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JGWPT Holdings Inc. (NYSE:JGW)

Q2 2014 Earnings Conference Call

August 14, 2014 10:00 AM ET

Executives

Jennifer Gambol – Head of Investor Relations

Stewart Stockdale – CEO

John Schwab – EVP & CFO

Analysts

David Scharf – JMP Securities

Moshe Orenbuch – Credit Suisse

Terry Ma – Barclays Capital

Yaron Kinar – Deutsche Bank

Sanjay Sakhrani – KBW

Josh Bederman – Pyrrho Capital Management

Marcelo Lima – Heller House

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the JGWPT second quarter 2014 financial results conference call. (Operator instructions)

I would now like to turn the meeting over to your host for today’s call, Jennifer Gambol, Head of Investor Relations for JGWPT. Please go ahead Ms. Gambol.

Jennifer Gambol

Thank you, Operator, and thank you everyone for joining JGWPT’s conference call for the second quarter of 2014. Statements in this conference call and in our earnings press release issued this morning, other than historical facts are forward-looking statements.

Actual results may differ materially from those projected in the forward-looking statement. Factor that might cause the actual results to differ materially are discussed in our earnings press release. The company disclaims any intent or obligations to publicly update or revise any forward-looking statement regardless of whether new information becomes available, future developments occur or otherwise.

One of the items we will speak about today is adjusted net income which is a non-GAAP measure. We use adjusted net income as a measure of our overall financial performance. We define adjusted net income as our net income under US GAAP before non-cash compensation expenses, certain other expenses, provision four or benefit from income taxes, and the amount related to the consolidation of the securitization and permanent financing trust we use to finance our business.

We use adjusted net income to measure our financial performance because we believe it represents the best measure of our operating results. As the impact of the variable interest entities and other excluded items do not influence our operations.

In addition, the add backs described above are consistent with adjustments permitted under our term loan agreement. Please refer to our earnings release for a reconciliation of our GAAP net income to adjusted net income.

Now, I would like to introduce Stewart Stockdale, our new Chief Executive Officer.

Stewart Stockdale

Thank you, Jennifer, and good morning everyone. We appreciate you joining our equity investor conference call. First, I would like to thank, David Miller for his years of service to this organization. He led the company through the financial crisis with instrumental and diversifying our financing sources and led JG Wentworth in its merger with Peachtree. David brought us to where we are today, and we all thank him for it.

Today, I will give you an overview of my background, touch on the results for the quarter, and discuss my early high level findings and priorities going forward. I will then ask John Schwab to provide a detailed overview of the financial results. We will then open it up for questions.

I’ve been here a couple of weeks, and I am excited to be here. I think that my background in consumer financial services and marketing is relevant in taking the company to the next level. Most recently, I had the opportunity to work in private equity with Summit Partners. It was a great experience and very helpful to me today.

Prior to Summit, I was leading the global consumer financial services business for the Western Union Company, one of the most global brands. Before Western Union, I serve as President of Simon Brand Ventures and Chief Marketing Officer of Simon Property Group, a leading retail real estate company.

I have also held various leadership positions with Conseco, MasterCard Worldwide, American Express and Procter & Gamble. I think my experiences are beneficial and have provided me the right set of tools to lead the company into its chapter.

As far as the second quarter results, John will cover them in detail. The company had a great second quarter, growing adjusted net income to $17 million which represents an increase over the second quarter of 2013 of $6.7 million. The company grew Total Receivable Balance or TRB to $288 million which is up from last quarter’s TRB of $261 million, demonstrating the team’s hard work and push for success. These positive results will serve as a foundation for our strategic plan going forward.

Over the course of my first few weeks here, I have met a very talented management team. We have been spending time together and getting to know each other. I am very happy to have joined this team and look forward to realizing our full potential together by leveraging our core competencies and becoming a high performance team.

I see many competencies throughout this organization. Some of them include our national brands, JG Wentworth and Peachtree, our direct marketing capabilities, our operational and underwriting proficiencies, our low cost to funds and our winning culture.

