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Cash America International Inc. (NYSE:CSH)

Q4 2008 Earnings Call

January 29, 2009; 8:45 am ET

Executives

Daniel Feehan - President & Chief Executive Officer

Tom Bessant - Executive Vice President & Chief Financial Officer

Analysts

Rick Shane - Jefferies & Company

John Hecht - JMP Securities

Eliza Pierce - Roth Capital Partners

John Rowan - Sidoti & Company

Gregg Hillman - First Wilshire Securities

Jordan Hymowitz - Philadelphia Financial

Ted Hildemeyer - North Star Partners

Operator

Welcome to the Cash America fourth quarter 2008 earnings call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions)

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

Daniel Feehan

Good morning ladies and gentlemen and welcome to our call. Tom Bessant, our CFO will lead off the call this morning with the reviews of both the fourth quarter financial performance and earnings guidance for 2009. I will then rejoin the call provide a few brief comments on the year just passed and give you my perspective on our challenges and opportunities with year ahead.

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

The actual results of the company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including without limitation the risk and uncertainties contained in the company’s filings with the Securities & Exchange Commission.

These risks and uncertainties are beyond the ability of the company to control, nor can the company predict in many cases all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this call terms such as believes, estimates, plans, expects, anticipates and similar expressions, as they relate to the company or its management are intended to identify forward-looking statements.

Now, I’ll turn it over to Tom for fourth quarter report. Tom?

Tom Bessant

Thanks Dan. The fourth quarter and fiscal 2008 has a variety of one-time and unusual items in the quarter. So, let me first review some of the specific items and provide some detail and color behind each one of them and then I will get into the financial aspects of the quarter.

As you saw in this morning’s press release we confirmed our prerelease information provided on January 20th, earnings per share in the quarter of $0.54 including deductions for one-time and unusual items, which totaled $8.6 million pretax. This is on a 7% increase in total revenue to $279 million and based on net income of $16,267,000.

The details of the one-time and the unique items for the quarter are as follows; totaling $8.6 million $3.4 million related to management realignment activities, which you will find in our pawn segment, $3.9 million in store closures and other cost related to the transition of products in the state of Ohio following the November 4th election results and $1.3 million in referendum costs related to that election, both of which were in store front cash advance segment.

The closed stores and related charges are $2.5 million after taxes and management realignment net of taxes is approximately $2.2 million for a total of $6 million in after tax cost when you add the $1.3 million for the referendum, which is not deductible for tax purposes. This brings adjusted net income from a reported level of $16.3 million to $22.3 million, which is up 15% from the prior year.

Equivalent earnings per share impact of the one-time charges after taxes totaled $0.20, which meets our reported $0.54 per share up to $0.74 per share compared to $0.88 in the prior year. This adjusted EPS levels below the bottom end of our guidance for the fourth quarter of $0.91 per share, which we provided with our third quarter financial results in October.

Our view of the fourth quarter at that time was at the growth in the quarter from $0.88 in 2007, to $0.91 in the fourth quarter of 2008, would be achievable based on a continuation of the improvement loss trends and also sustain momentum in pawn activities.

Unfortunately the difficult retail environment and an emphasis on inventory disposition led the lower gross profit margin on sales during the quarter. While operating costs and expenses were up, as a result of higher salaries and wages on greater store average of operation and increases in healthcare and insurance reserves causing the year-over-year expenses in the pawn operations would be higher in the quarter. However, the pawn business is only a small piece of the mess in the quarter, as cash advance activities did not achieved expected performance.

Our store front cash advance business was challenged by the transition of products in a state of Ohio and the general description of introducing a new product, as well as gold buying. These activities in the training and development associated with the serving these customers in that state seems to further disrupted revenue growth.

Revenue levels did not really as expected and expenses were higher, which comprised a large percentage of the disappointing results in the cash advance segment. The company’s online cash advance business which is transitioning at a major markets in the fourth quarters specifically Pennsylvanian and Minnesota, saw revenue levels diminish slightly and loss rate increases as a percentage of fees compared to the prior year.

You’ll also notice in our supplemental segment information that we provided additional detail related to our card services operations known as primary innovation. As many of you know this is a business we acquired in third quarter orient to providing electronic solutions associated with our cash advance product and potentially other products in the future.

This business reported a loss in operating income of approximately $750,000, which is about $0.01 higher than expectations end of the third quarter. As a result you will see the cash advance segment comprised approximately $0.12 of the $0.14 net decrease in fourth quarter EPS comparing current year to prior year.

Now let’s move on to the segment results and start with the pawn business, which added 112 store acquisition of Prenda Facil late in December. For the fourth quarter total revenue from pawn lending activities reached approximately $195 million up 11% year-over-year. As I’ve said the diminishment in gross profit margin on sales, which were up 13% for the quarter cost net revenue to be up only 6% year-over-year.

Reported income from operations for the pawn segment is down from $32.7 million last year to $29.3 million this year. However, the management realignment cost of $3.4 million are reflected in the pawn lending business meeting the income from operations was flat at $32.7 million in the pawn business for the fourth quarter after adding back this amount of income.

Adjusted operating income from the pawn segment represented 80% of consolidated operating income after adjusting all businesses to exclude the one-time items. As the pawn business moves forward we are encouraged by the fact that the U.S. pawn loan balances were up 11% year-over-year to $152 million and consolidated balances were up 23% to $169 million combined the front acquisition with the U.S. business in the quarter.

Pawn service charges were up a healthy 14% coming out with the strong pawn loan balances that the company experienced in the third quarter and same-store net revenue in the fourth quarter related U.S. pawn business was up 6% year-over-year. As I mentioned inventory finish the quarter in good shape with same-store U.S. pawn inventory levels up only 7.5% year-over-year. The company’s aged inventories continued to improve as merchandise greater than one year fell to 7.6% of total inventory compared to 10% at the end of the year 2007.

Elaborating further on gross profit margin decreased year-over-year prevailing gold prices were lower in the fourth quarter, however, gold volume continue to be strong resulting in more gross profit dollars generated from gold sales in the prior year. This pushes the blended margin on overall sales down to 34.2% compared to 37.7% last year.

Overall, we believe the pawn business is well position as it entered the important first quarter period when loan demand tends to be strong early followed by tax refund activity creating bulk redemptions into the selling period for the pawn business during the quarter.

Before I leave this segment, I would like to also point out that for the full year pawn operating segment reported a 14% increase in operating income, which included the add back of $3.4 million mentioned earlier on a 10% increase in net revenue, so overall strong year for the pawn business despite a soft fourth quarter.

Now moving over to cash advance segment, we want to highlight that the business was pacing at a significant markets during the fourth quarter and suffered from the decrease in economics related to the Florida business which change in the second quarter this year. As a result, the cash advance segment posted uncharacteristically disappointing results in the fourth quarter.

One-time charges included in the cash advance segment of $5.2 million burden the reported income from operations for the cash advance segment. Adding the one-time changes back would increase the operating income from $2.7 million to $7.9 million, nevertheless, this is down $4.9 million and the $12.8 million reported in the prior year fourth quarter. Total revenue was down slightly and the cash advance segment’s revenues were $84 million compared to $85.5 million in prior year.

Recurring expenses did not fall with revenues, is the online business sustain its operations to build future opportunities, which hurt marginal profitability. Loan losses in the combined segment were higher at 43.7% to total fees, compared to 39.6% in the prior year, mainly due the impact of the online business during the quarter.

