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

Q3 2011 Earnings Call

October 27, 2011 8:00 AM ET

Executives

Jamie Fulmer – Director, Investor Relations

Patrick O’Shaughnessy – Chief Executive Officer

Jim Ovenden – Chief Financial Officer

Analysts

David Burtzlaff – Stephens

John Hecht – JMP Securities

Bill Armstrong – C.L. King & Associates

Operator

Good day, everyone. And welcome to the Advance America, Cash Advance Centers Third Quarter Earnings Results Conference Call. As a reminder, this call is being recorded.

At this time for opening remarks and introductions, I’d like to turn the call over to Jamie Fulmer. Please go ahead, sir.

Jamie Fulmer

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, perspective demand for our products or expected legislative or regulatory developments that may affect the cash advance services industry are forward-looking statements.

Please note that these forward-looking statements reflect our opinions only as of the day of this presentation and we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.

In this regard, please keep in mind that our actual future results could differ materially from our expectations and are subject to risks, uncertainties and other factors, many of which are not within our control or may not be predicted.

For a more detailed discussion of some of these factors, please refer to the risk factors section of our annual report on Form 10-K for the year ended December 31, 2010 and our quarterly report on Form 10-Q for the quarter end June 30, 2011, copies of which are 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, Patrick O’Shaughnessy.

Patrick O’Shaughnessy

Good morning. And welcome to our third quarter 2011 earnings call. Also joining me today is Jim Ovenden, our company’s Chief Financial Officer.

Yesterday we were pleased to report the results of the quarter ended September 30, 2011. Our third consecutive quarter of center gross profit and earnings growth. Before we discuss the financial results in detail, I would like to briefly update you on the few developments since our last call.

Yesterday, our Board of Directors approved Advance America’s 28th consecutive dividend since becoming a public company. This dividend of $6.25 per share is payable on December 2, 2011 to shareholders of record as of November 22, 2011.

On October 10, we completed our largest acquisition in over 10 years by closing on the purchase of CompuCredit Holdings, 300 retail store front lending locations. These centers are located in nine states where Advance America already operates and we are excited to add them to our existing national network.

The purchase price is approximately $46.7 million and was comprised of the $45.6 million contract amount and a working capital adjustment of $1.1 million. It is subject to possible post closing adjustments and indemnities.

While still early in the transition, we’ve seen most of the centers and met the employees and believe that we share a common commitment to providing the highest level of customer service possible.

We believe that this acquisition will return value to our shareholders quickly and expect they will be accretive during 2012. It will also likely cause higher operating costs during the fourth quarter due to costs associated with the completion of the acquisition and the addition of 300 new centers.

As we previously disclosed, highlights of the acquired businesses, unaudited financial results for the trailing 12 months ended June 30, 2011 included total revenues of $72.1 million, center gross profit of $20.3 million and SG&A expense of $8.8 million. Included in this cost is depreciation of expense of $900,000.

We will continue to evaluate future opportunities that will supplement our existing footprint, allow for market expansion and provide access to new product platforms. As evidenced by our financial results for the quarter and nine months, market demand for short-term credit continues to be strong.

Historically, consumers can satisfy their demand for short-term credit through several different options, including late payments to vendors, overdraft protection NSF, debit advance and courtesy pay offered by banks and credit unions. Unsecured cash advances from retail vendors like Advance America, as well check cashiers and online lenders or short-term secured loans like those offered by car title and pawn makers.

As I have shared with you on numerous occasions, we have always welcomed the healthy competition in the short-term credit market whether it’s from banks or non-bank providers. I believe consumers benefit from having multiple options.

We’ve recently seen activity from both depository and alternative financial service providers as they focus on developing strategies to better serve their customer short-term credit needs.

Short-term credit services offered by banks, credit unions and new startups are receiving increased attention. Banks can offer depositors advance loans since well before Advance America was founded in 1997. The more of these institutions and others are beginning to offer this as a service to their customers.

While these products have gained some media attention lately, most banks and credit unions continue to provide overdraft services and courtesy pay as their primary source of short-term credit to their customers.

Loan services reports since August 2010, when new rules took effect that prohibit banks from automatically enrolling customers in overdraft plans for debit cards or ATM transactions. The overall opt-in rates for such plan has grown to exceed 77%. This high opt-in rate clearly demonstrates large consumer demand for short-term credit and that consumers regard overdraft as a safety net and not as a penalty.

The Office of the Comptroller of the Currency also recently acknowledged that overdraft programs are a credit product much like the short-term direct deposit advances offered by some banks. The OCC issued a new set of proposed guidelines and see to create a regulatory framework for both overdraft and deposit advance services.

