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Executives

Julie Prozeller – Financial Dynamics

Jeff Weiss – Chairman and CEO

Randy Underwood – EVP and CFO

Analysts

David Burtzlaff – Stephens

John Hecht – JMP Securities

Bob Napoli – Piper Jaffray

Rick Shane – Jefferies

John Rowan – Sidoti & Company

Ryan Zacharia – Jacobs Asset Management Partners

Ramin Kamali – Credit Suisse

Liz Pierce – Roth Capital Partners

Anya Waugh [ph] – Sykes Advisors

Dollar Financial Corp. (DLLR) F2Q09 (Qtr End 12/31/08) Earnings Call Transcript January 29, 2009 5:00 PM ET

Operator

Hello, and welcome to Dollar Financial Corp’s fiscal 2009 earnings conference call. All lines will be in a listen-only mode. At the request of Dollar Financial Corp, today’s conference call is being recorded. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) I would now like to turn the conference call over to Julie Prozeller of Financial Dynamics. Ma’am, please go ahead.

Julie Prozeller

Thank you. Good afternoon, everyone, and thank you for joining the Dollar Financial Corp’s second quarter – fiscal second quarter 2009 earnings conference call. Joining us on today’s call are Mr. Jeff Weiss, Chairman and CEO; and, Mr. Randy Underwood, Executive Vice President and CFO.

Before we begin our conference call, I would like to remind you that the remarks made during this call with reference to future expectations, trends, plans, forecasts, and the performance of Dollar Financial Corp, its subsidiaries, and its markets, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company’s current beliefs, estimates, and expectations, and involve a number of risks and uncertainties.

Today, the company will be commenting on previously issued guidance on expectation of future results. As a reminder, these statements indicate the expectations of the Dollar Financial management team as of this date. These statements supersede any and all previous statements made by the company regarding the matters addressed. These statements are forward-looking statements and cannot be guaranteed, and may prove to be wrong. This outlook is based upon various assumptions, which include but are not limited to the following, no material change in the products and services offered in all locations as of January 29th, 2009; no material change in the company’s current store development acquisition plans; no material adverse results and litigation, or regulatory proceedings involving the company that currently exists or that may arise in the future; and of course, can be affected by changes in currency exchange rate.

Factors that could further affect results are outlined in the company's annual report and Form 10-Qs and 10-Ks. The company’s statements will include a discussion of adjusted EBITDA, which is a non-GAAP financial measure. The most comparable GAAP financial measure to adjusted EBITDA is income before income taxes. The reconciliation between adjusted EBITDA and income before income taxes is consistent with the company’s reconciliation as presented in the company’s recent press release dated January 29th, 2009, which is available on the Dollar Financial Web site at www.dfg.com.

I would now like to turn the call over for an overview of the recent quarter's activities. Jeff?

Jeff Weiss

Thanks, Julie. Good afternoon, everybody. We are very pleased with our results for the quarter as we continue to navigate through unprecedented market conditions. All of our business units continued their solid performance on a local currency basis with each generating higher year-over-year profits. And of course, as the US dollar strengthen significantly during the quarter with respect to the Canadian and UK currencies and as the majority of the company’s consolidated revenue is generated outside of the United States, with Canada and the UK, reported for the results for the company’s foreign subsidiaries were negatively impacted on a non-cash basis when translated into US dollars as required by US generally accepted accounting principles.

More importantly, the company continues to reinvest cash generated by its Canadian and UK business units back into those businesses, and therefore, does not typically repatriate the foreign earned cash to the company’s US interest. As a result, fluctuations in currency exchange rate have no near term yield cash flow impact on the company’s operation.

Therefore, in order to better explain the real performance of our business units for the quarter, excluding the effects of accounting based currency translations, we will also provide metrics on our financial results for the quarter on a constant currency basis. Therefore, on a constant currency basis, when applying the currency exchange rate from the second quarter from the prior 2008 fiscal year to the current quarter’s result, the company’s consolidated revenue grew by 9.8% or $13.9 million for the quarter, while store and regional margin, as a result of the recent North American store closures and other cost reductions and operating efficiency programs, grew by 10.8% or $5.3 million.

We have seen moderate erosion in the size of customer’s check and the number of checks we are cashing across all our business units in the US, Canada, and UK. As we have seen in past recessions, this is typically indicative of a weakening economy as many of our customers are forced to transition from one job to another due to a layoff or a job fallout in addition to realizing reduction and the availability of overtime or regular hours as employees strive to reduce their operating costs.

However, in general, our customer base is composed of service sector workers who typically work in more non-discretionary jobs, at hospitals, food restaurants, store chains, janitorial services, and other general skilled and semi-skilled positions. The nature of which tends to dampen the impact of fluctuations in employment from changes in the economy. This is as opposed to other employment sectors, which is manufacturing, which draw or tend to fluctuate more directly with the ebbs and flows of the economy. No matter what the state of the economy, someone still needs to cut hair, flip burgers, work the cash registers at gas stations and cleaning stores, and tend to the sick and elderly.

Additionally, we would expect that our customer base will be a primary beneficiary of economic stimulus programs currently being suggested in the US, Canada, and UK. And those programs should help to stabilize employment of low to income – low to middle way income wage earners. We expect that the longer economic downturn – the longer the economic downturn continues, customers in demographic and income groups that had previously not utilized our product and services may devolve into our customer base in greater numbers.

