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Dollar Financial Corp. (NASDAQ:DLLR)

F1Q09 Earnings Call

October 30, 2008 5:00 pm ET

Executives

Jeffrey A. Weiss – Chief Executive. Officer

Randall Underwood – Chief Financial Officer

Julie Prozeller – Financial Dynamics

Analysts

John Rowan – Sidoti & Company

Dennis Telzrow – Stephens, Inc.

John Hecht – JMP Securities

Robert Napoli – Piper Jaffray

Henry Coffey -- Sterne, Agee & Leach

Richard Shane -- Jeffries & Co.

Operator

Hello and welcome to the Dollar Financials Corp fiscal 2009 first quarter financial results conference call. (Operator Instructions). I would now like to turn the call over to Julie Prozeller of Financial Dynamics.

Julie Prozeller – Financial Dynamics

Thank you, good afternoon everyone, joining us today from Dollar Financial Corp, are Mr. Jeff Weiss Chairman and CEO and Mr. Randy Underwood Executive Vice President and CFO.

Before we begin our conference call I would like to remind you that the remarks made during this conference call with reference to future expectations, transplants, forecasts, and the performance of Dollar Financial Corp and its subsidiaries and it’s markets are forward looking statements within in the meanings of the Private Security Litigation Reform Act of 1995.

These forward-looking statements reflect the company’s current beliefs; estimates and expectations involve a number of risks and uncertainties. Today the company will be commenting on previously issued guidance on expectation of future results. As a reminder these statements indicate the expectation of the Dollar Financial management team as of this date. These statements supersede any and all previous statements made by the company regarding the matters addressed.

These statements are forward-looking statements and cannot be guaranteed and may prove to be wrong. This outlook is based upon various assumptions, which include but are not limited to the following. No material change in the products and services offered in all locations as of October 30, 2008, no material change in the company’s current store development acquisition plans.

No material adverse results and litigation or regulatory proceedings involving the company that currently exists or that may arise in the future and of course can be affected by changes in the currency exchange rate.

Factors that could effect results further are outlined in the company's annual report and form 10-Qs and 10-Ks. The company’s statement will include a discussion of adjusted EBITDA, which is a non-GAAP financial measure. The most comparable GAAP financial measure to adjusted EBITDA is income before income taxes.

The reconciliation between adjusted EBITDA and income before income taxes is consistent with the company’s reconciliation as presented in the recent press release dated October 30, 2008 which is available on the company’s website at www.dfc.com. I would now like to turn the call over to Jeff for an overview of the recent quarter's activities. Jeff?

Jeffrey A. Weiss

Thank you Julie, good afternoon everybody, just like the Phillies we are again pleased with our results for the quarter as we achieved record revenue of $153.1 million driven by growth in all of our [inaudible]. Although these are unprecedented times with extreme economic volatility we are confident in the strength and resiliency of our business model. Our growth strategy continues to focus on developing our business as a multi-product, multi-country, multi-channel retailer of basic financial services to the under bank consumer.

We continue to be the most diversified company in our sector in terms of both products and geography. We believe this diversification helps manage specific product line and regulatory risks while providing a broader foundation on which to build sustainable earnings growth and shareholder value.

Clearly no one is immune to these turbulent economic times; however, our recession resistant business model remains sound. The key challenge facing us today is the volatility in the currency markets, which Randy will discuss in more detail later in the quarter.

Although we are seeing some slight erosion in the size of our customer's checks it has not been significant as our customers are generally in jobs that need to be done despite economic turmoil. Our customer base is primarily composed of service sector workers. Workers who typically work at non-discretionary jobs, hospitals, fast food restaurants, retail store chains, janitorial services, and other general skilled and semi-skilled areas, many of which are recession resistant. For example, no matter what the state of the economy someone still needs to cut hair, flip burgers, and work the cash register at gas stations or convenience stores.

In addition service sector workers consistently adjust to loosing a job quickly. For example, they loose a job in a pizza parlor, there’s a job they can find with similar pay in other businesses, like McDonald’s or Dunkin' Donuts.

Unlike an accountant or auto mechanic whose skill and pay level may require a more focused and lengthy job search, our customers are willing to do whatever jobs are available. Historically these customer characteristics tend to dampen the effect of the economic cycle in our business.

Over the past few months the global financial markets course has been very volatile driven by falling home values and record mortgage default. Only a small percentage of our customers are homeowners and as a result are not directly impacted by the current economic crisis. While it remains difficult to predict exactly how and to what extent the current credit crisis will filter through the overall economy, thus far we have not seen a significant impact from the current credit crisis on our business.

We have noticed that over the last several quarters the collections environment is becoming somewhat more difficult. The softening global economy, higher year-over-year gasoline and energy costs as well as price increases in other everyday necessities are stretching the average consumer's budget.

In response, as we have previously mentioned during our last calls, we took active steps to decrease our risk exposure to certain customer segments by reducing the amount we are willing to loan them. In addition we’ve also placed additional emphasis on pre-calling customers to remind them the due dates of their loans and to establish a convenient time for them to come in and repay their loan.

As a result our consolidated loan loss provision as a percentage of gross consumer lending revenue improved to 18.7% for the quarter as compared to 21.6% for last year’s first fiscal quarter.