As mentioned on our last call, the Consumer Financial Protection Bureau became the new federal supervisor for consumer financial products on July 21st of this year. Since that time, the bureau has a released a guide for its examiners to use in overseeing companies who provide consumer financial products and services. The guide calls for consistent oversight of both banks and non-banks.

In particular, the guide outlines the way that the bureau will examine sales and marketing materials and disclosure requirements. They plan to review information and disclosures to ensure they’re presented in a clear and conspicuous manner, and that they can form the applicable laws.

As we have stated numerous times, we wholeheartedly agree with the bureau’s stated goal of helping to promote fair, transparent lending in a competitive consumer financial services marketplace where Americans can rely reliably access credit on a level playing field.

This made all short-term credit options obviously governed by similar regulations including uniform disclosure requirements to ensure that consumers are equipped with all the information they need to compare services.

Such approach will provide valuable consistent treatment for lenders without limiting valuable consumer choices. It’ll also protect consumers from operators in the marketplace that both options that are in their words, dramatically better than PayDay loans. Even when a close examination of their late fees and terms often shows that they are offering basically the same product.

Providing fair and comparable disclosures is a cornerstone of a healthy regulatory environment. It gives consumers the tools they need to make a comprehensive analysis of their option.

Another apparent focus of the bureau’s approach to examination and their supervision process will be a reliance on data and in particular, consumer compliance when evaluating financial service providers.

At Advance America, we take great pride in the fact that as regulated business, we have an extremely low number of customer complaints that we receive from state agencies that regulate us across the country.

Since 2005, regulators have received on average less than 100 complaints per year from customers about Advance America out of approximately 75 million transactions, about one complaint for every 136,000 transactions.

Among the variety of available credit choices, consumers consistently choose our service because it supports their personal and economic interest. They recognize its value proposition, assemble reliable, transparent and competitively priced option that helps them meet their needs. And they are highly satisfied with the services we provide, which continues provide a solid foundation for our company and its future.

I will now turn the call over to Jim Ovenden for an overview of our financial results for the quarter ended September 30, 2011.

Jim Ovenden

Good morning. For the quarter ended September 30, 2011, our total revenues increased 3% to $158.9 million, compared to $154.2 million for the same period 2010. This represents the first quarter-over-quarter growth in revenues since the third quarter of 2007.

These comparisons include the results of operations in Colorado, Washington and Virginia where law and regulatory changes in 2010 negatively impacted the company’s revenue and profitability and in Wisconsin and Illinois where state law changes went into effect during the first quarter of this year.

Revenues in these five states were $11 million for the quarter ended September 30, 2011, compared to $17.3 million for the same period in 2010. Excluding the results of these states from both years, revenues increased by 8% for the quarter ended September 30, 2011, compared to the same period of 2010.

For the third quarter, total revenues for centers opened prior to July 1, 2010 and still open as of September 30, 2011 increased by 4.9% compared to the same period of 2010.

If you exclude revenues from Colorado, Illinois, Virginia, Washington and Wisconsin for the quarter ended September 30, 2011, total revenues for the company’s centers opened prior to July 1, 2010, and still open as of September 30, 2011 increased 8.8% compared to the same period of 2010.

The provision for doubtful accounts as a percent of total revenues for the quarter ended September 30, 2011 decreased slightly to 20.9%, as compared to 21.6% in the same period in 2010. The company did not show any previously written-off receivables during the quarters ended September 30, 2011 or September 30, 2010.

The company opened a total of seven centers during the quarter ended September 30, 2011, company also closed a consolidated 51 centers in nine different states during the third quarter of 2011, including 30 in Washington state where operating results have been negatively affected by law that went into affect in January of 2010. We have approximately $900,000 of center closing costs during quarter ended September 30, 2011, compared to $2.4 million during the same period of 2010.

Closing costs include severance, center tear-down costs, lease termination costs and the write-down of fixed assets. For the third quarter of 2011, total marketing expenses were $6.3 million or 4% of revenues, compared to $5.5 million or 3.6% of revenues in third quarter of 2010.

For the first nine months of 2011, total marketing expenses were $15.5 million or 3.5% of revenues, compared to $15.7 million or 3.6% of revenues for the same period of 2010.

Center expenses for the quarter ended September 30, 2011 were $115.9 million, compared to $118 million for the same period of 2010.

Center gross profit increased 18.7% or $43 million for the third quarter of 2011, compared to $36.2 million during the same period of 2010.

