexican nationals with impressive backgrounds and extensive experience in the pawn business in Mexico.

Their ongoing involvement in the business was a key factor in our decision to do this deal. One of the gentlemen is the founder of the business and the other gentlemen is someone we have known well for over five years. The company’s loan portfolio currently exceeds $20 million US dollars and we expect the transaction will be immediately accretive following the closing. Now, I’ve frequently commented on previous quarterly calls about our desire to enter the Mexican market with the right opportunity and the right partners.

Prenda Facil is the most attractive candidate we have found and we believe we have found the right platform and management team for building a large presence in Mexico. The business model operated by Prenda Facil is very similar to the model we operated in Sweden and the UK prior to exiting those markets in 2004 so we are very comfortable with the fundamental metrics of their business and we believe we know how to add value.

Prenda Facil has proven its ability to successfully expand its footprint having doubled the number of store locations over the past three years. We believe the opportunity exists to significantly expand the operation in Mexico with both new store openings and acquisitions. As Tom indicated, we have not included any earnings estimates for the acquisition in our 2009 guidance but we will update that guidance once we close the deal.

Now, I’d like to turn it over to questions and answers.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Dennis Telzrow – Stephens, Inc.

Dennis Telzrow – Stephens, Inc.

I don’t know if you’ll mention more on Mexico but in that $90 million to $95 million acquisition costs is there also any debt being assumed?

Daniel R. Feehan


Thomas A. Bessant, Jr.

No. Basically it’s we acquire the debt through the transaction.

Dennis Telzrow – Stephens, Inc.

So there is debt on their balance sheet?

Thomas A. Bessant, Jr.

Today there is, yes.

Dennis Telzrow – Stephens, Inc.

I think Dan mentioned I guess as part of the funding question for Mexico we also have, at least on the balance sheet it’s $69 million for the last cash net earn out. So is that going to be paid all in cash or is that going out in stock?

Daniel R. Feehan

We haven’t made that determination yet Dennis. That payment is due on November 15th. As I indicated in my comments we’re working on financing alternatives for the Prenda Facil transaction so we have not made a final determination of exactly what we will use in the final payment to cash net.


Our next question comes from Richard B. Shane – Jefferies & Co.

Richard B. Shane – Jefferies & Co.

This may in fact Dan fall in to the category of trying to predict gold prices, as part of your lobbying efforts in Ohio have you done any polling? And, what has the polling data in Ohio suggesting at this point on a referendum.

Daniel R. Feehan

We have been extraordinary active in this activity. I’ve been personally spending a fair amount of my time associated with the activity in Ohio and the committee that is managing the referendum effort which is a committee of industry participants including Cash America has been doing polling on a weekly basis since early August. I’m not going to predict the outcome.

Quite frankly, this referendum is very difficult to predict. All I can tell you is that the polling has improved since early August. But, I think it is very, very difficult to predict the outcome of the referendum effort. I would tell you this, I am absolutely confident that the industry has done everything within its power and has dedicated the right amount of time, energy, effort and money to make this a success. While I’m optimistic, it’s really impossible for me to predict the outcome.

Richard B. Shane – Jefferies & Co.

What is the polling data, and again I’m not asking you to predict the outcome, what is the polling data showing? Is it showing 50/50? Is there a strong majority either way? What sort of statistics are you seeing?

Daniel R. Feehan

Rick, I’m going to dodge that question and I apologize for doing that. The reason why I’m going to dodge that question is obviously we’re spending a lot of time and money in a polling effort which is intelligence for our side of the equation in terms of understanding what we need to do from a messaging standpoint and what audiences we need to target.

I’m absolutely confident, as you know, that this call is recorded and as a matter of public record and I’m actually confident the people on the other side of this equation would love for me to give out some information, some business intelligence they could use to their advantage over these last week and a half of the election. I apologize but I’m not willing to give out any specific polling information at this point.


Our next question comes from John Hecht – JMP Securities, Inc.

John Hecht – JMP Securities, Inc.

Just some comments on sort of the store activity you’re seeing leaving Q3 going in to Q4. You mentioned some bargain shopping, are you seeing new customers that you normally wouldn’t see at the retail level? And the second question on this, is can you give us a sense of how you’re managing your retail inventory mix maybe relative to a year ago in terms of jewelry versus non-jewelry products in to an environment where you are envisioning slower retail activity?

Daniel R. Feehan

John obviously we don’t have pure quantitative data that tells us who is a traditional customer and who is not a traditional customer so I’ve got to rely a lot on the conversations that I have with our store management people. I will tell you two weeks ago we had 30 store managers in our home office here for a week long training program, a thing we call Cash America University we do four or five times a year and bring people in.

I spent a lot of time with that group during that session discussing what they were seeing on the retail side of the business. I got a significant number of anecdotal comments from store managers of seeing people on the retail side they have not ever seen before. I take a lot of comfort quite frankly in those anecdotal reports. Those guys are out in the field and on the front line day-to-day and its clear to them that we’re seeing traffic that they’re not necessarily people we would consider our traditional customers. I’m encouraged about that.

On the inventory mix side, as I indicated in my comments, we clearly have a bias towards jewelry and being in a position where we can quickly liquidate things. We have encouraged our folks and manage our product knowledge point of sale system in such a way that we’re emphasizing jewelry loans over to what we refer to as the general merchandise categories. We have specifically compared to this time last year significantly deemphasized our tool business.

We recognized six months ago or even earlier than that quite frankly, that we didn’t want to get long in tools given the slowdown in residential construction particularly in areas that we have a heavy store base in Nevada and Florida. So, I think we’re in really good shape, our guys responded well there. On the electronics side, quite frankly that business has held up remarkably well. I’ve been surprised at how well our electronic business has held up.

I think we have an opportunity in this environment when people are looking for staying home and they’re focused on key forms of entertainment then we’ve got such great deals on electronics, TVs and things I think we stand in a pretty good spot right now. Those are the sort of things that we have been doing in keeping on top of and adjusting. Our other categories, particularly musical instruments and household goods and things I think are in solid shape.

We’re watching inventory levels very closely. If you look at our inventory levels and we track aged merchandise very carefully, our aging in our inventory portfolio today is better than it was this time last year. I feel very good about where we stand. Our comments indicated we’ve got a lot of caution about this retail environment and we really don’t know exactly what to expect. The psychological impact of all this news has got to have an impact on everybody at every end of the social economic spectrums so we’re keeping our eye on this very closely.

John Hecht – JMP Securities, Inc.

The second question is with respect to guidance, you talk about ancillary products online, you talk about leaving some states. I’m wondering how you kind of measure those? Are you expecting higher losses as you leave states like Pennsylvania? And, what type of ancillary products are you evaluating online?

Thomas A. Bessant, Jr.

John, you know as we move out of these states it’s better to do it on a gradual basis by first eliminating new customers which is your highest risk of a default. So, it’s more of a gradual shift out. I will say we exited the Florida situation and the chains there due to the database became a little more problematic than we expected and it impacted our losses in the third quarter.

Again, a more seasoned approach to the phase out of these states which again, as I mentioned, began in Q3 and is impacting our Q4 guidance and certainly impacting 2009 it’s really driven more by a loss of revenue than it is any acceleration in losses that we’d see. In Ohio, it’s kind of an interesting dynamic. We’re obviously moving to a lower yield product in an environment where we think our consumers are going to be seeking alternatives so I don’t know that Ohio would have the kind of effect that you’d typically see in more of a go dark type environment.

That’s on the revenue side and I’ll let Dan comment on ancillary products.

Daniel R. Feehan

On the online side I’ve mentioned previously that we’re working to develop a higher dollar, longer term installment loan type product as opposed to the short term small dollar cash advance that dominates our product set today. We are working on that entire technology platform to roll out an installment loan product in a variety of states beginning sometime in the first half of 2009.

We’ve also charged our online group with managing the early stages of a product set that has been mentioned in our 10Qs and things that relates to a stored value card that we made a small acquisition of a startup business with that carries a potential line of credit component associated with that card, stored value payroll card. Our group in Chicago at Cash Net has taken on the responsibility to incubate that product and get it up in running in a robust fashion.

There are a number of things that we’re working on there and none of them – we’re incurring costs to date to try and build out new products in response to some of the problems we continue to have around the country in these states. We’re trying to find alternatives to serve the customers’ needs in these states where the local regulators and legislature don’t quite understand the needs of their constituents so we’re working hard to find alternatives, spending a lot of money doing that today.

I’m confident we’re going to find some options to generate additional revenues and earnings for us with new products in ’09 and 2010 and beyond.

John Hecht – JMP Securities, Inc.

Then the last question Tom, I’m sorry to ask you for this information because I’m sure I can get it from your published material but your loss rates in the online division were 52% this quarter. What were they last quarter?

Thomas A. Bessant, Jr.

Are you talking about the loss rates just on the online business?

John Hecht – JMP Securities, Inc.


Thomas A. Bessant, Jr.

As a percentage of fees you’re right they’re 52% in Q3, they were 45% in Q2. So again, as I mentioned it was very unusual last year we saw sequential decrease as our business really matured nicely and as I talked about a couple of times Q1 and Q2 we expected to see a sequential increase coming in the normal trend from Q2 to Q3 to Q4. That’s exactly what we saw and as I mentioned we had a little bump there in Q3 somewhat unexpected but well absorbed.


Our next question comes from Elizabeth Pierce – Roth Capital Partners, LLC.

Elizabeth Pierce – Roth Capital Partners, LLC.

Could we just go over that I think Tom what you were just talking about, I just want to clarify on the Internet loss because last year you had a pretty big improvement on the Internet side from Q2 to Q3 and then this year we saw the reverse of that, is that right? Do I have my numbers right?

Thomas A. Bessant, Jr.

We saw a traditional trend, in 2008 we saw a much more traditional trend where typically Q1 will be the lowest quarter of the year and then it trends up from there to Q2 to Q3 to Q4 and then it reverses back to Q1 where it’s low. Last year we had two things going on, one the ’07 period was comping to a very high loss rate in ’06 and we also had the seasoning of our business so that we have a much higher percentage of customers with proven histories in our portfolio.

So, we commented I think on the call that we didn’t anticipate a sequential decrease from Q2 to Q3 and its highly unusual but we were obviously very pleased with those results. We saw the same thing moving from Q3 to Q4 last year where just because it’s relevant as we’re looking at this, we went from 54% on the online business only in Q3 ’07 to 48% in Q4 ’07. We will not see, or it’s not likely to see a material decrease in our losses as a percentage of fees sequentially as we go from Q3 to Q4 because it will be a much more traditional cycle.

Now, that being said and again we’ve knocked out a few markets here so maybe it’s down a fraction but in this economic environment I’m not going to estimate that any losses are lower whether we’re dealing with Q4 or 2009.

Daniel R. Feehan

Liz, the other thing on the sequential numbers you’re looking at is remember now that we had the benefit of tax stimulus checks in the second quarter which clearly would have I won’t say artificially but from a trending perspective would have impacted Q2 loss rates. Without that, I don’t think you would have seen the sequential differential.

Thomas A. Bessant, Jr.

Yes, we went from 43% in Q1 to only 45%, again I’m dealing only with the online business, we went from 43% to 45% Q1 to Q2 and without tax stimulus checks that’d probably be a more traditional straight line between the 43% in Q1 to the 52% in Q3.

Daniel R. Feehan

Another factor on that as well as we’ve been ramping [inaudible] which clearly still remains a pretty new market for us over there and in that process have incurred – the mix a little higher loss rates than you would find in our US portfolio.

Elizabeth Pierce – Roth Capital Partners, LLC.

I think Tom, to paraphrase what you just said that if we extract the stimulus check out, Q2 probably would have been more normalized in that 50 so it doesn’t look like it was such a big changes sequentially?

Thomas A. Bessant, Jr.

Yes, exactly.

Elizabeth Pierce – Roth Capital Partners, LLC.

Then on the administrative side, I noticed that the expenses on a corporate level were a lot lower than I had anticipated so I I’m just curious. It looks like its returned to levels seen in the early part of ’07, is that kind of a level $6 in change that we should think about going forward? Or, was there something one-time? Was it just the leverage on the higher sales?

Thomas A. Bessant, Jr.

Well frankly, we were well outpacing our budgets through the first two quarters so we’ve decreased our incentive compensation which is a big part of that. We also had a nominal amount of true ups in reserves as it relates to health insurance and workers’ comp and that type thing. That traditionally occurs in the mid year third quarter type environments. We tighten things up moving towards the fourth quarter.

Nothing disproportional in this quarter. We probably has a little heavier spend in Q2 which made it look a little higher. My guess or my estimation that moving in to Q4 that number moves up from the Q3 level. Maybe it doesn’t go all the way back to the Q2 level but moves up from the Q3 level.

Elizabeth Pierce – Roth Capital Partners, LLC.

Then similarly on the tax rate take it back to 38% is probably what we should use for Q4 as well as ’09?

Thomas A. Bessant, Jr.

Yes, it’s a little tricky because typically we have such heavy retail sales in the fourth quarter it will be our lowest effective tax rate but we do have this $500,000 of referendum spending which is going to [inaudible] a little bit. So, somewhere in the 38% range, maybe a tad higher should be a reasonable number.

Elizabeth Pierce – Roth Capital Partners, LLC.

So the $2 million that you spent and whatever you anticipate, I think Dan had said $500,000, is not tax deductable?

Thomas A. Bessant, Jr.

That’s correct. Lobbying costs and things of that nature are not tax deductable.

Daniel R. Feehan

We had expected to be able to deduct some portion of that but when we got deep in to the analysis with our tax folks the conclusion we had to draw was it didn’t look like any of it was deductable which is unfortunate.

Elizabeth Pierce – Roth Capital Partners, LLC.

Then in terms of Mexico, I think that Tom you had I talked about this but I was just curious kind of as you’ve looked in to this a little bit more what you plan to do because I think the Prenda Facil right now is scrap only? And, what your thoughts are in terms of opening up a retail center?

Thomas A. Bessant, Jr.

Well you know at this point we have not acquired that business so I’m hesitant to provide details of our expectations. Prenda Facil operates a very streamlined, a very effective model that does not currently include retail.

Elizabeth Pierce – Roth Capital Partners, LLC.

Any thoughts on when this might close? Do you feel expected to close?

Thomas A. Bessant, Jr.

We’re certainly working hard to get it closed in 2008.


Our next question comes from Henry Coffey – Stearn Agee & Leach, Inc.

Henry Coffey – Stearn Agee & Leach, Inc.

How tight are the financing costs on the Mexican transaction? Is it simply a question of getting technical amendments on a existing line or having you go out and get new financing?

Thomas A. Bessant, Jr.

Well Henry, it’s what I will call an unprecedented capital market environment so probably not headlines for anybody on this call. But, it certainly is a lot different than it’s been in the past. Cash America is fortunate because we have a balance sheet that is very strong, we have a lot of cash flow in our business, we have committed lines of credit. We anticipated at the time we signed the letter of intent the need to go outside or beyond shall we say our committed lines to gain additional financing.

We’ve made a great deal of progress along those lines. We’re not finished but feel like we’re on the right track and like I said, working hard to get that finished up in 2008.

Henry Coffey – Stearn Agee & Leach, Inc.

Is the issue with your lenders the availability of funding or the cost?

Thomas A. Bessant, Jr.

That’s really a difficult question to answer but according to our government our lenders are suppose to be lending money so I’ll leave it at that.

Henry Coffey – Stearn Agee & Leach, Inc.

On the government issue, this is probably the hardest thing to fathom, we’re probably going to have a democratic president in the White House, he’s got some pretty strong remarks in his underlying proposals in terms of what he wants to do in terms of a national interest rate cap, etc., etc. Do you or the political consultants you work with have any sense of how much of that is posturing and where is the federal debate going to go on things like the payday loan issue?

Daniel R. Feehan

We spend a lot of time and a lot of money on the regulatory front and have a large staff of people that spend 100% of their time working this activity and have a lot of contacts in Washington. Just recently we added a full-time person on our payroll in Washington. But, I don’t know if I can give you any clarity on that that is any better than anything else you’ve seen or read. I think it’s still very uncertain how Obama and a democrat controlled House may react.

I’ve heard a lot of discussion over the last six months about a variety of issues both positive and negative. I continue to be encouraged by discussions that I hear that are not public relative to a reluctance of people in Congress to usurp state laws and state rights to set interest rates and design products that are best for the citizens in those states. I think it’d be pretty unprecedented, obviously it would be a very unprecedented move to move to a national rate for our lending products particularly when you have existing state laws around the country that have been debated over long periods of times and state legislators that have come to grips with these issues.

You can call me naïve but I want to believe that that precedent would hold throughout a Obama Presidency, if indeed he gets elected.


Our next question comes from Gregg Hillman – First Wilshire Securities Management.

Gregg Hillman – First Wilshire Securities Management

I had a question about I guess relating to Prenda Facil but in terms of when you went in to Sweden and the UK, how did you improve the operations there? And, what kind of metrics could you give me for those two countries?

Daniel R. Feehan

Well, when we acquired both the UK and Sweden we brought a certain philosophy to the business that didn’t really exist before. Both business were very conservative in nature and were not what I would say were not very customer oriented contrary to how we always operated our business in the US. So, we were able through training and programs to accelerate the growth of those businesses and bring in a much larger customer base than they had previously dealt with.

We also enhanced the disposition activity in both countries greater marginal profitability of the disposition and liquidation of merchandise. We did add in the UK, we added a retail component to the business that didn’t exist before. However, I will tell you that the Prenda Facil from a customer service perspective is an extraordinary well run and well managed business so I’m not going to suggest that we can really improve significantly on the customer service component of that business. I think they do an extraordinary job and they’ve got great customer loyalty in that business.

I think one of the things that we bring to the table that will help that business is access to capital, assuming that the capital markets will return to some form of normalcy here over the next few months or next year. We will bring capital to that business to allow them to have more flexibility in expanding their store fronts throughout Mexico in the de novo operation.

We also bring to the table a lot of experience and expertise on the acquisition front. That’s not something that they’ve participated in in the past but again, we think there are consolidation opportunities in Mexico and our experience in making acquisitions in this business I think will be a huge asset to the organization. We also believe we could add value in terms of again the liquidation activities on their gold.

This business is exclusively lending on gold and they currently do not operate a retail business and they liquidate their forfeited items through a scrap process and we think that the leverage we have and the volume of business we do and the relationships that we have there that we could add several hundred basis points of marginal profitability perhaps associated with that liquidation activity.

We also believe that there’s an opportunity from a systems perspective to leverage some of our knowledge based systems to help them in their training programs, etc. That’s a handful of items.

Gregg Hillman – First Wilshire Securities Management

Just one follow up question on a different thing in terms of disposition of gold, could you just tell me how that works and what’s the seasonality of the disposition of gold and what’s the sensitivity of your earnings or how you calculate that?

Thomas A. Bessant, Jr.

Well, liquidation of merchandise whether it’s gold or general merchandise follow the same trend as our pawn loan balance. Our pawn loan balance hits a seasonal low in the first quarter due to tax refunds as people repay loans and it begins to rebuild in to the second quarter and continues to build really through the first week or two of January before it repeats the cycle. As pawn loan balance builds during those periods.

60 days later, roughly basically the length of the loan term will be when inventory starts to be replenished in to our stores and our disposition activity will accelerate. So again, whether its general merchandise or whether its jewelry or whether it’s scrape gold, our heaviest selling period is the fourth quarter and then followed by the first quarter activities. So, the forfeit component of the business trend very nicely in to the traditional trend of consumer behavior.

As it relates to gold, we’ve talked about it in the past Cash America has taken an approach for many, many years that we estimate the amount of future disposition activity of scrape gold. We will forward sell contracts up to a year in advance but traditionally at least six months in advance for somewhere in the neighborhood of 50% of our expected volume. Then, we come along behind that and opportunistically take the bids to replenish the residual 50% at current market prices.

Well obviously, with the change in gold pressure the last three or four years, that has kept our disposition price below market prices. If the current trend continues, that will reverse itself and our disposition activity will be above market prices. However, as Dan alluded to, it’s a very volatile market right now with absolutely unprecedented swings in gold prices and again, our approach is to be consistent with our hedging strategy.

