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Executives

Daniel R. Feehan - President, Chief Executive Officer, Director

Thomas A. Bessant Jr. - Chief Financial Officer, Executive Vice President

Analysts

David Burtzlaff - Stephens, Inc.

Joshua J. Elving - Feltl and Company

Bill Armstrong - CL King & Associates

John Hecht - JMP Securities LLC

Richard B. Shane - Jefferies & Co.

Jordan Hymowitz - Philadelphia Financial

Henry J. Coffey, Jr., CFA - Sterne Agee & Leech, Inc.

John Rowan - Sidoti & Company

Gregg Hillman - First Wilshire Securities

Presentation

Cash America International, Inc. (CSH) Q3 2009 Earnings Call October 22, 2009 8:45 AM ET

Operator

Ladies and gentlemen, welcome to the Cash America International third quarter 2009 earnings release conference call. During this presentation all participants are in a listen only mode and afterwards we will conduct a question-and-answer session. (Operator's Instructions) As a reminder, today's conference is being recorded on Thursday, October 22nd, 2009. It's now my pleasure to turn the conference over to Daniel R. Feehan, President and Chief Executive Officer at Cash America International Incorporated. Please go ahead, sir.

Daniel R. Feehan

Thank you. Good morning, ladies and gentlemen, and welcome to our call for the third quarter of 2009. As usual joining me this morning is Tom Bessant, our Chief Financial Officer, who will lead off with a review of our financial performance for the quarter, updated earnings guidance for Q4, and our initial earnings guidance for 2010. I will then rejoin the call and provide my perspective on the condition of our business and a preview of our strategic focus for 2010. We will then open the call for questions following my remarks.

Before beginning our comments, please bear with me while I read our safe harbor disclosure. While on this call, comments made by Tom or me may contain forward-looking statements about the business, financial condition, and prospect of Cash America International Inc. and its subsidiaries. The actual results of the company could differ materially from those indicated in the forward looking statements because of various risk and uncertainties including, without limitation, the risk and uncertainties contained in the company's filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the company to control, nor can the company predict, in many cases, all the risks and uncertainties that could cause its actual results to differ materially from those indicated by forward looking statements.

When used in this call, terms such as believes, estimates, plans, expects, anticipates, and similar expressions or variations as they relate to the company or its management, are intended to identify forward looking statements. The company disclaims any intention or obligation to update or revise any forward looking statements. Now with that I'll turn it over to Tom for his financial report. Tom?

Thomas A. Bessant Jr.

Thanks, Dan. As you'll see in our third quarter press release this morning, Cash America posted a 10% increase in total revenue to $276.1 million and a 19% increase in net income to $22.5 million or $0.73 per share. The $0.73 a share number comes in slightly above the middle of our $0.70-$0.75 previously announced range for consolidated earnings per share for the third quarter, and the results of the third quarter 2009 were led by another solid performance for the pawn segment and a resurgence in our storefront cash advance business coming off the momentum evidenced at the end of the second quarter.

The cash advance segment was further supported by overall lower loss rates on the cash advanced portfolio creating an increase in cash advance segment operating income of $2.4 million, up 27% year over year and representing the first increase in the cash advance segment for fiscal 2009.

Focusing now on individual segment performance, the pawn segment, which accounts for almost three quarters of consolidated earnings, posted solid growth in total revenue and operating income as the US Pawn business continued its margin in 2009 with positive results.

US Pawn operating income was higher on the strength of a 27% increase in finance and service charges on pawn loans. As expected in the quarter, the retail sales environment was difficult, and while retail sales were up 5% in the quarter, first profit on the disposition of merchandise was flat year over year. Pawn's first profit margins were lower at 34.1% compared to 35.5% as a much higher mix of refined goal sales blend with softer retail sales and lower retail margins.

However, because we are now operating gold buying and pawn lending in our storefront cash advance business, we did pick up additional profits from those activities, leaving the company's consolidated growth profit up 5% to $39.2 million including those activities and posting a consolidated gross profit margin of 34.2% for the third quarter.

Consolidated gross profit margin and retail sales excluding refined gold sales decreased from 41% last year to 39.4% in Q3 of 2009. Refined gold profit margin was higher than the prior year at 28.4% compared to 27.6% last year. Inventory turnover was the same as the prior year at 2.6 times and inventory aging continues to show better results with only 7% of goods greater than 12 months old.

Total pawn segment finance and service charges were higher as the loan balance growth in Prenda Fácil, our Mexico City based pawn operations, continues to contribute to overall figure. The US finance and service charges were up a healthy 11% for the quarter, adding to the success of this key revenue component. Consolidated pawn loan balances rose to $190.5 million, up 20% year over year with US pawn loan balances up 6% and same store pawn loan balances up 5.4%.

The US Pawn business posted the same store net revenue growth of 6.6% in the quarter. This shows the continued momentum of the US Pawn business as we move into the fourth quarter of 2009.

As expected, the Mexico based pawn operations continue to successfully add new locations and year to date has added 45 net locations finishing the quarter at 157 locations. As we discussed in the second quarter call, this continued aggressive store opening schedule is driving higher operating expenses for the quarter due to the higher percentage in new store locations. These factors led to a $1.7 million operating income contribution from this business, but no earnings benefit after taxes and interest in the quarter. The overall pawn lending segment was up 13% in net revenue to prior year, posting an 11% increase in operating income to the prior year. Pawn activities maintained its overall dominance as a percentage of the company's consolidated operating income at 72% for the third quarter of 2009.

As I move to the cash advance segment, I’m pleased to be able to report that storefront operations, which ad a very difficult start to the year following storefront closures at the end of fiscal 2008 and modification of loan products due to change in regulations posted outstanding results for the third quarter of 2009. The storefront cash advance business led the overall cash advance segment to post an increase in operating contribution of 27%, which is the first quarterly increase in fiscal 2009.

The storefront cash advance business component of the cash advance segment reported $4.4 million in operating income compared to a slight loss in the prior year of previous quarter, notwithstanding a 7% decrease in net revenue in Q3's 2009 compared to the prior year. This performance was possible due to lower loss rates on its cash advance product and the addition of gold buying and pawn lending in many storefront cash advance locations.