Even though our business model tailors itself to our consumer base that is to a large extent, recession resilient, we should assume that the market for our products and services will not grow as strongly in such economic climates. Therefore, until we have greater visibility as to the depth and duration of the current recession, we are temporarily refocusing our primary efforts away from investing in longer term growth initiatives such as the De novo store development program.

Alternatively, we are focusing on investing additional resources into the development of new products and services, which can be implemented quickly and in a more (inaudible) effective manner to our existing store platform and provide a more immediate impact on the profitability of our business. At the same time, we are continually initiating programs designed to further enhance the efficiency and profitability of our base business.

I’d now like to take a couple of minutes to mention a few of the initiatives we have currently underway. As we have mentioned on the previous call, we recently added a Chief Credit Office division, which is a global position responsible for maximizing the profitability of our consumer lending and check cashing products from both the gross fee and net fee basis while also encompassing the debt collection performance of the two product lines. Our new CCO is currently engaged in the refinement of company proprietary credit scoring models, which we believe will further enhance our ability to determine an optimum loan amount for a particular customer considering a customer’s statistically modeled ability and likely propensity to repay the loan.

It may be – we believe we may be the first company in our state to develop and implement such an advanced credit scoring mechanism for the payday loan product. Additionally, over the last several quarters, the collection environment continues to become more challenging as our customer’s safe declining payroll checks increased their obligations. As a result, as we’ve mentioned previously, we have already taken steps to decrease our risk exposure to certain customer segments by reducing the amount we are willing to loan them. In addition, we have also placed additional emphasis on pre-calling customers, remind them of the due dates of their loans, and to establish a convenient time for them to come in and repay their loan as well as establish repayment plan for some customers.

As the regulatory environment in Canada becomes more settled, we expect that some of the larger US operators may enter the Canadian market. With our very strong grant awareness, 25 years of excellent customer service, and the lowest price provider in the country, we believe we are very well positioned from a competitive standpoint. We also expect that additional competition will bring about greater awareness of our products and services (inaudible) increased floor footprint and advertising programs. This should naturally expand the entirety of the market to our products and services for all operators in the industry.

However, in order to ensure the continuing loyalty of our existing customer base against potential increased competition, we are planning additional customer retention programs to increase the stickiness and loyalty of our customers. In this period of economic downturn, we continue to re-examine our existing store footprint to improve operating efficiency by evaluating and closing on the performing stores, for example, on instances where a lease is coming up or in a loop when we have other stores in close enough proximity to effectively transition many of the affected customers to do alternate stores.

In addition, we continue to re-examine our support and headquarter functions and assets to eliminate all excess costs. We have already begun to see the benefits of this ongoing strategy as illustrated in the year-over-year improvements in our store and regional and EBITDA margins.

When we have a clearer picture as to when the global economy will emerge from the current global recession, we expect to maintain such a cautious approach to managing our business. This approach entails sensible underwriting practices, a greater focus on debt collections and loans servicing, continual improvements to our core structure in the operating performance of our store base, and a judicious deployments of capital toward building or near term cash position.

We remain focused on maximizing the profitability of our base business and strengthening our operating platform in all of our markets. And believe we will be well positioned to take advantage of the inevitable growth opportunities that will present themselves as the global economies emerge from the current downturn. Although these are unprecedented times with extreme market volatility, we are confident in the strength and resiliency of our business model.

Our growth strategy continues to focus on developing our business as a multi-product, multi-country, multi-channel retailer of basic financial services to the under bank consumer. In addition, the company has a very strong cash position, minimal near term debt obligation, and a substantial annual free cash flow from business operations.

I’d now like to highlight some key achievements in developments for each of our business units of the quarter. During the second quarter, our UK business contributed revenue of 21 million pounds, growing by 25.3% over the previous year’s quarter. Consumer lending revenue rose by a robust 50.4% worth 3.8 million pounds, while the other revenue category increased by 900,000 pounds or 69.7%, primarily as a result of increased revenue from foreign exchange products as well as additional foreign merchandise and scrap sale.

However, as we would expect in this environment, check cashing revenue in the UK decreased by 600,000 pounds or 8.8% for the quarter as would be expected in a downturn as a result of lower check volumes and a lower average base amount of check cash. We believe the decline in our check cashing business in the UK reflects fewer payroll checks as a result of the shrinking construction industry in London and its environs during winter season; and the return home of the transient East European labor force, which is significantly dependent on the construction industry. We are hopeful that as weather improves and the labor force returns to continue – oversee construction, that we will see an improvement.

Although it appears that the pace of the UK economy is slowing down as evidenced by the decline in check cashing fees, we have not yet seen any significant slowdown in our business thus far with respect to our loan products as consumer lending fees increased by 41.5% on a same store basis. Along with the strong growth and the single payment loan products, the UK consumer lending business continues to benefit from increased pawn lending activity, which primarily consists of loans on collateralized gold jewelry. Interest income from pawn loans in UK was 1.6 million pounds for the quarter, compared to 1 million pounds from the prior year’s quarter, an increase of 61.8%. We see this as an ongoing growth area for the UK business unit, and believe we are the third largest pawn lender in the United Kingdom.

We believe we can leverage our growing expertise with the UK pawn business to further expand this product line to other markets and countries. Our Canadian business unit generated 70.3 million Canadian dollars total revenue, which was essentially flat from the prior year’s quarter. Check cashing fees in Canada decreased by 2.5%, or 500,000 Canadian dollars, while consumer lending increased – consumer lending revenue decreased by 3.8% or 1.4 million Canadian dollars for the quarter. Money transfer fees increased by 10.9% or 400,000 Canadian dollars for the quarter, while other revenue category increased by 1.2 million Canadian dollars or 16.1% as a result of growth in the debit card business, foreign exchange products, and other ancillary products.

