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Executives

Julie Prozeller

Jeffrey A. Weiss – Chairman of the Board & Chief Executive Officer

Donald Gayhardt – President

Randy Underwood – Chief Financial Officer & Executive Vice President

Analysts

Dennis Telzrow – Stephens, Inc.

Daniel Fannon – Jefferies & Company

Robert Napoli – Piper Jaffray

[John Rolin – Sidoti & Company]

John Hecht – JMP Securities

Henry J. Coffey – Ferris, Baker Watts, Inc.

Daniel Smith – Teton Capital

Dollar Financial Corp. (DLLR) F1Q08 Earnings Call October 30, 2007 8:30 AM ET

Operator

Hi, my name is Cheryl and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Dollar Financial Group First Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer period. If you’d like to pose a question at this time please press star and then the number one on your telephone key pad. If you’d like to withdraw your question, press the pound key. Thank you. It is now my pleasure to turn the call over to your host Ms. Julie Prozeller. Ma’am you may begin your conference.

Operator

Thank you operator. Good afternoon everyone. Joining us today from Dollar Financial Corp are Mr. Jeff Weiss, Chairman & CEO; Mr. Don Gayhardt, President and Mr. Randy Underwood, Executive Vice President and CFO. Before we begin our conference call I would like to remind you that the remarks made during this conference call with reference to future expectations, trends, plans, forecast and the performance of Dollar Financial Corp, it subsidiaries and its markets are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements reflect the company’s current beliefs, estimates and expectations and involve a number of risks and uncertainties.

Today, the company will be providing guidance on expectations of future results. As a reminder, these statements indicate the expectations of Dollar Financial management team as of this date. These statements supersede any and all previous statements made by the company regarding the matters address. These statements are forward looking statements and cannot be guaranteed and may prove to be wrong. This outlook is based on various assumptions which include but are not limited to the following: new material change in products and services offered in all locations as of October 30, 2007, a material change in the company’s current store development and acquisition plan, and new material adverse results in litigation or regulatory proceeding against the company that currently exist or that may arise in the future. Factors that could affect results are outlined in Form S3 where the company’s senior convertible note offering filed with the SEC on September 20, 2007 and its Fiscal 2007 Annual Report on Form 10K.

The company’s statements will include a discussion of adjusted EBITDA which is a non GAAP financial measure. The most comparable GAAP financial measure is adjusted EBITDA is income before income taxes. The reconciliation between adjusted EBITDA and income before income taxes is consistent with the company’s reconciliation as presented in the company’s recent press release dated October 30, 2007 which is available on the company’s website at www.DFG.com.

I would now like to turn the call over to Jeff Weiss for an overview of the recent quarter’s activity. Jeff.

Jeffrey A. Weiss

Thanks Julie. Good afternoon everybody. Once again, I’m pleased to announce another quarter of record operating results. Revenue grew by a robust 26.5% for the quarter while pro forma pre tax earnings increased by an impressive 46.7% over the previous year’s quarter fueled by the continued success of our multi country, multi product and multi channels strategy. During the quarter we continued to pursue the most strategic investment opportunities across all three of our geographic markets. As part of our accelerated store extension strategy we opened 20 de novo stores in the quarter and acquired 34 additional stores throughout the US, Canada and the UK markets.

We also entered into a purchase agreement on October 11, 2007 to acquire 82 financial services stores in southeast Florida. We expect the total annual revenue and adjusted EBIDA contribution of these stores to be approximately $45 Million and $12.5 respectively excluding, transition and integrating costs for the 12 months following consummation of the acquisition. The earnings per share accretion from the acquired stores during that period is estimated to be between $0.19 and $0.22 per fully diluted share. We expect to complete the acquisition upon receipt of approval of the company’s lenders and applicable regulatory approval including receipt of state and local business license which are expected to be obtained in the next 30-45 days.

These 82 stores will be a great accompaniment to the 23 stores we previously acquired on the west coast of Florida in November, 2006 and serve to substantially increase our presence in the Florida market which has favorable regulatory framework, traffic demographics and a rapidly growing [inaudible] sector workforce. The build out of our store base in this market underscores our strategy to improve the profitability of our US business and unlock the value of our significant US income tax and our wealth.

Now, I’d like to mention a few highlights from the quarter. Consolidated revenue was $116.1 Million up $24.3 Million with 26.5% over the prior year’s quarter. Total revenue for our Canadian and UK markets increased by a combine $27.8 Million for the quarter representing an increase of 43.4% year-over-year. Store and regional margins as a percentage of total revenue increased 40.3% as compared to 37.1% in the prior year’s quarter. Adjusted EBITDA margins as a percentage of total revenue increase 29% compared to 25.9% for the prior year’s quarter. Net income was $12.1 Million for the quarter compared to a loss of $1.7 Million for the previous year and pro forma fully diluted earnings per share was $0.52 compared to $0.36 per share for the prior year’s quarter.

I would now like to highlight some key achievements and developments for our Canadian business for the quarter. The Canadian business generated $61.3 Million in total revenue which represents an increase of 49.4% over the prior year’s quarter. Consumer lending revenue in Canada increased by 64.7% in the quarter while check cashing revenues increased by 36.5%. We opened 15 de novo stores in Canada in the first quarter and acquired three additional store locations. We anticipate that a portion of our previously announced 75-100 stores expansion program in Canada will be composed of smaller chain store acquisitions where we find stores with attractive locations and reasonably purchase prices.

