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Cash America International (NYSE:CSH)

Q4 2012 Earnings Call

January 24, 2013 08:00 AM ET

Executives

Dan Feehan - President and CEO

Tom Bessant - CFO

Analysts

John Rowan - Sidoti & Company

John Hecht - Stephens Incorporated

Bill Carcache - Nomura Securities

Bob Ramsey - FBR Capital Markets

Henry Coffey - Sterne Agee

David Scharf - JMP Securities

Sameer Gokhale - Janney Capital Markets

Bill Armstrong - CL King & Associates

Dan Furtado - Jefferies

Gregg Hillman - First Wilshire

Operator

… participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operation Instructions) As a reminder, this conference is being recorded Thursday, January 24, 2013.

I would now like to turn the conference over to Dan Feehan, President and Chief Executive Officer. Please go ahead.

Dan Feehan

Thank you and good morning ladies and gentlemen. Thanks for joining us this morning for the earnings call on our final quarter 2012. Tom Bessant, our Chief Financial Officer is with me here this morning and will be providing financial report on the quarter followed by brief overview remarks.

Before proceeding with our prepared remarks, I'd like to remind you that all the statements made during this call that relate to future results and events are forward-looking statements and are based on current expectations. Actual results and events could differ materially from those projected in the forward-looking statements because of a number of risks and uncertainties which are discussed in our SEC filings and in the cautionary statement on our website under Investor Relations. We assume no obligation to update our forward-looking statements.

I also want to mention before we proceed that a reconciliation of any non-GAAP information provided on this call to the most directly comparable GAAP information is available on the Investor Relations section of our website at www.cashamerica.com. Non-GAAP financial information is not meant as a substitute for GAAP results but is included solely for information and comparative purposes.

Okay. Now, let’s talk about quarter. I want to start by making sure we’re all on the same page with respect to our earnings performance relative to the guidance we provided in late October in our third quarter earnings release. And that’s when we published guidance for the quarter for EPS in the range of $15 to $25. In our fourth quarter release issued early this morning showed reported EPS of $0.79 but also highlights two large non-recurring items totaling $0.50 per share which Tom will discuss in more detail momentarily.

Estimates for both of these charges were previously disclosed but not included in our earnings guidance of $15 to $25. So, adding those numbers back to the reported EPS would lift us to a non-GAAP number of $1.29 a share just above the top end of our guidance range.

So assuming that we’re all now on the same page with respect to our operating performance in the fourth quarter relative to our guidance range, I’ll spend a few minutes sharing my perspective on our recent trends of our two business segments.

First I’ll address the retail lending services segment of our enterprise which is a segment where both nonrecurring items are recorded in the fourth quarter. When you look past the nonrecurring items and focus on our US storefront business, you’ll see that the trends we discussed in Q3 and forecast it for the fourth quarter for our domestic pawnshops did indeed play out as we predicted.

I mentioned to you in our October call that we expected to experience very tough year over year comparisons due to fourth quarter of 2012 and the first quarter of 2013, for loan growth retail sales and scrap dispositions. Same store pawn loans were down slightly in the fourth quarter compared to the same period of last year although better yields and pawn loans acquired during the quarter combined to generate a welcome 8% gain in pawn service charge revenue.

Our disposition activity continues to be toughest year over year comparison particularly with the volumes and margins associated with commercial sales and scrap gold and diamonds. Over the counter retail sales and margins for the quarter were actually little better than I had expected, but the gross profit dollars on commercial sales were all significantly when compared to the fourth quarter of last year. This phenomenon first served first in the second quarter of this year and has worsened in each sequential quarter.

Now mentioned in third quarter report that we had experienced outsize growth in jewelry purchases and jewelry loans written during the last three quarters of 2011. Now we saw this abnormal growth pattern slow in the first quarter of 2012 and then dropped dramatically on a year over year basis beginning in the second quarter. Consequently as I expect in Q4, we had far less commercial inventory to scarp than we did this time last year and again I would expect we will continue to face remittable head wins for scrap dispositions in the first quarter and at least the portion of the second quarter here in 2013.

At same time we've seen volumes drop, our commercial margins are compressed on the year over year basis with gold prices stabilizing in high $1,600 range. I am encouraged however that our commercial margins are up sequentially from the third quarter of this year. Our scrap margin degradation was a bigger problem in the second and third quarter of this year. The impact of dropping volume was more of a factor in lowering year over year profits in Q4. Tom will provide a little more detail in his comments.

Now let me turn my attention to e-Commerce segment of our enterprise which did exceed our forecast in the fourth quarter in both the domestic and foreign portions of its business. We continue to see solid online loan demand across all product sets including our short term single pay products and longer term and solid products. In the US, our gross short term loan portfolio has grown approximately 25% over the past year while the U.S. gross installment loan portfolio has grown by 87%. Installment loans are now 27% of Innova's gross loan portfolio in the U.S. compared to only 20% at the beginning of the year. Included in that installment portfolio at year end is approximately $5 million of loans booked through the new net credit platform that we launched in June. We're seeing good demand for these product set, which gives us the opportunity to migrate upstream to a higher credit quality customer.

Our e-Commerce segment also enjoyed a strong revenue growth in the foreign component of its business, with higher year over year revenues in all countries and increasing gross margins across all product sets. You will note in the reported number that the loss rates in the foreign e-Commerce business are down almost 20% when compared to the fourth quarter of last year which certainly helped drive a significant year over year gain in operating income. While our short term loan products in the UK, Australia and Canada all posted higher year over year gross margins in the fourth quarter, the largest percentage improvement in loss rates during the quarter was associated with our installment loan product in the UK. We're seeing a more mature mix of new and existing customers with this product in the UK which is driving greater marginal profitability.

