QC Holdings Inc. Q4 2008 Earnings Call Transcript

| About: QC Holdings, (QCCO)

QC Holdings Inc. (NASDAQ:QCCO)

Q4 2008 Earnings Call

February 12, 2009 2:00 pm ET


Don Early – Chairman, Chief Executive Officer

Darrin J. Andersen – President, Chief Operating Officer

Douglas E. Nickerson – Chief Financial Officer


David Burtzlaff – Stephens Inc.

Beth Adams – Kaufman Brothers

Mike Smith – Kansas City Capital

[Mitchard Brockbinder] – Wachovia Securities


Good afternoon ladies and gentlemen and welcome to the fourth quarter 2008 QC Holdings, Incorporated earnings conference call. My name is [Michal] and I will be your coordinator for today. This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on the company’s current expectations and are subject to a number of risks and uncertainties which could cause actual results to differ materially from those forward-looking statements.

These risks include among others, changes in laws or regulations governing consumer protection or payday lending practices, litigation or regulatory action directed toward volatility in our earnings, the increased leverage of the company as a result of the $48.5 million special cash dividend in December 2007 and the other risks detailed under item 1A, Risk Factors in our 2007 Form 10-K.

QC will not update any forward-looking statements made in this presentation or in the conference call accompanying this presentation. Also, if you would like to follow along with the slide presentation, please access the QC Holdings website at QCHoldings.com and go to the investment center page of the website.

(Operator instructions). I would now like to turn this presentation over to your host for today’s call, Mr. Don Early, Chairman and CEO. Please proceed, sir.

Don Early

Good afternoon and welcome to our fourth quarter earnings conference call. Thanks for your interest in QC. I’m joined on today’s call by our President, Darrin Andersen and by our Chief Financial Officer, Doug Nickerson.

We are generally pleased with our fourth quarter and full year performance. Given historic lows in consumer confidence and retail spending combined with increasing unemployment, our comparable branches performed well.

Our fourth quarter revenue growth was just over 8% quarter-to-quarter while our gross profit from comparable branches grew 5.4%. For the full year, our 7.6% increase in revenue and 7.7% increase in gross profit reflects excellent performance and management. These results again signal the strength of our business, resilient consumer demand for our products and the excellent job of our field managers have done in balancing revenue growth and loan losses.

Our Board of Directors is pleased to announce a quarterly dividend of $0.05 per share. The economic turmoil does not eliminate the need for short-term credit. We will continue delivering excellent value to shareholders, customers and our employees.

Thanks again for your interest in QC. I would like now to turn the call over to our President, Darrin Andersen.

Darrin J. Andersen

Welcome again to everyone on the call. I’m pleased to report our fourth quarter and full year 2008 results. Today I’ll review our financial and operational highlights for the quarter and the full year along with a brief preview with what we expect in 2009. Then I’ll turn it over to Doug for more financial detail before opening the call up for questions. This will be our last earnings conference call for a year, which I’ll discuss in a few minutes.

As Don indicated, we are generally pleased with the performance of our core operations in the challenging economic environment. Our revenue increased 8% to $61.1 million compared to $56.6 million in the fourth quarter 2007.

Importantly, gross profit from our core operations for comparable branches was up 5.4% and income from continued operations was $4 million or $0.22 per diluted share. Excluding expenses associated with our one time referendum efforts, income from continuing operations was $4.3 million or $0.24 per diluted share.

On slide five, a few notable facts about our fourth quarter operations. Our adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, was up 25% quarter-to-quarter to $11.1 million and as Don announced, our Board of Directors declared a regular quarterly dividend to shareholders of $0.05 per share.

Finally, our installment and automobile loan revenues totaled $12.4 million up from $8.8 million in the fourth quarter 2007. We are pleased with the progress we have made in developing these products and with the reception they have gotten from our customers.

Our installment loan business has grown in New Mexico and Illinois, and our testing of these high dollar longer term loans in Montana is encouraging as well. Our Autostart brand, Buy Here Pay Here automotive operations are also growing rapidly. Last month we acquired two lots and have established our self as one of the premier Buy Here Pay Here dealerships in the Kansas City area.