Clearly the team in our storefront cash advance business has done a fine job as far as their 2009 and as I said at the end of the second quarter, we are encouraged about the continued opportunities for success. The same store active cash advance balances in storefront cash advance business finished the quarter up 24% year over year.

Loan losses in the storefront cash advance business were 21% of fees in the third quarter of 2009 compared to 24% in the third quarter of 2008. The third quarter 2009 figure of 21% is actually better than it seems on the surface because the yield on the cash advance product being offered in these storefront locations is significantly below the prior year, indicating that actual loss rates as a percentage of volume are even lower than the percentage of fee figure would indicate.

The other component of the cash advance segment, our online business, continues it recovery from the elimination of certain markets which have yet to fill the anniversary in 2009 compared to 2008. However, growth in new markets including success in our UK operations, as well as the entrance into Australia in late Q2 2009, has allowed the business to post an increase of 7% in net revenue.

Notwithstanding a decrease in the cash advance loss provision year over year, and improved loss rates performances as a percentage of fees which decreased to 46% in Q3 2009 compared to 52% in Q3 of 2008. The added investment and new product development and promotional new market spending caused total expenses to be up 14%, producing a decrease in the online cash advance income from operations from $10 million in the prior year to $7 million in the current year.

However, the online business continues to contribute nicely to cash flow and profits and provides opportunities for growth in future periods as our international markets gain earnings traction.

So, as I wrap up comments on a third quarter of 2009 and leave behind a quarter which posted a 19% increase in net income and a 16% increase in earnings per share, I must also comment that for the nine month period ended September 30th, 2009, the company has now posted an increase in total revenue of 6% to $796.6 million and has virtually made up all of the ground we lost in the first half of the year as we were posting year over year decreases in comp due to the significant loss of markets in our cash advance segment.

Year to date operating income is now flat year over year at $117.1 million and earnings per share is trailing by only 4% at $2.06 a share for the nine-month period. Achieving these goals of profit recovery was no easy task facing the absence of Pennsylvania, Minnesota, Florida, and significant changes in our Midwest markets as we entered 2009. And it's good to be three quarters of the way through 2009 and almost fully recovered from those obstacles. For those of you who follow the intricacies and timing of lost markets, the first quarter of 2010 will be the first substantive year over year comp with the absence of markets not present in 2009 that were contributors in 2008.

Now as we look forward to the final quarter of 2009 and the outlook of 2010, we have a variety of initiatives under way which we are excited about and Dan will provide you some insight and highlights in a few moments, but from a fundamentals perspective, we have added as significant number of pawn locations in our Mexico based operation and our pawn loan balances are up nicely both in Mexico and in the United States supported by stronger market prices of gold.

In addition, we expect the underwriting inflection activities and higher active balances in our storefront cash advance business will contribute to additional margin expansion in the fourth quarter and beyond. However as most companies that deal with retail sales have confirmed, there’s a great deal of uncertainty surrounding the appetite of consumers in the fourth quarter selling season.

Cash America has demonstrated that it will continue to aggressively pursue retail sales and demonstrate strong inventory and healthy inventory aging as evidenced by our disclosures. Bearing these uncertainties in mind, we establish a range for the fourth quarter of 2009 of between $0.94 and $1.02 per share which fits our full year estimate at between and $3-$3.08 per share. This compares to a fourth quarter of 2008 result of $0.54 per share which included $0.20 per share and one-time costs related to store closures, product transition expenses, and management realignment costs.

For fiscal 2010 we are initiating our baseline guidance of between $3.45 and $3.60 a share as we expect to have continued momentum from our storefront activities moving into 2010 and are looking forward to a recovery of our online cash advance business in 2010. In the latter half of the year we will expect nice incremental growth out of our Mexico-based pawn operation contribute to overall growth in our pawn segment with our US Pawn business continuing along its consistent path of year over year growth.

And with that I'll turn the call back over to Dan.

Daniel R. Feehan

Thanks, Tom. Let me take a minute, as I indicated, to comment on our performance this past quarter and provide my perspective on some of the strategic objectives moving into Q4 and 2010. Much like the second quarter of this year, I think our third quarter just ended with a reasonably routine quarter for us. Revenue and earnings were right on top of our plan for the quarter and squarely in the middle of our earnings guidance provided at the end of the second quarter.

I've discussed with you all here my concern about the macroeconomic environment with rising unemployment, falling home prices, and stagnating wages, which in my opinion, when combined with the vitriolic political debate our company’s future, have all served to weaken the confidence of consumers leading to what many believe is a behavioral shift from consumption to savings.

And even though the Dow and S&P recovered significant ground from the depths of early March and some pundits have declared the recession over. In my view, our customers don't seem to be particularly encouraged, and I'd say especially in two of our top three states namely Florida and Nevada, where unemployment rates are much higher than the national average and home prices have fallen much deeper than the national averages. I believe our customers throughout the US will remain cautious for the foreseeable future.

Well that brings to reference, I do have to admit that I am pretty happy with our operating performance in the third quarter and I have a handful of key takeaways that I'd like to share with you. First and most importantly, the US Pawn business continues to hold steady with a very comfortable growth rate of pawn loan written and outstanding. Our redemption rates remain on target, inventory levels remained in check even with relatively soft retail demand.

As Tom reported, our over the counter retail sales continue to comp down year over year and the gross profit margin on retail sales dipped below 40% this quarter. Now the softness in our over the counter retail demand, which I believe to be the result of the macroeconomic factors at play over the past 18 months was once again offset by a robust volume of refined gold sales at margins that improved over the third quarter of last year thanks to higher gold values. Clearly gold prices above $1,000 per ounce level work to our advantage.

In the balancing of pawn loan growth, redemption rates, inventory turns, refined gold sales and gross profit margins is part art and part science, and I believe we continue to manage this balance about as well as it could possibly be managed. Our team is always focused on driving the greatest possible cash income while serving the needs of our customers and making sure our assets remain fluid and productive. We never manage to arbitrarily manage to specific yield and margin targets, but we constantly manage the give and take between volume yields and margins that would drive the most cash income. This is one thing we do really well and I consider it one of our strongest core competencies.