Notwithstanding the losses of major markets the online cash advance business increased its volume of loans written in the fourth quarter by 17% year-over-year, our store front volume fell 23% in the quarter.

Again, we were at a transition in the Ohio markets, as our stores have put in the new loan product and have begun gold buying activities. Gold buying activity in our Ohio locations provided only small contribution earnings in the fourth quarter, however, it does signal the initial success of the introduction of the service for our customers and we hope that it builds on quick start in 2009.

Now the company looks toward 2009 there are variety of factors will impact earnings in the coming year. As mentioned in our release we reported in October of 2008 the elimination of profitable cash advance markets, which were highly accretive in the first and second quarters of 2008 will cause the first two quarters of 2009 to be down year-over-year.

We’ve attempted to provide some insight to the potential core impact to the loss of certain markets by estimating the expected after tax earnings on an annualized basis to be between $20 million and $25 million or between $0.66 and $0.85 per share. Vast majority of this earnings stream will be absent in the first two quarters of 2009 as this business was impacting profitable and loss rates were clomping down year-over-year in that period. Therefore our estimate between 35% and 40% of those totaled would be attributable in the first quarter, decreasing in the second quarter and then diminishing significantly to maybe 20% and 15% in the last two quarters of 2009 respectively.

Another important consideration impacting the cash advances business in the first half of the 2009, will be the low levels of assets in our Cashland locations coming off year-end at same-store active loans are trailing the prior year by 15% in this business.

As we begin reporting in Q2 of 2008 storefront active cash advance balances were down significantly year-over-year and I’ll take time for those balances to build during 2009 to create profitability in the storefront cash advance business. Therefore, I expect only marginal contributions in the second and third quarters in the storefront business at a more promising outlook in the fourth quarter.

First quarter activities at a Cashland may provide a nominal level of profitability due to strength of tax refund season creating loan redemptions, but loan balances were start Q2 at levels too low at our earnings in that period.

The 2009 outlook for the pawn business is much more promising, as again, U.S. pawn loan balances were higher and inventory levels are well balanced coming in the first quarter and the retail selling activities consisting with tax refund season. In addition, we should benefit from our first full quarter with front of the seal business adding to the aggregate pawn lending operations in this quarter.

As a result, contribution in the pawn business should return to its year-over-year growth in the first quarter. However, we’ll not be sufficient to offset the significant decrease in the cash advance segment during the quarter. These elements lead us to an expected range for the first quarter EPS of between $0.61 to $0.65 per share, compared to $0.85 per share in the first quarter of 2008.

In addition, we have confirmed our guidance for the full year of 2009 of between $3.10 and $3.30 per share understanding the course that this is heavily weighted to the second half of the year and based on the reemergence of our cash advance business in the last half of 2009 and success in our Ohio market.

With that, I will turn the call back over to Dan.

Daniel Feehan

Thanks, Tom. I’m going to begin this morning with just a brief reflection on the past year. 2008 was clearly one of the toughest years in the 25-year history at Cash America. Primarily as a result of number of these legislative and regulatory setbacks in the key states Ohio, Florida, Pennsylvania, and Minnesota. We’ve discussed these states in previous calls and in number of press releases; so I am assuming that most of you are familiar with these issues.

Actions by the legislators and regulators in those states have turned the meaningful portion of ongoing earnings associated with our short-term cash advance product and as Tom indicated, it resulted in certain store closures; asset write-offs and we’ve recently implemented management reorganization designed to adjust our corporate overhead burden to the profile of our remaining business and despite, this turmoil during 2008 we still manage to post a record year for revenues, EBITDA, net earnings, earnings per share, again these were all historical highs, reported historical highs from the company.

In our share price during the year favor better than most public companies having drop to only 15%, compared to drop in the mid-to-low 30% range form most of the major industries. Unfortunately, we’ve not close that gap following the prerelease of earnings last week, which obviously unsettled investors at the time when any public company has punished severely on the announcement of softer than expected earnings.

In our case, I believe the preponderance of weakness in our stock has probably less to do with the concern over the macroeconomic environment and more to do with the heavily discounted valuation multiple for the earnings of our short-term cash advance product, and new concerns about the stability of our core pawn job business.

I’ve got to conclude to some, it’s not all of you are wondering just how management will respond to these challenges both we have received. Now attempt to deal with those concerns and I discussed our business plan for 2009 and certain initiatives that we have underway to address vulnerabilities and provide a pathway for continued growth. A major’s difficult for any companies that begin the discussion about its 2009 business plan without acknowledging a certain degree of anxiety over the predictability of the near-term economic environment.

The 2009 outlook is probably one of the fussiest planning arises I’ve ever faced and that true for our business, which has traditionally been more immune to the ups and downs of the GDP growth and I’m assuming that most public companies feel their planning exercise for 2009 is nearly a shot in the dark.

There are many uncertainties facing all businesses today, but they’re handful of specific uncertainties that relevant to Cash America. The first on my list relates to the current what I call psychological paralysis of the consumer. I think its clear that the cause of larger bad news about failing institutions bailouts, raising unemployment, etcetera. A frighten consumers at every wrong in the social economic ladder.

We have been impacted far or less and most retailers and traditional consumers lenders. But I want to just how deep and how long that paralysis might extend. I am also wondering about the uncertainties associated with the rapidly shrinking availability of the traditional consumer credit. Banks and prime credit card companies others seriously contracting and consumer refining less available credit. This reality could provide an opportunity for us to capture decent franchise customers from these another institutions that is not cleared to me have quickly we might be able to convert people to our products.

Our online and traditional marketing campaign will attempt to appeal those customers, but I do recognize and what are the challenges is to change the context of consumer habits. Also the direction of two important commodities gold and gasoline will be important for us in 2009.

The price of gold is remained more stable to most commodities and has recently showed some renewed strength. Some experts predict gold prices will skyrocket following inevitable inflationary pressures greater by global stimuli programs and other predicted risk of near-term deflation may stifle any up tick in gold values. So, for lack of any better clarity our plan assumes gold prices will average in the mid $800 level for 2009.

Now let for gasoline prices in 2009 seem to be framed in a much narrowband and that of gold prices with most people predicting gas prices will laying down. We believe the precipitous drop in gasoline prices in the later half of the 2009 from $4 a gallon to some $2 a gallon, marginally constrain loan demand for us and it’s cleared with any future abrupt move up or down will effect our business quickly.

Finally, the uncertainty in credit markets will cause us to containing any discretionary capital spend in 2009, and while our plan does not provide for any further disruption due to the legislative or regulatory activity, I do recognize this concern remains the troubling overhand for us and others in our industry. One thing I answered about in our 2009 plan, if you will allow me use a football mediocre as that we take in the opening kickoff and we’re starting with first and ten backed up our own goal line.

As Tom’s indicated the setback we face in 2008 have created fairly large hole that we must dig out of first to work our way back to even and as we disclosed last week and in today’s release and as Tom mentioned this morning, we’ve estimated the potential lost earnings from affected markets in 2008 is in the range $20 million to $25 billion after taxes and to complete my football analogy, we’ll need to execute a few really good plays just get back to the 20-yard line.

But we do have a lot of positive thinks working for us and our plan provides that we will recover the lost earnings from 2008 and showed positive growth for the year, even after adjusting for the one-time charges we have incurred.