Most importantly, I am particularly impressed by our people. I have held numerous meetings with many internal groups getting a sense of what drives them in our culture. We have smart and ambitious people who want to succeed. Overall, these core competencies provide an excellent foundation to build upon.

My initial priorities are to continue to get to know the people, the business and the current trends in the business. I don’t just mean reviewing the financial statements. But looking at the white of the eyes of employees and getting their sense and mode of where the business is headed. I want to fully understand our challenges and our opportunities.

Going forward, our three key strategic pillars are number one, grow the core. We are market leaders in the competitive structured settlement payment purchasing industry. And we should always drive to strengthen our position in the category.

Number two, become an information, data and analytics company. This will help the core business and provide the foundation for additional products and new services. We generate a lot of contacts and in turn – that turn into prospects. It is important that we capture information at every corner. Over time, we will be known for being a leading edge information based enterprise.

Number three, we will migrate to become a diversified consumer financial services player to the building, partnering and acquiring products that are logical extensions to our structured settlement core. We have a number of ideas that we are currently reviewing and other opportunities that we will pursue. We look forward to sharing some of them with you over time.

Finally, nothing else matters if we don’t execute. My stuff is always been to motivate and empower teams, change paradigms, and deliver on what I promise. We will measure progress against our priorities on an ongoing basis and you will see the results.

I will now turn the call over to John for our view of the second quarter financial results.

John Schwab

Thank you, Stewart. We had a great second quarter with TRB of $288 million, showing sequential improvement of $27 million. That combined with the lower cost of funds, drove our strong performance and were the primary factors in the increase of our adjusted net income sequentially and on a year-over-year basis of $7 million to $17.2 million.

Further, our continued focus on cost control has enabled us to lower cost base compared to 2013. Getting into some details, the total TRB for the quarter of $288 million was up sequentially from the first quarter TRB of $261 million, but decreased in the prior year of $295 million. TRB spread margin for the second quarter was 20.5% as compared to 18% in the second quarter of 2013 which is an increase of 260 basis points.

The second quarter 2014 margin includes approximately $2 million of spread revenue related to the purchase of an asset portfolio. I want to point out, to enable a more meaningful calculation of spread margin we have provided additional detail in our press release to break out TRB between securitized product purchases, life contingent purchases and pre-settlement fundings. In addition, we’ve also – we’ve also added some additional quarterly metrics to facilitate data trends over time.

For the second quarter, revenue was $123.5 million which represents an increase of $56.8 million from the second quarter of last year. The increase in revenue was driven by our unrecognized – our unrealized gains primarily due to lower cost to funds.

The rates continued to be favorable after quarter end which was evidenced by the successful execution of our 2014 two securitization. Interest income in the second quarter was 22.9% higher than 2013 due to the securitizations completed in 2013 and in 2014. This is offset slightly by lower interest income on our pre-settlement and other portfolios.

Our adjusted net income for the second quarter was $17.2 million compared to $10.5 million in the second quarter of 2013. The increase in ANI between the periods was largely driven by our lower cost to funds as well as reductions in our operating expenses.

Advertising expense decreased in the second quarter to $16.4 million from $17.3 million in the second quarter of 2013. This decrease was due to the timing of our advertising initiatives. As we develop TV production, you will see quarter-to-quarter variances in our advertising expense.

For instance we launched our new Peachtree branding campaign last week. And you will see the production cost for the new campaign hit in the third quarter of the year.

Interest expense during the second quarter increased to $50.7 million from $43.3 million in the second quarter of 2013. Primarily due to an increase in debt from securitizations, but partially offset by the net decrease in principal amount of our term loan and interest rate reduction that occurred in December of 2013.

Interest expense on the term loan was $10 million in the second quarter of 2014, down $2.3 million from $12.3 in the second quarter of 2013. Compensation and benefits expense and general administrative expenses for the second quarter were down by $1.1 million and $1.6 million respectively compared to the second quarter of 2013.

These decreases were driven primarily by the savings associated with the downsizing of the company’s Boynton Beach office and certain operational efficiencies from our cost savings initiatives. Professional and consulting fees were up 11% or approximately $500,000 compared to the second quarter of 2013. Due primarily to outside legal fees associated with the March 2014 CFPB inquiry.