In respect to regulation in Canada, the provinces of Nova Scotia, Manitoba and Saskatchewan have already passed the required registration and are expected to set maximum allowable rate by the end of calendar year 2007 or early in 2008. The province of Alberta believes existing legislation complies with the requirements of the Federal law and is targeting to set rates early in 2008. As we announced last week, British Columbia has recently passed legislation and bureaucrats in that province have indicated that rate caps established in Manitoba, Nova Scotia, Saskatchewan and Alberta will have important impact on their approach with establishing rates. [Inaudible] British Columbia is our second largest province and we welcome this development. The province of New Brunswick is expected to introduce legislation in late October, early November 2007 with public hearings to set rate expected to begin in early 2008. Legislature is anticipated to begin to introduce in Ontario in 2008 followed by a public process to set rates regulations.

In general, we are very pleased with the pace and details of proposed provincial regulation. We would, of course, wish for regulation to move more quickly but, we think that the provincial governments are doing a commendable job given the complexity of the issue and the necessity to balance consumer protection with reasonable returns for the industry company.

Before I turn the call over to Don, I would again like to extend my sincere thanks and gratitude to the thousands of stores central employees of Dollar Financial both domestically and international for their dedicated and effective service they extend each and every day to the company and to our many customers in the three countries in which we operate. It is because of their efforts, their continuing efforts that we are able to announce another strong quarter of operating results. I will now turn the call over to Don for an update on our UK and US businesses.

Donald Gayhardt

Okay. Thanks Jeff. Our UK business contributed revenue of $30.4 Million for the quarter growing by 32.7% over the previous year. Consumer lending revenue increased by 61.9% and check cashing revenue grew by 15.8%. On a native currency basis comparable store sales in the UK increased by a very strong 19% as we continue to see healthy growth in the market for all of our products and services in that country. In the first quarter we opened five de novo stores in the UK and also acquired five additional stores from competitors.

A special note, in the month of September we opened our 200th company operated store in the UK. This significant event represents another milestone and maximizes tremendous development opportunity that exists for our business in the UK market. We now have 179 company stores in England, nine stores in Scotland, eight stores in Northern Ireland and six company stores in Wales. We look forward to continuing to expand our store footprint throughout the British Isles in order to meet the ever growing demand for financial service products [inaudible] consumers in those markets.

Turning to our domestic business, for the quarter our US operations generated $24.4 Million in total revenue as compared to the previous year’s quarter of $27.8 Million. On a year-over-year basis, check cashing fees in the US were inline with the previous year whereas consumer lending revenue decreased by $2.5 Million. The decrease in consumer lending revenue was driven by the previously announced transition which began in the fourth quarter of fiscal 2007 of a portion of the US loan portfolio from bank funded installment loans to company funded loan products.

As previously announced on September 10, 2007 the company entered into an agreement to acquire 45 US financial services stores principally located in the Midwest and Hawaii. At the time of the announcement we had already completed the acquisition of 22 of the 45 stores located in Missouri, Hawaii, Arizona and Oklahoma and have since completed the acquisition of 19 stores in Kansas and Iowa and a single store in South Carolina. The necessary licenses in Nebraska are expected to be finalized in the next 60 days at which time we will complete the acquisition of the remaining three stores in that state.

On August 31, 2007 we launched an Internet payday loan product under state law in California. As we previously stated we intend to grow this product at a very measured pace until we have a consistent track record of credit measures and a solid evaluation of lending criteria used in our decision model. Leveraging product development in the US we anticipate launching an Internet payday loan product in the UK market on November 1st. As regulation in the UK is based on a single set of laws covering the entire country it is easier to implement such a product in the UK as opposed to the US where lending laws vary on a state-by-state basis. We will evaluate implanting a similar product in Canada, once provincial rates are established.

With respect to domestic regulation there is currently very little activity in state legislatures but upcoming legislation sessions in Virginia, Ohio and Arizona are expected to have discussion regarding some aspect of the payday loan provisions in each of those states. As always we will be working with our trade associations both nationally and within the states and believe we’re in a position to advocate our position on all relevant issues.

I will ask Randy to comment in more detail on the first quarter financial results.

Randy Underwood

Thanks Don. We achieved record revenue of $116.1 Million this quarter and total global revenue was growing by 26.5% over the prior year’s quarter. Our consolidated check cashing business grew by a very solid 18.9%. Our net consumer lending revenue grew by a robust 36.8%. This strong growth in global consumer lending revenue was achieved while maintaining the aggregate loan loss provision in line with the company’s expectations of 21.6% of gross consumer lending revenue. This loan loss provision level not only fell within the expected range that we previously announced but is also comparable with the 21.3% amount for our immediately proceeding quarter which ended June 30, 2007.

During fiscal first quarter we continued to leverage our infrastructure and cost structure which resulted in our store and regional margin improving 44.3% for the quarter and this compares to 37.1% for the prior year. On a percentage of revenue basis, our corporate costs increased to 15.4% as compared to the previous year’s quarter of 14.1%. This reflect increased stock compensation charges as well as, increased investment in infrastructure to support the substantially enhanced store expansion plan of the company as well as, the acquisition that we have recently completed and/or announced.

Excluding one time debt financing costs in the prior year, pro forma income before income taxes increased by 46.7% for the quarter on revenue growth of 26.5%. Pro forma fully diluted earnings per shared increased by 44.4% to $0.52 per share compared to $0.36 for the prior year’s quarter. Additionally, the company ended the quarter with cash available for investment and further acquisitions of approximately $130 Million which was remaining from the recent $200 Million convertible securities offering in June. Additionally, the entirety of our $100 Million revolving credit lines are undrawn on. The company therefore has amble liquidity to not only fund its present and anticipated future operations but, also expected growth of its multi national business platform.