Two thousand eight revenue improvements were largely attributable to the growth in our installment loans and automotive op sales and financing. Our overall annual growth of about 8% was within our expected range. The demand for our products showed resiliency during the economic upheaval and generally gloomy economic times. Still the government stimulus checks distributed in the mid-year negatively impacted us by reducing demand for short-term credit.

Our loan losses were up slightly quarter-to-quarter from last year and higher than our typical fourth quarter, but within our expectations given the impact of the overall economy that continued to decline throughout 2008.

Through the year, exclusive of one-time debt sales in each year, our loss ratio declined slightly, helped by our focus on consistent underwriting and collection processes in the both the field and our central collection program, all of which were refined in 2008.

New laws impacted our product and our profitability in Ohio and Virginia. In Ohio, which has always been a breakeven state for us, we were forced by state law into offering a short-term loan product with a variety of fees and opportunity to offer check cashing services to our loan customers. By mid-year 2009, we will have a better sense of the sustainability of those products.

In Virginia, changes in the state law have driven us to offer an open-ended credit product that is similar to a credit card account. Initial reception from our customers has been positive, but it will likely take us all of 2009 for us to properly evaluate the long-term viability of that product.

Our product diversification is probably most evident in Autostart, our automotive sales and financing business. For 2008, we focused on learning and building the Buy Here Pay Here business. After acquiring our first lot in late 2007, we opened two additional lots in 2008 including a high volume, high traffic location that serves as our flagship lot near our headquarters in Overland Park.

The car business gives us an opportunity to capitalize in our core capabilities of offering and collecting loans. We were also adjusting the variety of differences in that business. Because of the need to invest in and maintain inventory and finance those receivables, it is a much more capital intensive business than the simple short-term loans that we’ve offered through our payday stores. We are encouraged that our aggressive automotive sales goals are being met and losses are meeting our expectations.

Looking at 2009, we recognize that the overall economy is likely to get worse before it gets better and we generally anticipate flat volumes in our core short-term payday loan product. Importantly, we are taking prudent action to lead our business through these difficult times.

Our belt-tightening efforts will include reducing marketing and payroll costs, but will also include legal, travel, entertainment, meetings and other office supplies reductions as well. Other savings will come from our closing of between 20 and 30 branches due to the performance or regulatory issues. Most of these closings will happen in the first quarter. While these are not drastic actions, they will better prepare us for what promises to be a challenging 2009.

Regarding the legislative and regulatory outlook, we are expecting much of the same through 2009, including challenges in a few isolated states and some activity and debate at the federal level. We remain confident that once educated about the dynamics of our industry and our customers’ need for short-term credit, legislators will seek to protect their constituents’ access to important credit products and services, especially in these difficult times.

We will continue our product diversification efforts for 2009 focusing on automotive and installment loans. We’ve covered the growth of our Buy Here Pay Here automotive sales and financing and will continue to focus on growing and refining that business. We expect Autostart to begin delivering meaningful results including about $20 million of revenue in 2009.

Financially, we expect overall consolidated revenue growth of between 5% and 10%, with stable revenue and profitability at our core branches and growth coming from automotive and installment loans.

Now I would like to turn the call over to Doug for more detail on our third quarter financial performance.

Douglas E. Nickerson

Great summary, Darrin, thanks. Again, we really appreciate everyone taking the time to join us on the call today. I’ll be spending some time discussing in more detail the quarterly and full year results. For those following along on the web, we are now on slide 13, which is our income statement for the fourth quarter.

With respect to the quarterly information, there are several items worth noting. For the quarter, our revenue grew $4.5 million to $61.1 million. This growth occurred primarily in the Other component of revenues reflecting improvements in installment and automobile loan volumes. Our payday revenue grew as well, which is particularly nice given the movement of many of our New Mexico customers to installment product throughout 2008.

During fourth quarter our operating expenses increased $1.6 million reflecting higher insurance and benefit costs primarily due to a few isolated high claim cases over the last year, and also due to cost of sales on vehicles in our Buy Here Pay Here group, which are all new this year compared to last year.

As Darrin mentioned our loss ratio was fairly similar to prior year's fourth quarter. The challenge throughout the year has been collections, which is not surprising given the macroeconomic environment. Branch gross profit of $17.6 million was 8% higher than prior year’s quarter. This improvement reflects increases in the majority of our states partially offset by reduced profit in New Mexico as we transitioned our customers to the installment product.