As we had discussed on previous earnings calls, with many of the Canadian provinces actively engaged in formulating their respective product regulations and wage structures, we continue to believe it to be prudent to diminish the magnitude and tone of our marketing, advertising campaigns until the regulatory environment has been defined and established.

We believe it is best to provide input in these provincial policy makers through the Industry Trade Association in Canada, the CPOA, as opposed to a mass media campaign that could potentially lead to inaccurate and intrusive misinterpretation by regulators and other interested parties. As we have previously discussed, this decision, made in the spirit of establishing a viable and competitive payday loan industry for future years to come, has resulted in the store fitting of new customer growth in Canada. We fully expect to resume our advertising campaigns in Canada as provincial regulation has established.

Turning to our domestic business for the quarter, our US operations generated $41 million in total revenue, growing by $5.6 million or 15.9%. On a year-over-year basis, check cashing fees in the US increased by 14.4% or $1.8 million, while consumer lending revenue increased by 12.5% or $2.5 million. The US business benefited from the acquisition of 81 stores in Southeast Florida in the second quarter of the prior fiscal year. We continue to be very pleased with the performance of our acquired stores in Florida as well as our other store acquisitions in the US market. Additionally, we are currently experimenting with a gold purchase program with our customers in the Florida market and prices below smelting value. If this pilot test is successful, we would like to further expand this service to other markets.

I’ll now ask Randy to provide and update on Canadian regulatory matters and to comment further on our fiscal second quarter results.

Randy Underwood

Thanks, Jeff, and good afternoon to everybody. I would like to begin with a few comments on recent developments with respect to the continuing progress of provincial regulation in Canada. As we have previously reported, the Nova Scotia Utility and Review Board issued its recommendations regarding the regulation of the payday loans industry within its province this past July. As part of their evaluation, the UARB recommends the maximum cost of borrowing to be set at 31 Canadian dollars per 100-Canadian dollar loan, inclusive of all fees, presumably, in order to maintain a competitive environment in the province.

Even though the 31 Canadian dollars per 100-Canadian dollar maximum fee structure will present an opportunity to increase our rates in Nova Scotia, we expect to continue to provide payday loans to load its stated maximum in light of our historical strategy to be the lowest cost provider and first choice for consumers in Canada that are looking for a short term loan. The government in Nova Scotia is currently in the process of clarifying some of these proposed regulations with the UARB prior to their implementation, which is anticipated in the near future. We expect to be implementing the new regulations later this year in our eight corporate stores in Nova Scotia.

In April 2008, the Manitoba Public Utility Board promulgated the rate and fee structure for issuing payday loans in the province. As a result of several of our competitors in Canada appealing the Utility Board’s decision and one competitor commencing legal actions with regard to the PUB presumably exceeding its decision making authority beyond its chartered established rates, the Manitoba government is presently seeking a revised federal order designating the province the authority to set rates and thereby not have the rates set by the PUB. We believe this will allow final action on rates in Manitoba to likely occur later on this spring. We also expect to be implementing the new regulations later this year in our 20 corporate stores in Manitoba.

In Ontario, the provincial government passed the two-sector payday loan legislation in June and is presently very actively involved in its rate setting process. British Columbia and New Brunswick passed their legislation this past October and April, respectively, and are in the midst of their rate setting processes as well, and the provinces of Saskatchewan and Alberta were also engaged in the rate and regulation state of their regulatory process.

In summary, we are pleased with the progress we observed during the quarter as a number of provinces moved closer to establishing their respective rates and regulations. We believe this initiative will bring clarity and stability to the marketplace, and that they will present substantial longer term growth opportunity for our Canadian business as well. We continue to be extremely supportive of the CPLA, which is very involved in every provincial rate setting process and legislative action as we believe that any approved regulation must ultimately balance consumer protection while enabling a viable and competitive industry.

Now I’d like to make a few comments with regard to our consolidated financial results. We achieved revenue of $132.2 million for the quarter as reported in US dollars, which on a constant currency basis equates to $155.6 million, representing growth of $13.9 million or 9.8% over the prior year’s quarter. Also on a constant currency basis, our consolidated check cashing business in this economic downturn was essentially flat to the prior year, while the consumer lending business grew by 11.9% or $8.8 million and was being bolstered by strong growth in our UK pawn lending business.

The consolidated loan loss provision, expressed as the percentage of gross consumer lending in US dollars, was negatively impacted by a lower mix of foreign loans as a result of the strengthening value of the US dollar. Nonetheless, the consolidated loss percentage was 21.3% for the second quarter, a little better than the 21.8% for the second quarter of the prior fiscal year. And we believe it to be a very acceptable level given the global economic downturn we are in the midst of.

Store and regional margins, when translated into US dollars, was reported at $44.3 million for the quarter as compared to $49.3 million for the previous year’s quarter. However, on a constant currency basis, store and regional margin increased by 10.8% or $5.3 million. And as a percentage of total revenue, the margin improved to 35% from 34.8% for the prior year’s quarter.

Furthermore, we continue to leverage our global infrastructure and cost structure as adjusted EBITDA for the quarter expressed on a constant currency basis improved to 26% as a percentage of total revenue from 25.3% for the prior year’s quarter. With regard to the income before income taxes, when translated into US dollars and including $555,000 of non-reoccurring store closing costs, was $22 million as compared to $21.9 million for the previous year’s quarter.