The first and most important positive thing working for us is a large stable and lucrative cash flow into our U.S. pawn operation. This business unit is lived and well and well position to whether the economic headwind in 2009. The fundamentals of this business are sound pawn loan balances and inventory are in great shape today with the right mix, age and asset values and as many of you know managing the proper balance between lending and retail sides of our U.S. pawn business is credit to the ongoing success of the segment and I am confident about our ability to manage that balance.

The next thing working for us in 2009 is our newly acquired Mexican subsidiary Prenda Facil. Prenda has a very strong leadership team in Mexico with a proven ability to the successfully managed our operating while opening new units. The company begins the year with a 112 locations throughout central and southern Mexico and it will be accretive to our consolidated earnings in ’09. Prenda Facil will be our primary storefront growth vehicle in 2009; we’re planed open 50 to 60 new stores in both new and existing markets in Mexico.

We will be looking for other opportunities to add pawnshop units in the United States, but we do not plan to add any short-term cash advance units. Another key asset for us is the robust online platform and talented R&D team we have in Chicago with our wholly hold subsidiary CashNetUSA. And then likely the cash that we will recover all of its lost earnings in 2009 from the multiple state changes in ’08, the company is pushing ahead with new marketing efforts in our remaining states and a full ramp in the UK and plant expansion in Australia.

Additionally the CashNet team along the folks in footwear in Orland, California have been aggressively working on the development of the new products that can potentially serve its alternatives of the traditionally short-term cash advance our payday loan product we offered today. CashNet has recently launched an online and installment loan product and Illinois and New Mexico under existing state laws and we deals comparable to our current short-term cash advance product.

They are also working on the development of the installment loan product at lower yields that we believe may have a greater opportunity for scale. We hope to launch a lower yield of installment loan product by the third quarter. The online team is also assumed operational responsibility for the ongoing activities associated with the recently acquired primary cash holdings now know as primary innovations. Primary provides technology and marketing services and supportive bank issued direct deposit debit cards the carrier bank issued line of credit.

We believe this card-based product could develop as viable credit alternative for existing short-term cash advance customers. In addition to transaction fee revenue associated with the cards, we would anticipate having the opportunity to participate in the receivables on the bank issued line of credit. I would still characterize primaries of startup business, but it is successfully processing transactions and serving customers. In the month of December, primary reserved approximately 15,000 bank customers and processed approximately $6 million of bank advances for those customers.

So, as evaluating the business prospects for Cash America in 2009 and beyond, I think you should be focused on three key components. First is the strength and stability of our US pawnshop business, second is the exciting new growth opportunity in Mexico and Latin America with front of the CEO. And third is the significant development what we are doing upon new and innovative credit alternatives for our customers.

Additionally, as we evaluated our prospects for ’09 you should be aware that we have tempered our outlook in certain areas based upon expected challenges facing many in this current economic environment. First, we expect over the accounted retail demand to remain add risk until consumer confident stabilize and our federal stimulus dollars by the way into pocket books of regard customers.

Fortunately, soft over the counter retail demand can be offset somewhat to a readily available wholesale distribution channel for our scrape jewelry inventory. The safety valve has played an increasingly important role in our business over the past few years and is allowed us to continued supporting loan demand even in periods of slow in retail. I didn’t expect scrape gold margins will stabilize in the mid-20 range, which mean will be probably not experience the year-over-year leverage that we have enjoyed over the past few year and less gold prices continue at their recent rise.

Two additional expected headwinds in 2009 include the transition of our business model in Ohio for the remaining 114 shops in operation, any absorptions of the R&D cost associated with new product development.

On the first count, our storefront business model in Ohio now includes multiple activities. The primary product is a short-term loan issued under Ohio Mortgage Loan Act, which carries a lower yield in our previous product. We were also offering our traditional ancillary services of check cashing, money orders, money transfers, insurance, etcetera. And as Tom indicated, a newly introduce activity of gold purchasing in the majority of our locations.

We also plan to introduce a limited pawn lending into the model in a second quarter of ’09. In our ’09 financial plan for Ohio reflects at very modest profit contribution, although honestly its really too difficult at this point to accurately predict how that model performed during the year. On the second count, our plan provides for the allocation of significant internal resources to the development of new products and we are anticipating some early losses as we test products and again ramping. Estimates of these costs and losses are all back into our guidance for 2009.

On the flipside of the coin, there is some particular tail wins, I can provide upside opportunities. Higher gold and gasoline prices can provide near-term benefits, crossover traffic from non-traditional retail customers who definitely provide a boost, and anything stimulus plan providing direct payments to consumers will be a plus for our retail business.

Additionally, some early success either in installment loan product or the primary card based could add extra earnings and our storefront model in Ohio, could perform above our very conservative projections and provide an upside surprise, have none of these item to reflect in our plan.

Before moving on to the Q&A, I would like to take a minute and share with you that over the many years of my leading Cash America have often found myself to be self-critical among personal reluctance aggressively promote our company in the investment community. And me you know I’m not a promotional person by nature, and I’ve always been more comfortable allowing our actions and results to speak for themselves. I will recognize coming up a tough year in 2008 and disappointing fourth quarter that action and results are important in either. Also recognize we’ve got a lot of development activities on our play and execution is critical.

I am not going to change my approach with you and layout of bunch of pipe, but I do want to leave you with the simply plunge that we are not blind to the challenges ahead of us, we are not confused about what we should be doing and we are not sitting back waiting for something to drop into our labs.

We are very confident with the long-term viability and continued relevance of our secured lending pawnshop business are committed to expanding that business in both the US and Latin America. But at the same time, we recognize that our operating models and products for our unsecured lending must evolve to meet both the changing needs of customers and hard social/political realities of serving sub prime consumers.

We believe to succeed with unsecured credit products for our customers in future, we must be able to deliver product at lower yields, which entirely requires distribution channels with a lower cost profile in the storefront model that dominates the market today. We believe we are best position to develop those options and will invest a requisite time, money and energy to achieve that objective, even for me, we made back up before moving forward.

Our goal is not only to protect, but to significantly expand our position of leadership within the sector especially financial services. And that makes sound a bit promotional for some of you in our realized that we will have to continue proving ourselves with performance, but I wanted to know, we are definitely committed to that goal.

I’d like to go ahead and open it up for question and answer, please.

Question and Answer Section

Operator

(Operator Instructions) Your first question comes from Rick Shane - Jefferies & Company.

Rick Shane - Jefferies & Company

Thank you for taking my question. First of all, I will say, I think that in terms of the discussion of the financials and the discussion of the outlook, you’re frank this is very much appreciated, so thank you. In terms of what’s going on with the internet payday lending, it sound does like haven’t been through a period where losses were declining, you saw a little bit of surprising increasing in credit expenses this quarter.

I’m trying to figure out, if it is a function of changes in regulatory frameworks in Minnesota and Pennsylvania or if you saw something more broadly that’s related what we’re seeing economically and the reason being is that, as we look this going forward we need to ascertain if its related to labor and the continued labor problems in the U.S. or should be focused on regulatory structures?

Daniel Feehan

Yes. Couple of things there Rick, if I can take that question. If you look at the full-year performance for our online segment, our loss rates were down significantly for the full-year. Obviously, as we’ve indicated in the fourth quarter they were little bit higher than we have anticipated. We expected that loss ratio year-over-year that comedown in the quarter and I did not.

