Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Advance America, Cash Advance Centers Inc. (NYSE:AEA)

Q4 2008 Earnings Call

February 20, 2008; 8:00 am ET

Executives

Ken Compton - Chief Executive Officer

Patrick O’Shaughnessy - Chief Financial Officer

Jamie Fulmer - Director of Investor Relations

Analysts

David Burtzlaff - Stephens Inc.

Edward Antoian - Chartwell

Operator

Good day everyone and welcome to the Advance America, Cash Advance Centers fourth quarter earnings results conference call. As a reminder, this call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Jamie Fulmer. Mr. Fulmer, please go ahead, sir.

Jamie Fulmer

Good morning everyone and thanks for being with us. Before we begin let me remind you that during this call our comments will include certain forward-looking statements. All comments on this call other than those relating to our historical performance or our current conditions will be forward-looking statements.

For example, any statements regarding our future expenditures and the financial performance, our plans for product expansion and new center growth, our business strategy or expected development in the cash advance centers industry will be forward-looking statements. In this regard, please keep in mind that our actual future results could differ materially from our expectations as of today and are subject to risks, uncertainties and other factors, many of which may not be within our control or may not be predicted.

For a more detailed discussion of some of these factors, please refer to the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2007 and our quarterly report on Form 10-Q for the quarter’s ended June 30, 2008 and September 30, 2008, copies of which are available from the SEC, upon request from us or by going to our website at www.advanceamericacash.com.

Now I’d like to turn the call over to our Chief Executive Officer, Ken Compton.

Ken Compton

Good morning. Also joining me on today’s call is our Chief Financial Officer, Patrick O’Shaughnessy. Yesterday the company reported the results of the fourth quarter and year ended December 31, 2008. Before we discuss our results in detail, I’d like to update you on developments since our last call. Yesterday our Board of Directors approved Advance America’s 17, consecutive dividend as a public company. This dividend of $6.25 per share is payable on March 6, 2009 the stockholders of record as of February 24, 2009.

Through December 31, of 2008, the payment of our quarterly dividends together with our stock repurchase program has returned approximately $356 million in cash to our stockholders since we became a public company. During 2008 the company repurchased approximately 11.7 million shares for an aggregate price of $86.2 million. Since the stock repurchase program began in 2005, the company has repurchased approximately 23 million shares or 28% of the outstanding shares.

We joined our industry in supporting ballot initiatives in Arizona and Ohio, and I believe it was a correct course of action for the industry, the company, all of our stakeholders and our customers, who say they value the availability of payday cash advance services.

In fact, the settlement was validated by millions of consumers who voted to preserve the product in Ohio and Arizona. Unfortunately the outcomes of these ballot efforts will mean, hard working people will lose a sensible, reliable and regulated credit product to meet short-term financial needs, and will instead be forced to face fear and more expensive options.

In an effort to continue serving our customers in Ohio, we have obtained the required licenses to offer a small loan product in that market. In Arizona, we’re committed to working constructively with the Arizona legislature and other public officials to ensure access to affordable short-term loans in the future.

We recently announced our decision to close 24 centers in New Hampshire after a new law went into effect January 1, 2009 imposing a 36% annual rate cap on cash advances, effectively eliminating the product in that state. The company estimates the cost of New Hampshire closings to be approximately $1.2 million, $700,000 of which was recognized in the fourth quarter.

On February 9, 2009, the company announced the settlement of a class action lawsuit in Georgia that resolves all claims against the company in connection with originating, marketing or servicing any loans in that state. If approved by the court, the settlement, which does not involve any findings of wrong doing, will require the company to make a minimum payment of approximately $2 million up to an aggregate cap of approximately $3.7 million including attorneys’ fees and other related costs.

On the legislative front sessions have now begun in states all across the country. We continue to work with our partners and the Community Financial Services Association to educate legislators and other elected officials on issues related to industry needs and business practices. We should be able to provide better insight into the 2009 legislative session on our next call.

We are pleased to announce that in November we launched an online cash advance application on advanceamerica.net for customers to obtain loans from CashNetUSA. Now, our customers can obtain credit in three different ways. They can apply at one of our approximately 2800 locations. They can apply online and then visit Advance America Center to complete their transaction or they can apply online and receive the proceeds of a loan from CashNetUSA via an automated deposit to their checking account.

