Advance America, Cash Advance Centers, Inc. Q3 2009 Earnings Call Transcript

| About: Advance America, (AEA)

Advance America, Cash Advance Centers, Inc.

Q3 2009 Earnings Call

October 29, 2009 8:00 am ET


Jamie Fulmer – Director of Investor Relations

Ken Compton - Chief Executive Officer

Patrick O’Shaughnessy - Chief Financial Officer


John Hecht – JMP Securities

David Burtzlaff – Stephens Inc.

Rick Shane – Jefferies


(Operator Instructions) Welcome to the Advance America, Cash Advance Centers Third Quarter Earnings Results Conference Call. At this time for opening remarks and introductions I’d like to turn the call over to Jamie Fulmer.

Jamie Fulmer

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 information or current conditions will be forward looking statements.

For example, any statements regarding our future expenditures and financial performance, our plans for product expansion, our business strategy or expected developments in the cash advance services 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 the risks, uncertainties and other factors, many of which are not 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, 2008, and our quarterly report on Form 10-Q for the quarter ended June 30, 2009, copies of which is 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

Also joining me on today’s call is our company’s Chief Financial Officer, Patrick O’Shaughnessy. Yesterday the company reported the results for the nine months and quarter which ended September 30, 2009. We will discuss results of the quarter shortly but first I’d like to update you on a few developments since our last call.

Yesterday our Board of Directors approved Advance America’s 20th consecutive dividend as a public company. This dividend of $0.0625 per share is payable on December 4, 2009, to stockholders or record as of November 24, 2009. Through September 30, 2009, the payment of our quarterly dividends together with our stock repurchase program has returned approximately $367.4 million cash to our stockholders since we became a public company.

In late September we announced that we had entered into a settlement regarding the class action lawsuit against a company in Arkansas that resolves all claims in connection with preferred presentment transactions originated in state from June 1, 2006 through March 17, 2008. The settlement agreement remains subject to court approval. It’s important to note that the Arkansas settlement agreement does not involved any finding of wrongdoing by the company.

The company had previously announced in September 2008 its decision to close all 30 of its remaining centers in Arkansas. Under the terms of the settlement, the company agreed to pay a maximum settlement amount of approximately $10.95 million, including payment of claims to class members and payment of administration fees, attorney fees, and all other costs of the class members associated with the litigation.

The settlement of this lawsuit along with additional charges from a previously disclosed lawsuit settlement in Georgia resulted in a charge against earnings of $6.4 million for the quarter ended September 30, 2009. Settlement charges reduced the company’s diluted earnings per share for the quarter ended September 30, 2009, by approximately $0.07.

Generally speaking, we intend to continue to aggressively defend our products and services against lawsuits filed against the company. However, in this particular situation, given a cost benefit analysis we believe that this settlement is in the best long term interest of our stockholders.

With regards to legislative developments, I’ve mentioned on previous calls that the United States Congress has been paying particularly close attention to consumer credit market and that a number of bills have been discussed or introduced that would affect a variety of financial services, including cash advances. This activity continues to generate a significant amount of attention with most of it centered on the proposal to create a central regulatory authority for consumer financial protection, most commonly known as CFPA.

Legislation related to this central regulatory authority is currently being debated at the committee level in the House of Representatives. A timetable for votes and the ultimate end result remains uncertain. As this legislation works its way through the legislative process I would expect there to be a good deal of noise surrounding this issue until a conclusion is reached.

Our efforts at the Federal level remain focused on making sure lawmakers understand that cash advances can be a sensible and effective credit option for many people and that eliminating cash advances would have a devastating effect on millions of Americans who use them responsibly.

As I mentioned to you the last time we spoke, many of the current bills do contain a number of consumer protections that would promote the simplistic flexibility and transparency of all credit products. We support many of these measures and in most cases already offer them to our customers. It’s also important to point out that contrary to what many critics of our industry would have you believe, we are already regulated extensively at both the State and Federal levels.

Although states provide the primary regulatory framework under which we offer Payday Advance services, certain Federal laws and regulations for each apply to our business and are intended to protect our customers. Because our product is reviewed as an extension of credit, we must comply with Federal Truth and Lending Act, and Regulation Z adopted under that act. Additionally, we’re subject to the Equal Credit Opportunity Act, the Fair Credit Reporting Act, Gramm-Leach-Bliley Act and the Fair and Accurate Credit Transactions Act, and the Military Financial Service Protection Act.