And now, some notes on our financial condition. At June 30, 2014, we had $35.4 million of cash and equivalence on hand. The fair value of the company’s retained interest and finance receivables was $294.6 million at June 30, 2014 as compared to $234.9 million at June 30, 2013.

During our second quarter, we purchased 88,000 shares of the company’s common stock in open market transactions for $917,000 in conjunction with the previously announced share repurchase program. We will continue to assess our cash position and consider opportunities for additional share purchases in the future.

After the close of the quarter, we completed our 2014 two [ph] securitization and receive net proceeds of approximately $69 million. As a result of this transaction, the balance of our current cash and receivables to be finance is over $110 million currently. Please keep in mind that the cost related to the securitization will be reflected in our third quarter financial statements due to the timing of the closing.

So in summary, we had a strong quarter. We’re able to grow our TRB sequentially and increased profitability. We’re continuing to focus on driving growth, profitability and cost management in the core business. We are focused on building our strategic plan with Stewart and look forward to reporting on the progress going forward.

Now, I’ll turn things back to Stewart.

Stewart Stockdale

Thank you, John. Operator, can we please open up the lines for questions?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from David Scharf from JMP Securities. Your line is now open.

David Scharf – JMP Securities

Yes. Good morning and thanks for taking my call. Stewart, welcome, and I guess first question would be maybe just to follow up on some of the trends that surfaced in the beginning of the year related to judicial review and approval. Is there any updates you can provide us either on specific regions or just on a national basis how court approval rates are trending, whether or not they’ve changed materially from what you experienced in the first quarter?

Stewart Stockdale

Sure, David. Thanks for the question. As we reported on our previous call, we had seen an increase in the denial rates early in the year. And I think on the last quarter, we reported that the denial rate for the Month of March, it increased to 9.1% or so. Since that time, we believe the denial rates have moderated certainly, and we’ve seen them start to move back towards our historical averages.

So where we had – we’re concerned or did not know whether that new 9.1% rate was a trend. We don’t believe it is so. And we believe that we’ve seen things heading back to the more normalized levels.

David Scharf – JMP Securities

Okay. And just to be clear John, you’re defining normalized levels as more kind of in the mid-single digit projection rates?

John Schwab

Right. We talked about mid-single digits kind of be in where things where kind of over a long haul. I think we’re just headed back – we’re headed certainly towards that. We’re not there yet, but we certainly made some big progress in getting there in the current – over the current three months since we last spoke. So we’re very pleased with that.

David Scharf – JMP Securities

Got it, got it. And moving on to competition and just the pricing environment, any update there? I know that at the beginning of the year, there was discussion of particularly more price competition from sort of one of competitors, I know there’s one in particular that is a name that keeps popping up. But in general, based on both the prices that are offered out there as well as perhaps indications of step up advertising, is there anything you can update us on in that front?

John Schwab

Sure. I mean, as we’ve talked about, we do operate in a highly competitive industry. And we’re confident in our position in the space, our marketing, our brand strategy and brand recognition are aspects of the business that aren’t easily replicated. Making it tough for new players to get into the market and really gain scale.

As you guys know, we spend about $70 million a year in our marketing efforts. And it’s – I can’t imagine players reaching that same level. But the opportunity here as Stewart talked about as he went through his remarks is we have a tremendous opportunity in marketing advantage. And we plan to continue to augment that with leading edge information and other things as we grow the business over time. And so, from a competitive stand point, we feel like we’re in really good shape, and our market position has still remain as strong as ever.

Stewart Stockdale

And I’ll add to that David, being new to the family here, I can tell you that $70 million over the course of various years is something that is not easy to achieve. And the brand awareness that we have with the two brands is phenomenal. And then if you augment that with information capabilities, we think that we’ll further deepen that mote around us, and we feel good about the competitive position that we’re in.

David Scharf – JMP Securities

Got it, got it. And as it relates just to the pricing environment, I mean, clearly you remain the 800 pound gorilla, and the brands are far away the most identifiable, but I know they’re always kind of pockets of several months here, there where you do start to see step up price competitiveness from some other players. Does that seem to have moderated a bit from what you witnessed in the first quarter?

