Cash America International, Inc Q1 2010 Earnings Call Transcript

| About: Cash America (CSH)

Cash America International, Inc (NYSE:CSH)

Q1 2010 Earnings Call

April 22, 2010, 10:45 a.m. ET


Daniel Feehan - President, Chief Executive Officer

Thomas Bessant - Chief Financial Officer


David Burtzlaff - Stephens Inc.

Elizabeth Pierce - Roth Capital Partners

Richard Shane - Jefferies & Co.

Bill Carcache - Macquarie Research

John Hecht - JMP Securities

William Armstrong - C.L. King & Associates

Isabel Sterk - C.K. Cooper

John Rowan - Sidoti & Company

Joshua Elving - Feltl & Company

Henry Coffey - Stern Agee

Gregg Hillman - First Wilshire Securities


Ladies and gentlemen, thank you for standing by and welcome to the Cash America International, Incorporated quarterly 2010 earnings release conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, April 22, 2010. It is now my pleasure to introduce Daniel Feehan, Chief Executive Officer and President. You may go ahead, sir.

Daniel Feehan

Thank you. Good morning, ladies and gentlemen. Welcome to our call for the first quarter of 2010. Joining me this morning, as usual, is Tom Bessant, our Chief Financial Officer. Tom will lead off the review today of our financial performance for the quarter. I will then rejoin the call to provide my perspective as well as my views on our near-term outlook. We'll then have an opportunity to open the call for questions following my remarks.

Before beginning, 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 prospects of Cash America International Inc. and its subsidiaries. The actual results of the company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including without limitation, the risks and uncertainties contained in the company’s filing 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 of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the 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 and its management are intended to identity forward-looking statements. The company disclaims any intention or obligation to update or revise any forward-looking statements.

I also want to mention before we proceed that a reconciliation of any non-GAAP information provided on this call to the most directly comparable GAAP information is included in the financial statements issued with the earnings release today. It is also available on the investor relations section of our website at

Non-GAAP financial information is not meant as a substitute for GAAP results but is included solely for informational and comparative purposes.

Now I'll turn it over to Tom for his financial report.

Thomas Bessant

Thanks, Dan. Good morning, everyone and welcome to the first quarter 2010 earnings conference call. I'll start this morning with a reference to our fourth quarter 2009 conference call comments because as we ended 2009 we had a great deal of momentum in our cash advance business entering 2010.

This was particularly true for our storefront operations and our card services business, which were experiencing higher year-over-year loan balances. Also, our international online market in the United Kingdom was emerging and our US online cash advance business had restored a great deal of the assets that it lost in early 2009.

I'm pleased to report that we expected strength from this momentum. It did in fact manifest itself in a stronger year-over-year growth net of our cash advance segment in the first quarter of 2010.

Our storefront cash advance business, which now includes pawn lending and gold buying in most locations, and our international online cash advance distribution platform all posted strong results and significant year-over-year growth and profit contribution for the quarter.

In addition, the cash advance segment benefited from the continued momentum of our card services business on the strength of higher loan volumes starting the New Year which were sustained throughout the quarter.

The company's pawn operations continued its historical trend of strong performance led by the US pawn activities which finished the fourth quarter 2009 with higher pawn loan balances and well-positioned inventory levels. US pawn business rode that momentum into the first quarter and enjoyed success as our realized gold prices moved upward and liquidation of our fine gold and loose diamonds produced strong margins.

US pawn business also benefited from the timing and size of personal US federal income tax refunds, which many of our customers received during the period and were reportedly 10% greater than the prior year.

As our customers get their tax refunds they frequently enjoy our value priced shopping opportunities within our stores which further boosted our merchandise disposition in the first quarter translating into strong growth in retail profitability across the counter during Q1 in 2010.

Pawn loan balances performed well in the quarter as pawn services charges were up year-over-year producing outstanding results for our US pawn business which was comping to a pretty good first quarter of 2009. The afore mentioned highlights led Cash America to report in this morning's earnings release that consolidated total revenue rose 17% to $313.1 million, leading to a 30% increase in year-over-year income from operations which reached $56.4 million.

Consolidated earnings per share for the first quarter of 2010 finished at $1.01 a share and $32 million in net income attributable to the company, up 34% year-over-year. This $1.01 a share exceeds the high end of the company's previously announced guidance of $0.94 a share attributable to strong performance in each of the businesses I just referenced.

Now I'll turn to some of the financial metrics and highlights for the pawn lending segment and we'll follow that up with a discussion of the cash advance lending segment concluding with our outlook for the second quarter of 2010 and full year 2010 expectations.

As you look at the total pawn lending segment you'll see that revenue is up 7% and operating income is up 12%. However, on further revue you'll notice that the US pawn business performed at levels better than the overall pawn segment with an increase in operating income on 16% on a revenue increase that's just 7%.

The company's Mexico-based pawn operations, which added 62 gross locations over the last 12 months, did not experience the typical recovery from its seasonal loan balance declines which normally occur in December and January. This caused our Mexico pawn business to report lower operating income than the prior year finishing below our expectations for the quarter.

Pawn loan balance denominated in Mexico Pesos finished the quarter at MXN 282.3 million, up 13% year-over-year. However, you may remember that we finished the fourth quarter of 2009 up 40% year-over-year. Given this model's reliance on pawn loan asset levels to drive revenue, this drop off generated only a 14% increase in revenue year-over-year while expenses from opening almost 50% more stores over the last 12 months continued to grow, rising 46%, and operating income came in about $1.2 million below the prior year.

We are encouraged that we begin to see loan balances start to recover in late March and into April and believe the opportunities for better results in Q2 in Mexico are possible. This remains a late 2010 and full-year 2011 growth story.

Fortunately, our Mexico-based pawn operations are only a small piece of the overall pawn lending business; and the US pawn operations were able to post double-digit gain on the strength of the 9% increase in pawn service charges and 7% increase in merchandise disposition during the quarter, which led to a $4.6 million or 16% increase in income from operations, easily outstripping the decrease from our Mexico-based pawn business.

US pawn loan yields were up nicely during the quarter to 140.1% compared to 135.7% last year and gross profit margin is just slightly higher year-over-year at 36.5% compared to 36.46% last year.

Inventory turnover remains strong and exceeded the prior year at 3.3 times compared to 3.1 times last year. As you'll see in the inventory aging supplied in our attachments to the press release, goods exceeding one-year old is only 7.5% of total inventory.

In fact, as it relates to US pawn business, it's important to note that overall inventory levels are down 2% year-over-year while US pawn loan balances finished the quarter up 2% year-over-year. Both of these dynamics are attributable to the strong tax refund activity which occurred in the first quarter as we saw sequential pawn loan growth fall from up 7% at the end of the fourth quarter of 2009 to up 2% at the end of the first quarter of 2010.

