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Dollar Financial Corp. (NASDAQ:DLLR)

F2Q08 Earnings Call

January 31, 2008 05:00 pm

Executives

Julie Prozeller - Financial Dynamics

Jeff Weiss – CEO

Don Gayhardt – Pres, Director, Sec., Pres of OPCO, Pres of DLLR

Randy Underwood – CFO, Principal Accounting Officer

Analysts

John Hecht – JMP Securities

John Rowan – Sidoti & Company

Bob Napoli – Piper Jaffray

Richard Shane – Jefferies & Co.

Ravi Chopra- Samalin

Liz Pierce – Roth Capital Partners LLC

Operator

At this time, I would like to welcome everyone to the Dollar Financial Corp. Fiscal Second Quarter 2008 Earnings Conference Call.

(Operator Instructions)

It is now my pleasure to turn the floor over to your host, Julie Prozeller of Financial Dynamics. Please go ahead, ma’am.

Julie Prozeller

Joining us today from Dollar Financial Corp. are Mr. Jeff Weiss, Chairman and 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 Before we begin our conference call I would like to remind you that the remarks made during this conference call with respect to future expectations, trends, plans, forecast and the performance of Dollar Financial Corp., it subsidiaries and its markets are forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company’s current beliefs, estimates and expectations that 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 addressed. 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 January 31, 2008, new material change in the company’s current store development and acquisition plans, 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 further affect the results are outlined in Form S3 for 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 to 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 January 31, 2008 which is available on the company’s website at www.dfg.com.

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

Jeff Weiss

Once again, I am pleased to announce another quarter of record operating results. Revenue grew by 23.1% in the quarter to $125.7 million. Our pro forma net income increased by a strong 48.3% over the previous year’s quarter. These strong results were driven by the continued execution of our multi-country, multi-product, both in channel growth strategy and our ability to quickly and successfully integrate acquisitions. During the quarter, we continue to leverage our infrastructure and cost structure allowing us to deliver increased store and regional margin as a percentage of total revenue to 39.2% for the quarter compared to 36.8% from the prior year’s quarter.

During the quarter, we increased our global store footprint by adding 140 stores for the first time in the company’s history. We surpassed the 1000 company-owned store mark with 1088 stores and 1442 total system locations worldwide.

One hundred and forty additional stores for the quarter were comprised of 20 de novo stores in addition to the acquisition of 120 stores throughout the US, Canada and the UK markets.

Now, I would like to mention a few highlights for the quarter. Consolidated revenue was $125.7 million, up $23.6 million with 23.1% over the prior year’s quarter. Total revenue for our Canadian and UK market increased by a combined $24.1 million for the quarter representing an increase of 32.9% year-over-year. Store and regional margin as a percentage of total revenue increased to 39.2% as compared to 36.8% for the prior year's quarter. The consolidated loan loss provision as a percentage of gross consumer lending revenue was stable at 21.8% for the quarter. Adjusted EBITDA increased by 28.8% to $36 million versus the prior year’s period of $27.9 million.

Pro forma pretax income which primarily excludes $51.6 million of refinancing and restructuring cost in the prior year period increased by 48.3% to $22.1 million.

Net income was $13 million for the quarter compared to a loss of $52.4 million for the prior year and fully-diluted earnings per share was $0.52 compared to a loss of $2.23 per share for the prior year’s quarter.

I would now like to highlight some key achievements in development to our Canadian business for the quarter. This was another solid quarter for the Canadian business as it generated $64.4 million in total revenue which represents an increase of 30.7% over the prior year’s quarter.

Check cashing revenue in Canada increased by 28.8%, while consumer lending revenue increased by 27.6% for the quarter. We opened 15 de novo stores in Canada in the second quarter while acquiring five additional store locations. As we have mentioned in past communications, we anticipate that a portion of our previously announced store expansion program in Canada in Fiscal 2008 will be composed of smaller chain acquisitions where we find stores with attractive locations and reasonable purchase price.

Before I turn the call over to Don who will provide an update on the UK and US business units, I would like to take a moment to discuss the December 2007 US employment report as well as recent employment trends we have seen in Canada and in the UK in relation to our customer base and our diversified business model.

Meeting the financial services needs of the service sector employee is the backbone of our industry. For now, we believe the service sector economy remains strong and I believe current employment data support this view. Yesterday’s ADP Employment Report indicates that the economy generated 130,000 net new jobs in January. While manufacturing employment fell slightly, the service sector added 140,000 new jobs of which over 90% were in firms with fewer than 500 employees. So consumers looking for work and service sector jobs with small employers are the backbone of our customer base all are finding positions.

