Jamie Fulmer – Director, IR
Ken Compton – President and CEO
Patrick O'Shaughnessy – EVP and CFO
David Burtzlaff – Stephens Inc.
Advance America, Cash Advance Centers, Inc. (AEA) Q2 2010 Earnings Conference Call July 29, 2010 8:00 AM ET
Good day, everyone and welcome to the Advance America, Cash Advance Centers Second Quarter Earnings Results Conference Call. As a reminder this call is being recorded. At this time, for opening remarks and introduction, I’d like to turn the call over to Jamie Fulmer, please go ahead, Sir.
Good morning. I’d like to remind you that during this call, our comments will include certain forward-looking statements. All comments on this call, other than those relating to our historical information or our 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, our 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 risks, uncertainties and other factors, many of which may are not within our control or may not be predicted.
For more detailed discussion of some of these factors, please refer to the Risk Factor section of our Annual Report on Form 10K for the year-ended December 31, 2009, and our quarterly report on Form 10-K for the quarter ended March 31, 2010 copies of which is available from the SEC upon request from us or by going to our website at www.advanceamerica.net.
Now, I’d like to turn the call over to our Chief Executive Officer, Ken Compton.
Good morning and welcome to our second quarter earnings call. Also joining me today is Patrick O’Shaughnessy, our company’s Chief Financial Officer.
Yesterday, the company reported the results of the quarter ended June 30, 2010. Before we discuss these results, I’d like to update you on a few developments since our last call. Yesterday, our Board of Directors approved Advance America’s 23rd consecutive dividends as a public company. This dividend of $0.0625 per share is payable in September 3, 2010 to stockholders of record as of August 24, 2010. Since our December 2004 initial public offering, we’ve returned approximately $379.4 million in cash to our stockholders through the payment of quarterly dividends together with repurchase of shares.
As we have discussed on previous calls, the 2010 legislative session has once again been active on a federal level and several states across the country. Of course, much of the recent attention has centered on the Financial Reform Act of 2010, more commonly referred to as the Dodd-Frank Wall Street Reform and Consumer Protection Act which is originally signed in the law. This law represents a comprehensive overhaul of the nation’s financial system and effects of broad array of kinds of services from Wall Street to Main Street including now offering of cash advance services. It also recognizes the importance of access to small dollar consumer credit. As it specifically relates to the cash advance industry, The Bureau of Financial Protection created by this law, may have a significant impact on the way millions of consumers access credit.
We strongly believe that a competitive, regulated financial environment is in the best interest of customers, so that they can have conscience and legitimacy of personal financial decisions they make. We also believe that a strong regulatory framework is good for reputable lenders such as Advance America, and we hold and hardly support the government’s effort to protect American consumers from unscrupulous lenders who trap consumers in the complex loans that are difficult to understand and riddled with hidden costs.
Since I’ve joined Advance America in 2005, I’ve been constantly amazed that the fundamental lack of understanding that exists about the cash advance product. Each day I rarely see dozens of our articles that mischaracterize our product in any number of ways, whether it is an unfortunate stereotyping of our customers or inaccurate comparisons used to describe our rates and fees. Just last week, the Wall Street Journal and again, today, in the Washington Post, as story suggested that such secured administration had been depositing bad checks (ph) directly into accounts controlled by payday lenders which repay themselves from the bounced checks (ph) before remitting the rest of the money to beneficiaries. This is certainly not a practice that we engage in but is a good example about a cash advance product is also often confused with other credit products not associated with Advance America. Too often, our credit strategies what I call “fuzzy facts” dissuade an all too receptive media in the procurement of vehicle for promulgating misleading information designed to influence public opinion.
Perhaps the best example is the commonly excited pronouncement that there are more cash advance centers in the United States than McDonald’s and Burger Kings combined. While this may be true, I don’t see that as a bad thing. This tired, over-used fact is pointless. There are more bank branches, restaurants and drugstores and Starbucks than McDonald’s. What does that tell you about the value of our product to customers, absolutely nothing.