We saw pawn loan balances dip almost 18% from the year-end levels to the current loan balance. This is an exceptionally large drop, whereas we typically see about 10%, although we did experience a 14% drop in 2009 Q1.

However, when pawn loan balances are repaid, pawn service charges increase and retail sales also performs well and that was the case in the current quarter. Retail sales, excluding refined gold products was up 7.5% year-over-year in the quarter and gross profit dollars excluding refined gold items rose 6% year-over-year as the business continued to emphasize disposition activities.

Gross profit margin on retail sales excluding refined gold was 38.9% in the quarter compared to 39.4% last year complementing the counter sales with healthy performance in our refined gold liquidation and sale of excess diamonds which increased 7% year-over-year and produced a 15% increase in gross profit dollars due to higher realized gold prices and also stronger margins on the sale of diamonds.

Now moving on to the cash advance segment, you'll see that the operating income for the consolidated segment rose significantly to $22.2 million, up 76% or $9.6 million on a 40% increase in total revenue which reached $108.7 million.

The increase in the cash advance segment operating income came from a large increase in storefront profitability and another strong quarter from our card services activity. In addition, the online channel posted a 20% growth in operating income and you'll see in the supplemental materials to your press release that we have provided information which separates out our foreign cash advance business which is all online from the overall cash advance segment.

The foreign cash advance business includes the online offerings of the United Kingdom, Australia and Canada, however, the United Kingdom dominates these financial results because Australia was opened in May of 2009 and Canada was opened only in October of 2009 and both posted operating losses in the quarter.

Within the cash advance segment, cash advance written reached $612 million during the quarter, up 38% year-over-year, driving the 40% revenue gain while cash advance losses as a percentage of cash advance fees were essentially flat at 32%.

Cash advance fees net of losses produced a 39% increase in net fees contributing to the 76% year-over-year increase in operating contribution for the cash advance segment.

As I mentioned in the January call, I had high expectations for our storefront cash advance locations due to the higher balances at year-end which did, in fact, come true as operating income was over 350% at the level experienced in the first quarter of 2009 and reached $4.7 million on only a 16% increase in total revenue.

You'll also note that the continued development of gold buying and pawn lending added to our cash advance storefront performance as the net revenue related to pawn activities produced about $2.1 million in combined gross profit dollars and pawn service charges representing about 36% of operating income of the storefront cash advance business.

This pawn related contribution is up significantly from the prior year in the first quarter as we had just introduced these services and it produced only $590,000 in pawn related contribution.

The $1.5 million increase in pawn related contribution within our cash advance storefront represented about 40% of the increase in operating income for the storefront cash advance business from the first quarter of 2010 compared to the first quarter of 2009.

So, as I mentioned in the January call, a great deal of credit goes to our operations group for the success not only on the implementation of a new cash advance product in many of these markets but also the introduction of pawn lending and gold buying in these stores which will continue to add nicely to the bricks and mortar format.

You'll notice from the additional details in your materials that the cash advance loss provision as a percentage of cash advance fees in the storefront business fell to only 9.6% during the first quarter of 2010 compared to 13.9% in the first quarter of 2009. This incremental profitability also added to the success of the storefront business during the quarter.

Now, stepping back to look at the consolidated cash advance loss provision for the overall company you'll see that the cash advance loss provision in the current quarter as a percentage of cash advances written was 5.2% compared to 5.1% in the first quarter of 2009.

This ends a series of quarters of lower losses year-over-year and is really attributable to two factors; first, the growth in new customers in the US and foreign online business and second to the fact that the company was winding down certain online cash advance markets in early 2009 which reduces losses as underwriting gets tighter in those type of transitions.

So to conclude the first quarter of 2010, I’m excited about the strong start to the year with a 28% increase in year-over-year EPS, great loan volume dynamic and improved operating margins. We have now almost fully anniversaried the challenges of 2009 as our trailing 12-month EPS has recovered to a 28.9% year-over-year performance.

As we move into the second quarter, many of the economic strengths and dynamics of the first quarter will cause the second quarter to get off to a slower start because pawn loan balances and cash advances dropped further than expected and must recover from their annual seasonal lows during the second quarter.

We have been encouraged by consumer demand for our products as we feel the economy has not completely recovered and we continue to see an absence of traditional lenders serving our customers.

We continue to believe the cash advance product will perform well in the second quarter as demand appears to be ramping up very nicely for both the storefront and the online product, so our expectations are for another strong contribution from this segment led by storefront-based services with a strong assist from the foreign online business.

As a result, we have initiated our Q2 2010 guidance of between $0.63 and $0.69 a share which compares to $0.54 per share in the second quarter of 2009, because we are entering the second quarter at lower levels of pawn assets than we expected and we have excluded the Arizona cash advance market fro the second half of the year and Maryland cash advance market for the fourth quarter of 2010 as described in more detail in the press release.

We've only moderately increased our full-year expectations from an initial range of between $3.50 to $3.65 per share to a new estimate of between $3.55 and $3.70 per share compared to $3.17 per share for the full year.

Now for more details I'll turn the call over to Dan.

Daniel Feehan

Thanks, Tom. I'm obviously pleased with our quarterly performance having exceeded both consensus estimates and our own guidance by several cents, particularly following a similar performance in the fourth quarter of 2009.

Now, for those of you that have followed us for years, you know that we're not in the habit of lowballing our guidance, so it's unusual for us to post two consecutive quarters that are well ahead of the top end of our guidance and I would caution that you shouldn't get used to that.

The learning for us has been that really the macroeconomic turmoil of the past two years has introduced a new degree of unpredictability that we had not experienced for some time. As I've mentioned several times on the last few quarterly calls, when you look at the state of unemployment, consumer confidence, shrinking consumer credit, changing customer behaviors, those have all created a recipe that challenges our historical accurate planning models.

You add in a very strong tax refund season in the mix this quarter and we have certainly become the beneficiaries of a surprisingly strong earnings performance.

Now I mentioned to you in the fourth quarter call that the moons had aligned for our business units in that quarter and that all had performed in the top end of our expectations. That was true again here in the first quarter with the sole exception of our pawn business in Mexico, which as Tom indicated, has struggled a bit for asset growth this quarter following a solid portfolio growth in the fourth quarter of last year.

Asset levels in most of our mature shops in Mexico were below planned this quarter and the expanding percentage of new stores in the mix further diluted average assets per location and the related marginal profitability of the business.

We had expected a 50% year-over-year increase in the average store count to create an earnings drag in the quarter but encouragingly I am able to report to you that the new stores added over the last 18 months have actually performed better than planned. What we didn't get this quarter was the asset growth we were expecting from the more mature stores in our portfolio and the related lift in earnings that that would have provided.

Regardless, we intend to continue an aggressive store expansion campaign in Mexico and remain confident in asset growth in the mature units will resume with an improving Mexican economy which should follow the US economy out of the recession.