John Schwab

I mean, it continues to be competitive, David. But we haven’t seen any material changes in the period. We went off our shared yield [ph], as you guys know we’ve got a great cost to funds, and we’re able to win the transactions. But we haven’t seen a real material difference in the competition levels.

David Scharf – JMP Securities

Okay, good, good. And hey, just a couple modeling questions, and then I’ll get back in queue; you partially answered the question in your prepared remarks, John, I think on advertising. It sounds like we’ll see a sequential tick up in the third quarter with the Peachtree launch. But in general as we think about modeling and annualized figure, is the low $70 million still an appropriate budget or based on any analysis of new opportunities or new TV campaigns in addition to the two launch this year, should that – is that a figure that’s likely to increase materially going out of the year?

John Schwab

I think David, as we think about it we ran about $70 million in 2013. And as we’ve said, marketing is going to vary depending on opportunistic ways that we can enhance and increase the number of leads, number of contacts and other things that come along their way. I think the $70 million is a good number that we’ve been shooting for but I think again with some of the changes here and the reevaluation of a lot of things that we’re working on, I think that, yes, there’s an opportunity to work on that and change that in the direction.

So I don’t really have a good update and can’t give a whole lot of guidance as far as that goes. But maybe, Stewart, you have some.

Stewart Stockdale

Yes, I’ll add a little bit. I mean, obviously we’re going to spend around that amount in the foreseeable future. I think the more important question is how to – the direct marketing that we do is very measurable because – and we’re not building brand only, we’re also getting direct responses. So we’re getting response rates and we really know what works.

So what we’ll see us do is test a lot of stuff on an ongoing basis on top of what we’re already doing. And then we’ll measure more – probably not so much the number but where do we spend our dollars, whether it be on the web, whether it be on TV. And so we’ll look to maximize the response rates and the conversion rates going forward. So that’s something that we will continue to do.

David Scharf – JMP Securities

Got it. Are you noticing any impact in consumer demand as we start to see prime credit card issuance finally turn the corner in increased issuance? Are you seeing – any sense that your consumers may be seeing alternative sources of capital at comparable rates?

Stewart Stockdale

Yes, at this point, David, we haven’t begun to see any big massive shifts in trends or shifts in rates as far as that would go from a volume perspective. But obviously if things were to develop in that way, we’d certainly – materially we’d make everybody aware.

David Scharf – JMP Securities

Got it. And lastly, John, in terms of debt issuance costs, you closed the 2014 second securitization in Q3. Should we still think about $2.5 million to $3 million per quarter or in those quarters in which you – effective securitization is the right level?

John Schwab

Yes, David, I think if you look back over the last three securitizations we’ve done, the average was just in the low $3 million numbers and I think that’s something – a fair base to base things on. As you would expect, we’re still adding up the cost now as the transaction just did close. But I think that’s probably a fair thing to look at is the historical trends and kind of for modeling that amount.

David Scharf – JMP Securities

Great, thank you.

John Schwab

You bet.

Operator

Your next question comes from Moshe Orenbuch from Credit Suisse. Your line is now open.

Moshe Orenbuch – Credit Suisse

Great, thanks. I’m not sure if I missed your – could you talk a little bit about the acquisition that you did make and whatever else might kind of be out there prospectively and talk a little bit about that?

John Schwab

Yes, first, Moshe, thanks for the question. From an acquisition standpoint, I had mentioned that we did a portfolio acquisition in the quarter. So as many know, we have a wholesale business that we operate in the normal course of business whereby we’ll purchase structured settlement payment streams from other originators that are out there.

And during the quarter, an opportunity presented itself to us from another originator to purchase a larger – a big – a portfolio that they had and they were looking to monetize. And we were able to do so and we were able to then include that into our securitization that was completed after the period.

So it really wasn’t asset acquisition versus a business acquisition, just to be clear. And also to be clear, we did not include any of the TRB associated with that purchase in our TRB numbers, just to be clear on that.