A second key note for the third quarter is the performance of Prenda Fácil, our new pawn subsidiary of Mexico which the company is the majority owner. The story here is a little bit of a mixed bag. I think we've made great progress in opening new stores, 14 for this quarter and 48 year to date, and we've really found some great new locations that are ramping according to our new store model.

However, the startup losses associated with this aggressive rollout, coupled with slightly slower asset growth than planned in our older stores, combined to produce earnings this quarter for Prenda Fácil that were just a bit below our expectations.

The economy in Central Mexico has been hit hard by the US recession as well as internal economic issues in Mexico and we expect the macroeconomic environment there may have slightly affected loan growth, although I will say, our redemption rates at Prenda have held very steady.

Fortunately, the rise in gold values has afforded us the opportunity to increase advance rates on jewelry loans in Mexico and we've begun to see pretty good growth over the past six to eight weeks. Now we'll continue to add new units in Q4 and in 2010, but I do expect Prenda Fácil to track closure to planned in the fourth quarter and to be setup well and in good position for 2010 earnings growth.

A third key highlight for the quarter, as Tom indicated, was the resurgence of our storefront cash advance business, particularly related to a rebound of loan volume in Ohio. Cash advances written in our storefront units were up 16% this quarter compared to the third quarter of last year after coming down in both the first and second quarters of this year.

Even more encouraging for me is the fact that our storefront cash advances written this quarter was only 10% below the third quarter 2007 which is well before laws governing our cash advance product in Ohio changed in the fourth quarter of 2008, and that comparison to the third quarter 2007 is based upon 17% fewer units in 2009 than we had during the third quarter of '07.

Additionally, as Tom indicated, our operating income from our storefront units of a little over $4 million this quarter is a significant improvement over the slight operating loss we had in Q3 of last year during the midst of the legislative and referendum battle in Ohio. Interestingly, the operating income of our storefront cash advance units is also well ahead of the income reported for the third quarter of 2007, again on fewer units.

Now the important point here is that we've managed our way through a difficult transition to a new loan product in Ohio and now appear to have a viable ongoing business model there that includes new incremental activities of gold buying and pawn lending. Following our success with these incremental activities in Ohio, we have just recently expanded the rollout of that offering into other cash advance units in Indiana, Kentucky, Michigan, and Texas, which should provide some earnings lift in those jobs as the new activities ramp in 2010.

A fourth point of interest relates to our online cash advance business where earnings are down year over year, primarily as a result of ceasing to halt renewed loans in Pennsylvania and changes to the laws governing the company's short-term cash advance product in Minnesota, which had decreased the number of cash advanced loans made in that state.

The adverse impact of these changes was expected as we discussed in our last quarterly call, and overall the performance of our Internet lending business this quarter was consistent with our internal models. Even though the overall US loan volume was down year over year in our online channel, there are a couple of really positive trends that are not part of our routine disclosures.

First, new customer growth in the US was positive in Q3 for the first time this year. And while a higher mix of new customers to existing customers normally drives customer acquisition cost and loss rates higher in the near term, the overall increase in our US customer base should be very beneficial in future period.

Another very strong positive for the online channel was a significant year over year improvement in the UK portfolio. This portfolio produced a small loss in the third quarter of 2008 and a very meaningful contribution of earnings in the third quarter of this year. The UK portfolio is performing very well which hopefully provides good karma for our newly launched business in Australia.

The Australia portfolio which launched a few months ago in May, produced a loss this quarter that was squarely in line with our estimates.

Now the final point I'll make about the third quarter is our broad based improvement in cash advanced loss rates year over year. Consolidated loss rates as a percentage of cash advance fees was down 400 basis points in Q3 compared to the third quarter of last year. Importantly, cash advance loss rates were down in all reporting segments including pawn, storefront cash advance, and Internet cash advance.

Consolidated cash advance revenues are up this quarter and consolidated cash advance losses are down, obviously a very positive combination. Probably the greatest fear I have heard from many of you in the investment community about this recessionary environment when we entered this year was a concern about our ability to manage risk on our unsecured cash advance portfolio and I'm confident to say that our proprietary underwriting and scoring model to this point have served us very well in this challenging credit environment.

Moving on before sharing a brief strategic outlook for 2010, let me take a minute to update you on the ever fluid and relentless unpredictable federal regulatory landscape. I have perviously discussed with you a number of federal bills that have been filed that are designed to provide varying degrees of new federal regulation of either overall consumer credit or specifically payday lending. These bills which include bills filed by Senator Durbin and Representatives Gutierrez, Baucus, and Schuler seem to have stalled in deference to the desire of chairman frank to push the consumer financial protection agency act to a House vote.

The provisions of the CFPA Act have not been finalized and we have no way of predicting what the final bill brought to the floor might include, nor can we predict that the bill will be approved by the House or the Senate.

We've been very active on Capitol Hill this quarter, educating members on both sides of the aisle about our customer base and the acute lack of credit options available to them at a time when American families need all the help they can get in managing through the occasional short-term crisis that affects so many of them.

I do remain hopeful that Congress will ultimately recognize this need and allow specialty financial institutions like Cash America the opportunity to continue serving thee customers in a manner that addresses legislators' concerns while also respecting the burden that private enterprise bearers are providing reasonable returns on the private capital we employ.

At the state level we continue to monitor all the activity in the states where we operate, and the only state that has been elevated in our radar is once again the great state of Ohio where another effective prohibition bill has been filed in the House.

The activity on this bill is still in the early stages and we will be watching it closely throughout the fourth quarter.

Now I'll move onto our outlook for 2010. As Tom ha shared with you, our initial guidance range is $3.45-$3.60 per share for the year. And while it's still early to fully analyze our initial estimates for next year, I'd like to share with you a few things to keep in mind as you collect your thoughts on our opportunities and challenges for 2010.

Number one, we're not expecting a resurgence of consumer confidence or any significant change in the cautious mindset of our customers. Consequently we expect the US Pawn business will continues its current growth trends and we will continue to augment any softness in retail demand with the sale of refined gold.

The prices of gold will continue to be a significant external variable in this mix and sustained higher values should support pawn loan growth in 2010. And as I said earlier we will not be managing our business to specific targets to yield in margin, but will be managing to maximize cash income.