Until we have a clearer picture as to the direction and general trajectory of the global economy, we expect to maintain a cautious approach to managing our business. An approach which entails sensible underwriting practices, a greater focus on debt collections and loan servicing, continued improvement to our cost structure and the operating performance of our existing store base and a judicious employment capital.

Now I would like to mention a few highlights of our first quarter. Consolidated revenue was a record $153.1 million, an increase of $22.2 million or 17% over the prior year's quarter. Revenue from our U.S. business increased by 40.8% or $12.2 million primarily as a result of recent acquisitions in that market. Total international web revenue from our Canadian and UK markets increased by a combined $10 million for the quarter, representing and increase of 9.9% year over year.

Consolidated comparable store sales increased by 2% for the quarter and by 3.2% on a local currency basis. Internationally comparable store sales grew by 5% on the local economy basis. Consolidated adjusted EBITDA was $39.5 million an increase of 17.1% or $5.8 million compared to the previous year’s quarter, excluding one time charges, pro forma income before income taxes or 24.1 million which represents an increase of 16.7% or $3.4 million as compared to the prior year's period.

Pro forma net income considering a 43% pro forma effective income tax rate was $13.7 million versus the previous year’s quarter of $11.7 million. On a pro forma basis fully diluted earnings per share was $0.56 for the current quarter compared to $0.48 for the prior year period. Additionally we opened 11 de novo stores during the quarter.

I’d now like to highlight some key achievements and developments from each of our businesses units in the quarter. During the fourth quarter our UK business contributed revenue of $40.5 million, growing by 24.5% over the previous year's quarter, despite absorbing a $2.1 million unfavorable revenue impact from the recent strengthening of the U.S. dollar in relationship to the pound sterling.

Consumer lending revenue increased by a robust 47.8% while the other revenue categories increased by $1.7 million or 76% primarily as a result of increased revenue from the foreign exchange product and pawned merchandise sale.

Check cashing revenue in the UK decreased by 6.6% for the quarter on a U.S. dollar basis but was essentially flat the prior year on a local currency base. Along with stronger growth and a single payment loan product the UK consumer lending business continues to benefit from increased pawn lending activity. This primarily consists of loans on collateralized gold jewelry.

The increase in the price of gold has enabled our UK subsidiaries to increase the amount loaned on pawned gold stock and had also increased the resale and smelting of the collateral jewelry. Interest income from pawn loans in the UK were $2.9 million per quarter compared to $1.9 million for the prior year’s quarter. We see this as an on growth area for the UK business unit and we believe that we are now the third largest pawn lender in the United Kingdom.

Also on October 17th we completed the acquisition of five stores in the London Market, bringing the total company operated store network in the United Kingdom to 250 locations. Not only does this acquisition allow us to further our strategic goals of increasing store penetration in London, but also signifies that our store network in the UK has reached a critical mass and should help us to further expand consumer awareness of the money shop grant in this market.

Although it appears that the pace of the UK economy is slowing down we have not yet seen any significant slow down in our business thus far, as same store growth and the sales growth in the UK on a local currency basis was 21.9% for the quarter. However, we will continue to monitor our operations in the UK for the effects of the slowing economy and will make adjustments to our loan risk exposure and de novo store plans in that market as deemed appropriate.

Our Canadian business yet generated $70.3 million in total revenue, which represents an increase of 2.9% over the prior year's quarter. Check cashing revenue in Canada increased by 2.1%, while consumer lending revenue decreased by 2.2% for the quarter.

Money transfers fee increased by 19.5% or $700,000 for the quarter while the other revenue category decreased by $1.6 million or 25% as a result of the growth in the debit card business and other ancillary products.

As we have discussed on previous earning calls, with many of the Canadian provinces engaged in formulating their respective product regulation and rate structures we continue to believe it is prudent to diminish the magnitude and tone of our marketing and advertising campaign until the regulatory environment is better defined and established.

We believe it is best to provide input to provincial policy makers from the industry trade association in Canada, the CPLA, as opposed to a mass media campaign that could potentially lead to inaccurate influences and misinterpretations by regulators and other interested parties.

As we have previously discussed this decision made in the spirit of establishing a viable and competitive payday loan industry for future years to come has resulted in the temporary softening of new customer growth in Canada. We expect to resume our advertising campaigns in Canada once provincial regulation has been established.

Turning to our domestic business for the quarter, our U.S. operations generated $42.2 million in total revenue growing by $12.2 million or 40.8%. On a year-over-year basis check cashing fees in the U.S. decreased by 30.8% or $3.4 million whereas consumer lending revenue increased by 42.6% or $6.8 million. The U.S. operations include the results of the acquisition of 45 financial service stores principally located in the Midwest and Hawaii, as well as the acquisition of 81 stores in southwest Florida, which were completed in the first and second quarters of the prior fiscal year.

During the quarter the company followed through on its previously announced plans to close 53 underperforming or overlapping financial service stores in the U.S. and another 17 stores in Canada; part of its plan to rationalize its North American store base.

Of the 70 planned store closures 24 U.S. stores were closed in the month of July and 44 U.S. and Canadian store closures were finalized in September, with the disposition of the final two U.S. stores completed in the month of October.