Between November 19 and December 31, over 3,600 loans were originated online with average principal amount of $336. On our prepaid Visa debit card and MoneyGram programs continue to produce strong results. For 2008, we registered over 200,000 prepaid cards and loaded over $137 million. Total revenue generated from this program was approximately $2.2 million.

In 2008, we recorded over $900,000 MoneyGram transactions. This includes sends, express payments receipts and money orders, total revenues for this product offering was approximately $3.4 million. We believe that adding these types of products and services encourage consumer growth and improve customer retention. Our marketing expenses fluctuate from quarter-to-quarter. However, our total marketing expense for 2008 was $20.3 million or 3% of revenue inline with our previous expectations.

For the fourth quarter of 2008, the total marketing expense was $4.2 million or 2.4% of revenue, compared to $7.3 million or 4% during the fourth quarter of 2007. For 2009, we expect total annual marketing expenses to be approximately 3% of revenue. The average amount of a cash advance made during 2008 increased to $366 from $361 in 2007. The average fee on all cash advances made was approximately $55 for both 2008 and 2007. The average duration of all cash advances completed was approximately 16.8 days for 2008, compared to 16.5 days in 2007. In Illinois, we originated 32,142 installment loans to consumers in that state during 2008 compared to 31,209 during 2007.

As of December 31, 2008, the company had an operating network of 2,797 centers and 79 limited licensees in 33 states, the United Kingdom and Canada, including the 24 centers, we later closed in New Hampshire. During 2008, we closed a total of 86 centers in 19 different states. During 2009, we’ll continue to rationalize unprofitable centers and consolidate our centers to operate more efficiently.

Now I’d like to turn the call over to Patrick O’Shaughnessy, for an overview of our financial results for the quarter and the year-ended December 31, 2008.

Patrick O’Shaughnessy

Good morning. For the year-ended December 31, 2008 total revenues decreased 4.7% to $676.4 million, compared to $709.6 million for the same period in 2007. These comparisons include the results of operations in Pennsylvania and Oregon, which the company exited in late 2007, as well as operations in Arkansas and New Mexico, which the company exited during 2008. Excluding these closed states from both years, revenues increased by 0.2% for the year-ended December 31, 2008.

Total revenues for the quarter ended December 31, 2008, also decreased 4.7% to $175 million, compared to $183.6 million for the same period in 2007. Excluding the revenues in the closed states from both quarters, revenues decreased by 3.6% for the quarter ended December 31, 2008. Also for the quarter ended December 31, 2008 total revenues for the centers that were opened prior to October 1, 2007 and still open as of December 31, 2008 decreased 4.1% compared to the same period in 2007.

The provision for doubtful accounts as a percent of total revenues for the year ended December 31, 2008 was 20.1%, compared to 19.8% for the same period in 2007. For the quarter ended December 31, 2008 the provision for doubtful accounts as a percentage of total revenues was 24.4%, compared to 23.4% for the same period in 2007.

For the year, proceeds from the sale of previously written-off customer receivables totaled approximately $600,000, compared to $6.8 million for the same period in 2007. We did not sell any previously written-off receivables during the fourth quarter of 2008. Excluding the proceeds from the sale of written-off receivables, the provision for doubtful accounts as a percent of total revenues for 2008 would have been 20.2%, compared to 20.7% for the same period in 2007. For the quarter ended December 31, 2008 the provision for doubtful accounts as a percent of total revenues would have been 24.4%, compared to 24.4% for the same period in 2007.

General, and administrative expenses for the year ended December 31, 2008 were $70.5 million, compared to $59.4 million for the year ended December 31, 2007, an increase of 18.7%. General, and administrative expenses for the quarter ended December 31, 2008 were $19.8 million, compared to $15.4 million for the same period in 2007, an increase of 28.7%. The increase in general and administrative expenses for both the quarter and the full year is entirely due to higher legal and regulatory expenses and higher government affairs expenses.

Included in the legal expense is a $2 million accrual for the Georgia lawsuit settlement, which Ken mentioned earlier. For the year, expenses related to government affairs were $10.5 million higher than during 2007, including an $8.1 million specifically for our support of the ballot initiatives in Ohio and Arizona.

During the fourth quarter, government affairs expenses were $3.7 million higher than the same period in 2007, $3.4 million of which was related to the ballot initiative. This is particularly significant to net income because many of our government affairs expenses are not deductible for tax purposes.