Installment loans now account for approximately 40% of the gross loan portfolio of our foreign e-Commerce business, up from 25% at the beginning of 2012. You'll also know when examining our full year numbers for 2012 that almost 50% of our e-Commerce revenues were generated from activities outside of United States. I would also point out that approximately one third of the combined gross loan portfolio of the entire e-Commerce segment at year end is now represented by installment loans.

Now let me segway in a few comments on the regulatory front. We don’t have anything of consequence to report to you in the U.S. other than the fact that the Texas legislature is back in session this year and we do expect bills to be filed challenging the product design of credit access businesses in the state. We intend to join the industry and association and vigorously defending our right to do business in Texas just as we have done every year that Texas legislature has been in session.

The Texas legislative session typically extends only to the end of May and I will update you on your next schedule call in April. Since our last call in October, we have seen some regulatory developments in the UK. In late November the Office of Fair Trading issued an interim report on their review of the payday industry and issued guidance on the use of continuous payment authority. To refresh your memory, continuous payment authority is a process by which a merchant, or a lender in our case, can electronically debit the customer's bank account for payments. Our e-Commerce segment has adjusted its continuous payment authority process in accordance with the new guidance and we have not experienced nor do we expect any adverse impact from the adjustments we have made.

Additionally in December, The House of Lords in the UK adopted an amendment to the pending financial services bill that is intended to empower a new financial regulator in the UK with the authority but not the mandate to cap interest rates on a short term consumer loans. This new regulator which is the financial conduct authority is currently scheduled to be operational sometime in mid-2014 and we obviously have no basis for predicting what this new agency might do when it is up in operating in 2014 and beyond and we’ll simply keep you posted in our quarterly calls as learn anything new. I don’t have any other regulatory issues to discuss at this time.

Moving on, in the earnings release issued this morning, we reconfirmed our 2013 full year guidance range of $4.75 to $5.15 that we first published at the end of October and now that we completed 2012, I would like to share my perspective on the outlook for our business segments in this new year of 2013.

First on the retail lending services segment, I am expecting our reorganized business in Mexico to post a significant improvement in its operating performance in 2013. We have successfully closed and liquidated the assets of all the gold-only locations leaving us with 47 full format shops as we entered the year.

We have changed our branding in Mexico on these 47 shops to provide a new and more energetic image for our customers and a psychological break for our co-workers. Given the immaturity of these remaining 47 full format shops, our goal for 2013 would be to move the Mexico business from a large operating loss we have experienced over the last two years to at least a break-even or better performance in 2013. And as I said before, we will not be adding any new locations in Mexico and to overcome then we can achieve exceptional returns on any additional capital investment there.

Next, with regard to our domestic storefront business of 831 lending locations in 22 US states, I expect to remain cautious on the near term outlook for that business at least until we anniversary the first and second quarters of 2012 and hopefully return to more normalized trends for assets and earnings expansion.

I do believe that we see some decent GDP growth and job creation this year and I will grant you that’s a big if, but if we do, I would expect consumer confidence to strengthen and accelerate the demand for short term consumer credit both secured and unsecured. That will hopefully drive new traffic and generate more than the modest average pawn loan growth that we currently have modeled for the year.

Now as a pawn loan portfolio builds in 2013, I do expect we’ll see a higher mix of general merchandise on our pawn loan portfolio and in our inventory than we have seen in the past few years. Obviously adds in any significant escalation on the spot price of gold.

In retrospect I think both our customers and our company have enjoyed the easy benefits of escalating gold prices for the past two years and now we need to recalibrate our training and marketing programs and store operating model to one that is more attuned to the emerging general merchandize product categories in disposition channels.

We have over 28 years of successful experience in the US pawn business and I’m confident we’ll be able to manage through this transitional period and I will be dedicating a significant portion of my personal time to the segment of our business in 2013.

My outlook for our e-Commerce segment in 2013 is very upbeat. Given the momentum with which we finished 2012 I would expect us to post another strong year of growth in 2013. I’ve spoken frequently in previous calls about how well positioned our online platform is to fill the gap created by the friction of rising demand in the contraction of traditional consumer credit.

We have proven our ability to do so with meaningful scale in both the U.S and the UK and with a variety of products designed to meet the evolving needs of preferences of the online consumer. If we maintain our focus on product innovation, territorial expansion and best in class technology development and data management, I would fully expect our online platform to remain our most significant growth engine well beyond 2013.

And finally our Board of Directors have demonstrated their convection in the future success of our overall enterprise by passing a resolution that our regularly scheduled meeting yesterday for our new 2.5 million share repurchase authorization. Repurchases under this program will be made through open market purchases or private transactions based on market conditions and other factors at the time of purchase. And based upon our current share price and expected prospects for free cash flow from operations in 2013, I do expect to be more aggressive in repurchasing share issued than we have during the past few years.

And that completes my brief introductory remarks and I’ll turn it over to Tom for the fourth quarter financial report.

Tom Bessant

Thanks Dan, good morning to our listeners. As Dan mentioned, this morning Cash America reported fourth quarter financial results for the fiscal year ended December 31, 2012. As previously disclosed, there is a variety of unusual items in the quarter including the previously announced reorganization related to the closer of our 115 units in our Mexico based pawn operations during the fourth quarter to allow us to conclude the year with 47 full service pawn locations to start 2013 and the voluntary customer refund of 13.4 million related to our higher collection efforts which was expensed in the fourth quarter and disclosed in the previous press release.

In the fourth quarter of 2012 these two times total $20.4 million before tax and 15.4 after tax climbing to $0.50 per share. As result when adding these unusual items to the reported $0.79 per share for the fourth quarter of 2012 the company generated $1.29 of earnings per share for the three months period which was $0.04 above the high end of our expected range of between $1.15 and $1.25 per share for the quarter. In addition, the adjusted EPS of $1.29 is 9% above the $1.18 reported in the fourth quarter 2011.