Net income, which includes an effective income tax rate for the quarter of 47.1% with $11.6 million, while fully diluted earnings per share was $0.49 for the quarter. The effective income tax rate for the quarter was unfavorably impacted by a lower mix of foreign earned income, which have lower statutory rate, if I believe most of you are probably aware, as a result of the strengthening value of the US dollar and the translation of the company’s foreign subsidiary rebuild into US dollars as well as the US store closure policy incurred in the first quarter of the current fiscal year.

On a constant currency basis and excluding non-reoccurring charges, our pro forma income before income taxes was $23.9 million for the second quarter, representing growth of $1.7 million or 7.7% over the prior year’s quarter. Pro forma net income, considering a pro forma effective income tax rate of 43%, was $13.6 million, representing an increase of $1 million or 7.7% over the prior year’s quarter. Likewise, on a constant currency basis and excluding non-recurring charges pro forma fully diluted earnings per share increased by 11.8% to $0.57 per share.

Liquidity is certainly on everyone’s mind in these uncertain times. I wish to remind everyone the dollar has a very strong liquidity position, with approximately $75 million of excess cash available for investment or other corporate purposes as of December 31st, 2008. However, you should be aware that in looking at the year-over-year cash balance on the company’s balance sheet, the effects of currency translation once again must be recognized. Accordingly, the consolidated cash amount reported in the company’s balance sheet, which includes the cash in the company’s foreign business units, was significantly reduced in the current quarter due to the significant strengthening of the US dollar and the related translation of the company’s foreign cash account into US dollars as required by US generally accepted accounting principles.

This translational effect reduced the company’s reported cash balance at December 31, 2008 by about $37 million when the local currency cash balances are translated into US dollars. However, as these foreign cash accounts are maintained in Canada and in the UK in local currency, there is no diminution in value from changes in currency rate. And as a result, the cash balances are still fully available in their local currencies to fund the daily operations of the UK and the Canadian business units.

At December 31st, 2008, the company had a $37.9 million un-drawn balance on its revolving credit facility in the US, 28.5 million Canadian dollars un-drawn balance in Canada, and 3.2 million pound un-drawn balance in UK, in addition to of course, generating substantial annual free cash flow from our business operations.

Furthermore, the company’s long term debt portfolio further buttresses our strong liquidity positions. As the interest rate on the convertible note is fixed at 2.78% and on the term debt, the LIBOR based rates have been synthetically fixed at a weighted average lending rate of 7.4% for the term of the notes. The convertible notes are not due until June 2027, and are not colorable or liquidable [ph] until December 2012. And there are no deference for repayment requirements until potentially December 2012 or about four years from now. The term notes do not mature until October 2012. And in the interim period until maturity, their required fiscal payments amounts to just $3.7 million on an annual basis.

Now given this turbulent global economies and currency markets, the company has purchased foreign currency option contracts designated as cash flow hedges, which will provide a floor forward portion of the forecasted earnings through the month of April 2009 at exercised rates of 0.80 for the Canadian dollar and 1.60 for the pound sterling.

The company has not purchased foreign currency contracts for period beyond the month of April due to the considerable cost of these contracts amidst the volatility of currency rates in the financial markets as well as the desire to not pay excessive fees to hedge again what is in reality the non-cash accounting based translation of foreign earnings. In addition, the company’s labor costs, interest expense, and other cost of running the business are all paid in the local currency of each foreign subsidiary further negating the real economic impact of fluctuations in currency rates on the company’s operations and lessening the need for a more cost in currency basing program.

This leads us to our guidance metrics. Given the considerable continuing volatility in the value of the US dollar, returning year-over-year basis strengthened by nearly 20% against the Canadian dollar and approximately 25% against the pound sterling in the second fiscal quarter. It is obviously difficult to anticipate how the company’s foreign earned income will ultimately be translated into US dollars for the remainder of this fiscal year. However, if we apply the currency exchange rate from the prior fiscal year to our foreign subsidiary results that are anticipated for fiscal 2009, we would expect that our pro forma earnings would fall within our previously provided guidance range of $2.10 to $2.35 for fully diluted share.

However, given the dramatic and rapid deterioration in the macroeconomic environment as well as its substantially stronger US dollar, we are adapting a more conservative stance for the remainder of the year. As a result, we are reducing our fiscal 2009 earnings guidance to between $1.65 to $1.90 per fully diluted share.

At this time, we are not providing revenue and adjusted EBITDA projections as we believe it’s more prudent to focus on metrics that are the most meaningful in this evolving market. We will continue to monitor the currency markets and any further impacts of the economic downturn on our business and our earnings outlook as we move through the remainder of this fiscal year.

Now I’d like to turn the call back over to Jeff for some closing remarks.

Jeff Weiss

Thank, Randy. We continue to be confident in the strength and resiliency of our diversified business model. We believe that our extensive expertise in this industry will enable us to continue to adapt and thrive in the ever changing economic landscape.

Furthermore, a strong cash flow from operations and solid liquidity position – positions us well to take advantage of global acquisition and expansion opportunities in our existing and prospective new markets as well as support the development and launch of new products. We look forward to a strong finish to the fiscal year on a constant dollar basis regardless of fluctuations in the global currency markets while continuing to position our company as the most diversified and compelling investment opportunity in the United States. And as always, we would like to thank our thousands of associates and all of our retail and corporate headquarter locations in countries in which we operate for their dedicated service to our customers.

With that, we would now like to invite our listeners to ask any questions they may have.

Question-and-Answer Session

Operator

(Operator instructions) We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Burtzlaff with Stephens.