Number two, we expect to see both the unit and earnings growth from Prenda Fácil. Prenda began 2009 with 112 units and will finish this year somewhere around 170 units. We believe we can add another 40 to 50 units again in 2010. Loan growth in the older units together with maturation of the 2009 openings should provide plenty of momentum to absorb startup losses in 2010 and post good year over year earnings growth.

Number three, we expect cash met to post growth in all existing markets; the US, UK, and Australia. Cash Am's planned entry into Canada in the fourth quarter of this year will likely produce a loss in 2010, much like the UK did in 2008 and Australia has done in 2009. Obviously we then would hope Canada would provide a good earnings boost in late 2010 and 2011.

Number four, we expect our storefront cash advance business to provide earnings growth as well based upon the recent growth in cash advance receivables and the ongoing ramp of incremental profitability from our pawn related activity in many of those units. We would not expect to add any new storefront cash advance units in 2010.

Number five, we will challenge our team to keep cash advance loss rates consistent with our 2009 performance but we've currently modeled a marginal increase in loss rates based upon our cash advance growth assumptions for next year.

Number six, we anticipate providing increased visibility and enjoying increased success from a number of strategic product initiatives we have nurtured over the past year. These initiatives include our card services business, online installment lending, Internet retail sales, and our strike gold offering.

Seven and finally, absent any significant acquisition opportunities, we do expect to reduce consolidated debt levels in 2010. However, I should point out that we do expect to be more proactive in 2010 in our search for consolidation opportunities for our US Pawn segment and we intend to begin seriously evaluating expansion opportunities for the pawn segment in Central and South America.

Now there are obviously an incredible amount of detailed assumptions and intricate modeling that goes into our estimates for 2010, but these two items I have highlighted should provide you a snapshot of the strategic framework we are working on as we enter next year. And with that we'll now turn it over to questions and answers. Operator, please?

Question-and-Answer Session

Operator

With pleasure, sir. (Operator's Instructions) Gentlemen, our first question comes from the line of David Burtzlaff of Stephens, Inc.

David Burtzlaff - Stephens, Inc.

Good morning, Tom and Dan, and congratulations on a great quarter. A few questions, Tom, I know you kind of mentioned it and I think I just kind of skipped it. Can you give the retail in the scrap margins again?

Thomas A. Bessant Jr.

Sure. Well, basically for the total company overall the retail margin was 38.4% for retail, scrap was 28.5% for a combined 34.2%.

David Burtzlaff - Stephens, Inc.

Okay. And then how much stock did you buy back in the quarter and what was the dilution from the convert?

Thomas A. Bessant Jr.

The dilution probably amounted to about a penny as hare, Dave. We finished on the quarter at 30.6 million shares. We did buyback stocks during the quarter and we are filing our Q3 either today or tomorrow for the specifics on that. We invested about $11 million in the quarter in share buyback.

David Burtzlaff - Stephens, Inc.

Okay. And then in terms of your guidance for next year, what kind of macroenvironment do you anticipate, primarily employment, that's based into those estimates? And also what kind of share count are you looking for as well?

Daniel R. Feehan

Yeah. Let me take the first part of that. Again, I think as I indicated in my comments, we remain petty cautious about the macroeconomic environment. If you look at our business across the US and you've got to understand reasonably where we're concentrated in markets, we obviously have a big presence in Texas which has probably done better than a lot of the other regions around the country, but we also have a big presence in Florida and Nevada. In the Midwest I think that it's been particularly hurt by unemployment levels and falling home prices as I indicated earlier.

So I remain pretty cautious and my guidance to our FD&A group here has been not to expect a significant resurgence in retail demand in either the fourth quarter or next year. I hope I'm wrong about that, but as I travel about and I talk to our folks out in the field, I don't have the confidence yet that the economy's going to be recovering to the point where we're going to be a strong resurgence in retail demand. Obviously we're in some markets as I indicated, in regions of the country, that when the country does begin to come back people regain some confidence and start spending again, we ought to be enjoying pretty significant increases and I view that in the future as a positive.

But as you look at our estimates for next year, I'm not particularly bullish on the retail side of the business. I do think we'll be able to continue to meet loan demand and I think we'll continue to be in, again, an ongoing touch credit environment which will continue to manage loss rates effectively. I'm also not quite sure what to expect from the ongoing contraction in consumer credit. Obviously there a lot of things going on to constrict credit card borrowings and obviously some of those people will be looking for alternatives which I think can benefit us in 2010. So we'll be trying to take advantage of those opportunists, but really haven't baked in a significant increase in our business related to capturing that market share.

Tom, do you want to talk about share count?

Thomas A. Bessant Jr.

Yeah. Dave, as the share price of Cash America goes up, we incur additional dilution. Without getting into specifics on that, we assume our share price will continue to improve based on the strong outlook for 2010 and as a result we've built in additional share dilution into next year. So it's hard to get into specifics because you start getting into predicting where the share price is going to go, but from a guidance perspective, all I can tell you is we've built in dilution and you should assume dilution as well.

David Burtzlaff - Stephens, Inc.

Okay. Thank you very much.

Operator

Moving on, our next comes from the line of Joshua J. Elving of Feltl and Company. Please proceed with your question.

Joshua J. Elving - Feltl and Company

Hi, good morning. A couple of questions, and forgive me if I'm a little new to the game, but I did have a question about the growth of your cash advance numbers. You kind of talked a little bit about cash advance resurgence in the third quarter and when you look at the total number of, or I guess the dollar amount of cash advances across the company, it was up, I think about 14% year over year. Was there something that was anniversaried in the quarter that kind of drove that number higher, at least on a year over year comparison or is there any seasonality in that number? What was the drive in that number or the improvement in that number?

Thomas A. Bessant Jr.

There really wasn't anything to anniversary to the positive side. It's really more the resurgence in the storefront business that drove that number more than anything else.

Daniel R. Feehan

Yeah. We've had clearly in Ohio, particularly where we have a very large cash advance store base, the loan there again recovered nicely from this period last year. I think the only thing that you may consider an anniversary issue was there was a fair amount of confusion in the market about this time last year because the legislation had actually passed in the second quarter and while I'm sure you don't remember all this, but there was injunctive release pending a referendum. In November in Ohio there was a fair amount of confusion in the customer base in the third quarter of last year about whether or not the product was even still available and we had a difficult time in our shops communicating with customers and making sure they understood we were still in business.