Performance in the fourth quarter exceeded expectations due to the continued strong growth in the company’s e-Commerce segment. Operating income during the fourth quarter 2012 for the e-Commerce business segment increased 68% year over year to $33.9 million compared to $20.2 million in 2011. The strong performance was due to the continued expansion and marginal profitability in the foreign e-Commerce business and the initial return to improved margin profitability as the US e-Commerce business as we’ve been expecting due to the recent growth in assets throughout 2012.

Operating income for the domestic e-Commerce business increased 26% to 16.6 million in the fourth quarter of 2012, which was a satisfying turnaround from the 31% year over year decrease experienced in the third quarter of 2012 albeit on higher Q3 2012 revenue.

The fourth quarter improvement in US e-Commerce business was due to a 38% increase in total revenue complemented by a sequential flattening of loan losses as a percentage of fees which were 47% in Q4 of 2012 down 1% sequentially from 48% in Q3 at 2012 resulting in a 28% increase in net revenue.

We have been anticipating this turn in US e-Commerce operating profits which is a positive sign as we move in to 2013. The foreign e-Commerce business continued its consecutive string of strong quarterly performance as operating income increased 148% year over year to 17.3 million.

Foreign losses as a percentage of fees in the fourth quarter of 2012 were 44% compared to 55% in the prior year. As many of you remember, installment loan balances increased significantly in the fourth quarter of 2011 leading to very high loss rates in foreign e-Commerce operations. However since that fourth quarter of 2011, the foreign e-Commerce business has produced expanding, marginal profitability throughout 2012 to lower loss rates and once again that revenue increased 54% in the fourth quarter of 2012 on only a 23% increase in total revenue.

Foreign operating income comprised 51% of consolidated e-Commerce operating income in Q4 2012 and foreign consumer loans were 52% of total loan assets in the e-Commerce business. The success of the e-Commerce platform continues to be evidenced by solid and consistent growth in assets of both short term and long term products. Total installment loan balances within the e-Commerce segment continued to grow nicely and increased 102% year over year reaching $122 million. U.S. installment loan balances increased 87% to 46 million and foreign installment loans more than doubled to 76 million.

Total e-Commerce loan balances were up 35% year over year to $360 million at year end 2012 and installment loans now comprise 34% on a total loan balance in the e-Commerce business at year end compared to only 23% at year-end 2011.

Now moving over to the retail lending services business, the fourth quarter results were challenging and as expected largely due to lower proceeds from the disposition of merchandize as Dan mentioned. While retail gross profit excluding commercial sales in the domestic business was up 8%, the lower volume goal liquidated during the quarter reduced overall gross profit dollars by 14%, leading to a decrease in net revenue from the domestic retail services business of 4% in the quarter and of course that’s very difficult to overcome.

Pawn loan yields were better than expected and the portfolio continues to perform very well. Pawn services charges on the domestic portfolio increased 8%, however loan balances continued to ease lower in the fourth quarter finishing December up only 1% overall year over year at $240.6 million. Same store domestic pawn loan balances were up 4% at the end year and same store net revenue fell 8% year over year. While reported operating income for domestic retail business was up 34% at 45.6 million, this includes the 13.4 million in Ohio customer refunds, excluding these amounts from domestic retail lending services reduces this to a 14% decrease in year-over-year domestic operating income at retail lending services.

And I'll refrain from commenting on the Mexico-based pawn business except to say that the transition activity makes interpretation of the quarterly results difficult. Therefore we’ll be better prepared to review that business after our first quarter results.

So to conclude my comments on Q4 2012, the strong performance of the e-Commerce platform allowed us to overcome the expected challenges of the slowdown in the pawn lending business and posed a 9% increase in consolidated EPS, after adjusting for the unusual items which was better than our expectations coming into the quarter.

As we look to 2013, our outlook remains guarded to the retail lending services business as lower levels of pawn loan balances will make the first quarter comparison very difficult. However, we are optimistic that the e-Commerce business will continue to perform well in the first quarter and throughout 2013 by leveraging strong growth in installment loans built up over the last two years.

In addition, the further expansion of marginal profitability is expected as we appear to have reached an inflection point in the US portfolio and the foreign business is already displaying this trend.

As a result, we are expecting first quarter 2013 results to lead to earnings per share range of between $1.35 and $1.42 per share. At this time we are confirming our full year outlook as Dan mentioned for 2013 is between $4.75 and $5.15 per share until we get better visibility to the timing the tax refunds and the direction of US and Mexico based pawn business.

And now I will turn the call back over the Dan.

Dan Feehan

Thank you Tom. I appreciate it. So operator, we'll now open the line for questions please.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of John Rowan from Sidoti & Company. Please proceed with your question.

John Rowan - Sidoti & Company

Tom, I think you have said in your prepared remarks, I wanted to make sure I understood it, the pre-tax charge was 20.4 million, is that correct?

Tom Bessant

Yes.

John Rowan - Sidoti & Company

Okay. Were one of the charges not tax deductible?

Tom Bessant

No, let me just make sure. 20.4 million before tax and 15.4 million after tax or $0.50 per share John.

John Rowan - Sidoti & Company

Okay and as far as the buyback you have said that obviously, you know Dan said you’ll be more aggressive this year. Is that included in guidance?

Tom Bessant

Not really John. We just don’t include in guidance, just kind of our normal typical purchases so it’s not included in our guidance numbers.

Operator

And our next question comes from John Hecht with Stephens Incorporated. Please proceed with the question.

John Hecht - Stephens Incorporated

Regarding guidance, what’s the cash rate which you incorporated for next year?

Tom Bessant

John, I think we’ll continue to see a slightly inflated tax rate there. I’ll track pretty close to what you’re seeing in the current quarter until we show some profitability out of our Mexico operation.