David Burtzlaff – Stephens

Jeff, I have a few questions here. First, Randy, do you have the loss rates on payday for each country in the quarter?

Randy Underwood

Yes. I do, David. In the US, they were 29.6%, in Canada 20.7%, and in the UK 11.7%.

David Burtzlaff – Stephens

Okay. And in the UK, that 11.7%, does that include the pawn revenue? I mean when you calculate that on a percent of revenue basis.

Randy Underwood

Yes.

David Burtzlaff – Stephens

It does. Okay. All right. And then, the gain on the income statement in the other, I assume that’s from the currency hedges?

Randy Underwood

Yes. That’s the sale of the hedges and the net amounts that we realized on those hedges in the second quarter.

David Burtzlaff – Stephens

Okay. And then lastly, on guidance. The new guidance range, what kind of currency rates are baked into that, I mean to get to the high and the low end?

Randy Underwood

Well, I would answer that by saying, of course, that guidance is a combination of what we think about the currency providing themselves some room for the volatilities that we’ve seen here recently as well as some expectations that the economic environment might get a little worse. And I think we don’t have an exact number for the guidance as you’d appreciate in currency other than to basically suggest to everybody, as we said, if you took our anticipated results for the quarter, I mean for the year, as we see them at this point and time, and apply currencies that were in effect last year, we believe we would fall within the 15 [ph] or the old range of the guidance that we gave.

At this point and time, in the second quarter and as we’re sitting here today, the looney is down about 20% from where we were last year and the pound sterling is down about 30%. So I think if you apply those factors, that’s where we are today. And we provided just a little bit of room for falling below that knowing that I will remind you that we put in place as we stated in the earnings call here of $0.80 on the looney and $1.60 on the pound for January through April. I think that’s a fairly good benchmark at this point in time.

David Burtzlaff – Stephens

Okay. And then is that guidance on a GAAP basis or a pro forma basis?

Randy Underwood

On a GAAP basis.

David Burtzlaff – Stephens

Okay. Thank you very much.

Randy Underwood

Thank you.

Operator

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

John Hecht – JMP Securities

Thanks for taking my questions. I don’t want to be a dead horse, but just to be clear and thorough on these last questions, the new guidance is primarily or are adjustment – adjusted down for – related to foreign exchange or is there some losses and I guess some flexibility based on the economic environment as well?

Jeff Weiss

I think, John, it’s primarily foreign exchange based. But given the – we have seen really unprecedented fluctuations in foreign currency, and we’re also now seeing unprecedented rapid fluctuations in the economic environment in each of the geographies in which we operate. And we do not fancy ourselves to be economic forecasters or currency forecasters or speculators, we’re just readers of the newspaper and watchers of television. And things don’t seem to be getting better. So I think we feel that while we are – our customers are recession resilient, they do not live outside of the economy that everyone else does or are probably less affected. So we do have some measure of concern about the economic situation going forward and have factored that into our guidance.

John Hecht – JMP Securities

Okay. And I assume you do not have – don’t expect any benefits from the April currency hedges in your forecasting?

Jeff Weiss

I’m sorry, say that again?

John Hecht – JMP Securities

You don’t assume any benefits from the current currency hedges in place that expire in April?

Randy Underwood

No, I don’t think we do. I would, again just point out to amplify what Jeff said, if you just factor in the fall in the currency rate, you’re going to find it accounts for most of the decline in the guidance. We have a rather broad range there in the guidance that we do have. So we hopefully provided for both the uncertainty of currency and some uncertainty in the economic environment if it continues to – if it were to work.

John Hecht – JMP Securities

Okay. And then, Randy, one statistic I missed that you gave was the Canadian constant currency revenue number.

Randy Underwood

Let me look back. I’d tell you, can I check back with you after the call in the interest of time here?

John Hecht – JMP Securities

Sure, sure.

Randy Underwood

Thank you.

John Hecht – JMP Securities

And then, I’m wondering, can you give us charge off and recoveries as a percent of lending volumes? Do you have those? I know since you’re moving things into a constant currency basis, the presentation’s a little different wherever you have that consolidated, charge off and recovery figures

Randy Underwood

I don’t think I have that with me right now. We are in the process of changing a lot of our metrics around right now given the substantial volatility that we have in the currency.

John Hecht – JMP Securities

Okay. And then the last question I’ll ask is, you talked to give us an update on Canada and you referred to Ontario being in the negotiation phase with respect to the utility boards. When do you – to get resolution from Ontario given that it’s your biggest Canadian province. And what are you hearing thus far in terms of discussions?

Jeff Weiss

Well, first, John, as we’ve only said, among the other things we don’t forget are the liquidity or flowness [ph] that this government act. Our government relations both in Canada with whom we are, as you can imagine, in relentless touch, indicate to us they have a good feeling that progress is being made, that the regulation will balance the interest of consumer and the industry. And being such that is, we’ll maintain a valuable industry while affording appropriate consumer protection. And we are hopeful that before our fiscal year is over that we will have real clarity and movement there. But again, it’s government.

Randy Underwood

John, Randy. The Canadian revenue number for the quarter was 70.3 million in Canadian dollars.

John Hecht – JMP Securities

All right, gentlemen. Thank you very much.

Jeff Weiss

Thank you.

Operator

Your next question comes from the line of Bob Napoli of Piper Jaffray.

Bob Napoli – Piper Jaffray

Thank you, and good afternoon.

Jeff Weiss

Hi, Bob.