We obviously, not knowing the outcome of the referendum, pulled back a little bit on our risk profile at this time last year so I think there was a little bit of an increase with associated with and having a more stable environment this quarter than we had last year in Ohio. However, having said that I do think that there has been, as we look around the rest of the company and we look at our online channel, there has been ab it of resurgence in demand for the short-term cash advance product a little higher than we were actually expecting this quarter.

Online business as I indicated in my comments, new customer volume was up which was very encouraging. Partly consolidated numbers you're looking at reflect volume increases in the UK which is very positive as well as marginal increases on ac consolidated basis that were associated with our new business in Australia.

Joshua J. Elving - Feltl and Company

Okay. So I guess just to kind of boil that down, obviously a little bit in new markets as well as basically a significant demand increase then for that product? Have you loosened your lending standards at all back to the kind that — you mentioned tightening your credit underwriting in the third quarter of '08. Have you kind of gone back to normalization there or is this purely demand driven?

Daniel R. Feehan

Yeah. It is predominantly demand driven. We have not made any significant adjustments in our underwriting models t this point. Again, from a profitability perspective we're pretty comfortable in the combination of volume growth that we've got this third quarter, combined with the improvements in loss rates.

So at this point we've not made adjustments in our risk appetite for that side of the business. I won't tell you that we don't consider that on a regular basis, we do, but at this point we’ve to made those adjustments and I can't predict to you whether we'll do so later in the fourth quarter or in 2010. We may, dependent upon what we see happening in the market, we may loosen a bit. I don't anticipate tightening any more than we are today, but correctly answering your question, we haven't made recent changes.

Joshua J. Elving - Feltl and Company

Okay. And then I guess I had a quick question on the provisioning. I realize that credit losses were down in the quarter. The provision, the way I look at it is, is just taking a percentage of total loans written or the dollar amount of loans written, and it seems to kind of bounce around a little bit down a little bit year over year, but has picked up from the past two quarters. Is there a way to think about that going forward?

Thomas A. Bessant Jr.

Yeah. I think what you're seeing, Josh, this year, is a traditional business trend where on the provision expense it starts out low in Q1 and then gradually rises throughout the year and then repeats that cycle. So sequentially Q1 was about 5%, then we went to 5.5 and then to 6% here in Q3, each of those quarterly numbers, and the 6% compares to about 7.6% in the same quarter last year.

So it's a normal increase seasonally. Q1 tax refunds drive that number down lower, and then I just encourage people to really look at the cumulative numbers over time. So if you look at year to date, we're at 5.6% of volume compared to 6.6% last year for 100 basis point improvement in a difficult environment.

Daniel R. Feehan

And the other thing that would impact that as well is we have got a little bit of a shift in new to existing customer volume, particularly in our online channel. As I indicated in my comments, new customer growth was pretty strong this quarter. That's always going to have an impact in the near term of having a raise in short-term loss rates to loan driven, but again that's overall a very positive trend for us because those customers will benefit from in late Q4 an throughout 2010.

Joshua J. Elving - Feltl and Company

Great. And I guess last question just has to do with the tax rte looks like it was a little bit lower in the quarter. Is there any kind of color you can give me on that and give me a little bit of an outlook for next year?

Thomas A. Bessant Jr.

The tax rate is lower in the quarter. Last year we had some lobbying expenses which are not deductible in the Ohio's activities predominantly which increased our effective tax rate. 38.5% is a pretty good number. It tends to come down slightly in the fourth quarter and I would use the same numbers year over year. Then you should be in the ballpark 2009 versus 2010.

Joshua J. Elving - Feltl and Company

Great, thank you. Nice quarter.

Operator

Thank you. Continuing on, our next question comes from the line of Bill Armstrong of CL King & Associates.

Bill Armstrong - CL King & Associates

Good morning, a couple of questions on the payday loans. So, Ohio loan volume are rebounded on the store front — I think you addressed that with volume being depressed a year ago. You mentioned new products which I think is under the other laws that you’re operating under there, and incremental activities. Could you discuss what the incremental activities are?

Daniel R. Feehan

Yeah. We introduced in our shops in Ohio earlier this year, gold buying activity so that the shops there that had predominantly just been cash advance units prior to this year were just making cash advances doing some check cashing, some money order business, and things of that nature. We introduced gold buying activity where the stores are actually buying gold at the counter which they then send into our central processing center and are sold as refined gold.

So you will see in our storefront cash advance segment information activity associated with this position of merchandise which would be gold if they were buying in those units. We've also recently received licenses in many of those locations to actually do some pawn lending. So in a number of those locations we’ve started making pawn loans on jewelry. A t this point we've limited our activity to jewelry loans, but again we've gotten a very favorable response in the market from customers who are looking for other alternatives to again meet their short-term needs. So both those activities have been introduced in our storefront business. In Ohio we've had again, great acceptance from the communities, and as a result we've just recently begun to roll out similar activities, gold buying and pawn lending, into other cash advance units in a number of other sates where we operate.

Bill Armstrong - CL King & Associates

Okay. And on the Internet cash advance side, your operations expense look like it was up significantly and I think that was versus some lobbying expenses a year ago. I was wondering if you could just drill down on that a little bit.

Daniel R. Feehan

Yeah. On the Internet side of the business, expenses are up year over year. Part of it we've discussed in previous calls related to our design expense increased for development of new product alternatives at our group in Chicago our internet group is working for. They're responsible for the operations of our new card services business, they're responsible for the development of installment lending online, they’ve got two or three other projects in addition to the overhead expenses associated with opening Australia and getting ready for Canada. So there's a fair amount of R&D expenditures in the Internet expense numbers related to new initiatives.

The other thing going on particularly this quarter is higher marketing cost, higher lead cost. For leads as I indicated, our new customer volume was up for this quarter at our Internet lending subsidiary and our lead cost is also up pretty significantly. So that's the two things that you're seeing in those expense numbers.

Bill Armstrong - CL King & Associates

The cost of generating leads?

Daniel R. Feehan

Correct.

Bill Armstrong - CL King & Associates

Okay, thanks.

Operator

Thank you for your question. Our next question comes from the line of John Hecht with JMP Securities LLC.