Dan Feehan

Yes, we didn’t get the full benefit from a tax perspective of all the Mexico write-off. So, tax rate has been inflated a bit here recently and we continue to see a little bit of that going into 2013.

John Hecht - Stephens Incorporated

Okay. And then second is Dan you mentioned you’re adjusting the pawn segment in retraining people to account for more gross or general merchandise oriented operations. What do you think that means for inventory turns relative to historical turns in the next couple of years?

Dan Feehan

Historically, if you look back several years John, general merchandize categories in our inventory turn faster than (inaudible) categories and by historical standards almost twice the rate that (inaudible) has turned for us. So, it’s not an abrupt transition, I just think again as I said, that we’ve enjoyed both our customers and us have enjoyed these escalating gold prices and some easy benefits from that over the last two or three or four years and as I see what’s going on in our business today and look at what our competitors are also discussing. I think we need to get ourselves focused on the fact that we are obviously looking at our business more like we conducted it prior to these big run up in gold prices and I think it gets sharper on general merchandise categories, you have a whole new emerging electronics categories with smartphones and tablets and a wide variety of other things we’re seeing in our stores today and we need to be training our folks to encourage our customers to bring in those items to the extent that they have those versus jewelry or scrap gold.

Operator

Our next question comes from the line of Bill Carcache with Nomura Securities. Please proceed with your question.

Bill Carcache - Nomura Securities

The first question I had was on some of the trends that you discussed in the consumer loan business. I thought it was interesting to see consumer loan fees down in retail services but the provision being up while the opposite happened in e-Commerce we saw consumer loan fees increased there but the provision was down. so a couple of questions on that trend. you know, first can you talk about whether I think you touched on this in the past but was hoping you can kind of revisit the whole notion of potential cannibalization of the retail business by a very strong growth that you are seeing in the online business and then secondly can you talk about what’s driving that improved provisioning performance that we’re seeing in the e-Commerce business, is there some fine tuning of you know your underwriting model within that e-Commerce that’s kind of driving that because I mean it’s kind of interesting that’s all happening and that improvement is happening in the face of growing installment loan balances. I remember from I think it was a couple of quarters ago that higher installment lending activity because of the way the accountings works let up from provisioning and you know I would think that that’s strong installment loan growth would be a headwind with that would lead to higher provisioning, but we’re not necessarily seeing that. So was just hoping you can talk to some of those points?

Dan Feehan

Yeah Bill, good question. I think you’ve got to bifurcate the loan portfolios taken on the e-Commerce side when you talk about the loss provisioning installment loan growth. so we’re seeing good installment loan growth in the US that is taken the higher provision, today we’re newer in the expansion of our installment loan business in the US than we’re in the UK and if you look at, we don’t breakout that product set necessarily in all the metrics associated within our reports, but in the US we’re seeing exactly what you talked about in terms of good growth on installment products and higher loss provisioning. The big impact on rates as reported and we discussed was in the UK related to our installment loan product there that we referred to as pounds to pocket and what you’re seeing there is an increasing mix of new and existing customers, again that helps the loss provisioning and helps the marketing cost associated with our business there from an acquisition cost perspective. so marginal profitability increased pretty significantly year over year with our installment lending product in the UK. it also reflects our underwriting standards, some changes in process relative to collections etcetera. so some efficiency there, but by and large it's the nature of the portfolio and material. And that's been our premise from day one in installment loan business that we got into it and got more experienced with it, continued to adjust our underwriting models on a regular basis, that we would incur heavy provisioning in early days and work our way into greater marginal profitability with those products and we'd expect the same thing to happen in the U.S. so again, you got to look at the two different segments of our business to understand where we are from an evolution perspective in the U.S. versus our foreign business.

Bill Carcache - Nomura Securities

Okay and any commentary around the potential for further growth in that e-Commerce business, potentially being a source of headwind for the retail business?

Dan Feehan

I don't see again, we tracked that as I've said on previous calls, crossover traffic and we're not seeing any changes in our trends there. Again, to a large extent I mean the consumer, when you look at our retail business, you look at our store front mix around the U.S. a significant portion of our consumer loan business in the retail lending services segment resides in Ohio with a 120 locations that we have there and the large volumes that we had historically done in Ohio. So things that happened in Ohio tend to move those numbers at the retail lending services segment level pretty quickly.

You know what's going on in the retail lending services segment again I think we've got a different customer there than we're seeing online to a large degree. Fees have come down, offers have gone up, we made some adjustments to our underwriting models in the third, early fourth quarter of last year relative to default rates that we were seeing, rise, relative to that product particularly in Ohio and as a result some of that loss default activity has a lagging effect with respect to loss provisioning and at the same time we're getting caught by adjusting our models with a little revenue year over year. so, something that we continue to watch and adjust as we deem necessary, but again to a large extent that customer that we're dealing with in our bricks and mortar locations in the consumer loan business is different than the customer that we’re seeing online.

Operator

And our next question comes from the line of Bob Ramsey with FBR Capital Markets. Please proceed with your question.

Bob Ramsey - FBR Capital Markets

I know you all have said in your guidance for the first quarter that performance could be influenced by the timing of federal tax refunds. I was just hoping you could sort of go over again, you know to the extent it is pushed back, how that does impact you and then also talk about possible impacts from changes in payroll taxes and lower gasoline prices.