Bob Napoli – Piper Jaffray

Question on the balance sheet, on the – I’d like to understand if the AOCI account – I imagine that the adjustment there is tied to foreign currency hedges? I don’t know, what else goes through there?

Randy Underwood

Well, you’ll remember that like the income statement, we’re required to restate our balance sheet for the foreign currency impact as well. So you will find that almost every account on the balance sheet has gone down, oftentimes, significantly. And that’s why I called attention to the translational effect on the cash account. The exception is the – the derivative, obviously, became in the money, if you will, and became assets if we were to pay off the debt in its entirety the day after tomorrow, for example, because of the strengthening of the dollar. And the effect from the switch from a weak dollar to a strong dollar on the effect on the balance sheet as well as on the derivative where we swapped out the debt is the lion’s share between the AOCI area coupled with the translational effect on the rest of the balance sheet on the net asset less net liability statement.

Bob Napoli – Piper Jaffray

Now, if the currency stays right where it’s at, Randy, does that number stay permanently at that level or does that amortize back to zero?

Randy Underwood

In the case of the derivative, they would amortize back to zero by October 2012 when the debt would come due. The rest of the balance sheet will continue to float based upon whether the dollar goes up or the dollar goes down.

Bob Napoli – Piper Jaffray

Okay.

Randy Underwood

Of course all of this – we probably can’t say this enough, all these adjustments are non–

Bob Napoli – Piper Jaffray

I understand. As far as the revolvers and alliance you have in the revolvers, right now it looks like you’re kind of playing defense, if you will, from an investment perspective, which is certainly a wise thing to do. But would you expect to borrow further up the revolvers over the next several quarters or would you be paying down the revolvers?

Randy Underwood

First, I think it is fair to say that we are playing defense given the marketplace when we first capped those revolvers back in the October period when things were in such a turmoil in the financial markets just to ensure ourselves that they were still there. And they were then and they are today. And to this point, we haven’t thought to reduce those. Although we do have a lot of excess cash, as I’ve said earlier, whereby which we could certainly do that. So I think the answer to your question is we are going to continue to watch the markets and we’re going to continue to make sure that we are highly liquid.

Bob Napoli – Piper Jaffray

Okay. And with regard to the economy and the effect on your business, I’m looking at the constant currency numbers. It doesn’t look – I don’t see a big effect on your business so far from the economy. What are you guys seeing, obviously other than – besides the scary stuff on TV and in the newspapers? Are you seeing less – are you starting to see higher delinquency rates? Are you seeing less feed in the stores? Obviously, you’re seeing less cash than the average balance per check is down, so that’s something.

Jeff Weiss

I think, Bob, it’s kind of twofold. First, if you recall, more than a year ago, we started to get concerned about the economy and we started to reduce the amounts of money that we would lend even to some of our best customers. We’ve become more selective with how much we would lend to new customers. So we’ve managed down our book on an underwriting business over the past 16 months or so. Now, I’ll remind everyone that our highest default rate is in new customer across all of our product categories.

What we are seeing in all our geographies is a twofold decline. Until about, oh I don’t know, perhaps eight months ago, we have seen a modest of perpetually increasing safe amount of checks presented, or people were getting overtime work. There was competition for labor, so if you didn’t like your $11 job, maybe you could move to another job for $11.50. Maybe there were a few more hours of overtime, or a second or a third job on weekend. What we are seeing in all our geographies is a modest reduction in the actual numbers of checks presented and a very modest reduction in base amount as you would expect in recessionary times as employers seek to manage their labor down.

Fortunately, our customers as we’ve mentioned before, are by and large in non-offshorable [ph], hard to eliminate essential services. Someone has to tend the sick and the elderly, work the cash register, clean the hotel, et cetera. So we see a modest fall off there. On the lending side, while our charge offs have not increased, the assets to collect have increased, and we have substantially increased our pre-due date activities and our post due date activities in anticipation that our customers are more stretched now than they were in the past.

Bob Napoli – Piper Jaffray

Okay. And how about the number of customers coming into the stores?

Randy Underwood

I think there’s probably as many, if not more, people seeking loans today. But again, as Jeff said, we’re being very discriminating in terms of loans we make to new customers. And of course, we’ll remind everybody that in order to get a loan, you need to have a job. And obviously, there’s fewer people who have jobs right now, but they are seeking financial assistance, some of them.

Bob Napoli – Piper Jaffray

And a last question just on the US regulatory and your thoughts around payday lending in the US, I mean what could be the big picture thoughts – what do you think is going to happen? Are you concerned by some of the states where you’re – I don’t see how a Federal law would over – supersede the current state laws. But what are your thoughts?

Jeff Weiss

All we’ve said that when you are in a lending environment, A, financial services; B, consumer lending; C, lending for the financially excluded or under banked, the industry has and always will draw an excessive amount of attention from the media public advocacy groups, and then therefore legislators and regulators. I think that that is endemic to the nature of our business.

Currently, I think we are as comfortable as we get for the current regulatory environment in the state in which we operate. At the federal level, again simply speaking as a citizen although obviously our government, our relations people have shared the sentiment as well, it seems the magnitude of the problem affecting the country and the Congress may well preclude – focus on what are really quite small issues like payday lending. So I think, we’re as comfortable as we ever get on the state level. Obviously, we stay very close. We are significant members of the trade association in each state and the national association, and alert to any changes. But as of the moment, nothing seems diminished.

Randy Underwood

I’d only add what we’ve spoken to many people about store play and probably many people that would be in the call today that our strategy has been, through many, many years, to be a very diversified company not only in terms of the countries we do business in, but in the products we offer in our stores. And that diversification gives us a lot of protection for any particular product risk in any particular country. And I think that the benefit of our strategy that we’ve been consistently executing and will continue to execute to further diversify ourselves into other countries and other products and expand our existing product line will further protect us from any potential regulatory risk that may occur in the future.

Jeff Weiss

And we already have alternative products in some states that have been inhospitable to conventional payday lending.

Bob Napoli – Piper Jaffray

Okay. And then just a quick numbers question. I’m sorry. I missed the currency gain in the quarter that was in the income statement. What was that number?

Randy Underwood

You mean on the hedges?

Bob Napoli – Piper Jaffray

Yes, again on the hedges in the quarter.

Randy Underwood

It was a little over $5 million.

Bob Napoli – Piper Jaffray

Great. And that’s in the – where is that number? What is that?

Randy Underwood

In the other income line on the income statement.

Jeff Weiss

Bob, we’re reformed currency speculators.

Bob Napoli – Piper Jaffray

Right. Very good. Thank you very much.

Operator

Your next question comes from the line of Rick Shane with Jefferies.

Rick Shane – Jefferies

Thanks for taking my question. I think we understand all the impact on a currency prospective and how that impacts the balance sheet. Can you just help us understand how this impacts any of your – the movements on your balance sheet impact any of the covenants on your debt?

Randy Underwood

Well, first and foremost, I think we’re in fine shape in terms of our covenants on the balance sheet. The fluctuations are not more – generally speaking, the fluctuations are not significant because I’ll remind everybody that we synthetically fixed the interest rate and swapped the currency risk on our long term indebtness when we put that debt in place. So we really don’t have currency risk between now and settlement date on the loans nor do we have interest rate risks. Although if you go look at the agreement, it will say that it’s LIBOR spread based. But in fact, again, we synthetically fixed the interest rate. And the hedges are in a party between banks in terms of the interest payments that we make and the principal payments we make during the tendency of the loan.

Rick Shane – Jefferies

What about specifically in a network type covenant because the shareholders equity declined about $27 million. Is there any – anything we should be thinking about there?

Randy Underwood

We do not have a network covenant.

Rick Shane – Jefferies

Great. Thank you.

Jeff Weiss

Thank you.

Operator

Your next question comes from the line of John Rowan with Sidoti & Company.

John Rowan – Sidoti & Company

Just a couple of questions, in the beginning you thought – you said that you were obviously going to slow down on store expansion. Is that only through the end of fiscal 2009? Is that going to go on in 2010? And how should we look at potential De novo store openings?

Jeff Weiss

I’d have to tell you, John, I wish I could answer that question. But the economic situation is so turbulent and so murky. I think that if it continues at the present mode, we didn’t – we will continue to be restrained. If there is recovery, we will become more aggressive. If regulation in Canada happens in a fashion that we anticipate, I would anticipate we would become significantly more aggressive in opening in Canada. We continue to open stores in the UK. As we have said in the past, we do not think new store build out in the US is a strategy we will pursue now or in the future.

John Rowan – Sidoti & Company

Right. Can you just give us a little bit more detail on the pawn strategy in the UK. You did mention that you’re doing some kind of gold purchase item. What kind of margins are you going to get on that business?

Jeff Weiss

In the UK and all of our full service stores, we accept gold and silver jewelry, primarily gold jewelry, to pawn and we purchase gold jewelry at significantly below spot market prices. About 68% to 70% of the jewelry that we loan again is redeemed. Of the balance, a very small percentage is essentially used as advertising merchandise in those few of our stores, and have appropriate display windows at street level to indicate the potential of customers that we have this opportunity. The pawn revenue is primarily a fee revenue for making loans against the jewelry. And we do it in all of our stores. And we think it may have legs elsewhere.

John Rowan – Sidoti & Company

Okay. And just last question, going back to the potential Federal legislation. Just say, the Obama administration did get a law through and you had to close up shop in the US, and just theoretical, have you spoken to your banks as to whether or not they would treat one time charges on a pro forma basis and that goes back to your debt covenants?

Jeff Weiss

Remember again that virtually all our stores in the US are multi-product stores. So that even if we operate, for example, in Pennsylvania, which does not have any payday lending. So unlike a single product provider who would have to close up shop if there were a Federal 36% ATR cap and they could not find alternative installment products, some of which we are already offering, we believe that most of our stores are still viable.

John Rowan – Sidoti & Company

Okay. Thank you.

Operator

Your next question comes from Ryan Zacharia with Jacobs Asset Management Partners.

Ryan Zacharia – Jacobs Asset Management Partners

Question, so just on this federal thing, you don’t know of any components or writers in the stimulus bill that could further advance the stated goal of eradicating payday lending?

Jeff Weiss

At this point, we are not aware of any and we have not been notified by any of our GR people or the industry association that any are tangible.

Ryan Zacharia – Jacobs Asset Management Partners

Okay. Thank you. I know that you guys don’t currently extend payday loans to unemployed people, but would you ever consider doing payday against unemployment checks or people that you’ve confirmed are receiving unemployment benefits for an extended period of time?

Jeff Weiss

I think that we might consider it, but we haven’t in effect.

Ryan Zacharia – Jacobs Asset Management Partners

And is there a lower rate that you charge for cash in unemployment check – government check versus personal check?

Jeff Weiss

Almost in every jurisdiction in which we operate, a government check is charged with significantly lower rates and for – either for a payroll check or first party check. And in fact, we are not – we are not a seeker of those checks because the margin on those checks is quite low and most customers tend not to do other transactions a day.

Ryan Zacharia – Jacobs Asset Management Partners

Right. So if this environment is anything like that, the predominance of those kinds of checks, maybe your core customers are losing their jobs, is there – is that baked into your revised guidance?

Jeff Weiss

I think what’s baked into our revised guidance is uncertainty about the economic situation. Again, we are not a discretionary service. If you have a check to cash and you are in our customer demographic, you’re going to come to us or one of our competitors. It’s not as if you decide not to cash it. Our customers cash their checks almost immediately upon receipt because they’re living in a check-to-check environment and need the funds immediately.

I think probably, although I wouldn’t quantify this, I think we expect that it would be – it would not be unlikely for two things to happen as we go forward. The first is, any immediate economic stimulus may well trickle down to our customer base as the easiest demographic to reach in the economy in that regard. And secondly, unfortunately, I think we may see a devolution of previously more affluent individuals into our customer base needing our services.

Randy Underwood

Until everybody sees the stimulus bill, it’s hard to predict what the benefit will be. But it sure would seem that our customer base would be the beneficiary of some of the stimulus activities.

Jeff Weiss

Right. Don’t misinterpret what I’m saying. We don’t turn anyone away with a government check. But those, traditionally, those are very low fee checks for individuals who don’t do other services, and we have not aggressively sought them out.

Ryan Zacharia – Jacobs Asset Management Partners

Okay. Thanks.

Operator

Your next question comes from the line of Ramin Kamali with Credit Suisse. Mr. Kamali, your line is open.

Ramin Kamali – Credit Suisse

Sorry, I was on mute. Thanks for taking my call. Just seeking some more clarity on some of your covenants and how some of these currency fluctuations impact your EBITDA. So this income you recorded on the income statement this quarter, is that included in your EBITDA for covenant purposes?

Randy Underwood

Which income are you referring to, Romin? I mean, our income is included in our calculations, generally speaking, yes.

Ramin Kamali – Credit Suisse

So the 36.8 [ph] EBITDA that you have in your press release, does that include the income from currency?

Randy Underwood

Yes.

Ramin Kamali – Credit Suisse

It does.

Randy Underwood

Yes.

Ramin Kamali – Credit Suisse

So how close are you to your total leverage covenants and your credit agreements?

Randy Underwood

I think I stated earlier that we don’t have concerns on our covenants. It’s not our practice to state our covenant results every quarter, but I’m not concerned about our covenant as we stand here today.

Ramin Kamali – Credit Suisse

Okay. And then, I know a couple of months ago, you’d mentioned a significant class action lawsuit. I believe it was in Canada to a few hundred million. Have you made any progress on that lawsuit and can you give us an update on where that stands?

Randy Underwood

Again, it’s not our practice to comment on continuing litigation. We have outlined it in our SEC documentation. And again, as I mentioned earlier, when any company is in this environment, it attracts attention from litigants, the media, public advocacy groups, regulators. And while I wouldn’t classify any litigation as any ordinary cause, litigation is in the ordinary cause. And we believe the company has meritorious defenses in any action in which we are named.

Ramin Kamali – Credit Suisse

Okay. Thanks very much.

Randy Underwood

Thank you.

Operator

(Operator instructions) Your next question comes from the line of Liz Pierce with Roth Capital Partners.

Liz Pierce – Roth Capital Partners

Hi. Good afternoon.

Randy Underwood

Hi, Liz.

Jeff Weiss

Hi, Liz.

Liz Pierce – Roth Capital Partners

I think you guys pretty much covered everything. But I couldn’t – I had to step away for a second when you were starting in on Canada. I don’t want you to go through the whole thing. But just on Manitoba, if you could just quickly recap what you said.

Randy Underwood

Sure. In Manitoba, it appears that the federal – the demands for the government is seeking – for the federal government is seeking the right to promulgate the rate structure given the litigation and (inaudible) that was filed previously by other people in the Canadian industry out there.

Liz Pierce – Roth Capital Partners

All right. The federal government wants to step in. Or it’s with the litigation I’m just a little unclear.

Randy Underwood

I don’t know. The Finance Minister of Manitoba is seeking the ability from the federal government to promulgate rates within his purview – purview of his ministry as opposed to relying on the Public Utility Board, which he previously, I think, intended to retake guidance or rely on.

Liz Pierce – Roth Capital Partners

Got it. A price within the tender floor for all tax and purposes inside.

Randy Underwood

I’m not going to comment. Perhaps, the final rate stating will be by a different body, then perhaps it would have been several months ago.

Liz Pierce – Roth Capital Partners

So originality with the public utility, and now the Finance Minister is having a different take on it?

Randy Underwood

Taking a little bit different path, it appears.

Liz Pierce – Roth Capital Partners

Okay. I think actually that’s it for now. I may follow up afterwards, but – thank you.

Randy Underwood

Thank you.

Jeff Weiss

Thank you.

Liz Pierce – Roth Capital Partners

Thanks.

Operator

Your final question comes from the line of Anya Waugh [ph] with Sykes Advisors.

Anya Waugh – Sykes Advisors

My questions were answered. Thank you.

Randy Underwood

Thank you, Anya.

Operator

There are no further questions. Are there any closing remarks?

Jeff Weiss

I just thank everybody, and we look forward to discussing with you at the next appropriate opportunity.

Operator

Ladies and gentlemen, this concludes today’s Dollar Financial Corp fiscal second quarter earnings conference call. You may now disconnect.

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Source: Dollar Financial Corp. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
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