Diluted earnings per share were $0.60 for the year ended December 31, 2007 compared to diluted earnings per share of $0.70 for the same period in 2007. For the quarter ended December 31, 2008 diluted earnings per share were $0.10, compared to diluted earnings per share of $0.15 for the same period in 2007.

The charges accrued for the closure of New Hampshire and the lawsuit settlement in Georgia, reduced earnings per share by approximately $0.025 for the quarter and for the year. For the year ended 2008, the company’s effective income tax rate was 46.6% of income before taxes, compared to 40.7% during the same period in 2007. The increase is due to lower pretax profit, higher government affairs expenditures that I mentioned, most of which are not deductible for tax purposes and losses in our foreign operations, which are not deductible in the U.S.

As Ken mentioned in yesterday’s press release, the $8.1 million in expenses related specifically to the ballot initiatives reduced earnings per share by $0.13 for the year, due in part for the non-deductibility of those expenses. If that $8.1 million had been deductible, the company’s effective tax rate would have been approximately 42.2%, resulting in higher earnings per share by approximately $0.05 for the year and the quarter.

Despite these extraordinary charges for the year ended December 31, 2008 the company generated cash flow from operations after funding of advances receivables of $69.9 million. As of December 31, we had a $189.8 million borrowed under our revolving credit facility. We typically reduced our borrowings during the first quarter of the year and as of Wednesday of this week; we had reduced our borrowings under the facility to $151.3 million.

Now, I would turn the call back over to Ken.

Ken Compton

Thank you, Patrick. At this point we’ll conclude the presentation. Turning it back over to the operator for any questions you may have.

Question and Answer-Session

Operator

(Operator Instructions) Your first question comes from David Burtzlaff - Stephens, Incorporated.

David Burtzlaff - Stephens, Incorporated

I’ve got a few questions here. First, Patrick, where is the $700,000 New Hampshire store closings?

Patrick O’Shaughnessy

It’s in two places. It will be $480,000. $455,000 is in the provision for doubtful accounts. We accrued for additional losses expected there as we closed those centers down and the balance will be in impairment of assets.

David Burtzlaff - Stephens, Incorporated

Do you have loan originations for the quarter?

Patrick O’Shaughnessy

We probably do, you just give me one second.

David Burtzlaff - Stephens, Incorporated

Okay. Why you’re looking at that, what also do you think if free cash flow and debt levels for the end of ‘09?

Patrick O’Shaughnessy

That’s obviously very difficult to predict because it depends on, when I look at free cash flow, I’m looking at it after the advances receivable and so, a lot of times that depends on how quickly we grow. If you look at our financial statements over the years, typically the cash provided, if you look at the last three years, cash provided by operating activity has been around $185 million every year within a couple million dollars and how much free cash flow we have, really depends on the growth.

The lowest year in terms of free cash flow or after advances receivables in the last few years was 2006, when we had peak earnings because we were experiencing really high growth. So if we stay sort of how we’ve been, which is in the flat year-over-year range, we’ll actually probably pay down more debt than if we get back into a growth mode in the second half of the year.

David Burtzlaff - Stephens, Incorporated

Okay, if we look at $151 million right now, do you think that goes lower potentially by year end?

Patrick O’Shaughnessy

Typically, it will be at its lowest around the end of February. I wanted to caveat that statement. We typically do pay a lot of debt down during the first quarter. Our receivable balance gets to be about the lowest that it will be at the end of February and then it starts to pickup throughout the rest of the year. So, a good proxy for how much we’re going to pay down will be at the end of March and then you asked for the number of loans?

David Burtzlaff - Stephens, Incorporated

The total dollar amount.

Patrick O’Shaughnessy

The number of loans was just over $3 million and I’ll get you the dollar amount.

David Burtzlaff - Stephens, Incorporated

Okay.

Patrick O’Shaughnessy

$1.13 billion.

David Burtzlaff - Stephens, Incorporated

Okay and then one last question. Obviously government affairs, spending is kind of probably difficult to predict. Do you see that being much lower this year or?

Patrick O’Shaughnessy

We certainly expect and anticipate it to be much lower than in 2008. I would not expect it to go back to 2007 levels.

Operator

Your next question comes from Edward Antoian - Chartwell.

Edward Antoian - Chartwell

I have a couple questions. One, just kind of maybe explain to me and this is an ignorant question, but I’ll ask it anyway so I can learn. So, same-store sales down three and change, even if you kind of yank out stores where you closed down three and change, the 3.6 and same store down four. What’s the impediment, I understand why provisions go up, but I would have expected actually the loan activity to go up in the state that you’re operating in, when I look at, I don’t think they’re a sister company, but people in the rent to own business and in the pawn business, their activity is up, so what am I missing?