In the last 12 months alone, this comparison has found its way into the media countless times. From Associated Press to local outlets like the St. Louis Post-Dispatch, this ridiculous talking point from our critics since to find its way into just about every story written about the industry. This ingenious attempt to convince opinion makers that the existence of store-front lenders is bad for consumers and it completely ignores the underlying of simple fact that cash advance storefronts in the United States exist to meet the specific demand of customers. This point is further validated by the simple fact that millions of Americans choose the regulated cash advance product each year over their other alternatives. They use our product responsibly and are satisfied with the service they’ve received, as evidenced by the extremely low number of customer complaints we receive from the state agencies that regulates us across the country. Specifically, Advance America has had less than 30 complaints out of over 4.5 million transactions during the first six months of this year.
Our customers vote with their feet on a daily basis by seeking out the loan product that is best suited to them and the location most convenient to them. I use this example to point out precisely why a fact-based examination of the cash advance product by an independent entity will present us with the unique opportunity to set the record straight. We believe this new regulatory framework will focus on the specific attributes of the cash advance product we offer and will refute many of the mist that currently exists.
We see this historic new law as an opportunity for an unbiased discussion on the needs of lower-income consumers and the role of cash advance as plain helping them meet their short-term financial difficulties. As President Obama said last week, “our financial system only works –- our market is only free –- when there are clear rules and basic safeguards that prevent abuse that check excess, that ensure that it is more profitable to play by the rules than to game the system”. We intend to work with the administration and this new regulatory entity to explain the facts associated with consumer lending so they better understand the needs of the consumers we serve. American consumers want and deserve simple, transparent, fully-disclosed and fair products that are competitively priced to meet their needs.
Advance America and other responsible lenders are already highly regulated at the state and federal level. At the federal level alone, the offer on cash advance product is regulated by at least seven different federal laws including, but not limited to, the Truth in Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Gramm–Leach–Bliley Act, the Federal Trade Commission, Fair and Accurate Transactions Act and the Military Financial Services Protection Act. We welcome the additional inspection oversight of this new agency that this new agency will bring, because we believe a strong regulatory environment is good for the consumer that use the products and the services we offer.
At the state legislative level, sessions are winding down in states across the country. As of today, legislators in 27 of the states we’re monitoring have adjourned for the year. During the course of the current legislative year we have monitored a total of 135 bills in states across the country which is consistent with the recent years. Generally speaking, the legislative session has once again been a constructive one. In Wisconsin, a new law that we helped to shape goes into effect January 1, 2011. The law is designed to help consumers manage their debt and adhere to their financial obligations and creates tough new regulations that balance additional protection for consumers with safe and reliable access to short-term credit.
In Illinois, a new law will go into effect March of 2011 that is a result of a lengthy process, collaborative process, with consumer advocacy groups to address concerns about existing lending laws there. We’re supportive of the new short-term loan product that resulted from this process. But customer acceptance of this new product remains unclear, as it does ultimately affect our bottom line performance. In Colorado, a new law goes into effect August 11, 2010, that dramatically changes the terms in short-term cash advances by creating among other things a new six month loan. We have previously announced our intention to close and consolidate centers in Colorado as a result of this change.
On July 1, 2010 a new law went into effect in Rhode Island that reduces the permitted fee for a cash advance from 15% to 10% of the amount advanced.
Finally as we announced earlier this month, we made a decision to cease operations in Arizona when the existing law permitting cash advances there expired on June 30, 2010 and after we concluded that an economically viable alternative product or service does not currently exist.
Volumes of independent academic research supports our long held belief that consumers are best served when they can chose the financial service that best suits their needs, which in some cases maybe a cash advance.
Unfortunately, despite the campaign rhetoric of ambitious politicians in Arizona who offer no credible alternative, the biggest losers are employees who have lost their jobs and Arizona consumers who will be left with fewer and more expensive credit options.
On our last call we discussed new laws that went into effect in South Carolina, Washington and Kentucky while these laws had significant impact on the way we operate in those states for some period of time, the experience in states similarly effective have shown that our business model should recover as the competitive environment changes and a more stable regulatory environment emerges.
We continue to experience solid growth in most states in which we operate. As I said in yesterday’s release, we believe this overall strength suggests that demand for our service remains strong and will persist well into the future.
This overall strength of our business together with our efforts to control cost and consolidate underperforming centers have helped and will continue to help us navigate the effects of regulatory changes in various states.
We believe the efficient operation of our business combined with a strong balance sheet have strengthened the foundation of our company and puts us in a good position to pursue further opportunities as they present themselves.