Subsequent to the store closures we maintained a store representative at the closed store sites in order to redirect displaced customers to our nearest buddy store which would accept their loan repayments as well as transact new business with them. So far the transition of customers to our nearest proximity store has been successful and in line with our expectations. The company incurred a charge of $4.9 million in the first quarter related to severance and other store closure costs associated with the store closure plan.

I will now ask Randy to provide an update on Canadian regulatory matters and to comment in more detail on our fiscal first quarter financial results.

Randall Underwood

Thanks, Jeff. I’d like to begin with a few comments on recent developments with respect to regulations in Canada. A short time ago the Nova Scotia Utility and Review Board, or the UARB issued recommendations regarding the regulation of the payday loan industry within that province. As part of their evaluation UARB recommended the maximum cost of borrowing to be set at $31 per $100 loaned. Inclusive of all fees, presumably in order to maintain a competitive environment in the province.

Even though the $31 per $100 maximum fee structure would present a substantial opportunity to increase our rates in Nova Scotia, we expect to continue to provide payday loans below the stated maximum in light of our historical strategy to be the lowest cost provider and the first choice for consumers in Canada looking for a short term loan. As of September 30, 2008 the company operated eight corporate stores in the province of Nova Scotia.

On April 4th, 2008 the Manitoba Public Utility Board promulgated a future rate and fee structure for issuing payday loans in that province. Some of the definitions and some of the specifics of the new regulation have yet to be clarified by the board. And additionally, several of our competitors in Canada are currently appealing the Utility Board's decision and one competitor has commenced legal action.

We believe these appeals and legal actions will likely delay for some time the implementation of the new rate structure in Manitoba. As of September 30th, 2008 the company operated 20 corporate stores in Manitoba which generate approximately 4% of our total Canadian net consumer lending revenue for the first quarter.

In Ontario the provincial government recently passed its respective payday loan legislation in the month of June and has recently commenced its rate setting process. British Columbia, New Brunswick, likewise passed their legislation this past October and April, respectively, and have commenced their rate setting processes as well.

The province of Saskatchewan is also engaged in the rate and regulations process and in Alberta the province released its existing legislation already complies with the requirements of the Federal law. In general we are pleased with the continuing progress of establishing provincial regulation in Canada. We believe that it will bring clarity and stability to the marketplace and that it will present substantial longer term growth opportunity for our Canadian business.

We continue to be extremely supportive of the CPLA which is very involved in every provincial rate setting process and legislative action. As we believe that any approved regulation must ultimately balanced consumer protection of enabling a viable and competitive industry.

I would now like to make a few comments with regards to the consolidated financial results for our first quarter. We achieved record revenue of $153.1 million for the quarter and total global revenue grew by 17% over the prior year’s quarter. Our consolidated check cashing business grew by 6.3%, while our consumer lending revenue grew by 19% and was again bolstered by strong growth in our UK Pond business.

Store and regional margin increased by 15% to a record $53.8 million for this quarter. All our corporate costs increased by 10.5% or $1.9 million reflecting the previously announced increased investment in global management capabilities and infrastructure to support our enhanced global store and product expansion plans, as well as our continuing very active global acquisition strategy.

During the quarter we benefited from leveraging our cost structure as corporate costs on a percentage of revenue basis declined to 12.9% as compared to the prior year’s quarter of 13.7%. Income before income taxes which, includes $4.9 million of severance and store closure costs related to our North American program that we previously announced and approximately $500,000 of other one time charges, totaled $18.6 million which compared to $20.5 million the previous year’s quarter.

Our consolidated Federal, excuse me our consolidated effective tax rate for the first quarter was 21.1% and that includes a $3.6 million estimated tax settlement for certain prior year period which is the result of a favorable decision of a long-standing appeal to the competent tax authorities on the deductibility of certain inner company charges between the company’s U.S. and Canadian business units, and the assumption that the same principles will be applied to later periods including the current fiscal year, all of which is required by generally accepted accounting principles.

The effective tax rate for the fiscal year is anticipated to be between 42% and 46% and will ultimately depend on the relative mix of profit contributions between the company’s U.S. and its foreign businesses.

Net income was $13.4 million dollars for the quarter and that compared to $12.1 million for the previous year. And our totally diluted earnings per share was $0.55 and that compared to $0.49 per share for the prior year’s quarter. Excluding one time costs our pro forma income before income taxes is $24.1 million for the quarter. And that’s gross of 16.7% over the previous year’s quarter.

And assuming an estimated pro former effective income tax rate of 43% for the year or for the quarter, excuse me, pro forma net income and fully diluted earnings per share was $13.7 million and $0.56 respectively for the quarter ending September 30th, 2008, which compared to pro forma net income of $11.7 million and pro forma fully diluted earnings per share of $0.48 for the prior year period.

The company has a very strong liquidity position. With approximated $60 million of excess cash that is available for future investment remaining from its $200 million of 2.875% senior convertible note offering, as well as $97 million of undrawn revolving credit facilities as of September 30th2008. And of course its usual substantial annual free cash flow that it generates from its business operations.

The company’s long-term debt portfolio buttresses our strong liquidity position as the interest rate on the convertible notes; it sticks at 2-7/8% and on the term debt the LIBOR date rates have been synthetically fixed at an average blended rate of 7.4% for the remaining term of the note.

The convertible notes are due in June 2027 and are not callable until December 2012. And we have no debt repayment requirement on that issue until that date. The term notes do not mature until October 2012. In the interim period until maturity the required principle repayments amounts to just $3.7 million annually.