My view is, having got into this in a significant amount of detail is that, I am not alone on the broad-based perspective that you just ask about, a good part of this does relate to the fact that with changes that have taken place in the several of these key states. We’ve been enforce to turn back the volume of our business pretty significantly there and so the next component of those existing states in the overall portfolio in the fourth quarter, it was actually lower than we really anticipated.

Those particular states, when you break it out had lower loss rates than the broad portfolio of all our states predominantly because in a number of these states we had been established for an extended period of time and had a very strong mix of the existing customers and not as strong a mix of new customers, which is -- I know you understand Rick, as of loss rates.

So, when you take those states out of the mix pretty roughly in the fourth quarter, our loss rates were not as low as we had plan for then to be and the model it to be, but we have also adjusted our underwriting models in our online business in the fourth quarter as well, we made a few tweaks and changes there. So, again, I’m not seeing things with respect to the fall rates when I getting into the details as it cause me significant alarm that we’re dealing with broader based macro trend in the short-term cash advance arena.

Rick Shane - Jefferies & Company

Dan, that’s interesting. So, you’re saying it’s not really macro driven, its mix shift losing states where you had a higher percentage of mature business?

Daniel Feehan

Yes. We’re not seeing I mean honestly, either in the online business or bricks and mortar business and we have continued obviously with the decline in revenues that you see in our loan volumes, in our bricks and mortar cash advanced segments. All year we have been very conservative on the underwriting side of that business.

So, we’ve not at all been aggressive trying to test what’s going on in the macroeconomic world today. Our assumption has been that things are difficult things can get more difficult, so we’ve been pretty conservative all year. The numbers today three to fourth quarter don’t indicate to me that there is shift going on in the macroeconomic world, as we’re underwriting this product today. It causes main concerned about a broad-based problem.

Operator

Your next comes from the line of John Hecht - JMP Securities.

John Hecht - JMP Securities

I wonder if you guys could give us a little bit as more detail sense of the business at Mexico. Maybe a sense for the composition to business there, I believe it’s more jewelry-based, if not fully jewelry-based and maybe some of the store-based metrics, loan volume per store in a quarterly basis or loan balances at the end of the year?

Daniel Feehan

The business there John, as I think you might know is 100% jewelry-based business much like we operated in the U.K. and in Sweden. So, 100% of the business they operate today is based upon gold, jewelry, rates in that business are lower than they are in our U.S. business and typically jewelry forfeit rates are lower. We experience the same thing in Europe with that business.

That the yields down there are lower as well, the rates are about 12% for four week period. The average loan down there days is about a 1000 pesos and if you look at what we’ve reported with respect to the portfolio side in the number of stores you can easily get to the equation that the average portfolio down there is about 250 million pesos, which I guess today on a days exchange rate is probably closure to 200,000.

Tom Bessant

It’s about US$17 million, that’s 14 to 1 US pesos.

Daniel Feehan

So, the business is a separate business, than obviously a full scale a pawnshop that we operate here in the United States. We have a lot of familiarity with how that business operates given our experience in the U.K. and Sweden and we’re very excited about the growth prospects in Mexico, as you know and we’ve relative to what’s going on in Mexico with the economy and things there. Obviously, every business in the world’s are faced with the current economic turmoil that’s going on in the world, but I think the opportunity there based upon stores that have been opened in 2008 and it ramped well. Our opportunity to expand in Mexico is pretty significant.

On a per population basis, there is no question. If you look at Mexico relative to States in the U.S. were pawn has attracted the neighboring legislation. The entire country of Mexico is significantly underserved today in our opinion in the pawn business. So, I think there is a lot of opportunity for us to continue to grow there.

John Hecht - JMP Securities

Thanks for the color and detail on that. Second question is Tom, I’m wondering if you could give us just I’m sure, it’s going to all be very available in the 10-K, but a quick overview of, I guess the liquidity at $422 million of long-term debt, and I think you have a payment coming due for the final payment, if I remember right under the cash. Maybe walk us through, how much access you have in the capital markets and how much requirements you have in the near-term just give us a sense there?

Tom Bessant

Yes. John, sure well, this is company’s that’s blessed with high velocity of current assets, which turn in the cash very quickly and you know the first quarter is the period where we get the most liquidity with pawn loan balances and cash advances coming down dramatically in the first quarter with repayment from tax refund. Those tax refunds are highly reliable for our customers and certainly are not in doubt, only the timing in the first quarter sometimes can move a few weeks either directions and likewise when our customers are flushed cash they do like shop and so that brings our inventory levels down as well.

So, we are coming right into the teeth of our heaviest cash inflow season in the first quarter. We finished the year with our line of credit at about $274 million. We obviously completed the acquisition just before year-end and so we drew up on that line as well as put some other term note type facilities in place to complete the acquisition. We’ll certainly enter 2009 with the conservative view, I think as everybody is taking in this market toward ancillary capital expenditures.

Our unit growth as Dan mentioned, will be concentrated down in Mexico, these are quite small stores. Again for those that have seen our European business, very similar. So, they are small stores is not very expensive to open from a PP&E perspective, but our U.S. CapEx will be reasonably contain as we continued just to let the cash flow come out of this business in 2009. So, certainly feel good about things, but I think everybody in this market advance to be cautious and we’re not going to be any different.

John Hecht - JMP Securities

Okay. Last question is that Dan, you we love your thoughts. You guys are focusing, obviously Texas being one of them in ‘09, where there might be some potential regulator updates or considerations of those?

Daniel Feehan

Sure. Of course, I think anyway you who follow the industry closely know that Texas legislature is in session this year. We get in session here in Texas every other year and 2009 is underway. Bills will be filed, have been filed relative to our business model on the unsecured product, our CSO product that we participate here in Texas and these bills that were filed as well in the previous session two years ago and in the session two years before that.

If we are successful surviving these bills in this session, which we are working very hard to do, you can count on being filed again in two years. So, this is not new activity for us, clearly coming of experiences that we had in 2008 in Ohio and elsewhere. We have has spend a last 12 months preparing for and working on defense of our products set here in Texas.

I will tell you that, I believe that Cash America and the industry, it has done and is doing everything humanly possible and really spearing no expense or effort to make sure that we have our business in order here for the Texas legislative session. That were things that I believe the entire industry learned in Ohio, about what happened their last year and those mistakes will not be repeated in Texas.

So, I think we are doing everything we can, that from a concentration of business prospective, obviously Texas is a big component for us with our store-based here in Texas. They offer short-term cash advances and Texas is a significant state in our online business were cash down.

John Hecht - JMP Securities

At this point, is it too early to talk about any other states? I’ve heard, not much out of California recently and I’m wondering there is any update there because you do have some store presence there. I’m always [Multiple Speakers].

Daniel Feehan

Just about California, I recently saw some noise about Washington State. We have business in California, Washington State, all I will tell you that the profit contribution from our short-term cash advance, our love to particular states will not be missed, if something happens. They’re really, I guess in terms of any other activity they would be particularly relevant to ‘09 roll-on plan nothing really comes to mind and I think worth mentioning this morning.

Operator

Your next question comes from Eliza Pierce - Roth Capital Partners.

Eliza Pierce - Roth Capital Partners

I wondered if you could just walk me through perhaps some other things on the pawn side, management changes and also just kind of operationally, in terms of the inventory and in the gross margin, what exactly happened and what you’re going to do differently, or was this just saying just because of the general retail environment, etc.. Thanks.