Patrick O’Shaughnessy

Yes, that’s a good question, Ed and we ask it all the time. Clearly, in this economic environment, you would expect people to need more access to credit. One of our hindrances relative to pawn companies, as you mentioned is that, we only give loans to people that are employed. So, unemployment actually hurts our top line.

I would have expected as you mentioned, given where mortgage rates and most default rates that our loss rates would be much higher than they are, but they’ve been able to maintain relatively flat and that’s in part due to a lower number of new customers. Most of our risk in losses is with new customers, not customers that have been customers in the past that we know.

Edward Antoian - Chartwell

So, if I can just stay on that, should I expect the same kind of, as unemployment has risen the same kind of same store, same state activity here?

Patrick O’Shaughnessy

We don’t expect it to be positive, but I think that the fourth quarter was particularly low because we went through law changes in two states, Ohio and Virginia, during the fourth quarter and those were significantly impacted. So, I think the fourth quarter number is a little bit overstated, although I wouldn’t expect it to be highly positive. I wouldn’t expect it to be as negative as it was in the first place and I think, overall we’re starting, looking in the future, what will help us, I think is we’re starting to see some industry consolidation for the first time, some retraction in the number of stores that were out there and that should eventually accrue to our benefit.

Edward Antoian - Chartwell

The other number that surprised me was your in the quarter, your store gross profit margin, your center gross profit margin actually went up. That’s pretty hard to do with declining revenues, so what am I missing there?

Patrick O’Shaughnessy

That’s really just trying to control costs at the center level.

Edward Antoian - Chartwell

So, did you literally limit hours or what did you do? What costs are controllable?

Patrick O’Shaughnessy

We have lower full-time equivalents per number of transactions than we’ve ever had, in the history of the company, so it’s really just making sure that the stores are staffed adequately, but not over-staffed.

Edward Antoian - Chartwell

Then, I would like to also just understand the sale of a previously written-off, is it because you elected not to or they’ve just not worth anything?

Patrick O’Shaughnessy

I guess it depends on whether you’re the buyer or the seller. We used to sell our receivables on sort of, our written-off receivables on a forward contract basis quarterly and we got about $0.06 on the dollar for those written-off receivables. We sold debt, it was only debt that was already a year old and that the debt buying market has really dried up completely and the bids that we are getting for that are significantly lower now and they’re in fact, lower than we think we’re able to collect on our own.

So, it’s better for us to hold onto that debt and try and collect it like we are right now during tax season, because we’ll do a little better than that within the sort of the 2% bids that are out there.

Edward Antoian - Chartwell

So, when you sell it on your own, is it not reported as a …

Patrick O’Shaughnessy

We collect it on our own. We just keep it in the centers and collect in the centers.

Edward Antoian - Chartwell

So that number that you report when you said in Q4 was zero versus, I forget what it was, a million or something last year.

Patrick O’Shaughnessy

Right.

Edward Antoian - Chartwell

That zero doesn’t include any old receivables that you were able to collect at the center level on your own?

Patrick O’Shaughnessy

We’re collecting on our own; and that’s correct.

Edward Antoian - Chartwell

Now, this is probably like a Board level question, but I will ask it to you guys anyway. Paying a $0.065 dividend on a stock that, I don’t even know where it is, a buck and change almost seems silly. Why don’t you just hang onto the cash and then figure out if you want to own your stock? Why would you payout a dividend, when you could buy that stock and it’s only a 3X, 4X, whatever kind of paying on your cash dividend and I’m not even telling you should buy stock, I mean that’s not my point, but my point is it seems like paying out a dividend is a little silly.

Patrick O’Shaughnessy

I agree with you that we’re not getting any credit for it in the marketplace and that is, as you mentioned it is a Board level topic at every meeting what we have.

Edward Antoian - Chartwell

And that discussion goes kind of how?

Patrick O’Shaughnessy

It’s vigorously debated.

Operator

With that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Compton, I’ll turn the conference back over to you for any closing remarks.

Ken Compton

I would just like to say, thank you for participating in today’s call.

Operator

Again, ladies and gentlemen, this does conclude the Advance America, Cash Advance Centers, fourth quarter earnings results conference call. We do appreciate your participation and you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Advance America, Cash Advance Centers Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts