Advance America, Cash Advance Centers, Inc. Q4 2009 Earnings Call Transcript

| About: Advance America, (AEA)

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

Q4 2009 Earnings Call

February 18, 2010 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

Rick Shane – Jefferies


Welcome to the Advance America, Cash Advance Centers fourth quarter earnings results conference call. At this time for opening remarks and introductions I would like to turn the call over to Jamie Fulmer. Please go ahead, Sir.

Jamie Fulmer

Good morning. 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 reports on Form 10-Q for the quarters ended June 30, 2009 and September 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

Good morning. Welcome to our fourth quarter and year-end call. Also joining me on today’s call is our company’s Patrick O’Shaughnessy, our company’s Chief Financial Officer.

Yesterday the company reported the results of the year and the quarter ended December 31, 2009. First I would like to update you on a few developments since our last call. Yesterday our Board of Directors approved Advance America’s 21st consecutive dividend as a public company. This dividend of $0.0625 per share is payable on March 5, 2010 to stockholders of record as of February 23, 2010. Through December 31, 2009 we have returned approximately $371.4 million in cash to our stockholders since we became a public company through the payment of our quarterly dividends together with our stock repurchase program. This amount exceeds our current market capitalization and reflects our board’s consistent track record of returning value to our stockholders.

With regard to legislative developments, despite the noise associated with the legislative sessions in full swing across the country there have been few developments since our last call and little has changed since my last report to you. As I mentioned to you on our last call new laws went into effect in South Carolina, Washington and Kentucky in early 2010. We continue to believe that these new laws will significantly impact the way we operate in those states and may have a negative effect on results for some period of time.

In response to new state laws and the effects of market saturation across the country we continue to carefully monitor our underperforming centers to determine if consolidating or closing additional centers is in the best interest of our stockholders. It is for these reasons we announced yesterday our intention to consolidate our operations in Virginia by closing 58 of our 139 centers there. A state law that went into effect in January 2009 substantially changed the loan terms for Cash Advance services and severely restricted viable operations for short-term lenders.

Since the law went into effect we have continued to offer cash advances in compliance with the new regulations as well as an open-ended line of credit product. However, a recent regulatory ruling issued by the Virginia State Corporation Commission in December significantly restricts our ability to provide new lines of credit to consumers. Due to this latest action we believe that reducing our total number of centers is the most economic way to continue our operations in Virginia. It remains our firmly held belief that consumers deserve the opportunity to consider a variety of short-term credit options and choose the ones that best suit their situation.

This is particularly important in today’s uncertain economic environment where financial choices have narrowed, access to credit has tightened and bank fees have increased. The cash advance service industry remains a steady and reliable source for short-term credit. In fact our industry serves approximately 19 million households annually.

A shift in Advance America’s customer demographics over the past 12 months offers evidence that a broader range of Americans have chosen the cash advance option to meet their financial needs. The median annual income of an Advance America customer has increased to approximately $50,000 and nearly 20% of our customers earn more than $75,000 annually. This is further evidence to support our belief that consumers value the simplicity, transparency and cost competitive nature of our product versus alternatives.

With regards to additional service product offerings, the online cash advance application process continues to grow and demonstrates promising results. We continue to attract customers who initiate an application online and complete the process entirely online and receive an advance at the center as well as those who complete and process entirely online and receive a cash advance from a third-party lender as a direct deposit into their bank account.

Through the end of the fourth quarter our online services have generated approximately 95,000 loans and approximately 225,000 new customers online since the initiative began in November of 2008.

With regard to our prepaid Visa debit card and MoneyGram product offering via our relationship with NetSpend, during the fourth quarter we registered over 88,000 prepaid cards, an increase of 224% over the fourth quarter of 2008 and loaded approximately $46 million for our customers. Since inception we have registered approximately 548,000 prepaid cards and loaded over $374 million.

During the fourth quarter we recorded over 321,000 MoneyGram transactions with a face value exceeding $82 million. All MoneyGram services we offer continued to grow including send, express payments and receives.

With regard to advertising expenses for the fourth quarter of 2009 the total marketing expense was $6.9 million or 4% of revenues compared to $4.2 million or 2.4% of revenues during the fourth quarter of 2008. For the year total marketing expense was $22.2 million or 3.4% of revenues compared to $20.3 million or 3% of revenues for 2008. This expense level was consistent with projections we provided you on previous calls.

I will now turn the call over to Patrick O'Shaughnessy for an overview of our financial results for the quarter and year-ending December 31, 2009.

Patrick O'Shaughnessy

Good morning. For the quarter ended December 31, 2009 total revenues decreased 1% to $173.2 million compared to $175 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 legislative change affecting our revenue. Excluding the results of these states in both years, revenues increased by 0.6% for the quarter ended December 31, 2009 compared to the same period in 2008.