Tom Bessant

I’ll start with the inventory and then I‘ll pass it on to Dan to talk about more of the strategic step. Liz, we again, I think as all retailers view, fourth quarter is going to be challenging period and we’ve really focused on liquidation and merchandise and getting our aged merchandise moved out of our stores.

I think initially, we expected that a lot of the decrease in gross profit margin was associated at discounting in the stores. As we move through our analysis further, it became more clear that the dilution in the margin was associated with just lower scrape gold gross profit levels and at store level gross profit margin was basically flat, it may have been down a point or so, but there wasn’t a real big increase in sales there so, we didn’t get much of an increasing gross profit dollars at the retail level, but we did push lot of gold out.

The blended margin came down, gold as a percentage of the total GP was about 30% as it has been with about 60% of the increase year-by-year, which is very comparable that what it was last in the fourth quarter, but again the lower prevailing price with the higher cost because we are loaning more on those items as we trail that will follow. Gold prices caused lower gross profit margin there. You’ll see a GP margin on gold’s when you get the full disclosure indicated in the 25% range and that’s down from roughly 32% last year so, pretty significant drop there and again on more volume dollars.

As we move into the big selling season in the tax refund area and what I’m encouraged by is, older inventory is just such a small percentage of the total amount. I think I’ve never seen it below 8% as I said it 7.6. With that concentration been in jewelry, which doesn’t have any arms so have some factor to diminishment value like the electronics or non-jewelry items can have.

So, I think our stores are position of fresh inventory I think both continued to be sensitive to moving good dollar stores and discounting were appropriate but when you have new store, what we refer to express inventory on that stores then, you don’t quite is inclined to this accounting significantly but we are very, front a mind on inventory liquidations. In the first quarter and when I would say is expect lower margins throughout 2009, compared to 2008 obviously the swimming factor there is gold space where it is, continues to move north part about 900 then, we have the opportunity for some margin expansion along those lines.

Eliza Pierce – Roth Capital Partners

That’s enough. Of the follow up about the gold – go ahead.

Tom Bessant

No, no go ahead, then I will finish, I will talk about press referred.

Eliza Pierce – Roth Capital Partners

Could you give us sense on where your lending is that percentage spot increase?

Daniel Feehan

Well. It increase last year during the year, but now our loan rates are still in equivalent ounce basis $600 type range may be little higher than that but again that occurred, throughout in the 2007, 2008 year, in our price per ounce sold has gone up, I mean we heard about blended price about $850 ounce in the fourth quarter compared to have 740 last year and as we do hedge of percentage of our gold or hedges are above 900, so it really depends on where spot prices are, if we are going to get a closure 900 or would be in an 850 below range.

Eliza Pierce – Roth Capital Partners

How you have – begin experience pressure on your acquisition cost for gold?

Daniel Feehan

Well. Yes, I mean obviously customers are sensitive to gold prices and there is a lot of publications out on white gold prices were doing in – your gold down and get money in those type of promotional activity. So, it’s difficult not environment to leave your advance rates behind and obviously our competitors are very sensitive to increasing advance rate same time so, but certainly as I said its worth 600 to 650 say in last year, we may have been at $500 in ounce.

So, you’ve got 25% to 30% increasing cost per ounce and only a 15% increase in your settlement price of gold. So, there is a natural squeeze there but the 25% scrape margin that I mentioned in the fourth quarter by our measures of views are doing that there is a very solid scrape gold gross profit margin and recent levels about 30% are highly unusual in that driven by the inflated gold prices that we’ve seen and had frankly enjoyed, but if you are not getting closure to that 20% to 25% scrape margin you are not really loaning sufficiently and you are not generally in the pawn service charges of the portfolio that issued if you follow that.

Tom Bessant

Yes. Let this is get back to the issue of balancing the two side of the business so, that I will briefly refers to my comments and clearly, we are constantly testing that balance with respect to maximize in the cash flow of the business and you’ve got a assume if you taking the average cost on gold up on your lending, on your advance rate and seven out of much as big number; seven out of 10 people are re-bank those loans you are getting the benefit and collecting pawn service charges the offset for that is, you going to give us some margin when you scrape those items. I had entire mentality quite frankly is focused around maximizing the cash flow in returning cash of these shops and it is not strictly oriented to a particular scrape gold or retail margin per sales.

So, we’ve got a balance for demand side over to account to the loan, with obviously what we sell and part of the equation that we look at as we move advance rates up, what impact is that have on [fore picture] and we pushing people the point where its more value prevent loan not in perfect, which would been we have to sell in our recover investments then it is continued to redeem in our loan.

So, as we’ve increased advance rates we’ve done so on a lagging basis were the price of gold and I’m not seeing profitable rates are change. So, we are pretty comfortable with that strategy now again when you have a lagging effect when the price of gold quite rising that lagging gold we are going to cash up the margin and we got that in the fourth quarter were it got up with us. So, we didn’t get the year-over-year leverage that we have previously got in the first three quarters of the year in most of the 2007.

Eliza Pierce – Roth Capital Partners

And the gold buying you giving in Ohio stores, it is just basically the same thing I accept with the pawn?

Daniel Feehan

Yes, we are just – we are work very hard to get licenses, which is not easy to do in Ohio for that activity and just introduced it on late in the year obviously, don’t have any real experience under about we were encouraged by frankly in November and December with the volume of the business that we’ve got one of the advantages that we have in Ohio quite frankly is that, because pawn loss in Ohio are not particularly attractive from a yield perspective there is not a lot of pawn competition.

So, people do not have a lot places the take their gold and when we put up signs and again – and trained our people and spend the money and get all that implemented, we got pretty quick response from the community in Ohio, we’ve done at this point and we didn’t do any advertising marketing how they earnings banners out. So, yes, again I’ve account that in the upside potential opportunity for us in Ohio.

I think well even with lower yields on pawn loans, we are going to introduce some pawn lending relative to jewelry, we are able to seriously contain in our cost and exposure to the point where we can make money on those gold yielding pawn loans at the same time continue to buy gold across [gallon].

Eliza Pierce – Roth Capital Partners

The license from gold also lets see due to the license for pawn making it [Multiple Audio].

Daniel Feehan

Yes, I think they didn’t make up pawn license that allow us to do both.

Eliza Pierce – Roth Capital Partners

License have high, and would CashNet be able to do the same things since you hear some methods on TV and Radio would be able to, send your gold in, given that.

Daniel Feehan

Yes. I mean, I would tell you suggest the question on we’ve got a very young pilot program underway to, I didn’t mentioned in my prepared comments because it is very new, we are piloting program to do that prove, we currently we’ve done some online marketing for that and we will introduce some traditional TV marketing as well, probably in the early second quarter.

Where we will set up to basically compete with those exposure on TV advertising set as you goal, but obviously that advantage we have and we have the infrastructure in place, had a process and handle that we know what we are doing, we know had advertisement on gold out of smelting and do that, and not going to traffics on any certain thing, but we certainly already have the infrastructure and placed to handle all that so, that case is underway and it’s relatively new, but again I will give provide an opportunity for us to they had earnings in future years.

Eliza Pierce – Roth Capital Partners

Yes and then, if you could just maybe circle back to me other question on the management changes?

Daniel Feehan

Yes. The management changes, you can lose our significant part of our business in terms of the $231 million in that earnings without taking a very tough look at your corporate overhead structure and supporting that business and our challenges here was to realign our overhead structure or management team to fit the current profile of our business.