Moving now to the below the line, regional and corporate expenses declined by about $700,000. This reflects reduced public education expenditures in the current quarter versus last year’s fourth quarter. One of the big differences between last year and this year is our interest expense. Nearly $1 million increase quarter-to-quarter, which is about three pennies per share, is attributable to the indebtedness utilized to fund the special dividend last December.

Looking at diluted EPS from continuing operations was $0.22 this quarter versus $0.19 last year. Exclusive of the 2008 ballot referendum expenditures during the quarter diluted EPS was $0.24. And lastly with respect to the quarter, our adjusted EBITDA increased nearly 25% to $11.1 million for the quarter ended 12/31. As a reminder we have provided reconciliations for EPS and adjusted EBITDA at the end of the slide presentation.

Our year to date information tells a similar story to the quarterly results. For the year our average revenue grew 8% reaching $227.7 million, up from $211.6 million last year. Of the $46 million of Other revenues about $19 million is installment and $6 million came from our auto sales.

With respect to branch expenses prior year’s numbers include $1.6 million for branch closing costs. In pulling these costs out operating expenses increased $7.5 million year-to-year for the same reasons noted in the quarterly discussion, that is insurance costs and automobile cost of sales. In addition compensation costs were a bit higher due to typical inflation adjusted raises and also to occupancy cost which grew reflecting rate escalation provisions.

Exclusive of debt sales in each period, as a reminder that was $2.1 million in 2007 and about $624,000 this year, the loss ratio dropped from last year. It’s interesting to note that our returns as a percentage of revenues are actually down a little in 2008 versus 2007. Our collection rate on those returns however has also declined, which is not surprising given the tumultuous credit, economic and equity markets.

With respect to our administrative, regional and corporate expenses costs were up about $2.4 million primarily due to governmental affairs spending. Of this increase we have reflected the $1.7 million in ballot referendum cost as unusual for the year given the nature of the expenditures. The remaining increase is attributable to higher compensation to accommodate inflation gains. Interest expense was up $2.7 million which is about $0.09 per diluted share. And lastly our effective tax rate for 2008 is higher due to the prominent differences associated with our non-tax deductible ballot referendum costs.

Diluted EPS from continuing operations was $0.80 in 2008 versus $0.78 in 2007. When excluding the branch closing costs in prior year and the current year ballot referendum costs, EPS grew by a penny from $0.88 on ’07 to $0.89 this year. And finally, adjusted EBITDA totaled $41.2 million for the year, an increase of about 6% over 2007.

Moving now to the balance sheet we finished the year with about $17.3 million in cash, which is down about $7 million from prior year. This reduction reflects continued scrutiny and focus on cash and debt management, particularly given the overall markets.

Loans receivable totaled $73.7 million. As I mentioned last quarter, it is important to note the mix of receivables has changed over the year as there are now more installment and automobile loans at 2008 versus prior year. Obviously these types of loans are going to carry different returns than our shorter term payday loans.

On the liability side we have total borrowings of $70.750 million compared to $74.5 million last year. Our level of debt reflects how we have used the cash we generated during 2008 for various capital allocation choices which has included stock repurchases, dividends, branch investment, debt repayment and business development.

At year end we had total stockholders’ equity of about $50 million. During the year we repurchased more than 1.5 million shares of QC stock for $12.3 million. We now have a little less than 10 million left on that authorized program.

On our revenue by branch vintage slide I will draw your attention to the percentage change column where we have some positive results. As you can see from the slide, for most vintage years we have improvements in revenue from year-to-year which is solid given the macro factors we’ve been dealing with.

Our newest group of branches, or our newer group of branches that is 2004 and thereafter, all shared nice growth during the year. These newer groups also showed progress to reaching the $30,000 per branch per month bogie we have noted in the past.

Bottom of that slide you may note that closed branches contributed about $4.1 million in revenues during the 2007 none of which obviously repeated this year. In the bulk of the 2008 Other total relates from the revenue from our Buy Here Pay Here locations. From a profitability standpoint our more mature branches and that is, when I talk about that our pre-2004 branches, experienced gross margin near 40%. The 2004 branches themselves are moving toward that historical margin.