At this time we are reaffirming our previously announced calendar year 2007 guidance of revenue between $450-$460 Million, adjusted EBITDA of $127-$132 Million and income before income taxes of between $78-$80 Million. We are also reaffirming our previously announced guidance for fiscal 2008 with revenue between $470-$490 Million, adjusted EBITDA of between $135-$140 and earnings per share between $2.05-$2.20 per share. The company expects to reevaluate and likely increase its guidance when it completes the recently announced 82 store acquisition in southeast Florida which is expected to close in the next 30-45 days.

Finally, I’d like to mention that additional information on the operating results for fiscal first quarter can be found in the news release issued by the company earlier today which can be found on the company’s website at www.dfg.com. Operator, we would now like to invite our listeners to ask any questions they may have.

Question-and-Answer Session

Operator

Thank you. At this time we’d like to remind everyone if you’d like to pose a question press star and then the number one on your telephone key pad. We’ll pause for just a moment to compile the Q&A roster. Once again, as a reminder, if you’d like to pose a question please press start and then the number one on your telephone key pad. Your first question is coming from Dennis Telzrow of Stephens, Inc.

Dennis Telzrow – Stephens, Inc.

Good afternoon gentlemen, great quarter.

Jeffrey A. Weiss

Thank you, Dennis.

Randy Underwood

Hey Dennis. Thanks.

Dennis Telzrow – Stephens, Inc.

A couple of quick questions, Randy is probably too simple but the EPS guides of $2.05-$2.20 is that just normal? Or, is that your pro forma adjustment?

Randy Underwood

That’s just the range for the guidance we gave at the end of fiscal year back in September and reaffirmed today. That obviously doesn’t include anything that would emanate from the Florida acquisitions.

Dennis Telzrow – Stephens, Inc.

But, you’re not pro forma for the taxes you did in the first quarter? Or do you?

Randy Underwood

No.

Dennis Telzrow – Stephens, Inc.

Just straight up?

Randy Underwood

We gave an estimated range for the calendar, I mean for the fiscal year of, I believe it was 39-41%.

Dennis Telzrow – Stephens, Inc.

Yep. Got it covered. The 45 stores that you have acquired or acquired most of in the Midwest, were they doing payday when you acquired them?

Donald Gayhardt

They were doing primarily payday although, they are full service financial stores and catered out as such. But, they have a significant emphasis on payday, they were an owner operated business and we believe they may well be an upside there on other services.

Dennis Telzrow – Stephens, Inc.

And, last question, on the Florida acquisition, I assume that $0.19-$0.22 takes into any sort of headquarters consolidation efforts?

Randy Underwood

Yes.

Dennis Telzrow – Stephens, Inc.

Okay. Thank you.

Operator

Thank you. Your next question is coming from Dan Fannon of Jefferies.

Daniel Fannon – Jefferies & Company

Good afternoon guys and thanks for taking my questions. Your check cashing business continues to be very strong. Can you give us a little bit of color behind the rise of the average check size? And then, also discuss if there are any changes in the fees that you charge on the other products because, it looks like from my math that in Canada and UK your fees are your lending products also seem to go up sequentially.

Donald Gayhardt

I guess with respect to the check cashing business I think that some of that you’re going to have currency in there. Some of that at a base line level in native currency and in US dollars. Obviously, for US you’re seeing the average check size go up but, I think that’s just a function of economic growth. I think the other thing that’s going to drive check cashing average check size growth is the UK is the fastest growing part of our check cashing business and there most employees are paid monthly so the average check is a four week check or a 30 day check in the UK. So, that’s going to drive that average unit size higher as well. Also, in the UK the market, the average rate as a percentage of the check size is higher so that’s going to help the average fee per check go up as well. It’s just a higher rate market than the other markets.

With respect to the consumer lending pricing, in you know, the US it’s, then again, we bounce around between company funded and the installment business. With the loss of the installment business domestic, a lot of that California business, that comes back into a lot of those customers will go back to the payday, the company funded payday loan product which has a higher average rate than a blended average rate in the states. That will help bring the US rate up. In Canada, we’ve taken our overall checking cashing fees and we’ve raised those a little bit and that’s a component of the consumer lending revenue there for checks that we cashed as part of payment for a fast cash advance in Canada. And then, in the UK, I don’t believe we have changed our consumer lending rates at all. But, I’d have to maybe get back to you off the line about if there’s any pick up there.

Daniel Fannon – Jefferies & Company

Okay. That’s helpful. Could you quantify what the price increase was in Canada on those products? On your lending products?

Donald Gayhardt

I don’t know, you know, I’d have to follow up with you, I don’t have all those, it’s sort of a stratified number based upon the size of the check but, I’d have to get back to you.

Jeffrey A. Weiss

But, then again, remember that it’s really not a lending fee, it’s the fee we charge to cash third party checks that we have increased modestly.

Daniel Fannon – Jefferies & Company

Okay. Then, the servicing revenue of around $790,000 that is reported, that is obviously going down. Is that component of it, is that just the run off of the installment loan business still? Or, does that reflect your Internet business and should that be going to zero? Or, should it be growing from here?

Donald Gayhardt

That is a run off. We’re not, the loans we’re making on the Internet we’re making in California as a company funded loan. So, that will be, I think, a zero.

Jeffrey A. Weiss

And, I think in the second quarter it should be near zero, if not zero.

Daniel Fannon – Jefferies & Company

Okay. Great. And then lastly, if you could just let us refresh your memory of the value of the NOL today?

Jeffrey A. Weiss

It is still roughly $99 Million at this point in time.