Dan Feehan

Yes, those are all great questions Bob. I wish I had a great crystal ball to tell you exactly how that will unfold for us. We had in 2012, we had you’ll recall in our comments coming out in Q1 and in Q2, we had what we felt like was a little later tax refund season in 2012. so it’s really unclear to us how this what we’re hearing out of Washington and out of the treasury with respect to our refunds this year, exactly how that’s going to impact the timing of what we see in Q1. obviously earlier refunds tend to drive greater retail traffic in Q1 and compressed loan growth early in the quarter. we typically would like to see loan growth by the end of Q1 begin to strengthening a bit, obviously going in to Q2, so see loans strengthen a bit, what happened to us in 2012 but with the later refunds, we didn’t see, didn’t see our loans firm up as quickly as we have traditionally seen them in the past few years. So it’s hard to tell you how 2013’s tax refunds are going to impact us vis-à-vis our first quarter of 2012. now it’s also going to be interesting to see how the payroll tax increase is going to affect our consumers who, obviously are going to be subject to that, what I understand and read the treasury indicates that that may be as much as a $80 to $100 of pay period for the average consumer in this country and so I have got to think that puts a little bit of a pinch obviously on our customers and may drive some loan demand. We just have to see how that unfolds.

Bob Ramsey - FBR Capital Markets

Okay great. And then shifting to the installment product, I was wondering if you could breakout as you do in the provision in this quarter between installment loans and single path.

Tom Bessant

I am not sure that we break it out in great detail. I would also take the opportunity to point out one of the things that we did for you this quarter was identify one of the short term products that you haven't probably have as much visibility on our e-Commerce business which are our line of credit products so you are seeing that attachments to press release as well as our quarterly financials filings, we’ll have the detail of our line of credit product there. But I’m not sure specifically Bob, what you’re referring on loss as a percentage of the installment product.

Bob Ramsey - FBR Capital Markets

I think in the 10-Q you all do breakout the provision between the products but I can wait for the filing if you all don’t have that handy.

Tom Bessant

I don’t have it in my fingertips right here. I've just got the standard breakout between consumer loan fees and total for e-Commerce relative to the loss provision that you see in your filing or attachment press release.

Bob Ramsey - FBR Capital Markets

And then could you tell me as well with the installment loan customer, are you finding that a big piece of that is formal single pay customers or is it a new customer set entirely and sort of how does it differ and then maybe since you highlighted the line of credit product, what do you see in terms of who that customer is?

Dan Feehan

In the installment loan portfolio we have managed that process of migrating some customers out of our payday product but also opening up for brand new customers. So, when you look at so far UK business and our what I refer to as our cash net installment business in the U.S which is separate and apart from our net credit business, our net credit platform which as I discussed on our third quarter call, we launched in June and is designed to help us move our stream.

What we have done is taken our very best performing short term customers, given them an opportunity to migrate into an installment loan. So, that we begin our installment activity to both in the U.S and UK under that scenario. And that as we gain experience and knowledge and data associated with that developed and refined underwriting models, we began opening that up to new customers as well. Now the net credit platform again is designed to migrate upstream is going to be primarily focused on new customers who are not trying to migrate the best performing short term single pay customers into an installment product.

You’ll hear when we do our focus groups and we talk to consumers in our pay day product. They are clearly a strong preference over a lot of our customers that have the opportunity for a longer term loan. so you know again we’re trying to develop that option and give people multiple product options that fit whatever their needs maybe.

Bob Ramsey - FBR Capital Markets

And if you were to sort of roughly give the split, I mean is it former single pay customer or three quarters or little over half or just broadly, what is the mix of new versus existing customers moving into that product?

Dan Feehan

It depends on what stage you’re talking about, what portfolio you were talking about. so I don’t have the number overall above it and I can give you my gut my instinct that it probably today it’s probably closer to the three quarters and half. I don’t have specific numbers in front of me.

Operator

And our next question comes from line of John Rowan from Sidoti & Company. Please proceed with your question.

John Rowan - Sidoti & Company

Good morning guys, I’m back. just a quick question. obviously I can see the scraping numbers in the press release but is any of that just a fact of closing down Mexico, I kind of want to understand what the scrapping was doing just in the US?

Tom Bessant

Yeah, well John obviously reducing that store count in Mexico has some impact but it’s not very material, the bulk of what you’re seeing is in the US business. you know, I'd point out that the jewelry portfolio continues to perform very well within our pawn business. There’s really hasn’t been a material shift away from the quantity of jewelry loans in the portfolio and forfeiture rates continue to be lower year over year meaningless. jewelry is being forfeited out of the portfolio. but over the last two quarters as Dan talked about, we’ve had a pretty significant drop in over-the-counter purchases and we just saw a lot less volume go through the scraping process. so when your loan balances are lower in Q2, Q3, and Q4, you’re going to have less forfeited material and you’re going to have less purchases. so that significant drop which we saw in Q3 and continued in to Q4 actually increased in Q4 was out of US business.

Operator

(Operator Instructions). And our next question comes from the line of John Hecht with Stephens Incorporated. Please proceed with the question.

John Hecht - Stephens Incorporated

Tom, you mentioned some of the same store loan and sales characteristics. I am wondering, are you able to give us those kind of in the absence of the effects of gold to give us a sense of the core general merchandize business?

Tom Bessant

Yes John, we don’t break it out that way, I just really pretty much look at the business as a whole. Net revenue is net revenue, and of course disappointing in the quarter coming in off 8% which is following on a 6% decrease in Q3, but that does include the effect of the (inaudible). I did point out in the call that we did have (inaudible) shows gross profit on the retail side actually is up year over year. We did see a slight strengthening in the retail gross profit margin sequentially whilst down year over year, it's up slightly in our retail sales activities in stores excluding scrap gold was higher. Dan mentioned you know, we'll continue to put greater emphasis on the over the counter activity, so retail disposition activity of both jewelry and general merchandize in our stores, so you hope to see that compensate for the change in scrap activity.

John Hecht - Stephens Incorporated

Okay, I guess, sort of a follow up question, but just sort of a broader kind of commentary is, either in the middle of 2012 you suggested you're a little but perplexed by the customer behavior and I think it was related to probably directly I know related to kind of the volume of gold coming in and people's interest in using gold as collateral and willing to sacrifice their gold. at this point in the cycle do you feel like you more visibility into what kind of to the more updated customer behavior is and are you able to kind of assess that scrapping volumes are bottoming out or stabilizing at these levels?

