Advance America, Cash Advance Centers Inc. Q1 2009 Earnings Call Transcript

| About: Advance America, (AEA)

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

Q1 2009 Earnings Call

April 30, 2009 at 8:00 am ET


Ken Compton - Chief Executive Officer

Patrick O’Shaughnessy - Chief Financial Officer

Jamie Fulmer - Director of Investor Relations


David Burtzlaff - Stephens Inc.

Rich Shane - Jeffries & Company

Rebecca Song - Citi


Good day everyone and welcome to the Advance America, Cash Advance Centers first 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 and thanks for being with us on today’s call. I would like to 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

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

Ken Compton

Good morning. Also with me on today’s call is our Chief Financial Officer, Patrick O’Shaughnessy. Yesterday the Company reported the results of the first quarter which ended March 31, 2009. Before we discuss our results of the quarter in detail, I would like to give you an update on a few developments since our last call.

On April 22, 2009, our Board of Directors approved Advance America’s 18th consecutive dividend as a public company. This dividend of $6.25 per share is payable on June 5, 2009 to stockholders of record as of May 26, 2009.

Through March 31, of 2009, the payment of our quarterly dividends together with our stock repurchase program has returned approximately $360 million in cash to our stockholders since we became a public company.

Legislatures and sessions all across the country and there are legislations in several states of [Inaudible] that could impact our Company. We are currently monitoring a total of 259 bills across the country. Some of these we support, some of these bills we oppose and some of which we are neutral to but watch because they have the potential to affect our business. State legislature is still in session that we are watching closely include South Carolina, Ohio, California, and Texas with most sessions ending within the next 30 to 45 days.

In Ohio a law instituting a prohibitive 28% annual rate cap went into effect November 2008 which effectively eliminated the regulated cash advance option in that State and forced many lenders to close their doors.

Consumer demand for short term, small dollar loans remain strong in Ohio so instead of laying off employees and turning customers away we began offering different credit products and services in strict compliance with all applicable laws of that state. In fact during the legislative debate concerning payday lending last May we were encouraged to operate under existing lending laws and developed new credit products to service the growing customer demand for short term small dollar loans.

Despite the new products and services we are offering Ohio the economic viability of our operations in Ohio remain uncertain. During the first quarter results in Ohio negatively affected Center’s gross profit by approximately $1.1 million.

In South Carolina the legislative process is not complete but there is a reform package making its way to the general assembly that while, in our opinion is overly restrictive, generally strikes a sound balance of protecting South Carolinians against strong consumer, that would push strong consumer safeguards in pace.

Choosing to reform cash advances instead of banning them will ensure that South Carolina is protecting its citizens with additional regulations and consumer safeguards while still allowing access to immediate short term credit.

In Virginia where the session is now over Advance America continues to offer consumer cash advances in full compliance with all state laws including an extended [payment plan allowing customers more time to repay in advance without additional costs. While it is still early to measure the full effects of the new pay day law that went into effect on January 1, 2009, many operators have already that they will give up their pay day licenses or close their doors and exit Virginia.

With regards to our operations in Virginia, indications are that as we expected the economics of the pay day loan products have been adversely affected by the new law, although it is still too early to measure the full extent.

In addition to regulated pay day advances we now offer customers in the Commonwealth a secured line of credit that is in strict compliance with the new statute that went into effect earlier this month. To be eligible for the new line of credit product, the customer must provide us with the documentation of a registration or a title to a motor vehicle and sign a security agreement granting us secured interest in the motor vehicle. This gives Virginians an alternative credit product with credit lines of up to $750 on a monthly basis.

We currently have no intention of discontinuing our cash advance service in Virginia. Advance America will continue to make advances available in all of our Virginia stores. The secured line of credit is anew product to our Company and our customers who say they need a broader spectrum of credit options not fewer.

We believe that the cash advance product Virginia will meet some customers’ interests and a line of credit will meet others. Our new offering simply gives them a choice. Virginians deserve the freedom to access all reasonable alternatives and choose the credit option that best suits their needs.