Daniel Fannon – Jefferies & Company

Okay. And, given the expectation of the additional stores in Florida and the Midwest acquisition, is there a timing of when you guys think you’ll start to realize the value there?

Jeffrey A. Weiss

I think when we complete the Florida acquisition we will start to realize some value from the NOL and as we look to the future, we will begin to work with our auditors to work through a process by which we address the historical valuation allowance and how that begins to get accrued up related to the growth of the US business in the future.

Daniel Fannon – Jefferies & Company

Okay. Great. Thank you.

Operator

Thank you. Your next question is coming from Bob Napoli of Piper Jaffray.

Robert Napoli – Piper Jaffray

Good afternoon guys.

Jeffrey A. Weiss

Hi Bob.

Donald Gayhardt

Hi.

Robert Napoli – Piper Jaffray

A couple of questions. First off in the balance sheet $300 Million of cash, how much of that is operating cash?

Randy Underwood

Well, probably about $125-$130 Million of that.

Robert Napoli – Piper Jaffray

Okay. And, then you would use $108 of that to close the US acquisition?

Randy Underwood

Yes.

Robert Napoli – Piper Jaffray

Okay. Plenty more to invest. The tax rate following the, the 38% is that the tax rate, Randy that you think you guys are going to have say first quarter of 2008, March quarter 2008 post the close of that deal?

Randy Underwood

Again, I’ll refer back to the guidance being in a range of 39-41%. I think that’s still a good range for fiscal 2008. As we probably commented in conversations with a number of people before, you know, the actual rate is a function of the actual achieved income in Canada and in the UK, as well as in the US. The rates are different statutory rates in each of those countries so there is always going to be some blend fluctuation in terms of the rate from quarter to quarter. I think as we’ve spoken before, over time believe that 38% pro forma rate as we begin to release the NOL and we get some more benefits and growth in the US becomes a targeted rate not, hopefully not too distant future. I don’t think I can comment in terms of what we will achieve kind of quarter by quarter for the rest of the fiscal year, we just don’t have that kind of visibility.

Robert Napoli – Piper Jaffray

Okay. The corporate expense number of $18 Million is there anything, I know you talked about some investments in there but, is that a run rate number?

Randy Underwood

I think it was a little higher here in the first quarter than it would be as a run rate but, we will certainly continue to invest on an increased rate in terms of our store platform, people in training both at the store level as well as multi unit operators, as well as back office people and from a management stand point for additional depth and breadth of management as we look to future growth in all three of our countries.

Robert Napoli – Piper Jaffray

Okay. The US, same store sales in US and have sales, which his organically, have sales revenues bottomed out in the US?

Randy Underwood

As we commented before, it’s a difficult comparison because of the consumer lending run off on the installment loan portfolios. So, there’s just, I think, as we said last quarter, there’s not going to be a very good comparison in the US until we get through that run off probably in the third quarter of this fiscal year, maybe through that process.

Robert Napoli – Piper Jaffray

Okay. And, just competitively, you know, I’ve noticed Advance America, they’re moving up into Canada and the UK and people are going to start watching how successful you guys obviously, in these markets and want to invest more in those markets. Are you seeing, what are you seeing from a competitive front in those markets where you appear to have a major lead?

Donald Gayhardt

We understand that Advanced America has opened up a few stores. We don’t see any significant movement of US players into the Canadian market yet and I suspect they are waiting to see what the fee regulations will be. You know, and as we said, and our experience in the US was, for some three to five years when the new market opened, if we’d been there as we have been in the US ahead of everyone else, we see a really significant increase both in our business and the size of the market. So we think that there’ll be some period of time, over some period of years in which, you know, it won’t be a competitive situation, a real entrance will market a larger market. We expect that to have a positive effect on our business.

Robert Napoli – Piper Jaffray

Okay. Last question, Canada 75-100 stores, did I hear that includes some small acquisitions?

Donald Gayhardt

That is correct.

Robert Napoli – Piper Jaffray

Do you have any feel for like what would be de novo versus small acquisitions?

Donald Gayhardt

Maybe 2/3 de novo, 1/3 acquisition.

Randy Underwood

I would say 1/3, that may end up being on the high side.

Donald Gayhardt

You know, that would be, I guess we think about as our ideal but, if we couldn’t do that we’d make it up with new stores.

Robert Napoli – Piper Jaffray

Thanks guys.

Operator

Thank you. Your next question is coming from [John Rolin] of Sidoti & Company.

[John Rolin – Sidoti & Company]

Good afternoon and thank you for taking my question.

Donald Gayhardt

Hi John.

[John Rolin – Sidoti & Company]

Don, on the region margin obviously, it took a nice bump up here in the quarter. Regarding how sustainable do you think that number is within, obviously the guidance you provided?

Donald Gayhardt

How sustainable is the margin number?

[John Rolin – Sidoti & Company]

The regional margin, the 40%?

Donald Gayhardt

I think it’s very sustainable. Again, included in that number is you have a US business, you know where you’re going through this transition and that’s, you know, bog down the margins domestically. I also think that as we bring on, just kind of the way the math going to work margins going to work, you know, we’re buying some very strong chain stores domestically which when you blend those in with the operations we have now, you’re going to get a meaningfully better operating margin domestically. And, I think, you know, yet in Canada and the UK the business organically will remain very strong and there’s nothing, the things you look for, there’s nothing really that we see that’s kind of changing the cost dynamic or the cost characteristics, particularly in the international markets. You know, real estate in the UK is getting, you know, has been getting more expensive for a few years now, that’s what, kind of the only thing that we can point to as a meaningful item in the P&L where we see that kind of go off on, you know, kind of a comp store basis. So, you know, we need to manage that closely but, again, labor and employment is a much bigger piece of the puzzle and I think that remains a manageable item for us. So, I would expect we would see that number at least stay where it is and likely go up, just through the operating leverage of the business. And, I think also down to the EBITDA line, again corporate expenses are up a little bit this quarter. As Randy mentioned you got some stock comp charges that are higher than the prior year quarter and then I think that’s what we’re making in Canada sort of to the front load of the new store build with people at the corporate level. Once we start to average that in to the numbers and lap that number on a quarter-over-quarter basis, I think you’ll see that EBITDA bottom line [inaudible] margin as well.