Furthermore since the entirety of the company’s term note indebtedness is held by the Canadian and UK business units it provides a natural currency hedge for the company as well. I’m sure most of you are aware that the value of the U.S. dollar has recently strengthened considerably against the Canadian dollar and the British pound sterling. With large swings in the relative value of the currencies occurring and some of those daily, certainly this week as well.

As a result it is understandably difficult to predict where currency rates will settle during the remaining nine months of the June 3oth fiscal year. As a substantial amount of the company’s consolidated revenue is generated outside of the United States in Canada and the UK, the company’s reported results when translated into U.S. dollars for generally accepted accounting principles would be negatively impacted on a non-cash basis as the dollar strengthens.

However, as we continue to reinvest the cash generated in our Canadian and UK businesses back into those country businesses as evidenced by our recent acquisitions in the UK and therefore do not physically repatriate the foreign earned cash to the company’s U.S. entity, fluctuation in currency exchange rates have no real economic impact currently on the company’s operation, as the translation effects are obviously a non cash item.

We continue to be very pleased with the performance of all three of our geographic markets in the U.S. Canada and the UK on a native current basis, and are very excited about the ongoing global growth opportunities that we foresee. While visibility into the remaining nine months of our fiscal year remains cloudy, due to the overall economic uncertainty along with the very volatile currency markets, we would like to provide some further commentary around our expectations for our full year fiscal results.

On a year-over-year basis, if we were to translate our anticipated fiscal 2009 country level operating performance at the average currency exchange rate that we realized in the preceding fiscal 2008 year, we would expect that our results for fiscal 2009 would be at or above the top end of our guidance rates.

However, as a result of the recent volatility and the relative value of the U.S. currency, it is understandably difficult to project where the currency rates will settle and where the company translated results for fiscal year into June 30th 2009 will ultimately fall in relation to the previously provided guidance range.

However, if the recent strengthening of the U.S. dollar were to continue and we would anticipate that our results for fiscal 2009 would be near the bottom end of the guidance range. Given though we are early in our fiscal year we will continue to actively monitor the fluctuations and value of the U.S. dollar in relation to the Canadian and UK currency. And the impact the current credit crisis may have on the global economy and our customer base.

Overall we remain confident in our long-term business model and expect to continue evaluating and potentially leveraging additional growth and business performance opportunities in the future. Now I’d like to turn the call back over to Jeff for some closing remarks.

Jeffrey A. Weiss

Our company and industry will continue to act as a favorable alternative to paying ATM and bounced check fees charged by the banking industry. A recent study by Bankrate.com and the Wall Street Journal has shown that ATM fees have increased on average by 13% from a year ago, while a bounced check fee is now on average $28.95 and is frequently even higher than that with each subsequent bounced check transaction.

Through our extensive product portfolio we will continue to offer our services as a cheaper alternative to consumers who are facing ever increasing banking fees, in addition to higher costs of food healthcare and every other everyday necessities.

As I have witnessed many times in my more than 20 years with Dollar Financial opportunities for our business model present themselves in all economic cycles, both during economic booms, as well as economic downturns.

As the most diversified company in the industry in terms of both geographies and product offerings, we are in an excellent position to examine and take advantage of a wide spectrum of growth opportunities. While at the same time our diversification strategy helps to mitigate the potential effects of any unfavorable regulatory or economic change that may occur within any single State, Province or Territory.

We will continue to work to ensure that the fundamentals of our business remain strong which along with our strong cash flow from operations, our solid liquidity position, should allow us to continue take advantage of global opportunities as they arise in our existing and prospective markets as well as support the new products we are currently working to develop and launch.

Operator we would now like to invite our listeners to ask any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Rowan – Sidoti & Company

John Rowan – Sidoti & Company

Randy, just a couple of questions for you; first on the tax rate. The tax rate that you stated 40 what was it, about up to 46% for the year. Is that the based off of the pro forma tax rate for the quarter or is that including the GAAP tax rate for this quarter?

Randall Underwood

Let me provide, not only to you but probably for everybody, maybe a little more color because I apologize, as a CPA I can't believe that this is the way things work, but this is generally accepted accounting principles. So because of the very favorable events that we have where we won on a tax appeal for long-standing issues for actually the years 2000 to 2003, we know what sort of a return we're going to get in terms of previously paid taxes, and we have to recognize that year in the first quarter.

We also, under generally accepted accounting principles, have to estimate based upon that ruling what we might receive, and likely should receive, and I think likely will receive, the minimum amount that we would likely receive for the years 2004 through 2008, and book that estimated back in the first quarter. Therefore, we have this very strange 28% effective tax rate and causes us to do part or little bit of pro forma activity, which obviously I would say for all of you might be a little confusing. So I'll certainly try and help everybody through that if need be over the coming days.

We expect that the average rate for the year will be between 42% and 46%, and that will largely be based upon how the various companies perform through the balance of year obviously, because they have different statutory tax rates and that will affect the averages. It always has.

But quick math will tell you, therefore, our effective tax rate will likely be above 42% to 46% for the next three individual quarters which along with the 28.1% rate in the first quarter, then we'll average that 42% to 46% for the year. So I'm afraid it's going to cause everybody to make some adjustments in their estimates for the second, third, and fourth quarter, and unfortunately that's just the way it is.