In addition to legislative activity at the state level, this year The United States Congress has been paying particularly close attention to consumers’ credit market. Some members of Congress are seeking the path legislation that would impact a variety of financial services including cash advances. Specifically Representative Jo Baca of California and two Illinois lawmakers Senator Richard Durbin and Representative Luis Gutierrez are sponsoring separate pieces of legislation that if passed will result in limiting a customer’s ability to access our cash advance service and may preempt all or some of the laws of 34 States.

Senator Durbin’s bill will impose a 36% annual percentage rate cap on the fees charged for a cash advance. In addition those associated with most the types of consumer credit. Such a cap is equivalent to a $1.38 per $100 borrowed or about $0.10 per day for a typical two week loan period.

As we have expressed numerous times it is impossible to offer cash advances with this fee structure. The cost of service alone and the risk associated with unsecured lending are far greater than that amount.

The bill from Mr. Gutierrez is more complex than the Durbin legislation. It would limit fees for cash advances to $0.15 per dollar borrowed and require lenders to make available a fixed pay period extension for customers to pay back the balance of the loan without additional charges.

Representative Luis Gutierrez has acknowledged the clear demand for short term credit and the value of cash advances in helping consumers to responsibly meet their financial obligations. However we believe the Gutierrez bill is an overly restrictive approach that would pose serious challenges for industry operations perhaps jeopardizing tens of thousands of jobs. In particular we strongly object to establishing national fee cap for cash advances. No other short term credit product involves a national fee cap. Notably bank and credit union assess an overdraft protection fess which has increased sharply in recent years. The legislation however does contain a number of consumer protections that we support and already offer to our customer voluntarily or as part of state laws. This includes disclosure requirements and reasonable extended payment plans.

Consumers tell us that they appreciate the transparency of our service and the flexibility affords them to manage debt in a way that works best for them. We hope to work constructively with Mr. Baca, Mr. Durbin, and Mr. Gutierrez and other lawmakers in Washington to help develop meaningful protections related to consumer credit while preserving customer access to cash advances.

With regard to the expansion of new product offerings to our customers, last year we announced the launch of our own line of cash advance application on advance for customers to obtain loans from CashNet USA.

Through the end of the first quarter, over 13,500 loans have been originated online since the initiative began with an average principal amount of $314.

Our prepaid visa debit card and MoneyGram Programs continue to meet our expectations. During the first quarter we registered over 25,000 prepaid cards and loaned over $39 million. During the first quarter we recorded over 287,000 MoneyGram transactions. All services offered through MoneyGram including sends, express payments, receipts and money orders experience positive growth over fourth quarter of 2008.

Finally in the first quarter we completed the roll-out of our Check to Card program which are now available in over 2400 centers. Check to Card is a card alternative to check cashing that utilizes prepaid cards issued by [] Bank and automated risk assessment methods to avoid most of the costs and complexities in traditional check cashing.

Revenue at this early stage is of material however volume is ramping up. We approved and loaded 14,000 checks on the card with a total face value of 9.4 million during the period. Going forward we will enhance the Check to Card Program with targeted promotional campaigns and system improvements to broaden the range of checks that we accept.

We believe that adding these types of products and services helps to satisfy the wide array of product needs of our customers and we remain committed to the exploring development of new products.

As we have discussed on previous calls our marketing and communication efforts remain focused on the role that Advance America plays in helping hard working Americans in times of financial needs.

I would remind you that our marketing expenses fluctuate from quarter-to-quarter. For the first quarter of 2009, the total marketing expense was $2.2 million or 1.4% of revenue compared to $3.1 million or 1.9% during the first quarter of 2008. We believe that marketing expense for 2009 will be approximately 3% to 3.5% of revenue.

Our “You Advance America” campaign continues to serve as the umbrella for several successful marketing and communication initiatives including most recently the “Worry Free Advance” which we introduced earlier this month. The Worry Free Advance is anew protection for our customers who involuntarily lose their income while they have an outstanding advance with us. During the Worry Free Advance Program period, customers may forego repayment of the initial advance fee when they provide proof of loss of income during the advance period.