In Canada, for a recent report issued by Statistics Canada, the entertainment and recreation sector were two of the fastest growing job sectors in the country. With respect to the UK, we continue to observe a large migration of Eastern European workers to the UK and the greater London area lured by employment growth stemming from the build out of the Olympic facilities. A large part of these workers have taken advantage of our check cashing, money transfer and other services which has been a contributing factor to our strong revenue growth in that market.

In general, consumers continue to enjoy their Dunkin Donuts coffee, eating at McDonalds, traveling, going to nail salons and other activities all of which drive service sector employment. These activities, inspite of significant increases in the cost of living in recent years have become part of the daily life of our society. This along with the continued secular growth of our health care system should bode well for the stability of service sector employment.

Service sector work is essentially fungible. Our customer’s essential skill is their willingness to work and work hard, multiple jobs, long hours, overnight and overtime. Moreover, it is this willingness that helps cushion our customers from macro volatility such as the increase in the cost of gasoline, housing and other essential items and the decline of employment in the construction and real estate services industry. We recognize the challenges our consumers face and continue to work at developing new products and services with the goal of meeting their evolving financial services needs.

The basis of our company’s business model is diversification. If the local economy in any particular state, province or shire impacted by an economic downturn should not have a traumatic impact on our overall business operation. In addition, since our loans are typically of a two-week duration, we are able to quickly adjust and tighten when necessary our underwriting criteria as we have proven in the past in response to the heightened risk in any of our geographic markets that further minimizes large swings in our overall operating performance.

One final testament to diversification of our business model is that our revenue stream which is comprised of a very large volume of smaller sized transactions is spread across many customers. In the twelfth month ended December 31, 2007, we cashed $9.2 million checks globally with an average fee per check of $19.66. During the same period, we had underwritten 3.7 million loans worldwide with an average fee per loan of $67.99.

I will now turn the call over to Don.

Don Gayhardt

I will talk about our UK business, its mileage to the US including some regulatory highlights and then turn it over to Randy to discuss Canada and Canada regulations and some consolidated highlights.

Our UK business contributed revenue of $32.9 million for the quarter growing by 37.5% over the previous year. Consumer lending revenue increased by 71.7% and check cashing revenue grew by 14.9%. On a native currency basis, comparable store sale in the UK increased by a very strong 23% as we continue to see healthy growth in the market for our products and services.

In the second quarter, we opened three de novo stores in the UK and also acquired 17 additional stores from competitors. We successfully launched in internet payday loan product in the UK on November 1 and while we are extremely conscious of your interest in that area, we are still at the very early stages of the product launch, but we remain very optimistic to get the earnings potential that we could generate once our marketing efforts in the UK gain traction. In December, we completed the acquisition of seven stores in the Southwestern United Kingdom including locations in Southampton, Bournemouth, Worthing, Brighton, Reading, Kings Heath and Erdington. As part of our geographic diversification strategy, we continue to expand our presence in the UK. As over the past 12 months, we have opened our acquired 34 new branches to bring our money shop footprint in the UK to 221 company-owned stores, which further solidifies our leading position in this under served and rapidly expanding market.

As we said in the release in December, we have rolled all of the evidence to accept that we are currently enjoying the UK. We really believe that the outlook for the future there is even brighter. We invested very heavily in developing our UK business. We have a strong management team, industry leading information and collection system and really perhaps, most importantly a developing brand. Like we have in Canada, the brand in the UK being a money shop and this brand is gaining awareness and value with the growing base of under banked UK consumers.

Turning to our domestic business; for the quarter, our US operation has generated $28.3 million in total revenue. On a year-over-year basis, check cashing fees in the US increased by 4.4% whereas consumer lending revenue decreased by 9% or $1.3 million.

The decrease in consumer lending as we have discussed many times before was churned by the transition which began in the fourth quarter of fiscal 2007 of a portion of our US loan portfolio from bank funded installment loans to company funded single-payment loan products.

As previously announced on September 10, 2007, the company entered into an agreement to acquire 45 US financial services which were principally located in the mid West and Hawaii. In the first quarter of fiscal 2008, we completed the acquisition of 26 of these 45 stores located in the states of Missouri, Hawaii, Arizona, Iowa and Oklahoma. In the second quarter of fiscal ’08, we completed the acquisition of 15 stores in Kansas and one in South Carolina. The necessary licenses for the state of Nebraska are expected to be finalized over the next 45 days at which time; we will complete the acquisition of the remaining three stores.

On December 17, we announced the completion of the acquisition of 82 financial services stores in Southeast Florida. This acquisition brings the total number of financial service stores in Florida, our total number to 105, and within other stores, we have talked about our intentions to further diversify operations in the US by concentrating in the high growth Sun Belt markets.

Sun Belt regulation with respect to domestic regulation, our current focus and our industry’s current focus is currently in Virginia and to a lesser extent the State of Ohio. We are certainly not in the business of predicting outcomes, but we are actively involved together with our State and National Trade Association in helping our customers and employees educate policy makers on the value of our short term credit products and the appropriate and responsible regulation of our industry.

While all of this is going on, these are the lobbying fronts; third party research continues to badger us with the case that we make state by state. In November, researchers at the Federal Reserve released a study which included the consumers in states such as Georgia and North Carolina where short-term credit has been restricted or eliminated. Those concerned were experiencing significantly greater financial difficulties in the form of more bounced checks and more personal bankruptcy files. This then correlates to the Federal Reserve’s earlier research that included wider availability of short-term credit as measured by the number of offices relative to population made from better financial welfare for our customer base.

I should close by circling back to Jeff’s remarks about diversification and note that we have 16 stores in Virginia and 21 stores in Ohio, all of these provide multiple products and services. Net revenue from short-term loans of these markets combined was approximately $800,000.00 for the quarter ending December 31, 2007. And I will now ask Randy to provide an update on the Canada regulation and comment a little bit in more detail on the second quarter results.

Randy Underwood

With respect to regulation in Canada, the provinces of Nova Scotia, Manitoba, Saskatchewan have already passed their legislation and are expected to set maximum allowable rates in the next few months. In Alberta, the province believes that existing legislation already complies with the requirements of the Federal law and is targeting to separate to mid 2008. In British Columbia, they have recently passed legislation in October of 2007 and bureaucrats in that province have indicated the rate caps established in Manitoba, Nova Scotia, Saskatchewan and Alberta will be examined in reference to their approach to establishing rates.

In British Columbia, rates are anticipated to be established some time in the summer of 2008. In New Brunswick, the province introduced legislation in November 2007 which is expected to be passed into law some time later this spring. Public hearings in New Brunswick to establish rates are now expected to occur in the summer of 2008 and in Ontario, legislation is anticipated to be introduced later in the year.

In general, we are pleased with the progress 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 companies.

Now, with regard to our consolidated financial results, we achieved record revenue of $125.7 million this quarter with total loan revenue growing by 23.1% over the prior year’s quarter. Our consolidated check cashing business grew by a solid 17.7% while net consumer lending revenue grew by 24.3%. Demand for our consumer lending products remain solid although our Canadian trends have moderated somewhat. We think this is largely attributable to the confusion brought about by the pending regulatory changes and to be fair, somewhat exacerbated by our decision to significantly reduce both the frequency and the tone of our Canadian advertising and marketing programs during the tenure of the regulatory hearings.

We believe these trends will reverse with the advent of regulatory change in ensuing clarity in the marketplace. Turning to our loss provision, the aggregate loan loss provision for the second quarter as a percentage of gross consumer lending revenue was in line with our expectations at 21.8% and was comparable with the 21.6% rate for the first quarter of fiscal 2008. During the December 31 fiscal second quarter, we continue to leverage our store infrastructure and our cost structure which resulted in our store and regional margin expressed as a percentage of total revenue to improve to 39.2% for the quarter which is compared to 36.8% for the prior year’s period. And on a percentage of revenue basis, our corporate cost increased to 14% as compared to the prior year’s quarter of 13% reflecting the previously announced increased investment in management and infrastructure to support our enhanced store expansion plan as well as the acquisitions that we have completed thus far this year.

Excluding one time debt financing and reorganization cost in the prior year, our pro forma income before income taxes increased by 48.3% for the quarter, a revenue growth of 23.1%. In our pro forma fully diluted earnings per share increased 44.7% to $0.55 per share compared to $0.38 for the prior year’s quarter.

Looking at the company’s financial position for a moment, the company ended the quarter with cash available for investment and future acquisition of approximately $30 million. Additionally, the entireties of the company’s $100 million in revolving credit lines were un-drawn at December 31 and still are today. We believe this affords the company ample liquidity to fund its present and anticipate its future operations as well as the expected growth of its multinational business platform.

Today, we are also reaffirming our guidance for fiscal 2008 of revenue between $510 million and $530 million, adjusted EBITDA between $145 million and $152 million, income before income taxes of $91 million to $96 million and fully diluted earnings per share of between $2.15 and $2.30.

Finally, additional information on the operating results for the fiscal second quarter is contained 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 that they may have.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from John Hecht from JMP Securities, please go ahead.

John Hecht – JMP Securities

The first question is more of, I guess a modeling issue. You absorbed some new revenues and new cost that we all know that they are in acquisition this quarter, what point of the quarter on average did those revenues and costs come up, in other words, I am trying to get a base rate of cost and how much this $76.4 million of this quarter is reflective versus some additional costs related to the acquisitions. In other words, what on average during the quarter did you complete the acquisitions to kind of get a run rate cost and revenue increases from those?

Jeff Weiss

The core to the acquisition was completed about 2/3 of the way through the quarter, around the 19th or 20th of December or so to my recollection.

Don Gayhardt

It was almost at the end of the quarter. All through the way to December.

Randy Underwood

The other ones were Kansas and Missouri came in about the start of the second quarter in the month of October. We had a couple of other states that we announced earlier that came in towards the end of the first quarter.

John Hecht – JMP Securities

Okay, so the bulk of those in the first part of the quarter and before this stuff, 7/8 through the quarter.

Randy Underwood

Very little impact from Florida in this quarter.

John Hecht – JMP Securities

You talked about the impacts of your payday loan revenues from the dislocation and the installment loans in the California and Ohio areas, if you kind of separate that, can you tell us what the organic state of the US payday lending environment is?

Jeff Weiss

I think if you look at it as the portfolio, the dollars that are outstanding, I think that business, we have gotten that back to where it was prior to the change. Now there are these pricing differences there, so yield is not quite as high as it was. The aggregate dollar revenue was not as high as it was. But that business at least is back and we think it is kind of back to same footing in terms of aggregate dollars outstanding on a on a (inaudible) basis excluding acquisitions back in the stores. The extended basis stores before the acquisitions, we did the 45 and the 82.

Within that business, we set it like organically the US payday business is a business that is going to grow in the mid single digit range, all other things being equal. Now what is not equal obviously now is credit quality from the sense of five or six quarters continues to move against us in the US on kind of a sequential quarter basis. I think it is still on a pretty manageable range, but where we see the portfolio getting outside the bounds of kind of prudent loss metrics, we will take steps to take the volume off the table. I know it is an inexact answer, but that is kind of our sense of where the US payday market is right now.

John Hecht – JMP Securities

At least it gives me a sense of what trends should be in the model. You guys have been growing your payday volumes from the December through March period, which is tax refund season, at least in the US because of I guess strong international growth. Should we see any effects of seasonality? Kind of refresh my memory, what happens in the UK and Canada from a tax refund perspective and how does it affect volumes in the near term?

Don Gayhardt

Well, in the UK, there is no tax season in the UK. In Canada, there is a tax refund season which is going up currently, I would guess kind of in the midpoint. In the US, we understand that there was a delay in IRS issuance because of some complication of calculating eight alternative minimum tax, so the tax season was kind of late in the US season. What we have seen in the past is kind of year-over-year, the impact of that seasonality has declined. There has been some moderate decline in portfolio size in the US, less so in Canada because people get their refund checks and pay down their loans, a modest up tick in check cashing fees although that has smoothed out quite a bit as more and more merchants are offering deals if you bring in your tax check to the (inaudible). So the seasonality has become quite needed.

Jeff Weiss

Just two additions there, quickly, in the UK actually, January is a very slow month because it is the holiday month. The kind of post Christmas holiday and even in our customer base, there is quite a bit of travel that they do, so January tends to be our worst month. It is uniformly our worst month of the year in the UK from a revenue standpoint. In Canada though, we are agents for income tax filing preparation. In Canada, we have got a very, very good product that has been growing over the years, we will lose a bit on consumer lending originations there. In Canada, we have been more than making that up for the past few years with our income tax filing product, so you will see consumer lending revenue in Canada will take a slow, but in other revenues, you will see these from the income tax products in Canada.

John Hecht – JMP Securities

And there is some additional check cashing fees as well with that?

Jeff Weiss

A combination of loan fees and check cashing.

Don Gayhardt

One of the attractions of our products that we will disperse and refund in cash at the location.

Jeff Weiss

In Canada as opposed to the US. The actual lender for the tax refund.

Don Gayhardt

We are dialing into the system and filing the refund.

John Hecht – JMP Securities

Thanks very much. I just want to congratulate Don on I guess your ability to move on to something else. I look forward to I guess, to get one more conference call with you, but I look forward to hearing more about what you are going to be doing.

Operator

Our next question comes from John Rowan from Sidoti & Company, please go ahead, sir.

John Rowan - Sidoti & Company

Actually, kind of going back to the last question, what effects do you think you will see from this Federal Stimulus Package if these rebate checks go out. Is it a similar seasonal effect would be a tax refund?

Jeff Weiss

I think, again, depending on what the permutations of the program is and how the checks are mailed, I think we expect to see the similar kind of result that is increase in check cashing fees and people using the proceed of their rebate to pay down debt. So an increase in check cashing revenue and a decrease in loss metrics.

John Rowan - Sidoti & Company

But on a similar scale?

Don Gayhardt

There is a lot of competition for those checks, but I think we will get a good number of them, but I think as Jeff said, we think there will be a nice impact as well and we went through this before in I guess it was 2001, and I think we have some experience both in terms of marketing and capturing the checks, but also, what it does to loss metrics.

John Rowan - Sidoti & Company

And then on having activity, if I am not mistaken, you guys had hedges that rolled off, with currency hedges, can you just let us know what were the new hedges that you were putting on?

Jeff Weiss

We have hedges for the quarter that we are in now, our fiscal third quarter and the fourth quarter, the June 30th quarter, $1.00 on a looney and $2.00 on the pound. And those at the time, we bought them when the rates were very, very high in terms of the weakness of the US dollar. With those who were out of the money quit and right now, that is about where the rates are if I remember looking at it earlier today.

John Rowan - Sidoti & Company

But that will replaced with similar hedges?

Jeff Weiss

We typically hedge out at least six months and generally no further than a year that the cost just gets really prohibitive to go out much that long.

John Rowan - Sidoti & Company

Just one more question, regarding the legislation, obviously, you touched on Ohio, but can you just give me an idea what the differences in the bills that are, I believe there are two that are sitting in the committee right now in Ohio?

Jeff Weiss

I have got some sense of that. If we could follow up on that offline, it would be better. I would like to have the bills in front of me if that is okay. We could follow up offline.

Operator

Our next question comes from Bob Napoli from Piper Jaffray, please go ahead.

Bob Napoli – Piper Jaffray

Question on the Florida acquisitions and the profit outlook for the US business, I mean Florida has obviously, from a long-term perspective, I think that is an excellent place to be in the short term, that is one of the states that is getting hammered by the housing market, plummet in construction spending and construction jobs and I just wondered if the acquisition and I know it has only been a month since you have closed that acquisition, but obviously you have been watching it very closely since you agreed to make the acquisition, but how is that operation doing? Are you seeing some of the effects from the fallout in the housing market in Florida and is that going to set you back at all as far as attaining profitability in the US?

Jeff Weiss

So far, we are knocking wood here, Florida seems to be fine particularly since the preponderance of the stores we have in Florida, the overwhelming majority on the East Coast and while there was an enormous speculative room in the panhandle in Western Florida and particularly in Miami, our stores are kind of cited in areas that were already established residential and business neighborhoods. Now, obviously, there is a labor force that flocked to Florida and became fully employed in Florida because of the construction boom and I think that we have not seen any full work so far. Typically, I think what would happen is we would see a modest decline in the face amount of checks because employers would not have to tick so vigorously for labor, it was pro-employment in higher paying construction jobs and maybe a similar small decline in the number of checked cash over time would go away perhaps or weekend jobs, but thus far, we have not seen anything significant.

Don Gayhardt

And just to point out what we talked about in Jeff’s part of the script there. We continue to see a lot of growth in the service sector job force. Obviously, manufacturing and certainly there are some geographic differences, but I think by enlarge, state by state, I think you are seeing it at our end of the market, the job picture remains relatively healthy and certainly we have done as much as we can to kind of confirm that with various kinds of sources.

Jeff Weiss

And again, not to put too far the points on it, ropers may become restaurant workers and sheet rock workers may become bus drivers in environmental trends like that. Our customers work and still in the US, if you are willing to work, there are jobs.