Furthermore, as we continue on these appeals and nail down what the actual deflating and return of taxes that are owed and paid in the 2004 and future years become known amounts, as opposed to the estimates you've had to make, there will be a fluctuation there, I think if anything they'll be positive.

So we'll just try and keep everybody posted as the year goes by and these developments ensue, but the bottom line is that it's quite a little bit of money and it's good for us and good for our shareholders and at worst probably the pro forma pain that we'll all have to go through for a while. I hope you all agree with me on that.

John Rowan – Sidoti & Company

And to talk about maybe your currency hedges, I know most of them are expiring. They expired in September and I think the rest of them run off in December. Are you putting more on, and maybe talk about the sensitivity that you reported in your 10-K regarding a 10% change in currency would be a $9.1 million pre-tax change in income? Does that still hold true, and what kind of hedging strategies are you currently doing?

Randall Underwood

At this point in time we have in place for the second quarter that we are presently in, a $0.96 [Committee and Moody's] hedge or a put at $0.96. So at $0.96, depending on the day you want to look at it, it's worth a lot of money for this quarter. And if the rates stay where they are we'll certainly realize the benefits of the value that hedge at the end of November and October and December.

We have the pound hedge at $1.95. So again, we're in very good circumstances with a very valuable hedge right now.

In the third quarter we've locked in kind of an out-of-the-money put as we usually do, and remember we find and buy out-of-the-money puts because they're not that expensive, and I should say that in the volatility that we've seen here recently hedges are very expensive, and we've locked in a hedge at $0.80 on the Canadian dollar for the third quarter, and $1.60 on the pound sterling.

At this point in time, since our policy is to only look out about three months and no more than six, because the cost of these things just gets prohibited, remember these are real cash purchases as opposed to translational affects, we have not put in place a put yet for the fourth quarter. And we'll kind of follow the currency markets and try to see if they continue to bounce all over the place, to when is an opportune time to put a hedge in place for the fourth quarter and particularly when the rates are probably a little more attractive than they are this far out.

John Rowan – Sidoti & Company

The hedges that you're putting on are still all qualifying for hedge accounting, right?

Randall Underwood

Yes.

John Rowan – Sidoti & Company

And just one question for Jeff -- kind of $0,000 foot view, acquisition has slowed down, you have excess investable cash on your balance sheet. You're generating a lot of cash flow still, what do you do with the cash that you're generating? I don't think your debt covenants really allow buybacks or dividends. What's the strategy? I mean, you have to build out a lot of stores to use that free cash.

Jeffrey A. Weiss

Well, we have been a growth company in terms of sites over the last 20 years. What we have seen is that there has been a re-pricing effect in the market virtually across the board. Not only in our industry, in all industries, and it has been especially true, I think, in segments of our industry where there was a belief until relatively recently that there was a private equity put well above the level that a strategic buyer would be interested in doing anything.

We still have a relatively full pipeline of acquisition. Of course given the volatility of the times, we are being even more cautious than we usually are and I think we are contemplating what does constitute attractive opportunity in these serious times? So it has been our history that we think that we find ways to put cash to use that is earnings accretive and shareholder value generative, and we think ex the volatility in the marketplace, prices have come down substantially for acquisition opportunities.

Operator

Your next question comes from Dennis Telzrow – Stephens, Inc.

Dennis Telzrow – Stephens, Inc.

Randy did a good job on this tax comment. I just wonder when we talk about 42% to 46%, that's much higher than I guess most people would have thought on a go forward basis. Is that sort of a 2010 or 2011 range or is it a moving target?

Randall Underwood

I'm not sure I understand your question on 2010 to 2011 range?

Dennis Telzrow – Stephens, Inc.

Well you're saying the tax rate this year will fall 42% to 46%, which is higher than I think you've previously told people historically where the tax rate would come in. Is that a range that one would expect for following years, or is this a rate which is – I guess what I'm try to get to is that structurally the rate range you're going to be in as a tax rate after this year?

Randall Underwood

No I think, again, depending on finally getting some of these issues resolved, which has been pretty challenging for us, and at least in this year to remind everybody, we had this North American store rationalization program, which causes us to pass substantial one-off cost in the first quarter in the U.S. business. And we're still in that situation where we don't get to recognize the benefit of losses in the U.S. business this year. So therefore it's bumping up that effective tax rate.

If you look at it on a pro forma basis, which is why we've given you kind a pro formative view here at 43%, that excludes that one-off charge in the U.S. foreclosing severance cost, and I would not expect, obviously, those to be something that we would have to deal with as you look to future years. So this year is going to be a little higher because of those store rationalization costs, but I think it probably will largely be offset, the effects of that, probably by the resolution of these tax issues as the year continues to transpire.

But I have very little visibility, as you would appreciate, that how fast the competent tax authorities in Canada and the U.S. will move on this. Although, we've seen some movement this year, we've been at this protest for about six years now, so.

Dennis Telzrow – Stephens, Inc.

And, Jeff, no question you've got low-cost debt, but one of the problems with it is you've got covenant that prevents you from buying probably what would be the most attractive return on your cash and that is your own stock. Any thoughts on if you could resolve that, or just sort of a macro thought on that issue?