John Hecht - JMP Securities LLC

Good morning, great quarter, guys. It sounds like you've learned a lot in Ohio and you're sort of exporting some of the lessons from Ohio in terms of the ability to market new products and meet your customers' needs. I’m wondering, over the long term, and this maybe early on in the cycle here, but do you think this could be a meaningful portion of the store-based revenues as you bring it to new markets?

Daniel R. Feehan

Yeah. I think that our view is that it can be a meaningful portion of earnings. The beauty about adding incremental activity in these locations is that we have a fairly high fixed cost component in that business with facilities already established with rents and operating cost. From a variable perspective we don't have to add a lot of personnel to handle these activities.

So I think in our view, the percentage of revenue is probably less significant to us than the incremental earnings that we can creat based upon the fixed cost and the nature of our store front business. So I do think it can be meaningful going forwarding the storefront units as a contribution to earnings.

John Hecht - JMP Securities LLC

Okay. In addition, you talked about custom acquisition costs and you saw some new customer trends in both the pawn and the payday sides. I'm wondering, are there any trends you're observing with respect to the new customers that suggests that there's a shift in your addressable market, particularly with the elongated recession here.

Daniel R. Feehan

No. I can't say that I really do, John. The trends again in terms for our growth, loans written this quarter has been encouraging, but I don't attribute that to any significant behavioral change. Again, as I said about 2010, it's hard for me to understand what the opportunity is going to be for us with what I believe is again a significant contraction to consumer credit going on in this country.

I anecdotally hear stories everyday from the banks about people who no longer have credit cards available to them or people whose credit card limits have been slashed by their banks. That segment of the population is a little bit above the socioeconomic scale that we typically operate in, but I'd like to believe that a number of those folks are going to be looking for alternatives and I've challenged our team internally, particularly some of the R&D activities that we've got under way, to find aw ay to capture folks above the traditional socioeconomic scale that we deal with and capture that part of the community with new product offerings that I think are going to be perceived as valuable to that segment of the population.

So we've been working on that. I can't tell you that we have produced anything that has made any meaningful impact yet, but I'm so encouraged with the opportunity and encouraged with some of the things that we've got under way today, I think that we'll address that demand in the future. But other then that, I can't tell you that I've seen any specific trends that tell me there's a behavioral shift. Beyond what I've already discussed I do think people are being more conservative, less focused on consumption and more on savings today than there was 18 months or 24 months ago.

John Hecht - JMP Securities LLC

Okay. And final question, Dan, your cautious or conservative with respect to your assessment as you kind of retail demand and at the store level, yet you guys had a 6.6%, if I heard it right, same store sales growth on a comparable basis in the quarter. I'm wondering, that seems pretty positive, particularly in the context of how other retailers are doing. Are you more just cautious because it's an important holiday season coming up or is there some greater degree of normalized sales growth at the store level relative to the 6.6% that we could be looking for as things normalize.

Thomas A. Bessant Jr.

Yeah, John, let me just clarify that. The 6.6 is net revenue so that would include gross profit as well as finance and service charges. So that number is a bit larger. If you looked at just our retail sales, excluding scrap gold we were down about 3.5% for the quarter. Now, scrap gold sales pushed that back up and so as a result we ended up being up rather nicely for the quarter in aggregate, but the retail appetite was, I think, our concern. I'm sure Dan can elaborate further.

Daniel R. Feehan

Yeah. That is a concern, John, going forward — is just the absolute demand, what I call over the counter retail demand. We obviously have augmented retail sales activity with the sale of refined gold just as all of our competitors are doing today. With the $1,000 plus gold values, I mean it's a great safety valve when you have a soft retail environment. So my caution really again is (inaudible) around over the counter retail sales. I do feel good about our loan values today that will allow us to sell refined goal on a profitable basis. Our refined gold sales were actually up this quarter versus second quarter and I am optimistic that we'll be able to continue to manage the balance between our lending and inventory levels by augmenting that, what I think is softness in retail demand with a sale of refined gold.

John Hecht - JMP Securities LLC

Great . I appreciate that color. That's very helpful. Thanks very much, guys.

Operator

Thank you for your question. Our next question comes from the line of Richard B. Shane of Jefferies & Co.

Richard B. Shane - Jefferies & Co.

Good morning, guys. Thanks for taking my questions. Quickly, in the very back page you give an inventory aging schedule and it's favorable in that the merchandise held for more than one year is down which, given what you're describing in terms of retail, suggests that you guys have pretty proactively managed margins there and done a good job managing that.

The one thing that I noticed is that in the third quarter there was a little bit of a shift on the current merchandise, the less than one year merchandise between jewelry and other merchandise and you saw the other merchandise increase. Is that a strategic shift headed into the holiday season or what's going on there? And related to that, are you seeing any change — over the last couple of quarters you said poor mature rates have been pretty consistent. Have you seen a change in poor mature rates and is that different between jewelry and other merchandise given the rise in gold prices?

Thomas A. Bessant Jr.

I'll take that. I mean, the redemption rates on our inventory and loan balances for both jewelry and other merchandise remain pretty consistent, so we haven't seen any real shifts in that. I think what you see in a table with the increase of the other merchandise reflects two things. One is a pretty aggressive management of our jewelry inventory and again, refined gold sales were up pretty significantly this quarter so the jewelry inventory as a component of the overall business has been managed pretty aggressively with refined gold sales.

The other aspect of that on the other merchandise component, we do traditionally have a build in this category and other merchandise heading into the fourth quarter selling season. A good portion of that other merchandise is in electronics where we always perform very well. In fact, our electronic business, if you look at all categories this year, even with the concern that I've had about retail demand, our electronics category has performed very, very well this year. So a lot of what you're seeing there is a little bit of build going into the fourth quarter and it's in categories that we're very comfortable that we'll be able to move out if not in the holiday selling season, we'll obviously have another great opportunity in Q1 during the tax refund season.

Richard B. Shane - Jefferies & Co.

Terrific, guys. Thank you very much.

Operator

Our next question comes from the line of Jordan Hymowitz with Philadelphia Financial

Jordan Hymowitz - Philadelphia Financial

Thanks for taking my questions. If I ask a repeated question I apologize, I got off for a second. Can you discuss the Australians relative to the UK gains in the quarter, first of all? In the previous quarter you said that the UK gains exceeded the Australian losses, so if you can't give me the exact numbers, can you give a magnitude again?