Among other things, these Federal laws generally require disclosure of the principal terms of each transaction to each customer, prohibit misleading advertising, protect against discriminatory lending practices, and prescribe unfair credit practices.

Our products are clearly a highly regulated form of credit and many cases surpassing that of most of our competitor’s products. You don’t normally hear this during debates on Capital Hill. Frankly, when I hear comments during committee debates that are products aren’t regulated I have to question whether or not there is clear understanding of exactly what our product is and how it is regulated or whether some in Congress simply choose to ignore the facts for political purposes.

Additionally, amidst the debate how best to regulate financial service products, we should not lose sight of the fact that there continues to be strong demand in the marketplace for the simple, convenient, and transparent short term credit we offer that meets the distinct needs of the customers we serve. I find it odd as the debate rages on, credit might be denied to those who have rightly determined that our products offer them the most cost effective option. We will continue to carefully monitor Federal legislation activity.

At the State level, little has changed since my last report to you. By and large I believe the State legislative season has been a constructive one and our efforts have helped to ensure the consumers maintain their access to short term relatively small dollar loans. In early 2010 new laws will go into effect in South Carolina, Washington State, Kentucky, that will significantly impact the way lenders operate in those states and may have a negative effect on our bottom line results for some period of time.

In preparation for these new state laws in response to the effects of market saturation across the country, we continue to carefully monitor underperforming centers and may decide to consolidate or close additional centers in the future.

With regards to additional service offerings, the online Cash Advance application process administered CashNetUSA continues to grow and demonstrate promising results both from customers who initiate the application process online and those who receive a cash advance from CashNetUSA as a direct deposit into their bank account.

Through the end of the third quarter approximately 58,000 loans have been originated online since the initiative began in November 2008. As instructed to point out that so far most of our customers through this channel are first time customers which we believe suggests that we’re not cannibalizing from our current customer base.

With regard to our Pre-Paid Visa Debt Card and MoneyGram product offering via our relationship with NetSpend, during the third quarter we registered over 27,000 pre-paid cards and loaded over $34 million for our customers. Since inception we have registered approximately 460,000 pre-paid cards. During the third quarter we recorded over 320,000 MoneyGram transaction with a face value exceeding $80 million. All services offered through MoneyGram, including sends, express payments, and receives, continue to grow.

In addition, we have been testing MoneyGram utility bill payment program in two states and results have been encouraging. We intend to launch this product in most states in which we operate by the end of the first quarter 2010.

With regards to advertising expenses, for the third quarter 2009 the total marketing expense was $4.2 million or 2.5% of revenue compared to $6.1 million or 3.5% of revenue during the third quarter 2008. On our last call we discussed that we would be timing marketing initiatives to hit during the third quarter in an effort to maximize our efforts to drive new customers to our existing loan platforms. We continue to be pleased with the results of our online and offline marketing efforts.

While our expectations at this point remain that the company’s marketing expense for the full year will be approximately 3.5% of revenue, we are currently considering additional strategic expenditures that could drive marketing expenses higher.

I will now turn the call over to Patrick for an overview of our financial results for the quarter and the nine months ended September 30, 2009.

Patrick O’Shaughnessy

For the quarter ended September 30, 2009, total revenues decreased 3.4% to $167.9 million compared to $173.9 million for the same period in 2008. These comparisons include the results of operations in Arkansas, New Mexico, New Hampshire, and Ohio, states which we exited or had a major legislative change. Excluding the results of these states from both years’ revenues increased by 1.0% for the quarter ended September 30, 2009, compared to the same period in 2008.

For the quarter ended September 30, 2009, total revenues for centers opened prior to July 1, 2008, and still open as of September 30, 2009, increased 1.8% compared to the same period in 2008. The provision for doubtful accounts as a percent of total revenues for the quarter ended September 30, 2009, was 23.1% compared to 24.2% for the same period in 2008.