For our 2005 group, margins were 22.3% which is up from the 13% last year. While this is nice progress we still have some opportunity for meaningful upside as these 148 branches gain efficiency. With respect to loss ratios most vintages reflected typical full year rate albeit a couple of percentage points higher than we would like.

One item of note is that the year 2000 group of branches is higher than would have been expected and this is due to the new installment product experience in New Mexico. As our customers and our employers become more acquainted with the product, the loss experience will improve but during the initial transition period we will have higher losses. This is important to keep in mind as we roll out our new open end QC quick credit product in Virginia this year.

All in we had a gross profit of $70.6 million which is a gross margin of 31% and that still leaves some room for some upside improvement over time. I believe that concludes our prepared comments and we are ready now to open the discussion to questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from David Burtzlaff – Stephens Inc.

David Burtzlaff – Stephens Inc.

I have a few questions here. Kind of start on the auto business, what kind of lot expansion do you guys foresee this year?

Darrin J. Anderson

Well we actually acquired two lots in early January so we’ll have those two for the whole year. We will – we’ve got to get those under our belt, get the other three lots kind of going and mid-year we’ll look at whether or now we’ll add potentially one or two. We might add a service center as well, but I wouldn’t anticipate real rapid growth this year.

David Burtzlaff – Stephens Inc.

Okay. And Doug do you have the loss rate, what the auto loss rate is?

Douglas E. Nickerson

I can get that for you, David. Right now we are reserving at a pretty high level there for two reasons. One is we’re new to the business so we’re learning it and we want to make sure that we’re conservative with respect to that.

And the second thing is also as we all know the macroeconomic factors and you read a lot about that with respect to the automobile industry, so for those two reason we’re reserving at a much higher rate than we would for example in our payday. Where typically our payday is going to be – our loss ratio would be around 23 or 24%; with our car lots we’re going to be in the mid-30s as a percentage of revenue.

David Burtzlaff – Stephens Inc.

And then where do you kind of see the loss rate on for payday coming out this year? A little higher than where we were for 2008?

Douglas E. Nickerson

Yes. It’s funny. We mentioned something in the earnings release, David, about that and Darrin and I spent some time talking about that yesterday. Clearly given the environment we’re in and the nature of the difficulty with respect to collections, I mentioned early in my comments our returns are actually a little lower but our collections are worse and I don’t think we’re unique there.

I would be surprised if we could improve our loss ratio year-over-year. So I think it’s safe to assume that we will at best be about same and most likely be a little worse than what we were this year.

David Burtzlaff – Stephens Inc.

And then the flat payday volumes, is that just due to business or I mean does that also includes the 20 to 25 store closings?

Douglas E. Nickerson

Yes, it’s a combination. I mean, obviously, the store closings are going to hurt you right off the bat. I think it, basically reflects the nature. If you look at our revenue by branch vintage, we were fortunate in that in most of our older years, we were able to get 1% to 2% growth.

It gets harder and harder, particularly, with regulatory challenges and other things to continue to maintain growth in those areas. So I think just stepping back at where our receivable balances were at year end, and evaluating what the expectations are going forward, we thought that it’s probably safe to say we’ll be flat and, then obviously we’ll hope for some upside.

David Burtzlaff – Stephens Inc.

And then lastly, do you plan on opening any new stores?

Darrin J. Andersen

We’ll open a small number of stores. It’s really kind of filling in our footprint in various areas where we have some opportunity and when I say that, all in all we'll probably be less than 10 as a company this year in new stores.

David Burtzlaff – Stephens Inc.

Do you have – and then would you consider going to Canada if the regulatory environment becomes clearer there?

Darrin J. Andersen

We certainly looked at that over time and it’s encouraging what I’m hearing about up there right now, but it’s not something we’re focused on right now. We’re focused on kind of managing our existing stores we’ve got. Developing the Buy Here Pay Here business a little bit as we go and then looking at other potential diversification opportunities in the U.S.


(Operator Instructions). Your next question comes from Beth Adams – Kaufman Brothers.

Beth Adams – Kaufman Brothers

Can you guy’s comment on trends so far in ’09 as far as, people coming into the stores versus the fourth quarter?