Bob Napoli – Piper Jaffray

Now, given that, since that is on track, should the US be profitable in the first quarter, it will be the first full quarter with the Florida acquisition, you have the mid West acquisition on board and does that get you to where you can count on being profitable in the US?

Jeff Weiss

We will be profitable in the US for book purposes. As we have stated before, for tax purposes, that is the bigger challenge because you incur goodwill obviously on acquisitions and the goodwill is required under tax loss to be amortized over a 15-year period, so you incur a charge for your tax purposes and therefore, you get the blend without getting too technical here between deferred and tax provision and for tax purposes.

I think we will be at about a break even level, maybe up a little bit, maybe down a little as we go through the next couple of quarters, so therefore, we were not expecting any appreciable impact in those two quarters on the NOL, but certainly as we look to the next year and we have a benefit of the acquisitions on a full year for fiscal ’09 basis, we feel pretty good about being able to start to utilize that NOL as we look at ’09.

We also, as we mentioned have been doing quite a little bit of overhead building in our US business as we are in the midst of revitalizing that after many, many years as most people in this call probably know of putting most of our investment into Canada and in UK and building those franchises, so we are spending quite a little bit on revitalizing our infrastructure and putting on some very talented multi-unit managers to handle the additional stores and we are also making substantial investment to the consumer industry committee that we have for regulatory activities in the various state activities that we face and as a comment earlier today on, as we move into the legislative session and our expenditures on that over last year pretty significantly.

So a fairly sizeable investment for the long term being incurred I think here in the next couple of quarters in the legislative and lobbying arena. So, obviously those charges are coming through as well.

Bob Napoli – Piper Jaffray

On the tax rate, where do you expect to see that tax rate, I guess, in the back half of this fiscal year or calendar ’08?

Jeff Weiss

I think we are going to be between 41% and 42% which is basically where we have been here in the first couple of quarters. We are about 41%.

Bob Napoli – Piper Jaffray

You have been to pro forma of 38%, what does it take to get to that 38%?

Jeff Weiss

I think that takes us to fiscal ’09 and we will be there in fiscal ’09. I am saying something of significant change in the US business which I do not anticipate at this point, again, it is because we have got the load from earlier in the year. The way you do your tax provision and maybe I should clarify that, as you estimate your rate for the year, and you use that on a quarterly basis and therefore, you do not have big movement between quarter to quarter, so that is an expected rate for the year that has the blend of our first half of the year’s activities when we did not have the acquisitions in the back half of the year when we do.

If we were looking at it on a cash basis, our effective rate for book purposes would be less in the back half of the year than in the first half of the year, again, I hope I am not confusing things.

Bob Napoli – Piper Jaffray

That makes perfect sense. So beginning in the September quarter, you would hope to be posing a 38% tax rate or better?

Don Gayhardt

You also have corporate statutory rates that are set to start declining in Canada and in UK as well, so we should get some benefit and I think, we can get you exact metrics of when and where that is, but it is a point or two decline in both countries so that should help the overall tax picture as well.

Bob Napoli – Piper Jaffray

Last question, acquisitions, are you working on a number of smaller deals in various markets at this point?

Jeff Weiss

I think it is fair to say that the acquisition pipeline is quite full. I hope the exit more or less of private equity from the sector as I think enabled strategic buyers to look at possibilities much more realistically and I think sellers who might have had expectations that were kind of out the parameter for us are now more likely to think in terms that we are thinking so I think that the answer is that there is a full pipeline and we, as always, quite actively looking.

Operator

(Operator Instructions)

Our next question comes from Rick Shane from Jefferies, please go ahead.

Richard Shane – Jefferies & Co.

Given the three geographies, can you just sort of give us a sense as to what you think is going on economically in each market. I mean, obviously, I think we are aware of the slow down in the US, can you talk a little bit about Canada and the UK and I know you have alluded to this, but also, put it in context of what you might do with underwriting standards, again, earlier in the call, you talked about loss rates in the US ticking up a little bit and perhaps tightening underwriting there and we have heard talk from some of your competition about the same thing. What is your outlook by geography?