In addition for those who have trouble repaying the principal loan mount Advance America offers an extended payment plan that allows customers more time to repay a loan at no additional cost.

Our Worry Free Advance is part of Advance America loan standing and are involved in efforts to help the personal financial choices. We are proud to offer our customers this additional protection during these difficult economic conditions. We strongly believe that it is a right thing to do.

Now we would like to discuss some of the key operating metrics for the first quarter. The average amount of cash advances made during the first quarter of 2009 excluding installment loans in Illinois and lines of credit in Virginia decreased to $361 from $367 in 2008. The average fee on all cash advances made was approximately $53 during the first quarter compared to %57 during the first quarter of 2008. The average duration of all cash advances completed was approximately 17.4 days for the first quarter of 2009 compared to 16.6 days for the same period in 2008.

As of March 31, 2009 the Company had an operating network of 2740 centers and 82 limited licenses in 33 states, United Kingdom and Canada, including 2 remaining centers in New Hampshire that we expect to close during the second quarter.

During the first quarter we closed 60 centers in 15 different states and 1 center in the United Kingdom. As we discussed in yesterday’s [press release we currently plan to close approximately 130 additional centers in the coming months as part of our plan to rationalize unprofitable centers and consolidate our centers to operate more efficiently.

I would now turn the call over to Patrick O’Shaughnessy, for an overview of our financial results for the quarter ended March 31, 2009.

Patrick O’Shaughnessy

Good morning. For the quarter ended March 31, 2009 total revenues decreased 5.5% to $156.4 million, compared to $165.5 million for the same period in 2008. These comparisons include the results of operations in Arkansas and New Mexico, which the company exited in 2008 as well as operations in New Hampshire where the Company ceased making loans in January 2009.

As many of our competitors have suggested we believe the decrease in revenues year over year is largely the result of general economic environment and higher unemployment in uncertain markets. In addition revenues have been affected by law changes in key states such as Virginia and Ohio that Ken mentioned earlier as well as the closure of our New Hampshire center during the first quarter.

Excluding the results of closed states, Arkansas and New Mexico, and New Hampshire from both years, revenues decreased by 3.5% for the quarter ended March 31, 2009. For the quarter ended March 31, 2008 total revenues for the opened prior to January 1, 2008 and still open as of March 31, 2009 also decreased 3.5% compared to the same period in 2008.

We did not sell any previously written-off receivables during the first quarter of 2009 or the first quarter of 2008.

General, and administrative expenses for the year ended March 31, 2009 were $14.1 million, compared to $16.4 million for the same period in 2008 a decrease of 14.1%. This decrease is due primarily to reduced affairs spending as well as proceeds from an insurance settlement during the first quarter of 2009 which positively affected general and administrative expenses by approximately $830,000.

As Ken mentioned the Company closed 60 centers during the quarter, 22 of which where in New Hampshire and indentified an additional 130 centers to be closed, 50 of which are in Ohio. Most of these centers were either unprofitable or were able to be consolidated with the nearby center. The Company had approximately $3.4 million of center closing cost during the first quarter of 2009, including approximately $1.2 million of severance, lease termination fees, and [de-imaging] cost which are recognized in center expenses and $2.2 million in non cash asset impairment charge and loss of disposal of assets which are recognized as separate line items on our income statements.

During the first quarter of 2008, we had $900,000 in center closing costs. Closing costs had a net effect on EPS of about $0.03. After these charges pre-tax profit was $25.7 million for the first quarters of 2009 and 2008. During the first quarter of 2009 the Company’s provision for income taxes was 41% of pre-tax income compared to 42.3% during the same period in 2008 due in part in the reduction in effective state income taxes.

Net income for the quarter ended March 31, 2009 increased 2.3% to $15.1 million compared to $14.8 million for the same period in 2008. Diluted earnings per share were $0.25 cents for the quarter ended March 31, 2009 compared diluted earnings per share of $0.21 for the same period in 2008.

The Company generated cash flow from operations after funding of advances receivables of $60.9 million during the first quarter of 2009. As of March 31, we had a $137.8 million borrowed under our revolving credit facility.