General and administrative expenses for the quarter ended September 30, 2011 were $14.7 million, compared to $14.4 million for the third quarter in 2010, an increase of 2.6%. Income before income taxes for the quarter ended September 30, 2011 were $26.5 million, compared to $3.9 million for the same period in the prior year.

The effective income tax rate as a percentage of income before income taxes was 45% and 64.3% for the three months ended September 30, 2011 and 2010, respectively.

Basic and diluted earnings per share were $0.24 for the quarter ended September 30, 2011, compared to basic and diluted earnings per share of $0.02 for the same period of 2010.

Turning to nine months ended September 30, 2011, the company generated cash flow from operations of $115.9 million, a 41.4% increase over the same period of 2010. As of September 30th, we had total debt net of unrestricted cash of $46.9 million, a decline of $42.4 million in December 31 of 2010.

Getting with yesterday’s announcement of our third quarter 2011 results, we have started reporting EBITDA, which is a non-GAAP financial measure as defined under the rules of the SEC. This is intended as a supplemental measure of our performance.

We present EBITDA because we believe that when giving the company’s GAAP results in the company reconciliation, EBITDA provides useful information about our operating performance and period-over-period growth.

Additionally, we believe that EBITDA is commonly used by investors to assess a company’s leverage capacity, liquidity and financial performance. However, I would caution that EBITDA should not be considered an alternative, the net income or any other performance measure drive in accordance with GAAP or as an alternative to cash flows from operating activities or any other liquidity measure derived in accordance with GAAP.

As we reported yesterday, EBITDA for the most recent trailing 12 months totaled $119.8 million, an increase of 32.5% over the comparable prior year period. EBITDA margin was 19.8% for the trailing 12 months compared to 14.7% for the prior year period. For a reconciliation of net income to EBITDA, I refer you to yesterday’s press release.

Now, with regards to some of the key operating metrics for the third quarter. The average amount of the cash advances made, excluding installment loans in Illinois and Colorado and lines of credit in Virginia, during 2011 increased to $375 compared to $371 for 2010.

The average fee in all cash advances made was approximately $55 for both the third quarter of 2011 and 2010. The total principle amount of cash advances is originated during 2011 was approximately $1 billion compare to $961 million during 2010, again excluding installment loans and lines of credit.

The average duration of all cash advance is completed, is approximately 18.2 days for 2011 compared to 18.1 days for 2010. And finally, as of yesterday company had an operating network 2596 centers and 52 limited licensees, 29 states in United Kingdom and Canada.

Now, I’ll turn the call back over to Patrick.

Patrick O’Shaughnessy

Thank you, Jim. At this point, we will conclude the presentation and turn it back over to the operator for any questions you may have.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question is from David Burtzlaff of Stephens. Your question please.

David Burtzlaff – Stephens

Good morning, Patrick and Jim, great quarter.

Patrick O’Shaughnessy

Thank you, David.

David Burtzlaff – Stephens

Couple of questions, Patrick, you mentioned higher expenses for the acquisition in the fourth quarter can you kind of give an idea what that may be?

Patrick O’Shaughnessy

Well, obviously, we have closing costs associated with attorneys and accountants and other people that we used as outside advisors on that. And I would guess in total that would be around $1 million. And then obviously, we have -- the operating costs associated with the new stores and it will be -- and an overhead and it will be some time before we’re able to reduce those costs.

David Burtzlaff – Stephens

Okay. So we should just kind of use the same margins, you would think, for the fourth quarter for their operating expenses as what you kind of gave for the center gross profit?

Patrick O’Shaughnessy

Yeah. I think for the balance of this year, yeah.

David Burtzlaff – Stephens

And then you had another $1 million closing costs?

Patrick O’Shaughnessy

Probably in that…

David Burtzlaff – Stephens

In the fourth quarter?

Patrick O’Shaughnessy

Yeah.

David Burtzlaff – Stephens

Okay. I mean your same-store sales numbers of about 5% total, obviously you’re going to have some improvements from those affected states and you think you should start to cycle Colorado, is that right in the fourth quarter?

Patrick O’Shaughnessy

Well, Colorado I think continues to be a difficult product for us. We are growing volume there but its still isn’t as profitable as we’d like it to be.

David Burtzlaff – Stephens

Okay.

Patrick O’Shaughnessy

We’ll have those -- continue to have those state disclosures in the queue.

David Burtzlaff – Stephens

Okay. But I mean, that 5% same-store sales, is that -- do you think that’s sustainable going forward or was that kind of a better quarter than you have expected? Or are you seeing anything that would for the -- through October that would change that?