Darrin J. Andersen

Yes, I can make some general comments. I mean we’re one month into ’09. It is unusual times as we’ve said throughout the call. I believe that our customers to the extent they can are getting a little more frugal. So in other words when the dishwasher breaks, instead of borrowing money from us to buy a new one, they’re going to wash their dishes by hand. So I think that’s going to kind of soften demand a little bit for us to the extent that is different than a year ago. It’s not necessarily real different than the November/December timeframe.

Beth Adams – Kaufman Brothers


Darrin J. Andersen

We haven’t, seen anything change this first 40 days of 2009 different than it was really in the last 40 days of 2008. Generally, our customers are – they’re not as demanding the product as much as they were and then on the loss side they’re struggling a little bit to pay us back.


(Operator Instructions). Your next question comes from Mike Smith – Kansas City Capital.

Mike Smith – Kansas City Capital

Good morning or good afternoon. Could you go into a little bit more detail about the installment programs that you’re using in, where was it, New Mexico, Arizona and Montana?

Darrin J. Andersen

New Mexico, Illinois and Montana. In New Mexico and Illinois, it’s – they are slightly larger than a typical payday loan in size; I’d say $400 to $500 to $600. They tend to be a little bit more longer term, four to six months in duration. The price is a little bit less than the payday product. So that’s, I would say, probably a little bit closer to a payday than some of the more traditional installment lenders. Montana, however, is a little closer to kind of the installment loan product, closer to the $1,000 loan that will pay over seven to twelve months at half the rate as the payday for the most part.

Mike Smith – Kansas City Capital

So, about $25 per $100 or so, how much is it? How much are you charging on the –

Darrin J. Andersen

Oh, I think the annual APR on the Montana product is probably in the 200% range.


Your next question comes from [Mitchard Brockbinder] – Wachovia Securities.

[Mitchard Brockbinder] – Wachovia Securities

Hi, will there be any lobbying referendum type expenses this year? How will that compare to what you did last year? And if you would just review your short-term debt situation and what your balance sheet might look like at the end of the year if you’re going to do some refinancing or not?

Darrin J. Andersen

Yes, I’ll touch on the referendum costs a little bit and then let Doug talk about the balance sheet. We certainly don’t plan on doing any ballot referendum expenses this year. We did two of them last year and we didn’t get the result on either of them that we wanted, so I’m not sure we want to go down that path again. But we’ve got – it’s still early in the regulatory season and we’ve got to see how things play out in the various states that we operate in. But the likelihood of those is probably lower this year than it was last year, for sure.

[Mitchard Brockbinder] – Wachovia Securities


Douglas E. Nickerson

And then with respect to our debt we ended the year around almost $71 million. Obviously in the first quarter, we generate a lot of cash flow with repayments, etc. from in February on tax returns, so we’ll see our facility portion of that. Right now we owe $46 million under our term. The remainder is under the facility.

We’ll pay a big chunk of that back throughout the first quarter and then as you start moving through the rest of the year, based on volumes in payday and Buy Here Pay Here, we might see that start coming back up. Then also obviously taking – you have to consider what else we might do.

We’ve got a quarterly dividend of $0.05 and that will have to play, come into play to the extent we do any stock repurchases or any other investments that also will. But certainly, the nature of it is that facility will wind, will come down, and then we’ll start growing a little bit as we see the volumes increase.

And then also with respect to the facility, that doesn’t expire for us until December of 2012, so we really kind of have nice committed financing over the next period of time, which is a good position, obviously, for us to be in.

[Mitchard Brockbinder] – Wachovia Securities

That’s really good. That last part is what I was most concerned about.


At this time, there are no additional questions in the queue. I will now turn the call to Mr. Darrin Andersen for any further remarks.

Darrin J. Andersen

Great. Again, thanks to everybody for joining us on the call. I mentioned that we’re doing some belt tightening expense things. One of those is as we’ve considered these various cost saving possibilities is we’ve decided to discontinue our quarterly earnings call.

We’ll have another call this time next year and, certainly, we’re going to keep you informed via our quarterly earnings releases and SEC filings, but during the meantime feel free to call Doug or myself anytime to follow up with questions or comments or concerns. We certainly want to keep the dialog going, but we’re going to stop these earnings calls for the next year. Thank you all and we'll look forward to seeing you next year.


Thank you for your participation in today’s conference. This concludes the presentation.

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