While we fully expect as I indicated in my comments in our guidance reflects we’ve fully expect to recover that earnings which is helpful and our US pawn business in 2009 and continued to have growth.

There is no question and we felt like it was our responsibility to our shareholders in the company to get our rate structure adjusted. Our approach here I mean lot of company’s go through this process by, trying to go out and eliminate 20% of the Indians in the organization, our approach was, we’ve got lot of our folks out in the field generating revenue making earnings and our responsibility was that to move that corporate overhead that wasn’t directly serving customers.

And so the reorganization really had very little affect on our field organization although we did include some streamline operations and combine some markets in our field organization and most of it has come in our corporate office here in Fort Worth and the preponderance of the dollars will eliminate, relates what I call Chiefs and not Indians.

Operator

(Operator Instructions) Your next question comes from John Rowan - Sidoti & Company.

John Rowan - Sidoti & Company

The first few questions, I will just put them in a batch and then you can take them from there. What was the cash outflow for acquisitions in the quarter, and what will it be in the beginning part of 2009, and how do you balance that against, potential share repurchase you obviously mentioned that you feel like you have a discounted multiple versus de-levering the balance sheet in 2009?

Daniel Feehan

Yeah. John, while the concentration of acquisition dollars in the fourth quarter was in two pieces primarily print of the seal, roughly about a $92 million gross purchase price $10 million of that was in stock, so $82 million in cash outflow, we had a $35 million earn out payment associated with CashNet, a bulk to those two things occurred in the fourth quarter and at the end of March, surely thereafter we will have another payment to CashNet of about $35 million.

We also have about a $2.7 million payment related to primary innovation. Those are the only two acquisition payments in 2009 and we don’t comment on future acquisitions, but we don’t have anything right now given the fact that we just completed a very important and very valuable strategic acquisition in Prenda Fácil.

So, it’s a John Hecht who asked about earlier, we finished the year about 270 on our line of credit, we will see anywhere from $20 to $50 million in a cash coming in the first quarter bring that number down to the low 200s and then those payments I just mentioned there and we will begin, building working capital thereafter so.

We will target CapEx to a certain extent as I also mentioned, we will do some remodels, a couple of relocations but nothing very sustentative in 2009, again just because I think being cautious in this market is a good thing, will be highly selective on a share repurchases, but obviously when prices are low, prices are low.

So, we don’t comment on that in fact rarely commented on a call, we will just leave that to the public disclosure, when that public disclosure is filed. So, hopefully that answers your questions.

John Rowan - Sidoti & Company

And then, can you just give me an idea, where were all the one-time charges in your operating expenses, and then just kind of what do you see for the trend line for the 2009 in terms of your expense, you did mention a lot of R&D costs specifically in the first half of the year to organize new products? In your guidance is there essentially kind of a hump in operating expenses more awaited for the first half of the year?

Tom Bessant

To answer your first question on the one-time charges, the $3.4 million related to the management with realignment is in admin, the $5.2 million in storefront activity about $2 million of that is in depreciation and the rest of it is in operating expenses. As R&D expenses go that’s generally smoothed our throughout the year. Obviously, we have ongoing projects today and we will continue to evaluate the viability of those projects and those capital investments based on their prospect as we move through the year.

John Rowan - Sidoti & Company

The outlook for the provision expense in the first quarter, I would assume, you’ll still get a little bit of benefit on the provision relative to fees in the first quarter through the tax refund checks, but you are looking for it to be significantly higher than the previous years’. Is that correct?

Tom Bessant

Well. I think, anybody in this environment that tells you loss rates are going to go down is probably, not being completely realistic. We want to take conservative view towards loss rates, as Dan mentioned our storefront activities have calmed down nicely, online saw a little bit of a blip in the fourth quarter. We’ve made some adjustments there and I think Dan did a great job explaining the metrics behind that.

I expect in the comp op year-over-year you may remember we had incredibly low loss rates in the first quarter last year, but again this is the period of high redemption activity in the first quarter, the charge-offs are coming off of loans that really were originated late in 2008, but up year-over-year, how significant I wouldn’t tell, overly significant, but we certainly wanted to talk.

Daniel Feehan

Shouldn’t be dramatic, no.

John Rowan - Sidoti & Company

One last question, what’s the tax rate you are assuming in your guidance?

Tom Bessant

John I would put it in the 38%, 39% range pretty consistent with the current year.

Operator

Your next question comes from Gregg Hillman - First Wilshire Securities.

Gregg Hillman - First Wilshire Securities

I have a couple of questions. The first thing was about the contribution of, product profit contribution from the payday loans, when did it peak, the quarter or the fiscal year did it peak, and am I correct, you are projecting it to be like 15% by the end of the year or?

Daniel Feehan

That is the percentage of consolidated earnings in the payday?

Gregg Hillman – First Wilshire Securities

Yeah. That’s right. What quarter did it peak at and what fiscal year did it peak at as a percentage?

Daniel Feehan

And still missing, are you talking about contribution or these or are you talking about operating income?

Gregg Hillman – First Wilshire Securities

Well. Just it could be either bottom line or operating income either one, just the contribution from the payday loan business? What quarter did it peak at for the company?

Tom Bessant

Well. Let me just kind of walk you through a traditional four-quarter year. We begin January 1, and we hit a very high demand period as consumer spending coming off of Christmas tends to create loan demand that’s immediately followed by high redemptions off of tax refund. So, you get a big push on these early and then balance has dropped significantly as customers’ payoff their loans and we know these customers like to payoff these loans and are prudent about their borrowing activity.

So, you get a lot of income in the first quarter and your loss rates tend to be lower, so that is one of your highest contributing quarters. As you move into Q2, your balances are starting very low and so any marginal cost that you have as a percentage of fees tends to be higher, that likewise makes us the lowest contributing quarter. Balances continue to increase into Q3 as it’s a traditional borrowing period, so margins come up in Q3.

In Q4, you start the year with high balances as high balances stay high throughout the year, which you also pickup your higher percentages of losses in the fourth quarter. So, that’s the second to highest contribution margin if you will in Q4. So it is kind of a book-in type of full year side.

Daniel Feehan

I think you maybe if I understand your question as well. Without the benefit of going back and reviewing this and I don’t have all the data sitting in front of me right here, but I am going to guess that probably if you look on a trailing 12-month basis, the payday contribution earnings as a percentage of our consolidated earnings probably peaked on a trailing 12-month basis in the second quarter historically.

If you look at it short, it probably peaked in the second quarter of ‘08 and it has obviously declined and will continue to decline with these loss of earnings and then with the addition of profitability from our Mexico subsidiary and growth in our US pawn business. We are past the historical peak for payday. It will be in 2009, a diminishing component of consolidated earnings.

As I mentioned, these other products that we believe have the potential as alternatives that we are not going to see we have nothing baked into ‘09 plan of substantial profitability from that. But hopefully in 2010 and beyond you see other alternatives on managed care basis, recover as a percentage of our consolidated earnings, if I think understand the intent of your question.

Gregg Hillman – First Wilshire Securities

Yeah, that’s what I was trying to get out rather than seasonality, but and then in terms for the 12 months ending in the second quarter, what was the contribution as a percentage?

Daniel Feehan

Yeah, I don’t have that data right here.

Gregg Hillman – First Wilshire Securities

Is it more like 20% or?