All of the other business units outperformed expectations for this quarter with an extension of several of the positive trends we witnessed in the fourth quarter of last year. As Tom indicated, our US pawn business posted surprisingly strong retail sales which we believe reflect a significant bump in tax refunds in the pockets of our pawn customers this quarter.

As he indicated, over the counter retail sales it trended down in the second and third quarters of last year and we were really pleased to get back to flat in the fourth quarter of 2009. We had not expected to post a 7.5% increase in over-the-counter retail sales in this first quarter. We had also not expected to see our pawn loan balances drop so precipitously in the last six weeks in the quarter.

As Tom had reported, our pawn loan balances finished the quarter up only 2% on a year-over-year basis. I'd like to also point out, though, that our average balances during the quarter were up approximately 5% which is only slightly less than the averages from the previous three quarters.

Everything just sort of flipped in the middle of February for us with tax refunds flowing to our customers. Again, we believe that performance in our US pawn business does reflect the impact of higher-than-expected tax refunds rather than resounding economic recovery that has been heralded in the press over the past few weeks.

By the way, this is the first quarter in quite some time that the year-over-year increase in merchandise sales from our domestic pawn segment alone has matched the year-over-year increase in refined gold sales in our domestic pawn shops. That's a very encouraging trend if it continues.

Moving on to the cash advance segment, we continue to be surprised at the resurgent demand for our online short-term cash advance product in the US as well as our ramp in the UK. We began to see our US online volume grow a bit in the third quarter of last year following a weak first half of 2009.

The business picked up substantially in the fourth quarter and that trend has continued in this first quarter. I can't give you an ironclad explanation for the strong online resurgence as our storefront operations are not experiencing the same level of growth. I think a reasonable hypothesis may be that we are beginning to see customers fall out of the bottom tier of the bank community as banks have reduced credit limits and cancelled credit cards.

We would expect to see these disenfranchised customers appear online before ever seeing them in a storefront. I've got no way of confirming that's actually what is happening but I do believe it's a reasonable guess.

Growth in the UK has been significant this quarter generating year-over-year operating income increases that smothered the startup operating losses incurred in Australia and Canada. As Tom mentioned, we have just begun this quarter to break out our foreign cash advance operations and our public disclosures including the schedules attached to this morning's press release.

A number of you have been looking for that breakout and we have now reached the point where the foreign business is material enough for that disclosure.

You will remember that we entered the UK in 2007 and we launched both Australia and Canada in 2009. Australia and Canada are building volume but at a slow pace. We have been operating in Ontario and British Columbia since the fourth quarter of last year and we expect to add the Canadian Provinces of Nova Scotia and Alberta later this year.

Our storefront cash advance operation posted a substantial year-over-year improvement in profitability for this quarter with a trifecta of higher revenues, lower operating expenses and exceptionally low loss rate.

As you know, the lion's share of that business is in Ohio for us and we've come a long way since the dark days of the failed Ohio referendum in late 2008. Operating income in the storefront cash advance business was up almost four fold this quarter with our pawn related activities contributing a significant amount of that increase.

We are now buying gold at approximately 90% of our shops and making pawn loans in approximately 60%. We have also recently added retail sales to a few units and would expect to expand that later this year.

Year-over-year growth of cash advances written in our storefront operation has slowed from recent quarters and we're just now beginning to anniversary comparisons against the new product we introduced in Ohio at the end of 2008.

Our storefront cash advance business is back as a meaningful contributor to the consolidated income and I am really pleased with the state of that business. The remaining component of our cash advance segment is our card services business which has also generated significant year-over-year growth in loan volume revenue and operating income.

This new business has been on a steep ramp over the past year and I do expect that ramp will slow a bit until the bank we service can bring on additional program managers. Regardless, we should see this business continue to add earnings growth throughout the year.

Our performance with loss rates was also a positive highlight for me this quarter. I think in order to appreciate that you've got to dig a little deeper than the consolidated numbers and examine the components of our cash advance business.

If you look at the loss rate and if you look at it on a percentage of fees earned, we were actually about 40 basis points higher this quarter than the comparable quarter last year. However, when you look at the three reported components of our cash advance segment, that being internet lending, storefront and card services, all posted improvements in loss rates with the most significant improvement coming in our storefront business.

The overall mix of our business has shifted in favor of internet lending and card services which both carry higher loss rates when measured against fees than our storefront business. Consequently, the consolidated loss rate was pulled up from the first quarter of last year because of that mix change.

Now I'm really pleased with our loss experience of the last several quarters. Continuing to post year-over-year improvements in loss rates in coming quarters will undoubtedly prove more difficult and we will be comping against favorable rates from 2009.

The last two topics I'd like to cover are the current regulatory environment and my outlook for the balance of 2010. On the regulatory front, let me first address the federal activity which seems to have shifted a bit since our last call in January.

Most of our recent focus and political activity has been oriented around the work the Senate Banking Committee is doing on a comprehensive financial regulatory reform package, which you probably know addresses a sweeping array of regulations that potentially impact all forms of financial entities from the largest banks to the smallest mom and pop operator.

Our focus continues to be on the proposed creation of a new federal agency designed to created rules around the provision of consumer credit. This agency is included in the House bill as the Consumer Financial Protection Agency, or the CFDA.

The creation of such an agency has been a partisan bone of contention among members of the Senate Banking Committee and I reported to you in January that it appeared to me that support in the Senate for such an agency might be losing momentum.

Since then it seems the tide has shifted in the other direction and the creation of an agency looks more likely than not at this juncture. Of course, that could change again by the time we talk again in July following the completion of our second quarter.

Regardless, at this point it's virtually impossible to know if or how proposed congressional regulatory reform might impact our business. Legislative debates at the state level around the US have also become more active since we last talked.

After enjoying a relatively peaceful year in 2009 we have started 2010 with activity in a number of states where we operate. Those of you who follow the industry regularly probably know the industry's efforts to extend the sunset provisions of the payday law in Arizona have been unsuccessful.

We expect to wind down our payday offering in Arizona between now and June 30th. We are examining other product offerings for customers in Arizona but have not yet found anything worthy of mention. You may recall that earnings from Arizona payday have never been in our earnings guidance for the second half of the year.

We also expect to be affected by recent action taken by the legislature in Maryland which abruptly passed a bill earlier this month that negatively alters our current online offering in Maryland to the point that we would not expect to operate profitably with our current offering past the expected affected date of October 1 of 2010.

Like Arizona, we are searching for other product offerings in Maryland but have not yet found a viable alternative. Consequently, as Tom had mentioned in his report, our earnings guidance assumes that we had no earnings from Maryland in the fourth quarter of this year.

Finally, regarding my outlook for the balance of the year, I remain quite encouraged about the opportunities that lie ahead. We have enjoyed really good momentum over the past two quarters with solid contributions coming from most of our diverse product set and geographies.