Jeffrey A. Weiss

I think our macro thought is that our banks and all banks seem to be unreceptive to inquiries of any kind at the moment. So I think probably any discussion with our banks have to wait until the current volatility resolves itself somewhat.

Dennis Telzrow – Stephens, Inc.

And I guess as part of that, what's your thought about paying debt down given the sort of re-burst macro of leverages good to now the leverage is bad?

Jeffrey A. Weiss

Well clearly, Dennis, it's something that we are thoroughly considering as we consider all appropriate forms of financial structuring. We have spent a terrific amount of time and energy we think building a pretty bulletproof balance sheet, and depending on the opportunities to deploy the cash in other ways we certainly will look at all opportunities to enhance value.

Randall Underwood

We certainly agree the stock is undervalued and as I said, likewise that seems to be the case in a lot of companies during the present markets.

Operator

Your next question comes from John Hecht – JMP Securities.

John Hecht – JMP Securities

I hate to beat a dead horse with this tax rate, but what are you assuming for kind of U.S. profitability, or maybe not profitability and the ability to use the NOL?

Randall Underwood

Again, I don't expect the U.S. to be profitable this year given that substantial charge that we took in the first quarter and the provision that we made for that. We are pleased with the performance that we're seeing in our U.S. stores as we've completed that amalgamation process and the combining of some of our stores and the customers that have successfully joined another store's family.

And as we said repeatedly on prior calls, and I'll be happy to repeat it again today, the two U.S. acquisitions that we made here within the last 12 months are just going very, very well. And I think the combination of all those things bodes well for our U.S. businesses. But as we mentioned on the first quarter call, when we take that kind of a total rationalization charge, that's something that for tax purposes has to count in this fiscal year, and I think will keep the U.S. from pulling out of a net loss position for the fiscal year.

However, the year has a little over eight months to go and we'll see what transpires. But for the future things look pretty bright for our U.S. business.

John Hecht – JMP Securities

In terms of your forecasting, I know you guys have a very diversified store base, understanding you're in multiple countries, but how are you implementing the changes in Ohio and Virginia given your limited exposure there in your forecasting?

Jeffrey A. Weiss

I think that our exposure is so minimal that while we are hopeful and optimistic – in Virginia I think it's very modest, and Ohio, again very modest. And while we're hopeful that Ohio will turn out to be good, the outcome will be good for the industry, I think our forecast anticipates that it won't be good for the industry.

John Hecht – JMP Securities

And then you recently bought five more stores in the U.K. You mentioned that relatively full pipeline. Can you talk more about what types of store's geographies you're looking? Is it more of the pawn concept, that of the U.K. that you're focused on at this point? And maybe can you discuss de novo store expansion in your plans as well?

Jeffrey A. Weiss

Sure. I think in Canada we are taking a very cautious attitude at this point, because our expectations of the pace of reform have been disappointed and we really don't know which provinces went – once they enact legislation, which we will believe will be favorable, will actually implement it. So we're kind of waiting to see in Canada what happens.

There are still some mom and pops in Canada which we are looking at actively. There's relatively little of anything that's a good size to buy. In the U.S., as always, we continue to look at mom and pops proximate to where we are doing business. In the U.K. we think there is substantial opportunity as the de novo store builds out. There are limited acquisition opportunities of multiproduct stores, but we do find the [Corner Space] extremely interesting.

Randall Underwood

We announced, I think here a while back, we had put on staff a very tenured and experienced managing director of global strategy and development. The word global was chosen for a purpose. So we continued to look beyond the current three countries that we are in today.

Operator

Your next question comes from Bob Napoli - Piper Jaffray.

Robert Napoli – Piper Jaffray

Congratulations on the very, looks to me like a very strong quarter even within the base of – I mean the currency is in the hedge, any benefits in the hedge will show up in the other line right? I mean, the revenue is negatively affected by currency.

Randall Underwood

Sure, sure the benefit of the hedges show up in our corporate expenses. Both the cost as well as the income that, I think we will probably achieve here in this particular quarter.

Robert Napoli – Piper Jaffray

No I mean, I guess I was surprised by the strength in the UK and the pawn shop lending business in particular, really I think stood out and was much stronger than what we expected. Was there some – did you get a little bit more aggressive in, I wouldn't say aggressive is the right term, or did you find an adjusted strategy that 's working there or implemented a new strategy that seems to have accelerated the trend in that business in the quarter?

Jeffrey A. Weiss

I think that there are two things operating here Bob. The first is, as mentioned, when we noted that we had reached 250 stores. I think we are getting significant enough mass in the UK that our offerings are becoming more and more aware to potential consumers. We do market quite extensively there, but as you can imagine we are a small business in a large and expensive marketplace, but it is possible to do national marketing in the UK.

We now have significant footprint, so I think we are in that same as you know stooping circumstance where awareness has grown quite substantially. Secondly, as the price of gold rises, it has enabled us to lend somewhat more to our customers and subsequently if we have items that we sell we make significantly more margin and we make significantly more margin on smelt value. So that is going to help as well, and we lend well below current gold prices.

Robert Napoli – Piper Jaffray

Just looking, the hedge – the gain that you would have in the second quarter Randy, do you have any handle on how much approximately that would be in today’s exchange rates?

Randall Underwood

I have not calculated today. I –

Robert Napoli – Piper Jaffray

You know, just ballpark.