[John Rolin – Sidoti & Company]

And then, on the currency side, did you see any benefit in the quarter from, you know, positive shifts in foreign currency versus the dollar?

Randy Underwood

We saw a little bit. It wasn’t a major driver in the first quarter results. It was probably about 15% or so of EBITDA increase quarter-over-quarter for the prior year. And, the balance came not only from growth in same store sales in our base operations but also in the Canadian and Florida acquisitions that we completed last year in the second quarter.

Donald Gayhardt

Currency got a lot stronger the last three weeks of the quarter. It strengthened considerably.

[John Rolin – Sidoti & Company]

And do you add any hedges in the quarter?

Donald Gayhardt

No, we have a series of out of the money posts as we’ve discussed our strategy before and they’re quite out of the money right now.

[John Rolin – Sidoti & Company]

But they’re not substantially different than they were at the end of the year?

Donald Gayhardt

No, they’re not.

Randy Underwood

We didn’t add any new ones in any future forward stuff.

[John Rolin – Sidoti & Company]

Okay. And, one last question, can you just discuss the products that are at the Florida stores that you’re acquiring? Are there any different products than what you currently have throughout your network?

Donald Gayhardt

I would say, you know, the big differentiator is that they are, they have invested their own proprietary money order business which we will continue and we will evaluate whether that was attractive to us to expand to our other locations. They have virtually the same product set that we have in our stores.

[John Rolin – Sidoti & Company]

Great. Thank you.

Operator

Thank you. You’re next question is coming from John Hecht of JMP Securities.

John Hecht – JMP Securities

Good afternoon guys.

Donald Gayhardt

[Inaudible] John.

John Hecht – JMP Securities

How are you? Just if you could maybe describe for me guys your experience in transitioning the installment loan customers to the, back to the payday product if you will. Did you experience, I assume that’s a smaller average loan balance given that most of it’s out of California. How did that experience go in terms of, you know, the build up of loss rates through that transition and through customer attrition through that transition?

Randy Underwood

Let me do customer attrition. We were surprised at how, of how willingly our installment customers migrated to the payday loan product. So, I think our expectation there was exceed. On the loss side, I think our expectation was met in that as we were working a customer from a significant higher balance down, I think that we had to offer some extended payment terms and some other induces to repay and we did experience, I think, a modestly higher loss provision in those products, in that product.

John Hecht – JMP Securities

Was that this quarter or last quarter in terms of maybe a little bump up relative to where you would have been in charge off rates?

Randy Underwood

It was a little bit in the fourth quarter but, largely it was in this first quarter that we are just now reporting today.

John Hecht – JMP Securities

Okay. So, you’re actual credit results would have been even a little bit better with, when you work out this transition.

Randy Underwood

They would have been a little better in the year.

Donald Gayhardt

I think if you look just at the charge off rates, if you just look at it, if you just isolate the single payment, the payday loan product versus the installment product domestically, the charge off rates there are almost spot on where they were in this quarter last year. Which, I think as we said, by large its been getting harder to collect domestically. The entire rate is up a little bit, because as Randy just mentioned for blending in the loss rate on the installment business. But, on the payday product, it’s pretty comparable last year which given what we’ve seen kind of benchmarks and competitors etcetera, is pretty good. It makes some kind of intuitive sense because you’re getting the better credit quality installment lending customers coming back into the payday loan product and helping bump up the average credit quality of our payday loan customer base.

John Hecht – JMP Securities

And are you still seeing some of the credit trends in the foreign markets better than the domestic market?

Randy Underwood

Well, I think we’ve always said that the Canadian market has very different characteristics than the other two markets. There seems to be a much higher degree of willingness to pay among Canadian consumers in general. In general Canadians are significantly less indebted than our customers in other markets. The UK customer, our UK customer, I think, is a modestly better customer than the US customer in some aspects but, it’s a, since they’re paid on a monthly basis, the credit cycle is longer, collection cycle is longer in the UK.

Donald Gayhardt

I think John, just, I think we mentioned this before, one thing we’re very happy with is, if you look at the credit quality of our overall UK book of business, where again we don’t have a lot of payday loan competitors over there but, if you look at the broader credit cards trends and broader consumer credit trends in the UK, our credit losses this quarter versus prior year quarter were actually, the percentage were down a little bit. And so, I think a lot of that has to do with the fact that we consolidated two or three regional collection centers into one, we put some more technology in there, we’ve hired some good people there and I think we’re really starting to see some nice results there. So, I think we’re, relative to what’s going on in the UK, I think we’re kind of swimming against the tide a little bit there.

John Hecht – JMP Securities

Okay. And moving on to the store margins obviously, the trends there, I was wondering if you could maybe contrast us your best margins, which I think are in Canada, and I assume your worst margins are in the US and, you know, what can you do in the US? Is it a revenue issue? Or, is it a cost issue where you can maybe get the US margins to the, you know, level of the Canadian margins.