Our US pawn and cash advance businesses have performed ahead of expectations in recent quarters as has our international online business. As I mentioned at the outset of my comments, our Mexican pawn business is trailing expectations here in Q1 but I am really not concerned about the future of that business or its growth prospects.

We are building for the future in Latin America and I remain confident an aggressive expansion strategy is the right approach. Additionally, we are making good progress on the development of new US initiatives which will get launched in coming months.

Our earnings guidance reflects the belief that we can maintain growth momentum without a significant resurgence in the US economy. I still personally believe that consumers are behaving cautiously and will continue to display some degree of restraint until unemployment drops and jobs begin to be added in the private sector.

Higher fuel prices continue to be a burden for our customers as does the contraction of alternative forms of credit. Consequently, we do expect US pawn loan balances to bounce back in Q2 and the demand for our cash advance products to remain steady.

We have also strengthened our capital structure over the past year with our $115 million convertible senior note offering issues in May of last year and an additional $25 million on long-term senior unsecured notes issued in the first quarter of this year.

We have reduced any vulnerability we may have had to the refreezing of the credit markets and have plenty of capacity to pursue a variety of strategic options. So in balance, I remain very upbeat about successfully executing our business plan for the balance of this year.

At this point, operator, we'd like to open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of David Burtzlaff - Stephens Inc.

David Burtzlaff - Stephens Inc

A few questions, Tom, do you have the loan balance and the volume for the international business?

Thomas Bessant

At this point, it's not something we're breaking out from the cash advance segment. You'll see the detail. It shows the online cash advance business and that's going to contain the foreign business at this point.

David Burtzlaff - Stephens Inc

Right, so you're just going to give the income statement but not the balance.

Thomas Bessant

Yes, it barely really eclipses the need for materiality from the disclosure perspective. I felt like the earnings was probably a little bit more of a priority to folks than some of the intricacies. But, yes, you can see the substantial jump in the cash advances written in our online segment.

As I said in the comments, we did see a resurgence in US customer demand. But given that contribution on the foreign side you can assume that there's pretty healthy international growth as well.

Daniel Feehan

So, David, I may be able to help you a little bit with additional color there. I think as you look at those numbers you're safe assuming that yields are fairly comparable between the domestic and foreign on the international business and loss rates are at this point, because of the new nature of those businesses, are going to be higher typically than the US just because they're young businesses.

David Burtzlaff - Stephens Inc

Do you have the scrap volume percentage? I mean, where would the scrap - I mean, how much did you scrap differently than last year?

Daniel Feehan

So we were down in terms of actually the number of ounces, which is the way we follow it of refined gold, we were down about 10% this quarter. So really enjoyed a great scrap performance without shoveling through an exceptional amount of additional volume of ounces sold which was really encouraging to me.

David, if you look at our inventory levels in our domestic business they're down 2% this quarter, which that's the first time we've been down, well, since I can remember on a year-over-year basis. So, again, just a very, very strong retail period this first quarter.

As Tom indicated, all the research or all the data we've seen would indicate that the average tax refunds are up 10% which I think has had an impact of sales and things this quarter. It's hard to know how to model all of that going forward into Q2, Q3 but I've got to tell you I’m pretty happy with our balance sheet and where things sit right now.

I do think pawn loans will come back. As Tom indicated, we've seen some resurgence towards the end of the quarter and here in April. So I like where we sit right now, quite frankly.

David Burtzlaff - Stephens Inc

So, Tom, do you pay down about $90 million in debt during the quarter?

Thomas Bessant

Yes, yes, pretty healthy decline, I mean, when you drop your lending assets that significantly you're going to see debt levels just drop tremendously.

David Burtzlaff - Stephens Inc

Okay, so where do you kind of see debt for the year right now?

Thomas Bessant

Barring any significant transactions, let me also say that typically capital expenditures always get off to a bit of a slow start in the first quarter as people kind of line up projects and whatnot. So we're in the early phase of our capital expenditures program. But barring anything significant occurring, you've got to expect the line of credit to move from about $80 million to maybe peaking out at about $140 million to $150 million in Q3, late Q3, early Q4.

David Burtzlaff - Stephens Inc

So maybe $50 million, $60 million increase from the current level?

Thomas Bessant

A little higher than that, yes.

David Burtzlaff - Stephens Inc

All right and then the last question refers to the loan balances. Obviously you said they were down big in February. How are they trending come back later in March, so far in April? Are they recovering faster than they normally do?

Thomas Bessant

Well, it's too early to tell to be honest. But when I said 18%, that's 18% from December to March, so that's a tremendous drop. If you remember last year we talked about a similar trend where we had higher tax refunds. We had a 14% drop.

Of course, last year the economy was in a very challenged environment. The consumer was in a very challenged environment. We weren't sure how quickly pawn loan balances would snap back. They did snap back nicely.

Our early expectations, as Dan mentioned in his call, is that nothing will stop them from moving back aggressively in Q2.


Your next question comes from the line of Liz Pierce - Roth Capital Partners.

Elizabeth Pierce - Roth Capital Partners

Dan or Tom, I was curious, in Mexico if you could just maybe help me understand a little bit more. You think it's just the economy that these mature stores didn't perform as expected. I know that the two traditional pawn stores are fairly new, so it's hard to get a read.

But do you think that may have provided - if the consumer had more options then they would have performed better?

Daniel Feehan

Well, to your first point, I do think that - and we have been seeing this for a little while in Mexico that the economy dipped there pretty significantly as it always really follows the US economy. I guess the folks in Mexico will tell you that when the US has a cold it turns into pneumonia in Mexico from an economic perspective.

So our view is that the older stores that didn't have the asset growth that we were hoping for in the first quarter have been impacted by the economy in Mexico. I think to your other point - I think you're referring perhaps to our full format stores that we've opened up.

I do think that model ultimately has great promise in Central Mexico and Southern Mexico where we operate today. So we've actually recently discussed opening more of those units in 2010 rather than the current mix that we went into the year with between jewelry only and full format locations.

Earlier results we've got five full format stores open now; really pleased with the early results. I think giving the customers the option of having the ability to pawn other merchandise other than strictly the gold is a big plus.

There's not a lot of those shops currently in Central and Southern Mexico and I think that's a big upside opportunity for us.

Thomas Bessant

Yes, Liz, a big part of this is much like the US where it's a seasonal decline coming through December and January. These stores are very, very profitable. The question is how quickly the loan balance will snap back up much like the United States.

The consumer in Mexico is not enjoying a wonderful economic environment so inevitably the need for loans does return. I would be confident that in that Central region of Mexico things are going to continue to happen where balances will come back.

But we just didn't see the bounceback coming off of year-end that we had expected more than anything else.