Now I’d like to turn the conversation to our expanded services.
In late 2008 we began accepting online cash advance applications through Advance America’s website for customers when they apply for cash advances and either come to a center to complete their transaction or receive an advance from a third party lender that will be deposited directly in their account.
This distribution channel continues to grow and attract new customers. Through the end of the second quarter, our online services have generated over 166,000 loans and approximately 36,000 new customers online since the initiative began.
We continue to offer prepaid debit cards and money transfer services as an agent for third party vendors.
During the second quarter we registered approximately 46,000 prepaid cards, an increase of 71% over the second quarter of 2009 and loaded approximately $39 million on those cards for our customers. Since the inception of this offering, we have registered approximately 646,000 prepaid cards and have loaded over $464 million.
During the second quarter, we recorded over 341,000 MoneyGram transactions with the base value exceeding $83 million. All MoneyGram services we offer continue to grow including spends, express payments and receipts. I mentioned in our last call that we began rolling out a utility bill payment program. We now offer these services in 11 states and we’ll continue to add additional states during the second half of 2010.
I’ll now turn the call over to Patrick for an overview of our financial results for the quarter and six months ended June 30, 2010.
Good morning. For the quarter ended June 30, 2010, our total revenues decreased 5.8% to $141.4 million compared to $150.1 million in the same period of 2009. Keep in mind that these comparisons include the results of operations in Virginia, Washington, South Carolina and Kentucky where new law and regulatory changes have negatively impacted the company’s revenue and profitability.
Revenues in these four states were $14.1 million for the quarter ended June 30, 2010 compared to $28.9 million for the same period in 2009. We continue to experience performance headwinds in these states and expect to do so for the next several quarters.
Excluding the results of these states from both years, revenues increased by 5% for the quarter ended June 30, 2010 compared to the same period of 2009. For the second quarter, total revenues for centers opened prior to April 1, 2009 and still open as of June 30, 2010 were essentially flat decreasing by 0.7% compared to the same period in 2009. Again excluding the revenues from Virginia, Washington, South Carolina and Kentucky for the quarter ended June 30, 2010, total revenues for the company’s centers opened prior to April 1, 2009 and still open as of June 30, 2010 increased 7.9% compared to the same period in 2009.
The provision for doubtful accounts as a percent of total revenues for the quarter ended June 30, 2010 decreased to 17.7% compared to 22% for the same period in 2009.
As we have discussed on prior calls, loss reserves were lower during the quarter ended June 30, 2010 compared to the same period in 2009 due to lower losses and reduced loan balances for the company’s open ended line of credit product in Virginia.
We began offering a revolving line of credit in the fourth quarter of 2008 and stopped offering new lines of credit during the first quarter. We expect to stop servicing existing lines of credit or advancing on existing lines of credit in Virginia by October 1, 2010 in accordance with new regulations there.
For the quarter ended June 30, 2010 charge offs netted recoveries were $19.4 million compared to $28.7 million for the same period in 2009.
During the second quarter the company received proceeds of $134,000 from the sale of previously written-off receivables compared to $2.2 million during the same period in 2009.
The company closed or consolidated 26 centers in 12 different states during the second quarter. We had approximately $1.4 million of center consolidation and closing costs during the quarter ended June 30, 2010 compared to $1.7 million during the same period in 2009 excluding any increases in the provision for doubtful accounts. These costs consisted primarily of lease terminations, fees, deimaging cost and fixed asset impairment costs including impairment costs of $654,000 during the second quarter of 2010.
For the second quarter of 2010, total marketing expense was $6.6 million or 4.6% of revenues compared to $8.9 million or 6% of revenues in the second quarter of 2009.
As we routinely discuss on these calls, our marketing expenses tend to fluctuate and vary from quarter to quarter based on the timing of various initiatives and business needs. It remains our expectation that the company’s marketing expense will be approximately 3% to 3.5% of revenue for 2010.
Center gross profit for the second quarter increased to $31.1 million compared to $24.7 million for the same period in 2009, an increase of 26.2%.
General and administrative expenses for the quarter ended June 30, 2010 were $16.6 million compared to $13.8 million for the same period in 2009. This increase is primarily the result of higher legal and consulting expenses.