Jeff Weiss

Let us talk about Canada first. Everybody knows Canada has had a really booming economy particularly in the Western part of Canada because of the commodity, minerals, oil, gas et cetera and it is hard to see that that boom will sustain itself over the next indefinite period of time. Coming in from a data driven point of view, we have yet to see a really discernable differential in our Canadian business as a consequence of any economic slowing. I guess, when reading the newspapers, I think it is bound to happen. In terms of underwriting standards, in all our geographies, we make an assessment of our customer’s ability to repay based on income and we also evaluate job category, length of residence, et cetera. So our ability to modify our underwriting standards is to learn the whole host of parameters and we have had an awful lot of information because we have been doing this for an awfully long time about when to either eliminate a certain group of customers from the product entirely or much more likely to just put the amount of money that is being borrowed. And we can do that virtually instantaneously.

In the UK, you still have a very strong market although there has been a similar recorded dislocation in UK as housing prices have stopped increasing versus the report of decline in US housing prices, but you still have a very significant influx of people into the labor force particularly in the service sector as Don mentioned in the Olympics.

And in Canada, UK, and the US, fewer than 23% of our customers are homeowners, so they really are not afflicted by the sub prime mortgage blues. So the UK economy is more or less steady state although again, London which has enormous preponderance of the population in the UK and we are very strong and seeing a very strong surge in new potential customers whereas these people flock to the jobs created by the Olympics, so I think, from our vantage point, we have not yet seen anything dramatic as leading edge indicators of slow down, but again, the only thing that unites our customers is their economic category and their willingness to work. They are not construction people or exclusively housing and even in a given geography, we are unlikely to have any significant concentration of folks in any one occupational category.

Don Gayhardt

Just a couple of thoughts, we certainly see in Canada our credit loss has kind of sequentially are about slight up just up a little bit. In the UK, if you breakdown our loss, they are actually sequentially, we have got in the quarter, yearly, they would come down a little bit. Part of that is we used to have more installment based products in the mix there which have higher loss so we have a lower percentage of those in the mix now, but we have also centralized a lot of our collection operations there from some kind of distributed sites which we brought better staffing there, more professional collectors and some of the technology that we have in the States, we kind of poured it over there and we are using that.

But I think, we certainly see the credit quality stats in the UK following the credit card companies, et cetera and we see that they are swimming upstream a little bit right now. I guess, internally, we have done some stuff to position ourselves a little bit better there and I think over time, if general credit quality in the UK continues to deteriorate, we will see some of that, but I think we are in a good position to kind of insulate ourselves from that, not completely, but largely.

Richard Shane – Jefferies & Co.

And actually, that is very helpful. I really appreciate the focus on the UK because I think, your answer reflects that that is the most I guess, uncertain market just in terms of sort of counter bailing pressures. Second question, you guys may not know the answer to this, but do you know on a household basis what your customer’s average tax refund is? You had a lot of questions in the beginning about sort of the trend line in terms of consumer behavior around tax refunds. It would be helpful, since we pretty much know what the tax subsidy is going to be in May, if we could get some sense on a relative basis how big that is versus your customer’s normal tax refund?

Jeff Weiss

I think on average, we cash tax refund checks somewhere in the $1800.00 to $2100.00 range that is the average size refund check we cash that we refund in the US.

Don Grayhardt

In Canada, I think the numbers are about half that and if we are mistaken, we will certainly follow up offline on that. I think that is about half of the US.

Richard Shane – Jefferies & Co.

So that would suggest that the May refunds are going to be almost 3/4 of the typical March quarter refunds?

Don Grayhardt

We have been talking about in terms of the Stimulus Bill.

Richard Shane – Jefferies & Co.

Exactly.

Don Grayhardt

If they leave it alone, which we are certainly hoping for that is a lot.

Jeff Weiss

There is no senate modification of the house bill.

Richard Shane – Jefferies & Co.

And I am assuming there is not.

Operator

Our next question comes from Sanjay Zen (ph) from Bloomberg, please go ahead.

Sanjay Zen – Bloomberg

First, in regards to Don and who will be taking on his responsibilities and how you are going to split those up between the remaining guys, secondly, when I looked at your loan loss provisions in proportion with your gross lending revenues, they are just a tiny bit above where they were in the last recession, obviously, you are pretty diversified and you can readjust credit trends pretty quickly, but if you can just comment on how you would see those trending as the situation changes in the different economies and how high you would be willing to take your debt to EBITDA levels.