Daniel Feehan

I'd also point out if you look at the numbers out of Mexico that we did restrict the disposition activity. I mean, obviously part of the yield and part of the profitability of that business is disposing of the forfeited jewelry.

I think we have talked previously about our strategy to actively introduce retail in most of our locations and we did hold back a fair amount of actual gold this quarter that was distributed to quite a few of the locations as inventory for retail of sales. So that was a little artificially low this quarter.

But we do think introducing retail hit the two [inaudible] locations is another opportunity for us to expand the marginal profitability in the business so. Yes, we’re doing the things I think - as I said we’re building a long-term business here and we’re going to continue to be aggressive in our strategies.

I’m less concerned about the near-term profitability quite frankly as I am building a foundation there that’s going to generate earnings growth for us and a dominant position in the future.

Elizabeth Pierce - Roth Capital Partners

And what do you think the mix will be then this year for new stores in Mexico between the full pawn store and just the jewelry only?

Daniel Feehan

Well, we originally talked about, Liz, opening 50 to 60 locations and our original plan was to do 10 or 15 in a full format. So I think we only had the capacity because of inventory issues being able to open stores with the right amount of merchandise. We can’t make a dramatic shift but I would expect, quite frankly, instead of 10 or 15 to do maybe 20 or so.

Elizabeth Pierce - Roth Capital Partners

Then switching over to the US on the retail side of things what were, from a product perspective, a mixed perspective, what are you seeing that the consumers were buying? Is it more gold so they can turn around and pawn it or is it other items that may have lower margins?

Daniel Feehan

So it’s across the board, quite frankly. I mean, we had good disposition of our jewelry but also saw quite a lot of movement in our electronics this quarter which was encouraging as well.

But if you look across the board in all our categories we did well from a retail perspective this quarter, so it wasn’t any single category. People were in the shops and spending money and sort of back like the old days.

Now again, I’m cautious about assuming that’s going to continue at a fanatic pace the balance of this year. But we’ll see what develops here in Q2.

Elizabeth Pierce - Roth Capital Partners

Then finally in terms of a guidance, if you look at between pulling out Maryland and pulling out Arizona and then just the assets being a little lower than you anticipated, I mean, how should we look at - which was the bigger factor in terms of what you came out with for the year-end guidance?

Thomas Bessant

Well, again, when you outperform your first quarter but your asset levels don’t bounce back as quickly and you’re coming from a lower balance, what you’ve really done is just shifted some of that up into your first quarter.

So we’ve got a little bit of it out in the future but let's see where long balances go and we can probably provide you a little more insight on that later in the year because that’s the real governor there.

As I said in my comment, in the cash advance business it’s really well-positioned. I said that coming off of 2009 and I’ll say it again coming off of Q1 in 2010. So expect big gains there and then last quarter of the year more consistent performance out of the overall business.

Elizabeth Pierce - Roth Capital Partners

So was Maryland and Arizona never in the guidance and maybe I just don’t remember?

Daniel Feehan

Well, Arizona, Liz, was never in our second half guidance. We’ve known for some time that the payday law was going to sunset on July 1st. The industry has been working over the last year to convince the legislature to try to extend that law.

At one point we thought that might be possible but regardless it never included it in our guidance. Again, it looks at this point that all those efforts have proven to be unsuccessful.

Maryland, the bill has not been signed by the governor. We expect it to be signed by the governor with an effective date of October 1st. Maryland was in our original guidance that we issued for 2010 for the full year.

It remains in our guidance through the end of the third quarter and we have nothing from Maryland in our fourth quarter earnings guidance. As I indicated in my comments, we’re looking for alternatives. There’s clearly a huge demand in these states, both Arizona and Maryland.

Don’t have anything to talk about today but we’re continuing to search to see if there are other options we can continue to serve customers there. But we’re assuming at this point from a guidance perspective that we will not find anything and we’ll have no earnings associated with those states in the periods I’ve indicated.


Your next question comes from the line of Rick Shane - Jefferies & Co.

Richard Shane - Jefferies & Co.

Two questions, first, you guys had given some context in terms of what’s going on with loan volumes in terms of online payday lending. It sounds like it’s a little bit of a trade down as low-end credit cards are left available.

The dynamics on the US pawn lending business really seem to be driven by very strong tax refunds, which means good retail sales but lower loan balances. Dan, can you put in-store payday lending in context of what we’re seeing here just to help us understand that? Are you seeing the same loan volume increase or is it a little bit more muted?

Daniel Feehan

It’s not at the same pace as the online segment, Rick, although it’s still growing. Now I think when you look at our business and our storefront operation - and really we’re trying to draw comparisons or contrasts to other public payday reported numbers, etc.

You got to remember that a significant portion of our business is in Ohio where we operate under the Ohio Mortgage and Loan Act that has a lower yield than most of the payday rates around the country.

So the actual volume of the loans written in our storefront, again, have been growing over the last several quarters at a little bit slower rate, again, this quarter than what we had been achieving in our storefronts.

Primarily we begin to comp against growth that we had coming predominantly out of Ohio following the referendum issue and the shutdown of the O product towards the end of 2008.

So I do think, again, that the business on the storefront is seeing growth and seeing some resurgence. It's not as strong as the growth that we’ve seen in our US online business. Again, I offered that hypothesis that maybe we’re seeing folks drop out of the bottom of the bank to customer tier looking for alternatives now that things they’ve been doing for years are no longer available to them.

Richard Shane - Jefferies & Co.

Look, I agree 100% with that hypothesis and I think we’re definitely seeing the differences between the two products. It’s a great explanation as far as I’m concerned.

Last question, in terms of - given that you saw such strong retail sales during the first quarter, how do you feel about merchandise levels entering the second quarter and what strategically is your approach?

Do you think you want to build inventory levels back up or are you going to be a little bit more cautious there given maybe you saw some pull forward in terms of retail sales from tax refunds?

Daniel Feehan

Again, coming out of the first quarter obviously seasonally, as you know Rick, seasonally the second quarters and third quarters are when we typically build loan balances and they have traditionally on a seasonal basis not been our strongest retail periods, obviously Q1 and Q4.

We really rely upon retail activity there to keep our balance sheet in balance like we like to come out of the quarter. I’m thrilled to come out of the first quarter with year-over-year inventory balances down a little bit. I’m actually thrilled about that.

What that does for us out in the field is gives us an opportunity to be a little more aggressive on building pawn loans back not just on jewelry but on all of our general merchandise items as well.

So I get nervous when inventory levels are up year-over-year because just our store managers get nervous about their inventory levels because we charge them a capital cost associated with that that affects their store profitability which then affects their individual incentives and they get a little conservative at the loan counter.

So I'm thrilled to see where we are right now because I do think that gives us an opportunity to be a little more aggressive at the loan counter and address loan demand as it comes back, which I do feel like we'll see here in the second quarter and continue to build in the third quarter.