Donald Gayhardt

I would say it is. I think we’ve done some good things domestically on the cost side but, you know, where we had to take account for the loss of the installment product. We’ve, in some cases, almost taken out a layer of regional overhead part of that. But, you know, in the US the biggest issue is the flow through and, you know, that’s, we’re running right now in the US an operating margin of just around 20%. In the UK we’re running high 30s and maybe close to 40s and in Canada we’re running 10 points higher than that. So, as I mentioned, you’ll see better margins domestically as we average in the strong performance of the businesses that we’ve bought, the two acquisitions we’ve done. Now, it won’t get to UK and Canada just on that basis but, we think we can continue to kind of take a higher base with the acquisitions and grow it from there as we continue to get the consumer lending business domestically back on track.

John Hecht – JMP Securities

And, if I remember right your historical track record when you acquire a unit is that you generally see an improvement of about 15% in EBITDA over the course of the next few quarters, is that accurate?

Randy Underwood

That’s accurate. Yes.

John Hecht – JMP Securities

And then, last question is can you give us, given the store build out in Canada expectations, what would be your cap expectations for the next, for I guess, all of fiscal 08 and your maintenance cap expectations, if you can get those out.

Randy Underwood

We’re going to do some checking right here quick but, I think, we’re right around $30 Million in terms of total cap ex as we look out to the fiscal year and the maintenance aspect of that is probably in the $10 Million range, I would guess, $10-12 Million.

John Hecht – JMP Securities

Okay. Thanks very much for the color guys.

Operator

Thank you and your next question is coming from Henry Coffey of Ferris, Baker Watts.

Henry J. Coffey – Ferris, Baker Watts, Inc.

Good evening everyone. Could you give us, I know you made some comments on it already but, in comparing year-over-year credit quality with all the different moving parts we have to give, can you give us some commentary on, you know, where do you think you are and it sounds like its getting better but, if you could give us some kind of perspective. I also know that you made some comments about kind of June, September.

Donald Gayhardt

Yeah, I guess I think we’re, domestically I think like for like. We feel like it is probably marginally deteriorating a little bit and has been for sort of the last four or five quarters. I think it’s been a pretty consistent thing. I know, it’s been getting harder to collect.

Henry J. Coffey – Ferris, Baker Watts, Inc.

In the US?

Donald Gayhardt

In the US. Now, again, if you break our numbers down, the way we do currently, you’ll see that the payday book business, this quarter versus not the June quarter but the prior year’s September quarter, the payday business is kind of, is spot on the same credit quality as the prior year numbers and that has to do, just as we said, we the installment loans and consumers kind of opting back into the payday because they don’t have the option of the installment. And, that’s improved the average, the average credit quality of our domestic payday borrowers. But, I still think the credit, kind of credit climate domestically has been trending off a little bit.

Henry J. Coffey – Ferris, Baker Watts, Inc.

So your trend in the US are impacted essentially by installment loan customers that are having, kind of needing to exit the product but not.

Donald Gayhardt

Yes.

Henry J. Coffey – Ferris, Baker Watts, Inc.

They’re not exiting it as well as some.

Donald Gayhardt

Right. No, they’re not, and again, we were pleasantly surprised with our ability to retain customers in the smaller balance payday product. In Canada, you know, where we see a continuation of the trend that we’ve had for a long time where credit quality is, if you look at the numbers like for like, this September over the prior’s September, the loss rates as a percentage of revenue, charge offs as a percentage of origination, numbers are up. But again, that’s in a context of very strong volume growth and, you know, a business that continues to accelerate and in a context of an economy there which seems to be very, very well, you know, by almost any measures. So, an overall loss rate should continue to run below where we see US and UK loss rates running. And then, I gave you, I just gave you commentary on the UK where we feel like we’re, you know, in a climate where a lot of credit grantors are struggling where we don’t want to be, you know, have the credit quality Gods strike us down by, you know, spiking the ball before we get to the end zone but, you know, I think where [inaudible] we’ve got a lot of work to continue to do there. But, you know, in the context of very good volume growth there, a lot of new stores opening, and the Internet business coming on soon there, you know, we’re, you know, pleased with the way we’re managing credit quality in the UK.

Henry J. Coffey – Ferris, Baker Watts, Inc.

How are the acquisitions of these smaller stores in Canada kind of impact your performance in that market? Is that a better avenue than de novo? Is that just as good as de novo? Or, is that just a?

Randy Underwood

Yeah. I think that falls under the heading of “it depends”, you know. It depends on whether, we’re certainly not buying any bad stores unless we’re buying them because they’re in our trading area and we’re going to close them and consolidate their customers. By in large, I think our, our nine franchise stores that we buy don’t do nearly as well as the Money Mart stores. We can buy them very effectively and we can convert them to Money Mart stores wherein they do significantly better and that’s the power of the brand in Canada and it is our strategy for branding in the UK and it’s why we’re focusing on concentration in Florida where we believe we have the possibility of building the brand.

Henry J. Coffey – Ferris, Baker Watts, Inc.

And then finally, to dial in on the regulatory situation in Canada, is Manitoba still scheduled for November? Or, is that later?

Donald Gayhardt

It’s scheduled, again, the first week in November. I think there are two days of hearings each week for four consecutive weeks, I think. It kind of, they meet a couple of days and then break and that will go on through the month of November.

Henry J. Coffey – Ferris, Baker Watts, Inc.

Thank you very much.

Donald Gayhardt

Sure.

Operator

Thank you and again, that is star one to post a question. You’re next question is coming from Daniel Smith of Teaton.

Daniel Smith – Teton Capital

Great quarter guys. Two questions. Why are you guys seeing an acceleration of UK comps?