During the third quarter the company did not sell any written off receivables compared to 130,000 sold during the same period 2008. The company has closed or consolidated 190 centers in 26 states and the UK this year, 24 of which were closed during this quarter. The company had approximately $200,000 of center closing costs during the third quarter 2009. These closing costs consisted primarily of lease terminations, fees, and de-imaging costs and are therefore included in other center expenses.

We are beginning to see the benefit from the center consolidation initiatives and other cost controls we enacted during the first half of this year, in terms of lower center expenses relative to revenue. We will continue to carefully evaluate areas where we can reduce costs, including closing underperforming centers and consolidating centers within markets. This may result in an asset impairment charge or other closing charges in future periods.

General and administrative expenses for the quarter ended September 30, 2009, were $14.3 million compared to $18.3 million for the same period in 2008, a decrease of 22.1%. This decrease is the result of a reduction in public and government relation expenses and other cost controls, partially offset by higher legal expenses.

During the third quarter 2009 the company’s income tax expense decreased to 39.3% of income before taxes, compared to 44.2% during the same period in 2008. Year to date, our income tax expense was 37.7% compared to 43.2% for the first nine months of 2008, primarily due to a reduction in state taxes as a result of claims filed for recovery of taxes recognized in prior years and other discrete items. We do not expect to file for any additional state tax refunds in the fourth quarter and still expect our effective tax rate for the year to be approximately 40% to 42% which will result in a significantly higher effective tax rate for the fourth quarter then we’ve had in the first nine months of the year.

Net income for the quarter ended September 30, 2009, increased 48.8% to $12.6 million compared to $8.5 million for the same period in 2008. Basic and diluted earnings per share were $0.21 and $0.20 respectively for the quarter ended September 30, 2009, compared to basic and diluted earnings per share of $0.14 for the same period in 2008. Excluding the lawsuit settlement charges Ken mentioned diluted earnings per share would have been $0.27.

During the nine months ended September 30, 2009, the company generated cash flow from operations after funding of advances receivable of $54.4 million compared to $53.5 million during the same period in 2008.

With regard to some of the key operating metrics for the third quarter, the average amount of a cash advance made during the first nine months of 2009 excluding installment loans in Illinois and lines of credit in Virginia, decreased to $360 from $366 during the same period in 2008. The average fee on all cash advances made was approximately $53 during the first nine months of 2009 compared to $56 during the first nine months of 2008.

The principal amount of cash advances originated during the first nine months of 2009 was approximately $2.8 billion compared to $3.2 billion during the same period in 2008, again excluding installment loans and lines of credit. The average duration of all cash advances completed was approximately 17.5 days for the first nine months of 2009 compared to 16.7 days for the same period in 2008.

As of September 30, we had $149 million borrowed under our revolving credit facility compared to $158.2 million as of June 30. Also as of September 30, 2009, the company had an operating network of 2,614 centers and 75 limited licensees in 33 states, the United Kingdom and Canada.

Now I will turn the call back over to Ken.

Ken Compton

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 John Hecht – JMP Securities

John Hecht – JMP Securities

Do you expect the tax rate, you mentioned for fourth quarter what to expect, but for next year settle to the average rate of this year?

Patrick O’Shaughnessy

No. This year we had a lot of one time advantages, benefits to taxes. We had re-filed several prior years’ state tax statements and given refunds so you recognize those as discrete items in the period that you re-file those returns. I think all of that is behind us so the tax rate clearly in the fourth quarter will be higher and I expect 2010 to be again back to previous levels. This year was really an anomaly with those lower tax rates.

John Hecht – JMP Securities

Can you guys comment on the same store sale patterns? I think this is one your normalize for regulatory activity book revenues and same store sales improved this quarter relative to prior year quarters. I think this is the first quarter in a few that we’ve seen that. You do refer to stabilizing and improved demand at the product level. Can you give us a little bit more detail how that maybe new customer trends, any regional activity, are same store sale comps getting easier, things of that nature?

Patrick O’Shaughnessy

I’ll take new customers first. As we mentioned on the last call, we saw an increase in new customers first. As we mentioned on the last call we saw an increase in new customers at the end of June and beginning of July on a year over year basis for the first time in several years. That trend continued through most of the summer months. I think we were ahead of last year on new customers in July and August.