Again, we’ll be building inventory. We expect to build inventory between now and the end of fourth quarter where we’d be in great shape for that holiday sales season again. So from a balance sheet perspective I really like where we are.


Your next question comes from the line of Bill Carcache - Macquarie Research.

Bill Carcache - Macquarie Research

Can you talk a little bit about extending the thought process on the hypothesis about the lower end bank customers kind of driving some of the growth that we’re seeing in cash advance?

I know it’s too early to tell but do you think there’s a reasonable case to be made that maybe the credit performance from that lower-end customer will ultimately also be better and you may potentially see some more positive credit performance down the road relative to what you’ve seen historically?

Daniel Feehan

Yes, I think that’s possible, Bill. I can’t tell you that we’re far enough into this cycle for us to confirm that with any quantitative data analysis. But I’ve been saying for some time that, yes, you’ve got to understand what’s going on in this country from a political perspective, from an economic perspective.

Things are coming out of Washington that have impacted financial institutions with the Card Act and new overdraft protection legislation and things that, in my opinion, is seriously contracting the availability of consumer credit.

Obviously when that happens it’s people at the lower tiers of the credit model for the banks that are impacted the greatest. As they fall out when their limits are reduced or their card is cancelled, it doesn’t change the demand side of the equation. They’ve got to find some alternatives.

It seems logical to me as the first place that they might do is get online. I’m going to assume it’s a little more sophisticated customer and they're going to get online and look for options and alternatives.

I see that happening before someone would walk in to a payday storefront with check in hand to get a loan and I also see that before someone would walk in with their gold chain necklace or TV to get a pawn on it.

Again, it’s a hypothesis that I’ve been working on for some time and trying to prepare our management team to try to deal with, which is why we’re also doing a lot of research and development on alternative products that potentially we can offer folks that look like better values than they may think they otherwise see in the alternative financial services arena.

But if it’s true then you should expect online buying in the US to continue to grow and I think your hypothesis that perhaps it’s a customer that we may see better performance with is a logical extension of that argument.

Bill Carcache - Macquarie Research

If you don’t mind a question on client services and the tremendous growth that you’re seeing there, can you talk about just the profile of the average customer just so we kind of get a little bit of a better sense maybe of what the opportunity could be there?

Daniel Feehan

Yes, the average customer on our card services business, Bill, looks a lot like what we would profile as a - that’s a bad term, sorry, let me take that back - a lot like we would see from a demographic perspective in our storefront business.

So the average customer there doesn’t look a whole lot different than what we would expect to see in our storefront cash advance business. The nature of the product and the nature of the offering that’s provided - and again these are advances that are made by a national bank - provides a lower, quite frankly, a lower credit limit.

So the average loan amount in that business is going to be smaller and should continue to be smaller average advance amount - be smaller than you would see in either our storefront cash advance or our online cash advance business.

Bill Carcache - Macquarie Research

Are most of them doing direct deposit on your card product and then that serves as basically get the payday advance loans from?

Daniel Feehan

Yes, today the way the bank has designed its program you cannot qualify for an advance unless you are on direct deposit.

Bill Carcache - Macquarie Research

Right and are you seeing some of them keep a balance or they have direct deposit in place, they take out a loan and then do they pay it out and then it’s some period of time where there’s no loan and then they end up taking out another loan or are they consistently keeping a loan balance outstanding generally speaking?

Daniel Feehan

I don’t think generally speaking they’re consistently keeping a loan balance outstanding. This product, like all of our products, are designed predominantly for short-term use and customers that find themselves in between paydays, in a jam of some sort, emergency need or unexpected needs. That’s when they turn to us.

Our products are not designed, and we communicate this regularly to our customers, are not designed for habitual use and it’s the same for the card business that the bank has designed this product. It’s not designed for regular use.

So, yes, we have seen customers who’ve used it periodically. They’ll be out of it and as some other disruption in their cycle develops they’ve got the option to opt back in.

Bill Carcache - Macquarie Research

Right, but it seems like there's tremendous stickiness here. Once you get them on direct deposit with you then you’re the ones they're going to be doing business with in the future. So it seems like the stickiness could potentially be much higher there then in a traditional payday advance transaction. Is that fair?

Daniel Feehan

I think that’s fair. I mean, there’re not a lot of people in this business today, so -- .

Bill Carcache - Macquarie Research

Were some of them coming off - were they on paper checks, getting paper checks and then all of a sudden they find out about your product and they do direct deposit? Or were they getting direct deposit in a separate account somewhere else and just switched it over to you guys so they maintain the flexibility of being able to borrow when they’re in a jam?

Daniel Feehan

We have some of all of the above. You’ve got people that - some of the programs we operate on are payroll related programs. So they're people that are already getting their payroll issued on the cards.

Other people have adopted cards and have switched form getting paper checks to getting their payroll credited to the card. Others may have had direct deposit in checking accounts that they’ve moved over to the card.

It’s a significant convenience for the customer and most of these cards - and there are different program managers, so there are different cards involved in our program - but most of them carry Mastercard or Visa logo associated with them and operate on those rails. That’s certainly an additional attraction to an [under] bank to [inaudible] bank customer as well.

Bill Carcache - Macquarie Research

Last question, so is there the marketing for these right now given the tremendous growth you’ve been seeing? Has the marketing been strictly kind of limited to the people who are already customers of your existing storefront locations and then they have the product marketed to them when they’re in there or is there some other type of marketing? Would you consider potentially more aggressively marketing given the growth that you're seeing now?

Daniel Feehan

So this product is marketed primarily by the bank and their program managers. We are not actively involved to any great degree in marketing this program ourself and we do not market the program in our existing locations or to our existing customers today.


Your next question comes from the line of John Hecht - JMP Securities.

John Hecht - JMP Securities

Understand the US retail performance is very strong and we’re surmising that it was driven a lot by increased tax refunds. I’m wondering if you could give us a little bit more color on that.

I mean, can you track new customer activity? Can you give us some color on these retail merchandise-based, same-store sales in the US and how about the complexity that might change in the coming months?

Thomas Bessant

John, we don’t report actual merchandise sales on a same-store basis but our consolidated same-store results which includes performance on pawn service charges was up 13%, so the same-store net revenue up 13%.

By comparison, in Q1 of 2009 that number was down 2% but, of course, that was impacted by the cash advance business not being nearly as strong in the first quarter of 2009.

So we don’t actually break out merchandise because of the difficulties of trying to tie back scrap gold and things like that. It gets very confusing, so it’s probably pretty misleading at the end of the day. So it’s better just to look fundamentally at consolidated net revenue.

Now on the other hand, when you see this kind of volume we’re at, it’s a pretty good indicator that you’re picking up a lot of new customers. We’ve continued as we’ve talked about, I think in a couple of our equity presentations, to focus on advertising our retail product and trying to attract new customers into our stores to shop.