Patrick O’Shaughnessy

No, I don’t think so. I think it’s -- we think it’s sustainable. We’d like to see it much higher than that obviously but I think that in this economic environment until we see some real job growth and consumer confidence I think that that’s where we’ll be in the near term.

David Burtzlaff – Stephens

Okay. So we should look for positive revenue growth because when you said this was the first quarter since ‘07...

Patrick O’Shaughnessy

That’s correct.

David Burtzlaff – Stephens

That you saw that and especially with the acquisitions, you’ll get much better revenue growth, it should set up for a nice 2012 then.

Patrick O’Shaughnessy

We think so.

David Burtzlaff – Stephens

Okay. Last quarter you mentioned U.K. stores were underperforming. Any kind of update there, where they -- did they improve any during this quarter?

Patrick O’Shaughnessy

I would say the trends are much better there, which they’re still obviously -- it’s not how we would like it to be. We’ve done a lot of -- made a lot of changes over there and we’ll continue to work on that through the balance of the year and then early next year and hopefully, it will become a contributor. But right now, I’d say the trends are better, but it still isn’t contributing.

David Burtzlaff – Stephens

Okay. And then finally your revolver.

Patrick O’Shaughnessy

Yeah.

David Burtzlaff – Stephens

What -- how much is drawn on the revolver now after you’ve close the acquisition.

Jim Ovenden

Our asset -- as soon as we completed the acquisition, we have drawn down about $120 million first or in second week of October. It continues to be at about that level.

David Burtzlaff – Stephens

Okay. All right. Thank you very much.

Patrick O’Shaughnessy

Thank you.

Operator

Thank you. Our next question is from John Hecht of JMP Securities. Your question please.

John Hecht – JMP Securities

Good morning guys. Thanks for taking my question.

Patrick O’Shaughnessy

Good morning John.

John Hecht – JMP Securities

I’m wondering is there any way to break down the same-store sale growth, in other words, how much can you attribute that same-store sale increase to a per the average size increase per loan versus new customers and can you give us any details surrounding kind of new customer trends, the characteristics and the volumes there.

Patrick O’Shaughnessy

I think Jim gave you the average paper transaction. And again, that hasn’t change in quite a long time. So, any growth we have is customer growth.

John Hecht – JMP Securities

And are you seeing an acceleration on that or is it more related to maybe increase of frequency per borrower? How do we think about the new customer trend?

Jim Ovenden

Yeah. Again it’s I would say that as David asked sort of the same-store sales growth is indicative of the new customer growth, not increased loan size or increased fee. Maybe I’m missing the point of your question

John Hecht – JMP Securities

Okay. I guess I got what you’re saying. It’s all that you’re suggesting with all new customers then I guess the following question that would be...

Jim Ovenden

When we talk about new customers, to be clear, we’re talking about customers that have never been customers before. So, it might be customer growth from former customers that are coming back which we wouldn’t a call new customer but just increased number of loans. And obviously, in some of the states where we have eclipsed the database changes like South Carolina and Kentucky, we’re going to see much, much higher customer growth in those states than we are on average. But on average, we’re in that sort of single-digits growth rates.

John Hecht – JMP Securities

Okay. And then you talked about some of the banks and credit unions, I mean it appears that there are some marketing there effectively payday advanced product more aggressively (inaudible). Are you able to assess any competitive changes in markets where there may be some of those operators?

Patrick O’Shaughnessy

No, we don’t see any increase pressure, obviously. We’ve been competing with the banks for a long time. I know that in the media, I think a lot of people would have you believe that this is something that -- for example, Wells Fargo started doing recently, but they’ve been offering this service to customers as an alternative to overdraft since before we were even in business.

So it’s been a competitive product for a long period of time and I think that we view that as good. Consumers have choices. They can use overdrafts, they can take advances from their banks in a lot of cases or they can come to us and pricing convenience, priority, all those things go with -- factored into their decisions.

John Hecht – JMP Securities

Okay. And I wonder if you can give us an update on the probably the customer portfolio bought from (inaudible) center a few quarters ago. Was the retention rate still looking pretty good and how do you think about that?

Patrick O’Shaughnessy

It’s very similar to any new customer retention rate now that this is a short-term product and it’s usually short-term need and people, customers always cycle in and out. We didn’t see -- of the customers that we acquire, we didn’t see a different retention rate after than we see for a normal new customer.

John Hecht – JMP Securities

And unit -- would you characterize that as better than expected given that it was an external portfolio or in line with your internal expectations?

Patrick O’Shaughnessy

I think it was right in line with our expectations at the acquisition.