Moshe Orenbuch – Credit Suisse

Got it. Okay. And maybe then just to kind of relate to what you’re seeing in terms of potential for acquisitions of companies, I mean is that still something that you’re looking at as we go forward?

Stewart Stockdale

This is Stewart. We’ve been fairly vocal about diversifying the company over time. And so that is our goal. I think information will really help as we analyze all of the data and modeling capabilities that we will have on what are the next most likely products to have.

Short-term, we are. The team has been looking at a number of acquisitions and partnerships that I am currently reviewing, so I’m asking you for a little bit of timeout as it relates to just giving me time to review that. But that is the goal and you will see that over time we will partner, build or acquire new services, new products to add to the arsenal.

So we are looking at stuff short-term as well as stuff that will go more into mid and longer term.

Moshe Orenbuch – Credit Suisse

Great. And John, you had alluded to the cost related debt to kind of professional fees for your responses to the CFPB, kind of any update that you can give us there?

John Schwab

Yes, we continue to be responsive to the CFPB. There’s really no update. As we mentioned on the last call, we have met, we have agreed on a data submission plan to them. We have executed on that data submission plan and we are waiting to hear back from them. So there’s not a big update to give as far as sort of progress goes.

Moshe Orenbuch – Credit Suisse

Any sense just as to the focus of where their information requests kind of were concentrated?

John Schwab

Yes, I would say, Moshe, that the requests were fairly broad in nature and they touched many areas of the business. As we had mentioned previously, nothing new and nothing in our subsequent dealings with them that would have indicated a focus in any particular area. It was more of a broad swath of questioning around the business, the industry and how we go about our day to day activities.

Moshe Orenbuch – Credit Suisse

Thanks very much.

John Schwab

Sure, thank you.

Operator

And your next question comes from Terry Ma from Barclays. Your line is now open.

Terry Ma – Barclays Capital

Hey, just going back to the pricing for structured settlement in this environment, so given how low interest rates are, can you maybe just talk about whether or not you’ve adjusted pricing or your ability to adjust pricing to maybe pick up extra volume without sacrificing margin?

John Schwab

Yes, Terry, thanks for the question. We are evaluating everyday sort of what pricing looks like and how we should be pricing on the floor to the customers. And so we manage that very tightly and very heavily and so we are always considering the tradeoff between volume and margin and that’s something that we’ve been very cognizant of as we’ve been approaching the business.

So as you know, it is a competitive business out there. We continue to lead with our low cost of funds. But I haven’t seen – we haven’t seen any big shifts in things but are everyday evaluating that cost tradeoff.

Terry Ma – Barclays Capital

Okay, great. And then just going back to your three pillars, can you just talk about how you plan on growing the core EPS in any acquisitions and maybe just talk a little bit more about that?

John Schwab

Yes, as far as the three pillars go, I mean that continues to be something that we have a tremendous amount of focus on, as Stewart has alluded to. And we’re going to build on focusing on those pillars and growing them over time. I mean it’s very important that we ensure that the core is strong and that we continue to drive business in the core to allow us to generate the profitability that we need to get ourselves where we need to be to allow us to look into other areas and other markets.

Stewart Stockdale

Terry, and I’ll add, I mean the core continues to be and will be the most important part of our business. So growing it and growing it profitably is really important to the organization.

When I talk about information, I think that information not only to enhance what has already been done here, and I’m currently assessing the inventory of data and quality of the data and how that flows and so forth. We will continue to improve and look at process improvement through information and other processes to not only look at modeling capabilities, targeting capabilities to improve that core business on an ongoing basis, conversion rates and so forth.

So data and data driven isn’t only for the new products but it’s really to help both the lead prospecting as well as the conversion of the existing core. And we hope to continue to grow that profitably.

Terry Ma – Barclays Capital

Okay, got it. And I think last quarter you guys had initially mentioned something about broker referrals, and is there any update on that?

Stewart Stockdale

Yes, this is Stewart, Terry. Yes, we are in the middle of assessing a number of opportunities on that front. The team was fairly far down the road, all the way to having calls set up and so forth. I am reviewing that information and looking at the partners and the financials around it.