Randy Underwood

People are coming to the stores. And, I say that not frivolously. In the UK we essentially entered, not only did we enter a very young market, we entered a very young market with very few stores, seven or eight years ago. I think we are approaching, although we’re certainly not there yet, a degree of consumer awareness that was nonexistent even two years ago. So, I think we are seeing, as a function of the expansion of our store base and the fact that we’ve been trading there and our marketing efforts, we are seeing awareness penetration in the UK market and that is why we are seeing more customers.

Donald Gayhardt

I would add, the one thing you have this year which has helped as well, in the last couple of quarters is the introduction of the debit card, the prepaid debt card there. You know we have, if you break down the revenue categories we have other revenues growing and our comp store basis is growing 39% quarter-over-quarter. A lot of that is the growth of debit cards. So, it’s kind of added another leg to the stool there.

Daniel Smith – Teton Capital

And that is just in the UK? The other comps are up 39% in the UK?

Donald Gayhardt

Other revenue. That is outside of check cashing and consumer lending.

Daniel Smith – Teton Capital

That’s for all three regions?

Donald Gayhardt

No, that’s just the UK.

Daniel Smith – Teton Capital

Just the UK. Okay. Alright, makes sense. Secondly, when I’m looking at the acquisition that you guys just completed, or announced, the EBITDA margin is something like 28% and you look at your store and regional margin this quarter of 40%, is there any reason when you fold that acquisition in that it can’t be at that 40%, you know, within a year or so?

Randy Underwood

You are looking at Canadian versus the US.

Donald Gayhardt

I think if you’re looking at a EBITDA margin versus a store margin. In those numbers there are, they had a corporate office in Florida, so you’re getting a deduction for that corporate office before you’re getting, you’re comparing an apples and orange there.

Daniel Smith – Teton Capital

Well, I mean, don’t you guys already have some infrastructure there in Florida?

Donald Gayhardt

Well, we have 23 stores but on the west coast. Over time, we hope we can see some economies there. But, that’s, you know, we need the existing management in that business to continue to run those stores and, you know, I think in the context of our overall business, it’s not, you’re not looking for a meaningful number there.

Daniel Smith – Teton Capital

You’re not going to get much improvement in the EBITDA margin at this acquisition?

Donald Gayhardt

No, I think over time we will, I just don’t think if you’re saying, if you’re looking for an immediate lift, I don’t think we’re going to be able to see immediate lift in the margin of that business.

Daniel Smith – Teton Capital

Oh, I’m just saying within a year or something like that.

Donald Gayhardt

Absolutely.

Randy Underwood

Florida’s going to grow we think. It’s a great growth market and we think we can bring some things to that acquisition as we look to the future that will enhance it. But, we’re not looking [inaudible] to pop.

Daniel Smith – Teton Capital

I guess what I am getting at is, how do I look at these acquisitions because it looks like on the face of it you paid eight times EBITDA for it. You know, whereas you can build a store de novo for, you know, a couple hundred thousand dollars and maybe that’s, you know, two or three turns on EBITDA or something like that. I mean, why are you guys buying these things if you can’t get that kind of leverage?

Randy Underwood

Let me first clarify that within that purchase price and I think we laid that out pretty clearly, we purchased the cash in the stores and we also purchased the value of the consumer lending portfolio. So, in terms of.

Daniel Smith – Teton Capital

Yeah but, you’re not going to pull that cash out, right?

Randy Underwood

No. But, in terms of EBITDA multiple it’s more like a 7X, not an 8X.

Daniel Smith – Teton Capital

Okay.

Randy Underwood

So, we start off with a 7X and from there, you know, I think we have a great acquisition that is going to be immediately lucrative and will allow us to unlock a portion of the value of the US NOLs and I think you have to include that in terms of your evaluation of the potential for the acquisition and the lucrativeness when you get to earnings per share. These are things you need to look at and consider.

Daniel Smith – Teton Capital

When you’re acquiring them you’re paying three or four times what it would cost to build the same stores de novo. So, maybe you kind of wasted $60-70 Million or something like that to save $100 Million NOL that’s maybe worth $15 Million in net present value.

Donald Gayhardt

I think the other thing you have to take into account is the competitive dynamic domestically versus internationally. You know, in our view and I think we’ve certainly, you know, I’ve talked about this a lot, we think the US business is a very good business but, in a lot of places its competitive and there are already, you know, a build out of the store base, you know, in many, many states. I think Florida is a very good state for us because while it is competitive and there is a fair degree of build out there, the rates that the state allows on the payday money product are the lowest in the country and it makes for multi line operators market. It’s a competitive multi line operators market. But, we think the dynamic in the state is where we think the business is good, the demographic, [inaudible] in Florida are terrific, the ability to build a brand new business in Florida like we have in Canada, we think is there. But, we don’t think it’s there on a de novo basis. I think I would argue that the buy versus build equation that you’re talking about is different domestically than it is in Canada and the UK and you need [inaudible].

Randy Underwood

[Inaudible] in the US versus Canada and the UK, call it maturity as opposed to full maturity, just call it maturity of a new store is in the 24-32 month range. So, you have a very significant period of operating losses until that store becomes, a new store becomes a contributor.

Daniel Smith – Teton Capital

What’s a mature EBITDA for a US store?

Randy Underwood

I think that is all over the range.

Daniel Smith – Teton Capital

Well, I guess my point is would you rather, let’s just say worse case the economics are half as good incrementally, I mean, I have a hard time believing that but, maybe you pay five times EBITDA for a de novo versus seven for an acquisition. I mean, I still think its value destructive. But, you know, I guess that’s the only point I want to make. Great quarter guys, appreciate it.

Donald Gayhardt

Thank you.