For the fourth quarter total revenues for centers opened prior to October 1, 2008 and still open as of December 31, 2009 increased 3.2% compared to the same period of 2008. The provision for doubtful accounts as a percent of total revenues for the quarter ended December 31, 2009 decreased to 18.3% compared to 24.4% for the same period in 2008 due to lower charge offs net of recoveries as well as a lower advance receivable balance compared to prior periods.

During the fourth quarter the company sold approximately $1.3 million of previously written off receivables and did not sell any during the same period in 2008. The company closed 30 centers during the fourth quarter and the company had approximately $1.4 million of center closing costs during the fourth quarter of 2009. These closing costs consisted primarily of lease terminations, fees, de-imaging costs and fixed asset impairment costs. In addition, as Ken mentioned, we have decided to close approximately 100 additional centers in 2010 including 58 of our 139 centers in Virginia where we are consolidating operations.

We estimate the costs associated with closings will be between $2.4-5.5 million and we anticipate the majority of these charges will be incurred during the first quarter of 2010. General and administrative expenses for the quarter ended December 31, 2009 were $14.4 million compared to $17.9 million for the same period in 2008, a decrease of 19.4%. This decrease is a result of a reduction in public and government relations expense and other cost controls partially offset by higher legal expenses.

For the year-ended December 31, 2009 the company’s income tax expense was 38.1% of income before taxes compared to 46.6% during the same period of 2008. The decrease was primarily due to a reduction in state taxes as a result of claims filed for recovery of taxes recognized in prior years and significantly lower non-deductible lobbying expenses and other discrete items.

Net income for the quarter ended December 31, 2009 increased 234% to $19.8 million compared to $5.9 million for the same period in 2008. Basic and diluted earnings per share were $0.33 and $0.32 respectively for the quarter ended December 31, 2009 compared to basic and diluted earnings per share of $0.10 for the same period in 2008.

For the year 2009 basic and diluted earnings per share were $0.89 and $0.88 respectively compared to basic and diluted earnings per share $0.60 for 2008. Excluding the lawsuit settlement charges we have mentioned on our previous calls, basic and diluted earnings per share would have increased by approximately $0.06 in 2009 compared with an additional $0.02 in 2008.

During the year ended December 31, 2009 the company generated cash flow from operations after funding of advances receivables of $93.2 million compared to $69.9 million during the same period in 2008. As of December 31 we had $141 million borrowed under our revolving credit facility compared to $189.8 million as of December 31, 2008. As of yesterday we had under $100 million borrowed under this facility.

With regard to some of the key operating metrics for the fourth quarter, the average amount of a cash advance made during 2009 excluding installment loans in Illinois and lines of credit in Virginia, decreased to $361 from $366 during 2008. The average fee on all cash advances made was approximately $53 during 2009 compared to $55 during 2008.

The principal amount of cash advances originated during 2009 was approximately $3.9 billion compared to $4.3 billion during 2008, again excluding installment loans and lines of credit. The average duration of all cash advances completed was approximately 17.6 days for 2009 compared to 16.8 days for 2008.

During the year we closed 220 centers in 27 different states and in the United Kingdom. As of December 31, 2009 the company had an operating network of 2,587 centers and 71 limited licensees in 32 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) The first question comes from the line of John Hecht – JMP Securities.

John Hecht – JMP Securities

With regard to Virginia and the store closure activity can you tell us what products you are able to offer there now and what the intent of keeping a certain amount of stores open would be?

Patrick O'Shaughnessy

Right now we have been offering both payday loans and a line of credit product consistent with the new rules that were put into effect in January of 2009. There was a new ruling that came out in December of 2009 changing the way that someone that was a payday loan licensee could offer the line of credit products, effectively eliminating our ability to take new customers there. So we will continue to service our existing customers’ line of credit products and continue to offer payday loans under the Virginia statute but we felt like the inability to attract new customers to the line of credit led us to concluding to consolidate some of the stores to try and get higher volumes.

John Hecht – JMP Securities

So under the new store system there, the consolidate store system is this going to be kind of a neutral on a net income basis state that you hope to make some progress in on a legislative basis over time or is this just going to be collect the customer loans and shut further stores as necessary?

Patrick O'Shaughnessy

I think we will do whatever it takes to be profitable there. Obviously we don’t think the existing payday law…we think is confusing and difficult for customers. We don’t think it is a very customer friendly law and we would like to see it change but in the meantime we will do what we need on the cost side to make sure we can stay profitable.

Ken Compton

I don’t think we should give you the impression that there is any guarantee this law will be changed. So I think your assumption it should be we will operate under the current statute as it is written.