Tom Bessant

Yeah, mostly it will be in the 20%, I mean last in 2008 the contribution in Q1 was 22% and Q2 was 16% and that’s diminished since then in Q4, it’s about 8% and that is eliminating the one-time charges on a trailing 12 basis it is 14%, last year it was 12, 2007 was 12 and in the current year it’s 14. So, the answer is 14 on a diminishing level and again you are looking at a prior and it’s most inefficient level because store fronts for your concentration of costs are is where you are getting the least amount of revenue growth in year-over-year.

Daniel Feehan

Clearly strategically, you can’t take anything else away from our comments and my comments today, but you know the fact that we are focused on reducing that is the existing payday product contribution or short-term cash advance product contribution, our focus is on reducing that as a component of our consolidated earnings.

We are focused on expanding our pawn business obviously making a big acquisition in Mexico, supporting unit growth in Mexico in 2009 as well as trying to find opportunities for unit growth in our US pawn business and development of other alternatives as I said in my comments the deal with the changing needs of the customer and the social political realities of serving a sub-prime consumer with an unsecured credit product.

Tom Bessant

And you clearly push products through your store front activities to bolster that margin on profitability, we talked on this call about gold buying and Dan has talked about alternative products. So, I think, overtime but it’s going to be a little bit of a pull throughout 2009, you want to drive more revenue to cover those operating costs.

Gregg Hillman – First Wilshire Securities

Right, speaking of gold buying, do you have any idea what the margin will be on gold buying in Ohio?

Tom Bessant

No, I think such a small piece of our business right now on a relative basis, it will maybe be 1% or 2% of the gold volume selling going into the year. For purposes, if you wanted to model it, could model it at the same 25% margin that we get on our overall scrap gold, I mean that gold is being purchased, because people are liquidating it and until we put the pawn loan product in there where people are actually borrowing and repaying, most of these people are just disposing of the merchandize.

Daniel Feehan

Yeah, I would have expect as we get in through ramp that business up a bit, given the competitive landscape in Ohio being much less competitive than we experienced in some other states that hopefully we will have the opportunity to maybe acquire that gold on a lower average cost and maybe some of our other markets and enjoy a little bit higher margin, but at this point in time, to Tom’s point and the scheme of our consolidated results, it is going to take a while for that activity to even have any possibility to move the needle.

Gregg Hillman – First Wilshire Securities

Okay. And Dan, speaking of one of the new products you alluded to, it the Bank Corp product I think from primary innovations if I am not mistaken. I didn’t quite understand that could you explain how that works and why would it become material to your company at some point?

Daniel Feehan

Well, we provide as I indicated technology and marketing and processing services associated with the bank issued store value or debit card and that card is provided by a bank that we support, it carries a line of credit available with it. And so, our business opportunity is to expand our relationship with that bank and other banks to provide the technology and processing and marketing associated with that card and that line of credit to other sub-prime consumers around the US who don’t necessarily have access today that short-term credit.

That product doesn’t look too much different than product that banks like Wells Fargo and U.S. Bank provide to some of their DDA accounts today. The bank is providing for advances on that card as low as $20 increments and at rates that are currently $2.50 for 20 for basically an advance that is repaid on the next deposit against that card, payroll deposit against that card.

So, the opportunity for us is to expand our relationships and scale that business where we are not only enjoying some transaction fee revenue associated with it. But as I indicated in my comments, we believe we will be in a position as we are today to participate and the receivables on those advances. So, it becomes an opportunity for us to earn transaction fee revenue, but probably more significantly an opportunity for us to earn profits associated with receivables that are extended on the line of credit.

Gregg Hillman – First Wilshire Securities

You mean in terms of collections?

Daniel Feehan

No, we actually I mean just actually participating in the receivable itself from the standpoint of, owning the asset, participating in the ownership of the asset.

Gregg Hillman – First Wilshire Securities

Owning it okay. In one other service that you provide, but besides the back-end for the back office would be collections, I can take it in reminding these pieces?

Tom Bessant

Yeah, although it is today, again this businesses is in early stages and there is not a significant amount of collection activity associated with that today. Customers, the banks program is that it only provides it to customers who are on direct deposit of their payroll and the way the bank set the program up, if someone gets an advance their next direct payroll deposit, the advance is repaid immediately through a debit for repayment in the line of credit immediately as that deposit comes in.

So, there is less quite frankly there is less need for collection activity associated with this product, although I do thing there is as it scales, there is marginal profitability opportunity associated with it by us offering to provide collection services associated with this as well.

Gregg Hillman – First Wilshire Securities

Okay, and finally a question about regulatory risks in Mexico not so much [inaudible] internationalization under associates president, but just basically increased taxes on pawn shops, like using the Mexican government earning for money right now and could they like put a tax on pawn shops and has that been done in another countries, like in Sweden?

Daniel Feehan

No, we have not experienced any targeted tax programs for our particular business in country that we operated over our 25-year history, anything is possible by any governmental agency I guess, but you based on all the due-diligence that we went through, which was extensive in Mexico before making this acquisition in that due-diligence included local counsel and regulatory experts in Mexico trying to understand what the environment was there and what potential for any adverse legislation could be in Mexico.

We obviously were not concerned to the point where we did make the acquisition and I know of no current initiatives not aware of any current initiatives in Mexico targeted as at the pawn shop business per se and like we do in the U.S. Our company in Prenda Facil, does have lobbyist on a retainer and people that stay close to what any activity or any potential activity turning out of the legislative branch of government. So I’m not aware of anything and don’t have any particular concern today about facing something new in Mexico. Again I’ve been doing this long enough to where I am hesitant to predict what any governmental agency might or might not do, but I’m not aware of anything.

Gregg Hillman – First Wilshire Securities

Okay and lastly about the installment loan product and CashNet, do you have the best analytics in the industry and do you think you have a chance of being like a nation leader and that could become a huge profit center for your company?

Daniel Feehan

I will tell you that it is an important part of our long-term strategic outlook, we have a large and I think a very capable analytics teams in Chicago and I think, I just say very keenly, I think if anybody can figure this is out how to deliver it and underwrite it, that we have got the capacity to do that.

Again in my opinion, as I said in my prepared comments if I look out over the next two to five years, my view is shared by my board and management team here is that we need to be trying to develop unsecured products with lower yields and I think that’s difficult to deliver those products quite frankly in the store front cost structure.

So I think the advantage of having a sophisticated and currently operating robust online platform and our technology teams and analytics teams who are working full time on developing alternatives I think is one of the put us in a position that probably is unique to the current competitive group that we compete with today.

So I think we are doing the right thing. I think we got the right assets in terms of our human assets I think we got a head start with this card based product. I’m not going to tell you that we are the only ones who potentially can participate in that field, but I think there is an early movers advantages in this space that we seem to be in position to capture. So again, I think if you look our over the next few years, we are doing what we believe needs to be done to position ourselves to scale more significantly than we would otherwise scale without these products and without these other electronic channels.

Gregg Hillman - First Wilshire Securities

Well. Dan and Tom, I appreciate your comments and impressed by the experiments you are doing.

Operator

Your next question comes from Jordan Hymowitz - Philadelphia Financial.

Jordan Hymowitz - Philadelphia Financial

First of all, what was the loss rate on both the Internet and non-Internet payday?

Daniel Feehan

As a percentage of fees Jordan?

Jordan Hymowitz - Philadelphia Financial

If you could do it both ways, revenue and dollar balances.

Daniel Feehan

I don’t have the volumes per se, but the online business buy and sell was at 50.5% of fees, store comps was at 26.1% of fees, and that segment was at 43.7% of fees.