So over the course of the next few weeks, we’ll be in a position to tell you more. I’m just reviewing it but the team has made quite a bit of progress down that path.

Terry Ma – Barclays Capital

Okay. And just on the portfolio acquisition, so that wasn’t in TRB, but how much of that spread revenue was in your – I think I may have missed it, but how much of that was in your actual spread revenue for this quarter?

Stewart Stockdale

Sure, that was $2 million, Terry – about $2 million.

Terry Ma – Barclays Capital

Okay, got it. Thanks a lot.

Stewart Stockdale

You bet, thank you.

Operator

And your next question comes from Yaron Kinar from Deutsche Bank. Your line is now open.

Yaron Kinar – Deutsche Bank

Good morning and thanks for taking my questions. I wanted to go back to TRBs and specifically to the securitized product TRBs and the significant sequential growth we saw there. Other than the improvement in the court approval rate, was there anything else driving that, are you seeing more call volume, more conversions? What kind of led to that change?

John Schwab

Yes, thanks for the question, Yaron. Yes, as far as TRB increases go, I mean we’ve talked about over the years that there is some volatility there. It bounces around from quarter to quarter. If you go back and look back into 2013, you can see how that’s moved around.

We did have a couple of nice sizeable transactions during the quarter which did provide a little bit of additional TRB. But I think generally speaking, I wouldn’t say there’s been any large increases in volumes or anything else on the frontend that are driving the reason for the increases.

Again, it’s been a business that we continue to work hard and continue to focus on all of the activities that we do to drive those leads. And the timing of them is somewhat a little bit – sometimes a little bit more unpredictable. So you get a few more in the periods than others. That’s probably the best I can tell you as far as sort the reasons for that – for the increase in the second quarter.

Yaron Kinar – Deutsche Bank

Okay. That’s helpful. And then with regards to the court approval rate or the declination rate I guess, if I understand correctly, it certainly moved back to the historical average but it’s not quite there yet. Do you see some bifurcation between states or counties that are still at very low rates or kind of at the same rate of denial that we saw – that you saw in March versus other states that are kind of moving back to normal or is it really across the board that you’re seeing the change?

John Schwab

I would say as we looked at that, the denial rate is something that we’re very pleased to see moving in the right direction. Again, it’s a very positive thing for us. But I don’t have any particular state in mind to point out and to break out. So I don’t really have a trend to say, hey, these states are good, these states are bad in terms of sort of anything higher or lower as far as that’s moving. So I’d say it’s really across the board.

Yaron Kinar – Deutsche Bank

Okay. And one more on the court approval rates. Other than the court’s rejecting or declining or approving the case in front of them, is there something that the company can do to take control in terms of maybe – I guess a cynical way of saying it would be arbitraging the different counties and looking for courts that are more I’d say have a higher approval rate and try to bring more cases to those courts or is there any control that you guys have with that?

John Schwab

Yes, there is. You have to be very careful there. The company does not venue shop. There are strict regulations and rules that we follow regarding the jurisdictions that these approvals will get done in. And so we’re very mindful of that and need to make sure that we were in full compliance. And so there is not a lot of flexibility with how to move those things around.

Yaron Kinar – Deutsche Bank

Okay.

John Schwab

Yes.

Yaron Kinar – Deutsche Bank

Okay. And then one question not regarding the TRBs. On the buyback front, you see you did about $900,000 worth of buybacks this quarter. Why wouldn’t – that number has been higher, we have I think $11.5 million of authorization under your belt there and you had a very strong quarter. Why not make more use for the cash certainly while the share price is where it is today?

John Schwab

Yes, I appreciate the question. We did – we were very thoughtful about the share buyback. We were pleased to put in place a $15 million authorization. And I think we evaluated it along with sort of other potential uses of cash including acquisitions and other things and felt that that was sort of the right level for which to play at this point.

Now that is still open and we still have opportunity – we still have opportunity to buy in to that. And so we haven’t changed our thoughts as far as our view on the stock price because we do think it’s undervalued. But I think again given a number of things that are up in the air right now in terms of as reevaluate things here, we want to just make sure that we have the appropriate capital structure in place to handle what could be coming down the road.