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

Ken Compton

Thank you, Patrick. At this point we will conclude the presentation and turn it back over to the operator for any questions you may have.

Question and Answer-Session


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

David Burtzlaff - Stephens, Incorporated

I have a few questions here. One, Patrick, how much did the reserve in Virginia impact the loss rate?

Patrick O’Shaughnessy

It was very large. This is a new product for us. Clearly we are warming as we go along but the loss rate there was much higher than we typically have had in the past on payday event products. As a percent of revenue we certainly would have decreased during the quarter over last year as happened to the Virginia reserve.

David Burtzlaff - Stephens, Incorporated

Do you have loan volume for the quarter, for the loan originations?

Patrick O’Shaughnessy

We probably do, you just give me one second.

David Burtzlaff - Stephens, Incorporated

Okay. Maybe while you are looking for that, do you also have an estimate of what the impact from the closing of all these stores is? How much did those stores lose a percent of gross profit level?

Patrick O’Shaughnessy

That is a good question and I do not have the answer in front of me because I will explain sort of our thought process. Of the stores we are planning on closing were closed during the first quarter, 50 of them, they were planning on closing in Ohio where those were profitable stores last year. We just do not anticipate them being profitable going forward. The 22 we closed in New Hampshire were clearly profitable stores last year.

David Burtzlaff - Stephens, Incorporated

I guess maybe more on the 130 that you are… Some of those are Ohio but the other ones..?

Patrick O’Shaughnessy

Fifty of those are in Ohio but every other store, part of our analysis is that the cost to close in all cases when you combine them except for some where we were going to lose the lease or something like that but when we made a conscious decision to close the cost to close is less than the Company was losing in the 12 month period.

So when I looked at those, as we said, we reserved about $2.2 million for stores that we plan on closing during the remaining balance of the year. There is probably another additional $3 million to $4 million of expenses associated with closing those stores and lease termination costs and severance that we will recognize when we actually notify the landlords and the employees that we are exiting.

In total that is well over $6 million of costs; those centers were losing more than that.

David Burtzlaff - Stephens, Incorporated

Did you get the loan volume?

Patrick O’Shaughnessy

The principal amount of cash advances originated in the quarter was about $874 million.

David Burtzlaff - Stephens, Incorporated

Okay. The one last question, I guess the bill that was passed in the State of Washington, do you have any estimate of what that may do for the economics of the product and how much of the revenues impact that may be?

Patrick O’Shaughnessy

I have not done that analysis yet but we will if you want to. If you want to give us a call we will certainly go through that.


Your next question comes from Rich Shane - Jeffries & Company

Rich Shane - Jeffries & Company

One question, when you are looking at your Ohio, obviously in terms of loan volume, this the most difficult quarter of the year because the tax refund,. You said you reported basically $1.1 million loss. Do you think in a normal quarter or one of the better quarters that is a profitable business the way it exist now or it is this something that you going to have to reevaluate now that you have seen it?

Patrick O’Shaughnessy

We will have to continue to reevaluate it. We do not see it becoming profitable in the next quarter. The loan volumes are very similar in terms of numbers of loans. They were making last year. They may have to increase dramatically for that to become profitable.

Rich Shane - Jeffries & Company

Potentially this is something you will exit and you evaluate that it is not the quarter too and then make a decision?

Patrick O’Shaughnessy

We will continue to evaluate it. Certainly there will always be some centers that will be profitable. I do not see the whole state being unprofitable but we will certainly continue to watch every store and see then make decisions on how many we should actually have there.


Your next question comes from the line of Rebecca Song - Citi

Rebecca Song - Citi

Can you give us an update on what is going on in Arizona regarding the ‘sunset’ on June 10?

Patrick O’Shaughnessy

Nothing beyond what you know. Certainly there is work both with our Company and others to work with the legislature we have. In the 2009 and the 2010 session to try to get a piece of legislation that over rides that sunset but there is nothing specific I can report on that at this moment.


At this time there are no further questions in the queue, I would like to turn the conference back over to Mr. Compton for any additional or closing remarks.

Ken Compton

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


This concludes today’s conference we appreciate your participation.

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