The reason we do that very simply is we’re loaning on gold for example, today that will sell somewhere in approximately three to four months. So, what we try to do is lock in the prices, again opportunistically to make sure that if we do see a precipitous drop in gold prices it doesn’t impact our margins. Of course, we loan at levels well below spot prices and even well below the current market price of gold at its depressed level as of last night.

Gregg Hillman – First Wilshire Securities Management

If you don’t mind if I ask another question about merchandising in the United States pawn stores, I think you hired some guy maybe a head of marketing or merchandising. Could you just talk about what are you doing to improve merchandising in the United States? And, what kind of metrics, do you measure sales per square foot and are you better than the competition in terms of that metric?

Daniel R. Feehan

Yes, I’m not sure where your information arrives from. We have not added any personnel relative to marketing merchandising team any time in this past year. Our merchandising strategy is not changed from the merchandising strategy that we have employed for the last few years. We’ve got a standard, like a lot of retailers, the standard sort of planogram configuration in our stores and if you go in to any of our shops in the US you’re going to see a similar set up and configuration about how we present our merchandise.

We’re continually tweaking that, continually making improvements in that. In terms of metrics, sales per square foot is not a metric that typically we are spending a lot of time focused on our trying to match ourselves against our competitors. Again, in this particularly business we’re not out with a large purchasing department and supply chain component buying merchandise to fill in to these stores. Our key metrics and what we try to manage to is a balance between our lending and our retail activity and that varies from store-to-store and region-to-region.

The mix of merchandise varies from store-to-store and region-to-region because it really reflects what the merchandise footprint is or thumbprint is in a particular neighborhood. You can go in to a store in Memphis Tennessee and you’ll see a different mix of merchandise than you would in say Abilene Texas. The traditionally sales per square foot metric are not something that we find particularly relevant in our business.

Thomas A. Bessant, Jr.

The pawn business and the industry you’re dealing with uniform footprint stores and very few people report sales per square foot. As Dan said, the relationship between loans and inventory is important and I had a variety of comments in my prepared remarks about that. In addition, things like inventory turnover is really key in our business but this is not a retail activity in the classic sense. The retail activity is the end of the loan cycle.

So, we’re a lender by disposing of merchandise so again turnover is important, absolute volume levels is important. The key goal is to sell that merchandise, put it back in the hands of the consumer in that marketplace who has the opportunity to again use that as a pawn item. It’s a very unique business from a traditional retail perspective.

Gregg Hillman – First Wilshire Securities Management

Do you have room to take in the large flat screen TVs in the stores?

Thomas A. Bessant, Jr.

We see a lot of flat screen TVs these days.


Our next question comes from Charles Ruff – Insight Investments, LP.

Charles Ruff – Insight Investments, LP

On the Mexican acquisition, I know you said it was immediately accretive. Can you give us any sort of feel or range for how accretive or what kind of multiple of EBTIDA you’ll be paying.

Thomas A. Bessant, Jr.

At this point Charles this is a private company and they’ve been very clear about their interest in us not providing financial information about their company until this transaction is completed. A couple of more analysts that have looked at our business for a number of years have looked at the price as a multiple of loan balance and a certainly in this case is very much in line with a traditional acquisition.

This one obviously has a great deal of strategic value to it. I’m afraid I’m going to have to avoid that at this point. There certainly have been some published metrics out there by a few of our analysts. I can’t comment on those but we are very excited about it and more importantly about the growth platform that it brings. It’s immediately accretive but really the real value is in the long term continued growth and accretion in future periods.

Charles Ruff – Insight Investments, LP

On the payday loan side can you talk at all about what you see in other states? Obviously you’ve seen a number of states kind of move against the product. I’m wondering what you see as far as other states going in that direction, you know how worried should we be that that trend continues?

Daniel R. Feehan

Of all the states we operate in I can’t tell you that I’m seeing anything in any other state other than those that we mention that cause me concern today. There’s not activity, a lot of hot activity in any other state that again is particularly troublesome to us.


There are no further questions at this time.

Daniel R. Feehan

I appreciate everyone’s attendance on the call this morning. Thank you very much.


Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect at this time.

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