As we’ve said before, that program has been successful in the markets we’ve introduced it to. We continue to plan to introduce it to new markets in 2010 with the objective of driving retail sales and also, obviously, getting customers exposure to our loan products.

John Hecht - JMP Securities

Then moving on to some of the foreign payday lending division, it’s ramping up nicely on the top line and bottom line. From a mark in the contribution perspective, is this a fully scalable business now or is there more investment to be made in the platform as you continue to ramp it up?

Daniel Feehan

Well, we have individual IP associated with each country where we operate, although all countries operate on the same fundamental technology platform. So that code base has been developed and launched and you gained Australia and Canada so there’s really no, other than ongoing maintenance and enhancements to the code, there’s no ongoing investment relative to any of those countries of any meaningful nature.

Thomas Bessant

Again, that’s the beauty, of course. Now the only variable costs going forward is marketing. One step platform’s in place and of course working capital, so still in the early stages and the marginal profitability you see in the breakout today, of course, is certainly diluted by the two new markets of Canada and Australia.

John Hecht - JMP Securities

The final on that marketing front, Tom, when you first engaged in the US on the internet side I believe you had some first mover advantages kind of accrue over time with marketing.

Even though marketing got more competitive in the US you guys had a strong hold given your market share. Are we in that type of phase of marketing in the foreign markets or is it a little difference in terms of the maturity as you enter the market?

Thomas Bessant

Well, yes, I think we were fortunate as you said in the US because we did have a lot of first mover advantage and established kind of on a growth trajectory that didn’t require as much external marketing. Over the last few years we’ve introduced more external marketing to the US product.

As you move into international markets there is a greater burden there. You’re introducing a product in some cases that doesn’t exist and you’re promoting your website and your customer service. So it does carry a little more of a marketing burden going into the new international markets.

Our guys are very sensitive to that and very performance oriented, really focused on return on investments there. But you’re certainly seeing that and expect to continue to see that going into new markets.


Your next question comes from the line of William Armstron - C.L. King & Associates.

William Armstrong - C.L. King & Associates

Third party internet cash advance dollar amounts have been way up the last several quarters and they comprise roughly half of your total cash advances written. Can you just remind us, is that pretty much all Texas or do you do that elsewhere?

Thomas Bessant

Well, a big part of that increase is also, to point out, it’s also the card based service because, of course, those are all loans funded by the bank. So as card based services went from roughly $20 million to $83 million all that growth is, of course, out of the bank.

As it relates to storefront and internet, Texas is a big part of that. Other markets where we operate, including Maryland, is also in a third party based lending platform.

Daniel Feehan

As is Australia.

William Armstrong - C.L. King & Associates

On the storefront cash advance, is gold buying and pawn loans, are they now offered in all your cash advance stores?

Daniel Feehan

They’re offered - actually the gold buying is in about 90% of our locations and the lending is in about 60% of our locations. So we’re still working on expanding the lending component of that, part of which is licensing and zoning related issues and getting approvals from landlords and things. So I would expect to expand that as I mentioned in my comments.

We’ve also just introduced some retail activity, which I think is going to be an important component of the overall offering in the units. So we’re moving into that slowly here in the US but we will be expanding retail offering in our cash advance units.

William Armstrong - C.L. King & Associates

In those units where you do pawn loans but don’t have a retail offering, how do you dispose of forfeited merchandise?

Daniel Feehan

Right now most of that is jewelry-oriented stuff, so the highly valuable pieces of it are salable, will be transferred throughout our system to other pawn locations and then a large percentage of the jewelry there and our strategy with respect to loan value ratios are such that we can scrap that jewelry as refined gold sales.

William Armstrong - C.L. King & Associates

Are these stores physically large enough to have an attractive or viable retail presence?

Daniel Feehan

We think that a large percentage of them are. I mean, they're obviously not as large as our typical pawn shop. But we do think that much like we’re introducing retail in Mexico, which is consistent, the strategy there as well as here in the US is consistent with the success that we enjoyed doing the same thing in the UK when we operated there back in the 90s.

So, again, they’re not going to appear like a pawn shop necessarily but we think that, particularly in Ohio, that we have quite a few units that are large enough to have a respectable offering for our customers.


Your next question comes from the line of Isabel Sterk - C.K. Cooper.

Isabel Sterk - C.K. Cooper

How many provinces are you operating in Canada at this time?

Daniel Feehan

We're currently operating in two provinces, Ontario and British Columbia. We will definitely - our opinion is we'll definitely get into Nova Scotia and Alberta here this year, hopefully in the second quarter, third quarter sometime. I’m hopeful to get in these additional provinces.


Your next question comes from the line of John Rowan - Sidoti & Company.

John Rowan - Sidoti & Company

If I’m repetitive, just forgive me please. But did you just talk about Illinois at all and the regulatory issues?

Daniel Feehan

No, I did not talk about Illinois. There always seems to be some activity going on in Illinois related to payday statutes and the installment loan statutes in Illinois. Most of the business that we do in Illinois is in the pawn business.

The vast majority of our profitability out of Illinois all comes out of our pawn business and none of the noise around Illinois, quite frankly, has anything to do with pawn. So we’ve never really been highly successful operating a short-term cash advance business in Illinois for a variety of reasons.

So I don’t know where this is going to end up and there has been noise for years about closing the theoretical installment loan loophole in Illinois. I don’t, quite frankly, pay an enormous amount of attention to it because we just don’t have a big presence in this business in Illinois today.

Thomas Bessant

In fact, we, a number of years ago, discontinued the PDA product in our pawn locations there because of, frankly, just very poor performance. So it’s not even in our pawn shops and on the online side it’s very, very, very low amount of volume coming out of Illinois.

John Rowan - Sidoti & Company

As far as kind of a bookkeeping issue, administrative expenses were up a little bit, probably a little bit more than I anticipated. Was there any specific reason for that?

Thomas Bessant

Remember as you look at admin costs, you’ve got both the aggregate admin of the US storefront operations, the Mexico storefront operations and our online operations out of Chicago. Kind of continuing a trend that we’ve seen, most of that concentration is in our new development activities out of Chicago. We’re certainly, from our perspective, within budget and we’re not concerned about it.

Daniel Feehan

I’d also add to that that if you work your way through our proxy statement, you’ll see that all of our incentive programs are very performance-oriented both on a short-term and on a long-term incentive program. So good quarters are going to reflect additional costs associated with incentive compensation.

John Rowan - Sidoti & Company

But did you have any larger, I guess, regulatory costs this quarter than you had in prior quarters and maybe comment on that for the second quarter?