Thomas A. Bessant Jr.

Yeah. And you're referring to — what I’m' going to refer to, I should say, is more like operating income. And as Dan said, the UK is performing well and was significantly profitable in the quarter. From a magnitude perspective, Jordan, it's about three to one, the losses in Australia relative to the earnings in UK.

Jordan Hymowitz - Philadelphia Financial

Australia's losses are three times the UK profits?

Thomas A. Bessant Jr.

No. It's a third of the UK's profits. So there's incremental gain. I guess the specific issue here is when you look at international contribution to the online cash advance segment, there was incremental gain, notwithstanding the brand new market of Australia and the anticipated losses, so we did pick up some earnings from the international side during the third quarrel.

Jordan Hymowitz - Philadelphia Financial

Okay. And accordingly, you said about 72% of profits were earned in the pawn business, but if you net out the international side then, or put the international side where there was a regulatory certainty as opposed to uncertainty, what percent of your profits would be earned from either international payday or pawn in general?

Daniel R. Feehan

Well, it would be higher than the 70%.

Jordan Hymowitz - Philadelphia Financial

I know. That's why I'm trying to do it because a lot of people are thinking that that 70%, 30% could go away, but some of that 30% is in markets where there's regulatory certainty. So what I'm trying to do is figure out what that percent of business is actually at risk if US Payday disappears.

Daniel R. Feehan

Let us work on figuring that out and communicate that going forward, Jordan. I don't think we're prepared to break out all those numbers on the call this morning. I think your analysis is absolutely on target. There is a growing opportunity for incremental profitability in the unsecured lending business internationally where we're not subject to the same sort of US regulatory issues that we've been discussing for the last year.

Jordan Hymowitz - Philadelphia Financial

Okay. And second question on that is did you say Canada is likely to operate at a loss next year or just in the first half of next year?

Daniel R. Feehan

Well, I think for the entire year, and again there are a lot of variables that go into that in terms of actually when we get launched and how fast it may ramp, but for the entire year I would expect it to be an accumulative loss.

Jordan Hymowitz - Philadelphia Financial

Okay. Thank you very much.

Operator

Our next question comes from the line of Henry J. Coffey- Sterne Agee.

Henry J. Coffey, Jr., CFA - Sterne Agee & Leech, Inc.

Good morning, everyone. I'm particularly impressed with your 2010 guidance. It looks like - I mean, if we understand 2010, is it just fair to say that you're lapping all the challenges that you face from places like PA and Ohio? And you're getting back on that normal kind of 18 to 20% growth path or is this going to be a real exceptional year?

Thomas A. Bessant Jr.

Well, I think both to be honest. 2010 is positioned extremely well. We've talked about a variety of those factors. Clearly pawn loan balances, and as Dan said, the constrained consumer credit environment works to our favor. Gold prices work to our favor. You pick up the real growth in pawn again with US and its normal year over year growth complimented by the significant investment in Mexico and most of that contribution comes in the middle and back half of the year. The storefront cash advance business, we're just really getting into some beneficial comps year over year which is a difficult business, now that businesses didn't really contribute at all in the last half of last year, it should be profitable as we push off into Q1.

And then on the online side, as you point out, the recoveries from lost markets and that being complimented by the international components of our online business and some of the traction that we get there. So it's a combination of both I think. There's good strong organic seasonal growth and then you do get to anniversary a few things and you get the complimentary growth from really a planned de novo model coming out of our international expansion.

Henry J. Coffey, Jr., CFA - Sterne Agee & Leech, Inc.

Just two other questions as we try to ferret out the kind of at risk not at risk portions of the business, though if you see how chaotic it is in Congress right now I wouldn't worry about it a lot, but as you try to ferret that out is it fair to assume that the sort of non company funded business is primarily the CSO business and that's almost all in Texas at this point?

Thomas A. Bessant Jr.

It is mostly CSO, but the card business is also funded by third parties. That makes that CSO waiting look a lot higher relative year over year so make sure when you look at that you understand that that’s actually being funded by a bank or banks. And so the breakout's in the statistics there, but the other third party stuff is CSO.

Henry J. Coffey, Jr., CFA - Sterne Agee & Leech, Inc.

And then you did mention Florida and Nevada as two obviously challenged sites. I know you don't like to talk state by state performance, but can you give us a sense of either how growth or profitability in those two markets is showing up compared to your other sort of overall business?

Daniel R. Feehan

I'll deal with that because I’m the one that mentioned both Florida and Nevada. And if you look at the year over year growth rates in those two markets, they're well below our US Pawn averages. If you look at national loan employment today, it's a little less than 10%. In Nevada you're up to 13% and probably 11% in Florida. And again, home values have dropped pretty significantly. So our retail business as it relates to over the counter activity particularly in those two states have been hit pretty hard. We have obviously a better base of business here in Texas that hadn't been hit nearly as hard as those two states, but again, they're two of our top three states in terms of store count and revenue earnings contribution.

So again, they've been hit pretty hard, much harder than the balance of our store base. Again, you can view that as a positive. As the economy recovers we'll have the opportunity in both those markets to make significant improvement from where we sit today.

Henry J. Coffey, Jr., CFA - Sterne Agee & Leech, Inc.

Great quarter, thank you very much.

Operator

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

John Rowan - Sidoti & Company

Good morning. Just to circle back and touch on the card business, obviously it is funded by a third party bank. Can you discuss if these amendments that are floating around Congress about federal exemption rights would impede that business and just how big that portfolio is?

Daniel R. Feehan

Again, it's very hard to predict what's floating around Congress and what they may or may not impact. I mean, it changes by the way. I mean there was obviously a session yesterday the House Financial Services Committee and things are moving around as we speak. So it's almost impossible to predict what might come out. So the cash advance balance related to our cards service business is about $7 million of the total $170 million outstanding so it's not a significant number, but it has been growing pretty steadily

As I recall, I don't have it in front of me so I'm going to pull these from memory, but our cash advance is written in that card services business that we managed on behalf of the bank and it was about $20 million in the first quarter, about 25 in the second and we were a little over $30 million here in the third quarter.