The results for the quarter ended June 30, 2010 include a legal settlement expense of $2.4 million including $2 million related to the previously disclosed settlement of a lawsuit in Missouri.
Income before income taxes for the quarter ended June 30, 2010 increased 10% to $9.6 million compared to $8.7 million for the same period in the prior year.
Excluding the legal settlements, income before income taxes for the quarter increased 37% over the prior year to $11.9 million. The effective income tax rate as a percentage of income before income taxes was 46.4% for the quarter ended June 30, 2010 compared to 23.5% for the same period in 2009. The increase in effective tax rate in the current year is primarily a result of a one-time reduction in state tax expense recognized in the prior year and other discrete items recognized in the current year.
Including all charges in the higher effective income tax rate, net income for the first six months of 2010 decreased to $18.6 million compared to $21.8 million for the same period in 2009. Net income for the quarter ended June 30, 2010 was $.5.1 million compared to $6.6 million for 2009.
Basic and diluted earnings per share were $0.08 for the quarter ended June 30, 2010 compared to basic and diluted earnings per share of $0.11 for the same period in 2009. Excluding the legal settlement charges, diluted earnings per share for the quarter ended June 30, 2010 would have been $0.10 per share.
During the six months ended June 30, 2010, the company generated cash flow from operations after funding advances receivable of $21 million. As of June 30, we had $106.3 million borrowed under our revolving credit facility.
Regards to some of the key operating metrics for the second quarter, the average amount of cash advance made excluding installment loans and lines of credit during the second quarter of 2010 increased to $368 compared to $359 for the second quarter of 2009.
The average fee on all cash advances made was approximately $55 during the second quarter of 2010 compared to $53 during the same period in 2009.
The total principal amount of cash advances originated during the second quarter was approximately $888 million compared to $916 million during the same period in 2009, again excluding installment loans and lines of credit.
The average duration of all cash advances completed was approximately 18 days for the second quarter of 2010 compared to 17.5 days for the second quarter of 2009.
As of June 30, 2010, the company had an operating network of 2476 centers and 72 limited licensees in 32 states of the United Kingdom and Canada.
Now I will turn the call back over to Ken.
Thank you, Patrick. At this point we will conclude the presentation and turn it back over to the operator for any questions you might have.
(Operator Instructions) Our first question comes from David Burtzlaff of Stephens Inc.
David Burtzlaff – Stephens Inc.
Few questions. First, how many stores will you have in Colorado and Washington after these closures?
Colorado, we will have 32 and in Washington we currently have 74 and we will go to –
I think it’s 46.
David Burtzlaff – Stephens Inc.
46, okay. And so, when you give the revenues in those states that were lost, is that total what they did last year ex store closings or do you know, just total or does that take out stores that have been closed throughout this earlier this year?
That’s total. We will just give you total revenues. We tried as best as we can in those states where we consolidate stores to move the customers to existing stores. So for comparison purposes, we will have all the revenues not the per store revenues.
David Burtzlaff – Stephens Inc.
Okay. On the losses, Patrick, the loss (inaudible) very good obviously this quarter, where you see that kind of going forward? I mean you are not going to get the huge discrepancies between the years and the improvements.
That’s right. Most of the large charges we took for the Virginia line of credit were in the first half of last year. So the improvement won’t be as dramatic going forward. I think if you do the math, we will break out the states in Qs and I think you will see that the provision has been pretty flat when you take out the Virginia data.
David Burtzlaff – Stephens Inc.
Okay, so I mean we should expect closer towards what it was last year, in the back half of the year?
Okay. And then finally, how much was the legal expense and consulting in G&A increase over last year and when does that kind of slow down?
We don’t break out the details but I would say it’s most of the increase in G&A, certainly more than half and it’s difficult to predict, there has obviously been a lot of expenses to monitor what’s going on in Washington that we haven’t had in past years but it can be a spotty expense. It’s not something we really plan on, it’s continues to evolve as we monitor the situation. Is there anything you would like to add to that, Ken?
No, I think that’s right, I think if we go over the next few quarters, I think we will probably see some more clarity on that but it’s hard to predict now.
I am showing no further questions at this time. I would like to turn the call back over to Ken Compton.
Just like to say thanks for your participation today and we look forward talking to you at the end of the third quarter. Thank you.
Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and have a wonderful day.
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