Dan Feehan

Again, that's a good question John and you're right, we did express being a bit perplexed by it. I think the growing confidence that I have is again, we're going to have to look to our business for greater mix of general merchandize jewelry. clearly we've gone through now three quarters where we've seen far less purchases, customers coming in to sell gold than we did in 2011 and lower jewelry loans written than we did in 2011. Now we have seen this quarter an increase in general merchandize loans written in purchases which is encouraging as well and I think getting our team back to the disciplines about trying to appropriately manage that mix is a challenge that we have as a management team here. but you know when I look at the activities of our customers, try to understand behaviorally what's going on with them, we've also seen some reduced traffic around the country and we don't have traffic counters in every one of our stores but we have a strategically placed throughout the US, try to measure traffic counts and again, I think generally just we've seen a lower traffic year-over-year in the past few quarters than we had expected.

So, again I can come back to the same premise that I always come back to and that is the demand is what drives pawn at loan activity and if someone has a demand, customers traditionally deal with us in our pawnshops do so because even though they don’t have an option for an unsecured lending or they prefer a secured lending in bringing us collateral and if there is a demand, they are going to use whatever is available to them, you know whether its jewelry, scrap gold or other items, electronics, musical instruments all the other things we deal in.

So, I think some of those activities in my opinion has been affected by the demand to some degree. Not sure exactly what’s going on in the consumers mind today whether it’s continue to be cautious about getting themselves too extended. Again, I think we are going have to see a little better growth in the economy and growing job market for people who feel comfortable again. Hopefully the folks in Washington deal with the issues that we are struggling with from a debt as a perspective, which I do think all that media discussion about that impacts people’s view of their own confidence of going out and spending money and taking on consumer credit. So I think there are some behavioral changes that aren’t just associated with gold but I think clearly I have got to believe that at this point that people are going to have to start using additional collateral to some extent that they offered up most of that excess gold and jewelry over the last few years.

Operator

Our next question comes from the line of Henry Coffey with Sterne Agee. Please proceed with your question.

Henry Coffey - Sterne Agee

Dan if you look at the pawnshop business, how much of your focus is really going to be on addressing the revenue side of the equation, whether that would marketing or just in-store activity and how much of the focus do you think really has to be on write-sizing cost and kind of making this business a little bit leaner.

Dan Feehan

I think we have to do both Henry. when you look at the margin of profitability of the business we had to focus on both driving revenue and managing our cost probably in a little more disciplined approach than we have, although I will say that you know in Q3 and Q4 if you take a look at our operating cost and our retail lending, domestic retail lending services segment we have adjusted our cost structure expecting to have these lower revenues.

So, I think we got to take a look at the entire models. We do that on a regular basis not only our staffing stores but also over spending from a capital perspective on remodeling stores, opening stores et cetera, where we’re getting invested in the physical plan or things that are online and have been on my list to address and continue to tweak so that we’re getting the kind of investment returns that drive shareholder value long term.

So, I think the entire model is something that we got to continue to look at. But again, I think that our business is going to grow if we get pawn loan growth. It’s been the case for 28-29 years that we’ve been doing this. You got to get that asset growth in order to get longer term sustainable earnings growth. I don’t think you can manage the expenses to the point of driving sustainable earnings growth. I think we got to be responsible about it but we got to get the asset growth which will drive revenue growth and again, get ourselves back into what I hope to be more normalized patterns.

Henry Coffey - Sterne Agee

Is this transition creating more acquisition opportunities or are we still in a market where the sellers have stars in their eyes in terms of expectations on value?

Dan Feehan

Probably the latter, I think we still based on our experience and both we talked to, we still see stars in our sellers eyes. I mean I do think that as more discussion unfolded over the last few days and we talked about share repurchase and what other capital allocation alternatives are, I think we’re going to be quite frankly more defining about how we spend our capital dollars and how we allocate it. I do think that we’ve heard from a number of shareholders over the last six months or so that looks like to them that our share will be better investment opportunities than some of these out priced acquisitions that exist in the market today. so again I think we’re going to be a little more discerning on the capital allocation issues herein at least in 2013 and make sure that you’re allocating our dollars in the best interest of our shareholders.

Henry Coffey - Sterne Agee

You know you mentioned that the internet business was at an inflection. Does that mean a higher percentage of volume with its existing customers, lower marketing cost, potentially continued decline in the provision ratio?

Tom Bessant

Yes, I think Henry that was my comment and one of the things we talked about over the last year was foreign e-Commerce has shown tremendous leverage and improvement marginal profitability as the mix of new customers has settled slightly and loss rates have come down and that supercharged the e-Commerce foreign earnings in 2012. The US business which saw a lot of asset growth and a lot of new customers coming into that business in 2012 was experiencing increases year over year in loss rates throughout 2012 and we saw a flattening of loss rates from Q3 to Q4 and an expansion in domestic marginal profitability. So my inflection point was that now as we look to 2013, we expect to see a widening of operating margins on the domestic e-Commerce business much like the foreign business, so that’s a pretty attractive mix and that’s the inflection point that I was referring to.

Dan Feehan

Yeah Henry, it’s going to be a function of scale to on some of these product innovations that we have done and installment areas as well as line of credit, so part of that is a function how quickly we scale that business and again, that’s a component of our capital allocation strategy as well and you know we want to support the growth of installment loan business because we see the demand, we like the diversification of that product mix offers us away from the single pay product, but it is when you get in the installment lending component, it does consume more working capital when you scale that business. so it’s going to be a function how quickly we’re comfortable scaling it and see what happens in the US particularly with loss provisioning and marginal profitability.