Yaron Kinar – Deutsche Bank

Okay, I appreciate the color.

John Schwab

Yes, thanks very much Yaron.

Operator

And your next question comes from Sanjay Sakhrani from KBW. Your line is now open.

Sanjay Sakhrani – KBW

Thank you. I guess most of my questions have been answered. But I had a couple for Stewart. I guess when you guys talk about being a diversified consumer company – consumer lending, could you just talk about what other products – and I know you’re assessing them still – but like where you see yourselves going? And is the goal to balance sheet some assets as well?

Stewart Stockdale

It’s early to tell you what categories – I mean most people would think one particular category or another. I come from a diversified consumer financial services background, so I have a lot of ideas. I spent the last year in private equity. So I can tell you that there’s a lot of midsize companies out there that would love to leverage our brand, our direct marketing capabilities, our operational and underwriting capabilities, our low cost of funds and so forth.

So all I can tell you is that we think that there’s a number of categories that would make logical adjacencies to our core business. How we actually manage an account for those is still too early to tell. But I am really excited about the brand that we have and the type of pool [ph]. I mean if you think of our direct marketing capabilities, the huge awareness and calls that we get and if you think about – we only have a number – a product in particular to be able to fulfill this huge lead generation that we’re fulfilling, it really is I think a big opportunity for the company.

So all I could tell you is that we’re really excited about it. I’m really excited about it. That’s part of my charter in coming here. But it’s early to tell. And I think over time you’re going to be measuring our success. The data will tell us a lot as we look at not only our current set of customers and the file that we have on everybody that’s done structured settlements.

But everybody that’s calling us, what do they look like, how do they behave, what is their most likely product – will allow us to then in turn, look, should we go partner for a product or should we go acquire a product. And those have very different paths, as you well know.

But think of us as being an information machine that really then starts to say, what other products should we be offering with this really, really rich direct marketing capability that we have, both from an inbound perspective as well as an outbound perspective. And don’t discount the web because the web is a really important part for both searching as well as over time fulfilling product.

So today, think of us as a branded company. I’m sure people here take it for granted, but building a brand and sustaining a brand, a national brand, in what is the most expensive brand-building country in the world is something that we should never take for granted. We talked about it earlier. Certainly a competitive advantage and you combine the brand and the direct marketing and information, I think it makes for a really powerful recipe.

Sanjay Sakhrani – KBW

I just want to make sure I understand. This is leveraging your balance sheet and option then?

John Schwab

Sanjay, it’s John. We haven’t – at this point, it’s early days. But again, I think we’re more focused on the brand than sort of – and using and leveraging that rather than leveraging the balance sheet at this time. But again, as we get into these and get down further into discussions, we will then evaluate it. But it’s not something that we’ve – that’s one of our top priorities.

Sanjay Sakhrani – KBW

Got it. And then when we think about the core business and growing it, could you maybe just talk about what kind of growth story you guys think it is today?

John Schwab

Yes, I think when we look at the market, there is a large install base of annuities and structured settlements that are out there and available for purchase. And I think we continue to look at that as a terrific opportunity to leverage some of the brand and some of the awareness that we’ve talked about today to drive into that market and to gain – to address more of the market that’s currently being addressed, as well as continue to gain market share.

And so we’re continuing to focus on that and come up with ways and different campaigns at which to identify those groups and drive additional volumes through the pipe.

Sanjay Sakhrani – KBW

Okay. All right, great. Thank you.

Operator

And your next question comes from Josh Bederman from Pyrrho Capital. Your line is now open.

Josh Bederman – Pyrrho Capital Management

Hi, thanks guys. So on the denial issue, you guys had mentioned that last quarter it was focused in a couple of areas. One was Illinois, which seemed to be more of a broader issue and the other two were Florida and Maryland where there were specific judges. Can you give an update on the status of what’s going on with those three areas, please?