John Hecht – JMP Securities

Okay. And then, I think, you closed 51 centers last quarter particularly because probably the states you work with regulatory changes. Given the recent store acquisitions and the lingering effects of regulatory changes, do you expect any store closures that we could forecast for in Q4 at this point?

Patrick O’Shaughnessy

I think going through 2012, we’ll integrate these centers into our company. What we do on a quarterly basis is evaluate all underperforming centers and make a decision whether we’re going to consolidate those into -- those customers into another center in that market or close it outright and we’ll do the same thing with the new centers that we acquired.

We’ve taken most of the -- in the past few years, doing that, we’ve taken most of the underperforming centers out of our base so, that brings the base higher, we may see an acceleration in that but we’ll do that on a store-by-store basis, quarter-by-quarter throughout next year. As I said today, I don’t have a good guidance on what that number may be.

John Hecht – JMP Securities

Okay. And final question is, your loan balance was down year-over-year compared to quarter basis. Was this -- I can’t remember, was there a specific date, a quarter closed last year that might have been impacted that or is there any other comments that you might have on that?

Jim Ovenden

I think just the fact that the quarter ended on a Friday was a primary reason for that, for the low loan balance at the end of third quarter.

John Hecht – JMP Securities

Okay. And are you able to comment on loan balance transit that’s found in Q4?

Patrick O’Shaughnessy

I think it’d be consistent with the seasonal balances we were seeing in prior years and tends to increase during the fourth quarter with our revenue.

John Hecht – JMP Securities

Okay. Thanks very much guys.

Patrick O’Shaughnessy

Thank you, John.

Operator

Thank you. Our next question is from Bill Armstrong with C.L. King & Associates. Your question please.

Bill Armstrong – C.L. King & Associates

Good morning. So you have a provision for doubtful accounts, it’s down by 70 basis points. What were the primary drivers of that decline?

Patrick O’Shaughnessy

I will focused primarily on just the fact that the third quarter this year ended on a Friday and you have to look at the sequential year-over-year changes in the receivable balances last year, second quarter and third quarter and this year, second quarter and third quarter. Last year, you had an increase in receivables. This year receivables stayed relatively flat, so the impact to that and impact on the allowance would have a small allowance adjustment this year and that basically reflect the decline from 21.6 to 20.9.

Bill Armstrong – C.L. King & Associates

Okay. So this doesn’t reflect any broader trend, it’s really just kind of a timing issue?

Patrick O’Shaughnessy

That’s correct.

Bill Armstrong – C.L. King & Associates

Okay. Your same-store revenues excluding the five states were very strong despite the fact that unemployment is still pretty high and it looks like your marketing has been roughly flat this year. What do you see driving your more revenue through your stores? Are you seeing increased numbers of customers or are they taking bigger loans? What do you think is that driving that and how sustainable do you think that is?

Patrick O’Shaughnessy

The fee for customer has hardly changed at all. So, fee per transaction so, all the revenue growth is volume. I think there’s a few things driving that. I think that the one we’ve had -- some of these states that we went through, they have law changes last year that included the database.

We saw one time very quick reduction in our loan volume there and those states are now coming back with strong growth and because that’s the anniversary of those database dates. I think that there’s a general reduction in credit available. And we’ve mentioned this before that’s bringing a higher income customer into our stores that we haven’t seen before.

And then since you mentioned marketing, the spend is about the same. We are doing one thing differently. Very recently, we started doing national cable buys which we haven’t done in the past. And it’s very early on but we think that that’s -- we’re seeing some benefit and increased traffic out of that.

Bill Armstrong – C.L. King & Associates

Okay. Interesting. And I think I heard you say this before in a response to a previous question, but as far as the CompuCredit stores I assume you need to close some number alone you’re not sure at this point what that number might be.

Patrick O’Shaughnessy

That’s correct. And I would say that in general, we’ll look at two centers that are near each other and have the ability to be consolidated and we’ll be generally agnostic to whether that was one of the acquired stores or one of our own stores. We’ll just look for the best performing store in any given market. We’re determining which ones we may consolidate.

Bill Armstrong – C.L. King & Associates

Understood. Okay. Thank you.

Patrick O’Shaughnessy

Thank you.

Operator

Thank you. I am currently showing no additional questions in queue at this time. I would now like to turn the call back over to Patrick O’Shaughnessy for any further remarks.

Patrick O’Shaughnessy

Thank you very much for your participation in today’s call. We look forward to speaking with you when we announce results for the fourth quarter in the year end.

Operator

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect. And have a wonderful day.

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