Henry Coffey - Sterne Agee

But you are at a point where you can probably have greater control over your exact capital allocation and even if pawnshop business is a little slower that’s obviously disappointing but this is the kind of environment that frees up a lot of cash flow. is it possible that we'll see you run through this first buyback program relatively quickly and then set up a new one or what is your view on the repurchase?

Dan Feehan

I'm reluctant to give any, you know we've got the authorization and what I said in my prepared comments is that I do expect us to be more aggressive than we've been in the previous few years. We nearly bought back about $22.5 million worth of stock in 2012 and just shy of 20 million in 2011 as I recall, but I'm reluctant to give any specific number at this point. obviously facts and circumstances change during the course of the year. I want to maintain flexibility to make sure that we support our business plan appropriately and I mean I don't foresee any other significant investment opportunities outside of our current business plan today, that would take us off track with a share repurchase, but you never know what can develop here in the course of the year. So again, I don't want to lock ourselves in to a specific number at this point I want to maintain some flexibility but again, we will be more aggressive.

Operator

And our next question comes from the line of David Scharf with JMP Securities. please proceed with the question,

David Scharf - JMP Securities

I wonder if I can get a little perspective perhaps on the e-Commerce business both domestically and in foreign, obviously the bulk of the growth is coming from new products and on the installment line of credit side, can you talk a little bit about the single pay outlook for both domestic and foreign e-Commerce and what's going on competitively there perhaps a little color on just what kind of response rates to email marketing and the like, because obviously the single pay products is one that's both in terms of new originations and loan balances at year end is sort of kind of flattening out.

Dan Feehan

I will address that, I mean we had seen some flattening in the U.S. in late 2011 and early 2012, although quite frankly our single pay product in the U.S. in the fourth quarter was pretty significantly ahead of our expectations. We saw new activity in the single pay product in existing states, so it was not necessarily oriented around new products. So, quite frankly, I found that to be very encouraging in the four quarter numbers here in the US. and a little bit slower growth in the UK, I think that’s a function of the competitive environment. It’s gotten more difficult in the UK following the success that we had over there for several years, but again, we’re seeing offsetting growth in our installment loan product there and we’re also looking at trying to be innovative in some new product offerings in the UK as well. we think there may be an opportunity may be for some additional product design changes there. Part of the program here in the US is already around our marketing programs as well as in the UK. we have had a lot of success with non-lead generation channels in the UK. We’re beginning to do that more effectively here in the US and gain some traction on that front as well from marketing prospective with some PD campaigns et cetera. So, again I am not discouraged about the longer term prospects for the single pay short term product as well. Our goal is to have a product sweep that customers can pick and choose from whatever meets their particular need and their preferences. So in the states, where we were able to offer installment to same place we were able to offer payday, the goal is to give folks an opportunity to pick and choose.

David Scharf - JMP Securities

And lastly I just want to follow up and make sure that I heard you correctly that there was thrown out with the previous question, I think Dan when asked about your best guess of percentage of e-Commerce installment borrowers that sort of migrated from the payday universe which was 50% to 75% (inaudible)

Dan Feehan

Well the question was posed that whether 50 or 75 and then again, I don’t have those numbers in front of me here to give you the specific number. My response to that question was, my educated instinct would be closer to 75% than 50% but I don’t judge, don’t have the numbers here in front of me.

Operator

Our next question comes from the line of the Sameer Gokhale and it’s from Janney Capital Markets. Please proceed with your question.

Sameer Gokhale - Janney Capital Markets

Just one thing to clarify, something that I was confused by, I thought the commentary was that the general merchandise inventory turns over more quickly than gold inventory and then if I heard that correctly, then basically what I was confused about is year-over-year, if you look at the merchandise turnover domestically there is a decline from 3.3 times to 2.8 times. So I just want to reconcile the two things and if you could give me some commentary if I am not thinking of that correctly that would be terrific.

Tom Bessant

Yes. You heard it correctly and your conclusions are correct. So, what you’re seeing in 2012 is you’re really not seeing a pure measure so the impact of the slowdown on scrap gold activity is causing that deterioration and turnover ratio in the current year as inventory balance is flattened out but you just don’t have that scrap gold activity. So, if you look at for the full year, it’s about 3.4 to 3 flat. Going forward as general merchandise, assuming general merchandise activity is a larger percentage of the total, then you have the opportunity to see an increase year-over-year all things being consistent. So your conclusions are right but the data that you’re seeing is more of a function of slowdown scrap activity in 2012.

Sameer Gokhale - Janney Capital Markets

Okay. Thanks and then just another one to follow up on the operating expense run rate. I know Dan you’ve provided some color on that and I’m just trying to get a sense for what’s going to drive the OpEx going forward, when clearly you’ll be looking for some efficiencies maybe. But aside from store acquisitions maybe driving up some of the OpEx maybe some investments in the consolidated Mexican stores, is there anything else that should necessary be driving upward pressure on the operating expenses or should we kind of thinking about it it’s going to be more flattish from Q4 levels with the seasonal impacts maybe on that number.

Dan Feehan

I think probably the latter, I don’t see anything in our modeling that’s going to drive operating expenses other than performance. All of our compensation incentives in the organization are in and round growth, earnings and cash flow growth and we did have a lot of incentive income based on our performance so to retail lending services segment are at the enterprise level this year. So, that’s the only thing of any consequence that could drive the operating expenses up but it will only be if we get the growth in the performance.

Operator

And our next question comes from the line of Bill Armstrong with CL King & Associates. Please proceed with you question.

Bill Armstrong - CL King & Associates

Really just a couple of housekeeping items left since all others have been answered and that is with the nonrecurring items, are these in the P&L, are these all in the operations and administrative expense line?