Randall Underwood

Yes, the way the thing's been bouncing, it went down $0.05 or $0.06 on the [Moody] $0.10 on the pound late last week, and we're up $0.06 this week and $0.10 as a matter of fact, so – but those hedges are probably worth, I would guess about $1 million a month right now.

Robert Napoli – Piper Jaffray

Just on – I mean, you have a lot of opportunities to invest, but I mean, the convert market is an area that has just been obliterated. I mean, I think your converts were selling at $0.50 on the $1.00. Is that – I would think your banks would be excited about buying back some of that, like buying a $1.00 for $0.50 is not a bad strategy to do a little bit of. Is that something that you are considering or that capital is just too precious today to even consider doing something like that?

Jeffrey A. Weiss

Bob, I think given what has been happening the last couple of weeks, we are considering many options and may try and get a little feel for what things are going to sell at, and certainly the converts are I’m told are very attractively priced and paying down debts to the point that people have made is certainly an option.

We have always tried to leave ourselves plenty of room for things to go wrong and I think we are all feeling better about this global crisis, but I guess we'd like to make sure that we feel that, for the benefit of our shareholders and ourselves, but when we really are out of it. It's troubling circumstances that we got ourselves into before we kind of let loose of that precious cash. It feels pretty good right now, and it does provide I think the fact that we will certainly have a company to continue to grow and prosper with to the benefit of all of our shareholders.

We are going to be judicious I think about making a short-term decision that hopefully, we would not ever have to live to regret. There are many attractive opportunities in the marketplace, and like our opinion of our stock price or – go look at Conoco Phillips for 3.5 P/E. That’s several hundred billion dollars of annual cash flow. I mean these are just unprecedented times and there are just many opportunities everyway and as Jeff alluded to, there are many attractive opportunities that we keep hearing about putting that money to work.

Jeffrey A. Weiss

But we are not buying Conoco Phillips.

Randall Underwood

We have got a lot of strong cash flow and there are a lot of companies that are very attractively priced, that have very strong cash flow. At some point and time, to everybody's point and your point, that money will get put to use and I think it will be very – the returns will be very, very attractive for everybody.

Jeffrey A. Weiss

There are many categories that look very attractive now, but with everything else, visibility of the [inaudible] is still murky. So, I think we're in a watchful waiting period.

Robert Napoli – Piper Jaffray

Then I missed a part on the – I hate to do this – on the tax rate, but assuming the U.S. will lose money this year, will after this quarter I mean are there additional restructuring charges, I think that we will see in the December or the March quarters or is that it?

Randall Underwood

I think that yes, we made a provision and the only thing that happens under accounting principles is if we missed our estimates on what sub lease opportunity net income would be. We have to make small adjustments to that provision, but I do not anticipate anything significant.

Robert Napoli – Piper Jaffray

Is the U.S. still, after that charge and closing of those stores, is the U.S. business running at a profitable level or is it still modestly not profitable? Isn’t that the driver? If the U.S. is profitable your tax rate is 40% or below.

Randall Underwood

Let’s remember, because it has probably been a while since we talked about this, our U.S. store base on a four wall basis is very profitable, very profitable. The load of the interest costs on the convertible note and the load of our corporate global offices here, and all the other elements that go along with the corporate office and our regulatory costs that we incur in all the countries, that causes the U.S. business as you file you tax return. Amalgamation of all those things could be negative.

Sometimes I think our U.S. business is too often maligned as not profitable and on a four wall basis that is very far from the truth. But yes, by the time you file your tax return and you have all these other U.S.-based costs that at this point can not be more efficiently allocated. Although, we have made a lot of progress on that and part of the tax appeal that we just talked about was related as well. So what we been allocated in terms of costs in Canada and the UK, and so we have made some good progress.

Jeffrey A. Weiss

Of course, we did incur, as did everyone else in the industry, significant one time costs revolving around the referenda in Ohio and Arizona.

Randall Underwood

That is substantial, as it has been for the other companies that have reported, and that is a U.S. based cost as well that for this year is a drag. It's just a lot of things that are one off this year in the U.S. business that I do not think any of us anticipated, certainly we didn't, but I think for the right thing for the future.

Robert Napoli – Piper Jaffray

What are you expecting out of Phoenix? Do you have any insights into the results are going to be there?

Jeffrey A. Weiss

No. If I myself could remember when I went to vote, which way I wanted to vote on a referendum I would be more sanguine in predicting the outcome of everything. I think, as with everything else now, everything is so volatile, so difficult. I think, at the very least the industry will demonstrate that whatever the outcome, there are very large numbers of voters who want the product. In the teeth of kind of universal media negativity and that's true in Ohio as well. I think what will register on the part of the politicians is how many people vote for the product, whatever the final outcome is.

Randall Underwood

Remember, too often, to our chagrin, the customer is never heard from in these regular court processes. And this is probably the first opportunity where hundreds of thousands, millions of them are going to be heard from and so I think we look forward to the results. And what that will help, maybe, people understand that there is viable product here that a lot of people appreciate and avail themselves on a regular basis.

Robert Napoli -- Piper Jaffray

Congratulations on such a strong quarter, it's nice to see in this environment.