John Hecht – JMP Securities

The credit obviously came in pretty strong. Some of that was related to your lower loan balances you have. Can you give us some stats around charge off activity versus loan volume? Maybe some of the collection success? Maybe some characteristics of are you seeing a new type of customer come in the store given some of the restrictions in other parts of the systems around customers’ ability to get credit?

Patrick O'Shaughnessy

We definitely think we have been able to make some progress particularly in the fourth quarter this year in recoveries. Charge offs net of recoveries are down year-over-year and for the quarter. Part of that is just to try and be smarter about our ACH electronic collections activities and I think we hope we will continue that and improve that through 2010.

Ken did mention a different demographic we noticed this year. We had a third-party analyze a random sample of about 100,000 customers to look at demographic information and as Ken mentioned the average income of our customer was up about $9,000 this year year-over-year and a significantly larger pool of customers in the $75,000 and higher income bracket.

So we do believe we are starting to see people that may have initially bounced checks or used overdraft are starting to see this as a cost saving opportunity for them no matter what their income is and it is possible we are starting to see the benefit of people that are being denied credit in other arenas.

John Hecht – JMP Securities

With respect to 2010 what should we see if any changes given the changes coming forward in South Carolina? What do we expect to see there?

Patrick O'Shaughnessy

I think any time we have a state law change as you can see with our filings where we separate usually states in turmoil like we had last year with Virginia and Ohio and we will have this year in South Carolina and Washington and eventually Kentucky as well, those state laws are very disruptive. They have disrupted the customer base and we generally see a revenue decline that lasts until there has been enough people to exit the industry to recover it.

Specific to South Carolina the new law puts in a statewide database and we have gone through that in several states now. Typically we will see our loan balance and number of customers drop by about 30% when that happens. We are seeing that now in South Carolina. It usually takes about 18-24 months based on history to get our loan balances back to prior levels. But it really depends on what those law changes do to the competitive dynamics in that market. In our K we will have obviously all of those troubled states’ revenue and [C2P] broken out.

John Hecht – JMP Securities

What is a reasonable tax rate for us to assume for 2010?

Patrick O'Shaughnessy

I know that is very confusing and difficult to model. The biggest reason why we had some one-time benefits this year but the thing that is consistent every year is we have a certain number of non-deductible expenses that depending on how big those non-deductibles are as a percentage of pre-tax income will affect tax rates pretty dramatically in any given period.

I think from sort of a normal statutory rate we would be for modeling purposes in the 38-39% area but in 2009 we had about $10 million of non-deductible expenses. In 2008 we had about $16 million of non-deductible expenses. So if you add that back it is going to get you an effective rate much higher depending on what you model for pre-tax income. I would assume for your model going forward we will continue to have about $10 million of non-deductible expenses in every year.


The next question comes from the line of Rick Shane – Jefferies.

Rick Shane – Jefferies

I wanted to circle back on the question about credit. What was the actual dollars charged off this quarter gross and net and can you give that to us on a year-over-year basis? What is the allowance on the balance sheet at this point?

Patrick O'Shaughnessy

I don’t have the quarter numbers in front of me but I have the year-over-year numbers. Charge offs in 2009 were $153.8 million and recoveries were $23.5 million. In 2008 charge offs were $162.9 million and recoveries were $24.6 million. Then the actual ending balance sheet should have been on the…

Rick Shane – Jefferies

I think it only shows a net.

Patrick O'Shaughnessy

I’m sorry are you looking for the balance of the allowance?

Rick Shane – Jefferies

Yes please.

Patrick O'Shaughnessy

$53 million plus the accrual for third-party regular losses and taxes is $4.5 million so the total is $57.5 million.

Rick Shane – Jefferies

How would you characterize credit at this point?

Patrick O'Shaughnessy

It has been extremely stable. I know we as an industry generally report it as a percent of revenue but if you look at it as a percent of loan volume over the last 8-10 quarters it has hovered around maybe 4% and it may have been about as high as 4.2% and as low as 3.7% I think in the most recent quarter. So about 3.8%. So considering everything that has gone on in the economy and considering any comparable product whether it is the credit card or sub-prime mortgage I think our credit has performed extremely well.

Rick Shane – Jefferies

I am amazed frankly by how stable it has been across the industry and how little sensitivity it has shown to the overall economic cycle versus other credit products.


I show we have no further questions at this time. I will turn the call back over to Ken Compton for any additional comments or closing statements.

Ken Compton

I would like to say thanks for your participation today and we look forward to talking to you when we announce our results for the first quarter of 2010. Thank you.


That does conclude today’s conference. We thank you for participating.

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