Daniel Feehan

No, we did not. We have not had any ramping of regulatory [inaudible]. That ramped last year as we were - and it stayed at a higher level, I mean, year-over-year. We were spending a lot of money in our GR activities last year with everything going on in congress associated with a lot of individual bills that would have affected our business and then the ongoing issues regarding financial regulatory reform first in the House and now in the Senate.

So year-over-year we haven't ramped here in the first quarter. I wouldn’t expect us to do anything additional. I mean, we’re fully ramped and fully engaged and, quite frankly, at this point I don’t think spending any more money is going to influence the outcome, quite frankly, one way or the other.

John Rowan - Sidoti & Company

Last question, how many markets do you have the card services in at this point?

Daniel Feehan

Again, this is a product that is offered by the bank and the bank is currently making advances in all 50 states and I think two or three other US jurisdictions.

John Rowan - Sidoti & Company

Has the bank had, maybe you may not know this, but has the bank had any pushback from the regulators regarding their participation in it?

Daniel Feehan

None that they’ve shared with us.


(Operator Instructions) Your next question comes from the line of Joshua Elvin - Feltl & Company.

Joshua Elving - Feltl & Company

Actually all of my questions have been answered but thanks.


Your next question comes from the line of Henry Coffey - Stern Agee.

Henry Coffey - Stern Agee

When we look at Mexico, I keep wondering if it’s going to be kind of a replay of the payday loan business where you’ve got a product that you could launch quick stores in and it gets a little crowded and it becomes kind of a pedal to distinguish yourself. Do you think that’s the case? Is it getting a little crowded in certain markets or maybe you could give us a sense of that and then I just had a second question.

Thomas Bessant

I mean, when you look at density issue, Henry, not to say it couldn’t happen but it’s not going to happen any time real soon. Again, 75% of the population down there is in that unbanked characteristic.

It’s hard to know exactly how many pawn locations there are, 1500 to 2000, but there’s 4000 banks serving that other 25%. So you’ve got to believe there’s still a great deal of capacity and remember the pawn product serves not just individuals but it also serves small businesses, the proverbial moms and pops down in Mexico that don’t use lines of credit.

So great question, great point. I've got to say, I think we’re years away from that degree of saturation. As Dan said, our strategy is to continue to put locations where they need to be and benefit from getting to that market first and then, as you point out, distinguishing yourself from the others which is absolutely critical and that’s why we’ve got a management team down there oriented to do that.

Henry Coffey - Stern Agee

Then going back to the US, you are right. We had a very, very strong tax refund season. It seems that your customers either sort of are borrowing or buying but rarely doing both and so strong retail sales goes one way, translates into “low pawn loan balances" because they’ve either got cash in their pocket or not.

I remember last year it seemed that confidence had everybody frozen just because consumer confidence was so low. Do you see more just general levels of activity in the store? Do you think people start kind of getting back into that stronger cycle of borrowing and spending or do you think it’s the same way it was last year?

Daniel Feehan

I might address that, Henry. I think that if you look at what I think generally the psychological state of mind of our customer versus this time last year, I mean they're subject to the same sort of news reports that you and I might see or hear and indication listening to President Obama tell us all how good things are doing right now.

So I think that psychologically they're probably doing a little better than they did this time last year. My personal belief is that it's not a dramatic change. You've still got very high unemployment numbers. People still have family members who are out of work. Those people that are working I believe are still pretty nervous about the economy and where it's heading and whether they're safe in their jobs.

In the average, if you look, again, absent the tax refund phenomenon this quarter, it'd be hard to predict what the actual behavior would have been and how that would have compared what we've seen in the third and fourth quarters.

You may remember me saying in the fourth quarter I thought things were getting, from a behavioral perspective, customers were feeling a little more buoyant, a little more confident. I assume that that's part of what we've seen this quarter.

But, again, when you throw in the tax refunds, it's hard to draw a hard an fast conclusion. Clearly Q2 business trends should tell us a lot.

Henry Coffey - Stern Agee

Should I read that your mindset is still to keep inventory levels very lean and keep your credit standards pretty tight?

Daniel Feehan

I think that's a safe assessment.


Your next question comes from the line of Gregg Hillman - First Wilshire Securities.

Gregg Hillman - First Wilshire Securities

For the income from operations by operating segment, you segment it out by pawn lending, cash advance and check cashing. For cash advance it was like for $22.2 million. I was wondering if you could break that our between storefront, internet and card services.

Thomas Bessant

Greg, I could do it for you but you’ve got the tools there to do it. It’s going to take a little work. But in the cash advance segment you got the breakout between storefront, internet lending, card services and cash advance.

Then on the supplemental information on the cash advance you’ve got domestic and foreign. Foreign is only online. So if you take the internet lending income from operation $13.9 million and you subtract out the $1.6 million, you’ll get about $12.4 million. That would be the non-foreign online business.

In domestic you’ve got storefront, card services and, of course, the domestic online business. So from those three variables I think you can work your way through the specifics there.

Gregg Hillman - First Wilshire Securities

Just going on to the percentage of cash advance of consolidated operating income, it seems to be going up to like 39%. Basically the growth and [print of the sale] hasn’t kept up or the pawn area hasn’t kept up with the growth in cash advance and particularly internet loans.

I was wondering will this trend continue? Do you think this is an abnormality? If it continues this would make you increasingly vulnerable to regulatory risk in the United States. Is that correct?

Dan Feehan

Well, clearly I mean, the numbers are the numbers and we have a higher portion of operating income this quarter out of our cash advance business. Part of that is being driven by our foreign business as well, which it would not be subject to the same vulnerability you reference with respect to US legislation.

Part of it is being driven by the card services business, which is a bank product, which is a different legislative regulatory environment than the payday business in the US. So if you followed us and listened to anything we’ve been talking about for the last year or so, the last two years, we are trying to diversify this business model internationally.

We’re trying to diversify the product set to get in other products and services that perhaps are less vulnerable to US regulatory issues; working on, as I’ve indicated many times, working on other products and services in the installment loan area and things.

So the moves we've made internationally with our card services and other things are really designed to address that concern. But again clearly if you want to just do the math we do have a higher percentage this quarter of cash advance earnings on balance than we had at the same time last time.

Thomas Bessant

Yes, but I think your comment is fair as you point out the Mexico based pawn operations, which is a very new store intensive strategy, has not really had the opportunity to begin to contribute on the pawn side and obviously even with strong cash advance contribution, again, a lot of that coming out of card services and foreign as Dan points out. The pawn business is still 60% in the current quarter and will remain the dominant component of the overall contribution.

Gregg Hillman - First Wilshire Securities

I got on the call a little bit late, but did you cover regulatory risks in Congress, what was happening in the Senate, in the House?

Daniel Feehan

Yes, we did.


Speakers, we have no further questions at this time. You may resume with your presentation or closing remarks.

Daniel Feehan

Thank you, everybody, for being on the call this morning. We look forward to talking to you again in July. Thank you.


Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.

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