Jordan Hymowitz - Philadelphia Financial

So what really happened is the online segment went back up again, because that had been coming down, the store front was pretty much what we expected?

Tom Bessant

Yeah. Exactly right, I mean last year at Q4 the online business was 48% of fees, so it went up 2 points in the third quarter you may remember we’ve talked about some misuse that we had in our UK and online business, which essentially pushed losses of percentage of fees online up to 52% was about, 3.5 points of that was related some specific fraud identification we had early in that quarter. So, numbers were below 50% coming into Q4 and then they went up again to 50.5% in the fourth quarter whereas you said they have been sequentially tracking down prior to Q4.

Jordan Hymowitz - Philadelphia Financial

And I mean, who knows where things are on this environment, but eventually the thought was that the online version would come down with maturity to where the store front versions were, may be it would if it would come closer, it’s now been pretty steady as people have been rolling over and you are getting rid of losses, do you still think the losses in the online channel will get down towards the store front channel?

Tom Bessant

I think it would be difficult to get them all the way down to the store front levels, I know some of our analytics people feel like it certainly possible, as we’ve look at existing long-term customers that borrow and repay and comeback in and out, they do perform like store front customers.

We continue to touch a lot of new customers in that group as new people find the product and chose to use it. I think given that number in the low 40s right now would be ideal and obviously creates a lot accreted earnings, if we are unfortunate enough to get it back down into the 30s that would be extraordinary. I don’t think given economic environment that we should really be that optimistic in the coming year.

Jordan Hymowitz - Philadelphia Financial

In states that you can do storefronts, can you still do online or no?

Tom Bessant

Yes, we can I mean our online businesses licensed in the same states that we have store fronts, and we do have programs giving our customers the options if they rather get their products online, as a convenience, we want to be the ones providing that service to them.

Jordan Hymowitz - Philadelphia Financial

But, I mean like in Ohio is online still working?

Daniel Feehan

Yeah. Jordan, as you well know, we operate under state laws and licensing across the country and our online business unlike some other online providers you are operating offshore without any reference to US state laws or other onshore providers who are exporting rates without licensing to other states. We don’t do that, so we are operating in accordance with state laws and licensing requirements.

We are continuing to offer online advances in Ohio, but it is under the same Ohio mortgage loan act that we are offering advances in our stores, against the mortgage business. We are not doing things with our online business that is illegal with our existing store front business.

Jordan Hymowitz - Philadelphia Financial

And my final question/comment is that. Your aged inventory is down a lot, and you are the only pawn shop that discloses an aged inventory number, and your margins are lower. Do you think that some of the other pawn shop chains are disclosing that number, because they building up an aged inventory and hence their returns aren’t as great and their margins are higher?

Daniel Feehan

Well. I guess, diplomatically it certainly begs a question and, again we try to be very open about our disclosure and provide our investors and potential investors with enough information so they can assess our business completely. So, that is as far as I can really go with it.

Operator

Your next question comes from Ted Hildemeyer - North Star Partners.

Ted Hildemeyer – North Star Partners

Can you discuss a national regulation one concern here is that, people feel the Obama administration would think, a certain portion of their constituents by attaching some bill to a larger bill that wouldn’t allow kind of payday to get scrutinized and specifically in what format would anything like that show up and I don’t know what the regular timing for that is, as their at some point that people could have a sigh of relief, a follow up question with that?

Daniel Feehan

Boy, it is tough to comment I think on any federal legislation today with a branded administration. New Committee appointments on the hill, new leadership in the finance committees, and banking committees and things, it is very, very difficult to give you any I think real color of value have given of the changes that are taken place, it’s no secret to anybody that, President Obama and his campaign pledges had targeted and several of his pledges consumer lending whether it would be stuff that we are doing with our customers or credit cards, banks, everybody else, I don’t think anybody was really immune from the campaign rhetoric of the President when he was on the trail.

So, people are anxious about it, there are no questions, people are nervous about what might come out of Washington. We, Cash America have a presence in Washington with our own lobbyist both external and internal, the industry has a strong presence in Washington as well as for years and actively engaged in the process of reaching out to the new administration from the standpoint of making sure that people understand the service that we provide, the constituency that we provided to and again making sure that folks understand that we are in an economy of contracting credit availability and consumer paralysis that additional contractions of credit availability just really don’t make any economic sense at all.

So, we are trying to get that message across to people in these positions, but I can’t predict what will come out this administration, I think the risk is probably is limited to unsecured products. I have never seen much energy in Washington to legislate relative to our pawn shop business, but again it is impossible for me to predict. I would encourage you if you have concern about that to reach out yourself to folks that maybe able to help follow that issue because again until the administration showed us the something or suggests something or we have some specific that we have to deal with, it is very hard to discuss.

Ted Hildemeyer – North Star Partners

Okay and then follow-up to that. Clearly you are not getting much credit for the payday side. You guys do provide segment information, but can you give any color, I think you allocate overhead to pawn and payday and if the worst case scenario happened and payday went away, what portion of that kind of overhead in D&A would go away versus have to be absorbed by the pawn shops?

Daniel Feehan

Well you are right we do allocate, between the subsidiaries over there, but what I would tell you is our CashNet operation is fairly self-contained and so while there is a percentage of overhead going in that direction preponderance of their costs are driven by their own operating activity.

We don’t typically breakout our specific breakdown of your allocated dollars, what I can tell you is we do it based on aggregate personnel cost, because that tends to drive the overhead that overlaps things like human resources in payroll and aspects like that, but the preponderance of the administrative cost is pawned by the store front operations and that includes the pawn business.

Ted Hildemeyer – North Star Partners

Okay. When I for example look at D&A and I think kind of roughly D&A attributed to pawn is $23 million or so and the payday is 13, if payday went away would that entire 13 go away?

Daniel Feehan

Are you talking about D&A, depreciation and Amortization or are you talking about administrative costs?

Ted Hildemeyer – North Star Partners

Well. Right now I am talking about D&A and I will ask you after that…

Daniel Feehan

The depreciation and amortization costs are highly concentrated wherever the acquisitions are, wherever the property and equipment is, so we have got amortizing goodwill, the preponderance of our goodwill is non-amortizing, that’s where you are going to get your amortization and of course depreciation related to your plan, equipment which is a type, primarily the stores of course, there is some in production IT stuff that gets depreciated.

So, D&A does not get allocated between so, what you see is what you get, if it is in he segment then it stays in the segment. The only thing that gets allocated of any other cost is basically administrative costs, between the entities.

Tom Bessant

If any of our businesses would go away, which we are certainly planning on any further diminishing out of our base, but we would be in the same position we were in the fourth quarter, writing off assets and eliminating all the assets associated with that business and writing them off, not a cash cost obviously since we have already made those investments, but they would be written off and the relative depreciation and amortization associated with those would cease.

Daniel Feehan

And of course naturally if you move down a big segment of your operations your admin cost is not going to be fixed right, so it is not an going commitment, it is like the moves we recently made. So, if you have a big check, your operation then goes way, hopefully your administrative cost is able to adjust accordingly. So it is not an ongoing expense either.

Operator

And we have no further questions. I will now turn the conference back over to you sir.

Daniel Feehan

Thanks Alex. I appreciate everyone’s attendance today and look forward to talking to you next quarter. Thank you.

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 line

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Source: Cash America International Inc. Q4 2008 Earnings Call Transcript
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