Tom Bessant

Yeah pretty much, Bill, there is a little bit sitting in depreciation but almost all of it I am going to pull it out of head here, I am think it’s about million dollars is in depreciation in the foreign services maybe it’s had more than that, but most of it was in options in the quarter.

Bill Armstrong - CL King & Associates

Okay and then on the tax rate for this year, you mentioned it will be similar to Q4, when I back out the items, the nonrecurring items, it looks like you had a 36% rate. is that the rate we ought to be looking at going forward?

Tom Bessant

The 7 million in charges in the quarter for Mexico is non-deductible for tax purpose, so you have to make little bit of adjustment to be able to be higher than that. I would probably put it in the 38-40% range. yes, I am looking at that number now so to answer your question that 1.6 million in the quarter that was depreciation related and that was all in Mexico, the 13.4 is all in ops admin and the difference between the 16 and 7 is also sitting in operations in Q4.

Bill Armstrong - CL King & Associates

And just one last question if I could, in terms of disposition of retail merchandise, I know a couple of years ago, I think you guys were looking at eBay and some other e-Commerce sites to move maybe unusual items or items that didn’t necessarily move quickly at retail. I was wondering if you could maybe update us on any efforts you are making in that regard of, I am not sure if you heard the easy corp. the other night was saying that they started doing this less than a year ago and 8% of their retail sales were through online sites. so wondering if you could update on your efforts there.

Dan Feehan

Yes, we’ve got a few regions of the country are currently selling on eBay, and we're expanding that list this year to get to a larger store footprint selling on eBay this year and we're also selling pretty actively through Craigslist, we actually had significantly more volume this year related to Craigslist, I don't have the exact numbers in front of me Bill, but it was a meaningful number that we disposed through Craigslist and a less significant number on eBay. but those are great distribution channels and we're going to continue to promote that. expect to have a much larger footprint in the U.S. selling on eBay in 2013 than we did in 2012, but yes it's a good outlet for us.

Operator

And your next question comes from the line of Dan Furtado with Jefferies, please proceed with the question,

Dan Furtado - Jefferies

The only question I had was on the internet side, help me to understand the marketing strategy, because I'm not super familiar there and just in terms of, why not run a universal branding strategy for your different online outlets versus having them individually branded?

Dan Feehan

So, what we have today is we got brands in the U.S., we have different brands in the U.S. associated with our short term single pay product. the net credit brand that we launched in June were designed to appeal to a different customer who may not be attracted to a short term single pay product. so it deemed appropriate to us from a marketing perspective to establish a different platform there so people wouldn't be confused with the offering of that particular product, same in the U.K. We didn't want to get people confused between our (inaudible) brand which is our short term single pay product versus our pounds to pocket installment loan product brand. so again, I guess you it’s our view that distinguishing those brands, the nature of those products that potentially appeal to a little different customer set was a better marketing strategy than trying to combine it all under a single brand.

Operator

Our next question comes Bill Carcache with Nomura Securities. Please proceed with your question.

Bill Carcache - Nomura Securities

Actually I had two very quick follow ups. I thought of the continuum of your different products as with short term pay day loans being higher yielding greater credit risk on one side and the installment loans being lower yielding with less credit risk on the other side. Can you talk about your line of credit product and just give a little bit more color on that and kind of (inaudible) on that continuum and then I have one last quick follow up thanks.

Dan Feehan

So the lots of kind of credit product that we are providing in the US today is somewhat of a hybrid obviously between the single pay and installment loan. we are allowing people to have access to a branding name and credit amount to take and draw in and out of over a period of time. it’s a product that I think appeals to a lot of our customers from a yield perspective and loss perspective, it will mirror closer to the single pay product than the installment product. so from a performance perspective, as we look at that business and continue to model it, the yields and loss provisioning is closer to the single pay product. Although, I would tell you that the existing customer mix with that product is stronger than we see in the single pay product.

Operator

And our next question comes from line of Bob Ramsey from FBR Capital Markets. Please proceed.

Bob Ramsey - FBR Capital Markets

Thanks for the follow up. I was just curious if you had any thoughts or comments you would like to share on SAF capital who I guess had put out a press release about taking a positioning you guys in January?

Dan Feehan

We (inaudible) they put out a release, I think they indicated send a letter to our board, we have received a letter that we shared with our board and that the board obviously reviewed that and considered the issues, posted in the letter and other than that, I don’t really have any comments. We do not matter of practice not really interested in commenting on individual communication with the individual shareholders at this point. so, beyond the fact that I will confirm that we did receive a letter and have shared it with the board and other than that I don’t have comments.

Operator

And our next question comes from the line of Gregg Hillman with First Wilshire. Please proceed with your question.

Gregg Hillman - First Wilshire

Dan or Tom, can you comment on I guess marginal loan acquisition cost in the installment area versus pawn acquisitions? I remember I think in October last year you bought 34 pawn locations I think for 70 million which had a book through of 11 million in the pawn loan balance. And but at the same time you’re building up the installment loan balance I believe. And what was the cost to build up $11 million of installment loan balanced for example?

Tom Bessant

So again an acquisition of a pawn transaction which would be an ongoing business operation with established stores, so clearly there is going to be a price that’s relative to that going concern and attracted to the sellers. Obviously we require. Installment loans and or short term loans through our e-Commerce channel we have a customer acquisition cost, it’s more of a discrete cost related to that transaction. So, we don’t talk about the specific aspects of what our customer acquisition cost is on the e-Commerce business today. But obviously they are really not comparable but one installment acquisitions could certainly be an incremental cost and less than buying an ongoing business. Does that help?

Operator

Ladies and gentlemen, that does conclude the Q&A session for today. I will now turn the call back over to Mr. Feehan for any closing remarks.

Dan Feehan

I want to again thank you about for joining our call today and look forward talking to you again at the end of the Q1.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day, everybody.

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