We were back down to what I would call a normal seasonal trend in new customers. The benefit of that is that we have as many loans outstanding now as we had last year. We have that many loans on a smaller store base so that results in a higher same store sales count for the first time, you’re right, for the first time we’ve seen that in a while.

To the regional question, I don’t think there’s any; there are certainly areas where we have clearly large negative results versus last year, Ohio in particular, and states that had law changes. There’s not any areas that are single areas that are making up for that loss, its generally fairly broad across the country where we’ve shown improvement and a lot of that is from consolidating centers.

John Hecht – JMP Securities

I know you did refer to the new products and how they’re doing; I was wondering if you could discuss incremental products or geographies that you’re considering at this point?

Ken Compton

Let me take the geographic question first. I think you know we’ve reported several time what we’re doing in Canada. As those laws are getting closer to proclaimed, particularly in British Columbia and Manitoba, we’ll expand our presence there. I don’t think it will be significant in the short term. From a product standpoint other then the things that we have disclosed we continue to enjoy some success on the card products and MoneyGram and some of those items but there’s not a lot new to report strictly from a product standpoint.


Your next question comes from David Burtzlaff – Stephens Inc.

David Burtzlaff – Stephens Inc.

With the loss rate being down, I know you’ve had problems in Virginia with the new product. Do you think that’s been fixed, is that one of the reasons the loss rate has dropped?

Patrick O’Shaughnessy

Yes. Virginia is certainly one of the reasons the loss rate has dropped compared to the first two quarters of this year. Without that Virginia product it would have been lower year over year in every quarter. While I would say we’ve made strides there I wouldn’t call it fixed, it certainly isn’t operating how we would like it to be. I do think that the newer customers that we’re putting into it are performing better then the customers we’ve put into that product earlier in the year. Overall we really just brought the balance down so it’s not on the revolving line of credit so it’s not as significant a portion of our receivables balance as it was in the first two quarters.

David Burtzlaff – Stephens Inc.

The revolver was actually down this quarter yet loan balances are up about $17 million. Where do you see that debt levels going from here? Do you think you’ll continue to pay down debt or will they increase seasonally?

Patrick O’Shaughnessy

I would expect in the fourth quarter typically we have a slight seasonal increase versus the third quarter. As you said, we’re paying a lot down because we’re actually, we’re saving on costs and we’re generating more cash flow that gives us the ability to pay that down. As balances come up in December we’ll probably see the loan balance tick up a little bit. As you know, in the first quarter we generally pay off a substantial amount of our debt as the loan balances come down and we collect during tax season.

David Burtzlaff – Stephens Inc.

What are your thoughts on debt going forward in terms of; do you use most of the cash flow from the business to de-lever there?

Patrick O’Shaughnessy

What we do in the short run we’re constantly looking for opportunities clearly to invest or otherwise use our capital for good returns. I think in this economic environment I don’t see us being aggressive in opening stores or any other capital expenditures. I do think it’s more of, at least for the near term, conserving capital.

David Burtzlaff – Stephens Inc.

As the debt comes down will that mean you may be able to entertain stock buybacks again?

Patrick O’Shaughnessy

It’s certainly possible.


Your next question comes from Rick Shane – Jefferies

Rick Shane – Jefferies

A couple questions on the competitive landscape. What are you guys seeing in store pricing in terms of competition from your peers? Also, how much cannibalization are you seeing from the internet and is that going to be a bigger factor going forward?

Ken Compton

The second part of your question, in my prepared remarks referenced the cannibalization and made the statement that at least in our case we see most of the customers coming through that channel as new. We do not think that there is much cannibalization. We think it’s somewhat a different customer. Some of the customer demographics are we believe different. We don’t see the cannibalization.

What was the first part of your question?

Rick Shane – Jefferies

In terms of what you’re seeing pricing wise in, in store business. Are you seeing peers become more aggressive on pricing at this point or have we seen stabilization?

Ken Compton

I think we have not seen a lot of pricing movement. The margins aren’t that great in this business.


Having no further question in queue, I’d like to turn the conference back over to Ken Compton for any additional or closing remarks.

Ken Compton

Thank you for your participation and we look forward to talking to you when we announce fourth quarter and full year.


That does conclude today’s conference. We appreciate everyone’s participation today.

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