Operator

Your next question comes from Henry Coffey -- Sterne, Agee & Leach

Henry Coffey -- Sterne, Agee & Leach

Let me add my congratulations it's been a pretty rough couple of weeks for a lot of us, obviously much tougher for you all. I hate to sound really stupid. I disconnected my phone during one of the first questions. But the bottom line in terms of your tax rate is that on a going forward quarter basis you'd be looking at something in that range that you suggested, we'll call it 43% as an average.

And then with the actual tax rate being so much lower the ultimate full year number will be a lot lower or how does that all fall out? I know you went over some of this but I literally was off the phone on the first call.

Randall Underwood

We can go back to it quickly and if anybody --

Henry Coffey -- Sterne, Agee & Leach

And I apologize to everyone, of course

Randall Underwood

That's okay if anybody needs to clarify after the call, obviously, I will be around as usual. In the first quarter 28.1% we expect that the rate for the fiscal year '09 that we're in will be in the range of 42% to 46%. For pro forming purposes we stick 43%. To get to any one of those numbers with a 28.1% actual rate in the first quarter, obviously the rates in the second and third and the fourth quarter have to be higher.

So there's probably going to be, I would guess, several points above, couple points above, maybe 47 or 48% in the second, third, and fourth quarter. Again, and depending upon what, how fast or not the results progress in terms of resolution of near death of 2003 in these competent tax authority hearings that we're in the midst of.

Henry Coffey -- Sterne, Agee & Leach

That's the way I was understanding it. I want to make sure I had it right. And then in terms of looking at some of your specific cost items, you reported overhead, store level overhead, of about 99.3 if you subtract depreciation and the provision from that, it was like the stores are running at about $80 million a quarter. Now in subsequent quarters were there any items in there tied to the store closing or maybe extra political spin that would drive that number lower in subsequent quarters, or is that a pretty good run rate?

Randall Underwood

I think staying in currency should always be the qualifier we have to make here right now. There were quite a few charges in the first quarter for the government affairs activity. And, of course we do have the store closure costs which we have broken out on one of the tables so that you all can see the amounts thereof. And I would --

Henry Coffey -- Sterne, Agee & Leach

Are any of those buried on that store level figure? I know they show up as a separate line item on your P&L.

Randall Underwood

No, it would be from the government affairs, would be in the store level expenses.

Henry Coffey -- Sterne, Agee & Leach

And then in terms of, Jeff, I know you went through all the same store sales figures and mentioned everything, but what was the same store sales figure like in the U.S.?

Jeffrey A. Weiss

Same store sales in the U.S. was down about 4%, but we're playing straight here. We don't have the benefit, which I think we'll see in future quarters, of rationalizing that store base and losing a good part of that revenue to existing stores, so down a little bit primarily in check cashing stores.

Henry Coffey -- Sterne, Agee & Leach

And if you look at it on a country-by-country basis can you give us some feeling about what your loan quality will look like? Obviously it looked very, very strong on a consolidated basis.

Randall Underwood

Loan quality is pretty good, we think, in all three of the markets. Our losses for the quarter were down several points over the prior quarter last year as you may have seen. And I think, again, we announced several quarters ago that we were going to work very hard in our store operations to have a very watchful eye in terms of the credit decisions that we made.

And until we get a better viewpoint of where the economic circumstances are going in these countries it's our expectation we'll continue that process, Henry. And so the result is that our loan quality is pretty darned good right now.

Jeffrey A. Weiss

And we have made a [inaudible] some significant investments at the corporate level in very --

Henry Coffey -- Sterne, Agee & Leach

No, I'm just trying to get a feeling for how one country is performing versus the other for you all.

Jeffrey A. Weiss

Everything is okay across the board. And I think that's a function of our desire to, we always feel it's easy to give the money out, everybody can do that really well. It is getting it back that is hard, so we decided to give less out. And, as I mentioned, we've made a real investment in personnel at the credit/analytic level and I think that's starting to pay off for us.

Henry Coffey -- Sterne, Agee & Leach

You made the comment about currency rates and obviously it's hard to put an arrow on anything. But if currency essentially froze where it was in the September quarter, how would that affect your guidance for the rest of the year?

Randall Underwood

If it froze where it was in the first quarter it would be towards the top end of the ranks.

Operator

Your next question comes from Richard Shane -- Jeffries & Co.

Richard Shane -- Jeffries & Co.

Just a couple nuances on the convert. Is there a put feature to that convert?

Randall Underwood

Yes, there's a certain call feature.

Richard Shane -- Jeffries & Co.

What's the put date?

Randall Underwood

It'd be in four years from now.

Richard Shane -- Jeffries & Co.

And is that put at par?

Randall Underwood

That's my recollection.

Operator

Your last question comes from John Rowan – Sidoti & Company

John Rowan – Sidoti & Company

Two really quick follow-up questions. First, were there any one time costs relating to Arizona legislation?

Jeffrey A. Weiss

Absolutely.

John Rowan – Sidoti & Company

There were, what line item were they in?

Jeffrey A. Weiss

They are in our corporate expenses.

John Rowan – Sidoti & Company

Your EPS guidance is still, what is it, 210 to 235 on a GAAP basis, correct?

Randall Underwood

Yes.

Operator

There are no further questions at this time.

Jeffrey A. Weiss

Thanks everybody we look forward to speaking with you at the end of the next quarter; appreciate your time.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Source: Dollar Financial Corp. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript
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