John Schwab

Sure. Josh, thanks for the question, appreciate it. A couple of things. Again, we feel like things were headed in the right direction and we kind of migrated ourselves down from that 9% down towards 7% or so and so we feel pretty comfortable with that heading in the right direction.

From a state by state basis, yes, I would tell you that Florida and Maryland, as you brought up, we feel like they are moderated and they are back to sort of more reasonable and rational levels that we’ve seen in the past. So we feel comfortable with that.

Illinois, as you know, for us and for all of the competitors continues to be a difficult state to get structured settlements approved. And that’s going to take some time to remedy. And so we’ll need to – I don’t anticipate that changing in the near term. But again, I think the other two states are ones where we have been able to make – that there has been progress made and we feel much more comfortable with those, how they – effectively how they have been approved this quarter.

Josh Bederman – Pyrrho Capital Management

Great, thank you. And then just one more thing, your consultant fees et cetera were up because of the CFPB said you guys submitted something. Is there anything in terms of the process going forward that you think will keep those fees elevated in the near term. Can you give us some guidance on how to think about those additional fees?

Stewart Stockdale

Yeah, Josh. It’s hard for us to tell. Again, this is our new days in kind of getting through this and it’s the early part of the inquiry. And so, all I can tell you is we’re being responsive to the request that have been put in front of us and we’ll continue to be. And as far as the cost go and how that goes we’ll try to report it out to the extent that it’s material as we go forward. But I really couldn’t give you a perspective on how to model that out because frankly it’s something that’s going to evolve as we work through it with them.

Josh Bederman – Pyrrho Capital Management

Okay. Thank you.

Operator

And your next question comes from Marcelo Lima from Heller House. Your line is now open.

Marcelo Lima – Heller House

Good morning. Thank you. Stewart, I have a question for you on these possible acquisitions. One thing that really worries, I think a lot of your shareholders is – will worry them whenever an acquisition is announced is what type of return on capital are you going to be able to get out of that acquisition. As I’m sure you know, a lot of public companies destroy value by making ill-judged acquisitions.

So could you articulate how do you think about that? How do you think about the value that’s created, return on capital, et cetera? What are your metrics for any potential acquisition that you make. Thanks.

Stewart Stockdale

Thank you for the question. First and foremost, I am very familiar with the track record of public companies doing acquisitions. So I understand the history.

I would like for you to think of it a little bit differently. I commit truly from an operator perspective and going, okay, so we have a number of customers today that leverage our brand and are branded. From the information that we have and what does our customer base look like, what other products would these customers be wanting to buy from us.

The next question becomes should we partner to offer those products. Shall we build those products or should we acquire those products. And I don’t have a bias one way or another of those three. What I really want to do is execute to make sure that we’re able to fulfill the customer need and offer good products that people are going to buy at the right levels.

And I’ve done this in my past. If you look at the companies that I’ve been with, I’ve looked at the core and leverage the core to make sure that the adjacencies are really going to be additive and really build into a product set that makes a lot of sense and that is profitable growth for the company going forward.

As I said, sometimes we will build it, sometimes we will partner for it, and sometimes we will acquire it. And if we acquire it, we will look at all of those thresholds that you will look as well as far as what we’re investing and what type of return on capital we will foresee. But rest assured, we’re not going to do acquisitions to do acquisitions. We’re going to do it – targeted acquisition for product capabilities that will leverage our brand, our direct marketing capabilities, our operational and underwriting capabilities and our low cost of funds.

So these will be leveraging our brands to really add more product through the pipeline. So I think it will be a logical extension that we have today. It makes a lot of sense for us and I think that over time, you will welcome those additions to our product portfolio.

Stewart Stockdale

Operator, are there any more questions?

Operator

We have no further questions at this time. I’ll turn the call back over to the presenters.

Stewart Stockdale

I would like to thank everyone for joining the call today. If you have any additional questions, please don’t hesitate to contact John or myself or Jennifer and we will attempt to answer your questions. Thank you for joining the call today. We appreciate it.

Operator

That concludes today’s conference call, you may now disconnect.

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Source: JGWPT Holdings' (JGW) CEO Stewart Stockdale on Q2 2014 Results - Earnings Call Transcript

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