And the economic model of that business has been right on target for what we had planned so I'm encouraged about that business and the opportunity to grow that business and scale it nationwide. I think one of the most interesting things about that business is that we're through the bank and our association with the bank serving customers in all 50 states, so that's very encouraging and obviously we generated income from that operation in the third quarter compared to a small loss that we recorded in the third quarter of last year.

So that's an encouraging business opportunity for us. Our challenge is to get scale in that business. I think the opportunity is there, we just got to find the right way to do that and the right affiliations in order to reach the kind of scale that I think is out there.

John Rowan - Sidoti & Company

Okay. Did you change on LTDs on your gold lending at all or were you lending at market?

Thomas A. Bessant Jr.

During the third quarter were no changes from prior year.

John Rowan - Sidoti & Company

Okay. And where do you stand with your hedges?

Thomas A. Bessant Jr.

We're fortunate because while we're in the mid 900s here in the third quarter and kind of leading into the fourth quarter, we're in pretty good shape in 2010 so been able to take advantage of this market to put us up in the thousand dollar range. So we'll see where gold goes. We're going to stick to our consistent strategy hedging about half of our expected volumes, six months out. So as gold prices rise we'll pick up the benefits of that and at the same time we'll be rolling those higher prices into our futures positions as well.

John Rowan - Sidoti & Company

Okay. So your hedge is about 50% of your production in the first quarter at $1,000 an ounce, does that sound about right?

Thomas A. Bessant Jr.

At close to 1,000, yeah. It might be as midge under, but certainly right there at 1,000.

John Rowan - Sidoti & Company

Okay. And then just two more quick questions. Tom, you mentioned a tax rate of 38.5-ish percent. Is that the fourth quarter or is that something we should look at for a full year number into 2010?

Thomas A. Bessant Jr.

That was the third quarter number and I said that usually comes down slightly, usually 50 to 75 basis points in the final quarter of the year just as we gained some earnings leverage on that number. But I think the question was really what should 2010 look like and I said it should look a lot like 2009. In the non-fourth quarter periods in the 38.5% range is probably a pretty good ballpark.

John Rowan - Sidoti & Company

Okay. And then also what were your store growth assumptions for 2010?

Thomas A. Bessant Jr.

It'll look a lot like the current year, probably in the neighborhood of 45 to 60 locations.

John Rowan - Sidoti & Company

Okay, thank you.

Operator

Our final question is from Gregg Hillman from First Wilshire Securities.

Gregg Hillman - First Wilshire Securities

Good morning, gentlemen. Could you talk about the bill itself for the Consumer Financial Production Act, what's in it as it applies to your industry? And also what do you think the probability of it passing is for that matter?

Daniel R. Feehan

Yeah. The Consumer Financial Protection Agency Act is something that obviously is supported heavily by Rep. Barney Frank who's Chair of the House Financial Services Committee as well as something that the administration has been in favor of. And it is again being debated really as we speak. I mean, there were panel meetings yesterday. I think they're scheduled again today. I think Chairman Frank would hope to have something out of that panel in the committee perhaps tomorrow to try to get something to the House floor sometime this year before year end.

But at this point, and again it's hard to predict what impact it may have on us. In theory, it has been described as establishing a new federal regulatory agency that would regulate all forms of short-term consumer credit and affects all forms of consumer credit today. Obviously the bankers and credit card companies and everyone else has been trying to influence this legislation because it'll affect them and give a new regulatory agency the power to make judgments about what they deem to be fair oar abuse or deceptive practices and then promulgate rules that would affect banks, credit unions, credit card companies, payday lenders, potentially pawn operators, et cetera. So it's a very broad based bill today. It does not contain specific language relative to our business operations either in the pawn or the short-term cash advance side of the business, but it does establish an agency that would be empowered to make rules and regulations that affect consumer credit.

So obviously it makes all of us at our financial institution doing that today a bit nervous just not in understanding what we're going to be dealing with or who we'll be dealing with and what sort of power and authority they may have.

There have been a number of debates relative to whether this agency would have rate making authority to set these or prices or whatever else and I think that’s something that Chairman Frank's I think in favor of, but I know there are a lot of people on the Hill that have serious concern about that and again when it gets to the House floor I don't know what might happen and then if I get passed out of there and it gets to the Senate you could have all sorts of additional amendments attached to it.

The likelihood of something, I mean it's hard for me to predict. Chairman Frank is obviously a pretty powerful member of Congress and he seems intent on trying to get something at least to a House vote. That's about all I can predict t this point.

Gregg Hillman - First Wilshire Securities

Okay. And then just moving onto one other subject about you mentioned you were starting to have Internet retail sales. Just real quick, do you sell gold over the Internet, by the way?

Daniel R. Feehan

Well, we have an initiative. If you go to our website we have an initiative that you'll see called StrikeGold.com which is both dealing with trying to deal with customers online as well as over the phone. Much like you see, I guess the most popular one today that's on TV a lot, Cash for Gold, well we're having people who want to sell gold mail in kits to us that we'll pay for their gold. And again we're trying to acquire customers both through television advertising as well as search engine marketing that we're doing online.

Gregg Hillman - First Wilshire Securities

Okay. But once you acquire gold through your pawn shops or over the Internet, do you intend to sell gold to the retail public over the Internet as opposed to buy it from the public?

Daniel R. Feehan

We're not doing jewelry. Yeah, we have recently undertaken some initiatives on both eBay and Craig's List selling retail items online and not jewelry at this point. What we've been focused on is general merchandise, particularly items that are specialty items that we come across in our shops that we believe we can get much higher margins online through an Internet sales distribution channel than over the counter in our shops. So that's an initiative that we've undertaken this year. We begin to get some momentum. I would expect us to add to our Internet sales activity where we're actually selling items online to a retail customer in 2010.

Gregg Hillman - First Wilshire Securities

Okay. Thanks very much.

Operator

Thank you, Mr. Hillman for your question. Gentlemen, that does conclude the question and answer session from our audience. I'll turn it back to you for your concluding remarks.

Daniel R. Feehan

All right. Thank you for your help. I appreciate everyone's attendance on the call today and we'll catch up with you at year-end. Thanks, bye.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again and have a great day.

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Source: Cash America International Q3 2009 Earnings Call Transcript
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