Randy Underwood

Thank you.

Operator

Thank you. We have a follow up question coming from Bob Napoli of Piper Jaffray.

Robert Napoli – Piper Jaffray

Thank you. I guess it’s a difference between what it looks like on paper and reality. The Florida regulatory environment now becomes much more important for you guys and I just wondered, kind of the analysis you did on the Florida regulatory environment? Has there been any movement whatsoever in that market and why do you feel comfortable having that size of an investment in Florida?

Donald Gayhardt

Yes. I think we have watched it, as competitors watched it being involved in our trade association, very intently and I think, you know, it has been in place, the law that was passed, I believe, in about 2000, I think after about a year and a half of kind of back and forth. And, as I mentioned it is as well, of the other states we’re in, the lowest rate domestically but, you know, kind of the irony of it makes it is it makes what we think for us, it makes it the best kind of competitive balance in we’re not seeing a multitude of mono line payday stores. Just about all the competition down there, again, is multi line stores where make the stores successful and the customers sort of expect that you’re going to be able to do the whole range or products and services. So, we’ve just spent a lot time and have spent a lot, obviously, we bought 23 stores last November. We spent some time before that and I think we’ve mentioned we’re going on a year and a half now that we like Florida as a market and this gives us an almost statewide presence down there in a regulatory environment that we don’t see any changes coming.

Robert Napoli – Piper Jaffray

What is the payday rate in Florida?

Donald Gayhardt

The average rate works out to be about $11.

Randy Underwood

[Inaudible] a little bit above $12.

Robert Napoli – Piper Jaffray

Okay.

Randy Underwood

Yeah. A little bit above $12 or $12.50 probably tops depending on the timing.

Donald Gayhardt

I think 20-30% below the rest of the country.

Robert Napoli – Piper Jaffray

Okay. Have you determined what brand you’re going to use in Florida?

Donald Gayhardt

No.

Robert Napoli – Piper Jaffray

And, do you have some thoughts on what it will cost to build the brand, that you want, are you going to use one of the brands of the chains that you acquired.

Donald Gayhardt

I don’t, first we haven’t completed the acquisition yet so, I think those are questions that will undergo realist examination after we finish the acquisition.

Robert Napoli – Piper Jaffray

Okay. Okay. Last question, and I know you’ve been answering this question for 10 years. Wal-mart, because I keep getting more and more questions and obviously, your results in Canada, Canada is now a market that Wal-mart is becoming more competitive in and they’re talking more and more and more about financial services and I just wondered if you could give some, if you’re seeing any incremental affects from Wal-mart investing or talking more aggressively about financial services? And, if you have any concerns about Wal-mart doing in Canada what they’re doing in the US?

Donald Gayhardt

Well, you know, obviously Wal-mart is a extremely formidable business but, they have, I think, they have been cashing checks in their stores in the 17 years that we’ve been in business, as has virtually every supermarket in the United States. So, it is not the venue that the average payroll customer goes to, to cash a check because it is a separate destination venue as opposed to a convenience service. Average customer cashes their check virtually approximate to where they work or live and many of our customers, if not, the overall majority work for small businesses who are not in the database of acceptable makers to the Wal-mart system.

Robert Napoli – Piper Jaffray

Okay.

Donald Gayhardt

So, again, never say never about Wal-mart but, they simply don’t seem to be in the same demographic that we’re operating in.

Randy Underwood

Domestically, I think they talked about opening 800 or so, you know, financial centers in stores. Remember, we’re talking about a market domestically 35-36,000 we call them retail under bank retail financial universe. So, 800 stores in the context, and I understand it’s Wal-mart but it’s still going to be a little store within a Wal-mart so you’ve still go to compete, still got to offer the right products and services, people have to be trained, etcetera. We just don’t see that as a big enough footprint to have, you know, change of dynamics of the business at all.

Randy Underwood

You know Bob, you and I have dialoged before, I know you remember this but, about every two years or so they re-announce that they’re reinvigorating their financial services foray into check cashing and so, I never say never but.

Robert Napoli – Piper Jaffray

They recently announced it in March of 2004.

Donald Gayhardt

But, they had been attempting to do it for years previous. Remember, our average customer is either going to work or coming home from work with a very specific paycheck from a small business that he or she needs to turn into cash immediately. It’s not, that check is not meant to be taking on a shopping excursion, it’s meant to be turned into cash to buy money orders to pay bills, to fill a tank of gas in their car, to pay the babysitter, to get groceries. So, I don’t think it’s a shopping excursion check. I think there is a difference in the, you know, the annual refund anticipation loan business where somebody gets a windfall check and they will cash it at a merchant.

Robert Napoli – Piper Jaffray

Okay. Okay. Thank you.

Donald Gayhardt

You’re welcome.

Operator

Thank you. There appear to be no more questions at this time. I will turn the floor back to your host, Mr. Jeff Weiss for closing remarks.

Jeffrey A. Weiss

Thank you. In closing, we are pleased with our performance for the quarter and believe we are well positioned to continue to successfully execute on our multi country, multi channel and multi product growth strategy and pursue the best investment opportunities across all three of our geographic markets to achieve the highest possible return for our shareholders. We believe that there is no other single provider who can match us for our breadth and depth of our products, services, coupled with our geographical diversification. As a result, we have staked out a truly unique position and are very excited about the future. Thank you, we look forward to speaking with you on our next announcement.

Operator

Thank you. This concludes today’s Dollar Financial Group First Quarter 2008 Earnings Conference Call. You may now disconnect.

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Source: Dollar Financial Corp. F1Q08 (Qtr End 9/30/07) Earnings Call Transcript
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