Jeff Weiss

Don has quite an invaluable and crucial and important role in the growth of the company from a $14-million revenue company, private company to the company we are today and we, management and stakeholders and shareholders have a tremendous debt of gratitude and appreciation, but one of the great legacies he left has been his ability to help us build out our management group as we have grown the company and we have a very, very strong management group and we will be dividing this responsibilities amongst those managers. Many of whom you have met in some of the activities we have done, and as Randy mentioned, we continue to build management strength in anticipation of future growth and we have been growing the company very substantially. In terms of credit terms and credit losses, I think it is fair to say that we are relatively reluctant to dramatically grow top line at the expense of credit quality so that if they were accelerating negative trends in credit track, I think that we would be very cautious about loosening standards to grow top line.

I think, much more likely that you will see us tightening as opposed to loosening, but remember, the overwhelming majority of the lending we do is two weeks, and you have to be employed at the time that you receive your loan. So we are not in the kind of the long tail credit cycle of even a credit card company who may issue a card with $10,000.00 limit to someone who may become unemployed the next day and utilize that $10,000.00 limit as income without any offsetting income.

So I think that we are positioned in the market place to be able to respond very quickly if we see either deterioration or improvement by modifying our standards across any local or national or international geographies.

Don Gayhardt

I think the question about the kind of the recession and timing it over the last recession, you have the US payday business which is the only place we had a significant payday business. This is the last time we had a recession from 2000 to 2001. It is really difficult to kind of comp it out because as a business, we are growing so quickly and I think that in a general sense, we have kind of looked at the numbers and basically the business kind of grew though that recession. In terms of using that data to sort of comp out what might happen in the recession here, which we do not have in our model right now, but it is just not worked the whole lot, so I guess, as a general statement, could credit quality domestically continue to deteriorate, yes. Again, your domestic consumer lending is 10% of our total revenue so, would that have a material impact on the overall financial model, we argue pretty strongly, no.

Jeff Weiss

I also think it is important to point out that the industry and the company are very mindful of the public policy and social issue and while it might be possible to lend very profitably at significantly higher loss rate I think is a matter of social policy and corporate policy, we are not inclined either as a company or an industry to do that. So that while there maybe some modest deterioration in the credit quality, I think our inclination as I said is to make sure our standards reflect our public policy point of view as well.

Operator

Our next question comes from Ravi Chopra (ph) from Samalin. Please go ahead.

Ravi Chopra- Samalin

Last quarter, you talked about being optimistic about maintaining your operating level margins at 40% over the medium term. Obviously, you are internalizing your US acquired stores right now. Can you just talk through when we might start seeing the 40% run rate?

Randy Undwerwood

We basically are at 39% as we ended this quarter and on a blended rate basis, that is somewhere there in the high 30’s. It is probably about right as we look to the future. we are obviously in the process of transitioning the US business and the US business has, as I have mentioned earlier on another call additional cost that we are putting on as we revitalize that and in fact, some of the older stores up to standards that will allow them to grow in the future if we put money back in to that system, and that is going to take a little while obviously before you start to see the proof to that. I guess the depreciation up front as you revitalize your stores on cash expense item, but obviously the cash that we are spending.

In the Canadian business, that is one that like we said, we kind of backed off just a little bit and had more or less in our minds, it is self-imposed a quiet period given all the regulatory activity and I think it is probably best if we just do not talk a lot about the Canadian business publicly and we can comment on the UK. We are building quite a few more stores there and we see a great market so we are going to take on some more new store losses.

Don Gayhardt

You have been saying that this place is just kind of a mixed issue. In Florida, it is a great market and we like it a lot in part because it has as we have said, it is a little bit of an irony, but it has the lowest per transaction statutory payday loan rate in the US, so the market is very much a multi-line operators market which is the kind of markets where you have had extremely high growth of small mom and pop kind of mono-line payday loan chains. Those can be more difficult markets, so the flip side of that is because you are getting a low rate there with the operating margin on the acquired stores in Florida is in the mid 30’s. Now it is growing, it is a good business. It is a really good management solid territory et cetera, but as you blend that in overall, that is a step away from getting to 40%, but I think as we say over time, we think we will get that operating margin to go up and the blend, certainly the higher growth we are getting in Canada and in the UK will get us over that 40% number, but for the next couple of quarters, we are going to take a few basis points step back there.

Ravi Shapra - Samalin

And one other question on expenses, in terms of the corporate expenses, I know you explained that there are some elevated regulatory and lobbying costs in the number. Can you provide maybe just a ball park of what that might be or maybe as an outlook if this is kind of a good dollar run rate in terms of the corporate expenses from here on out.

Jeff Weiss

I would suggest around 14% which is where we were in the quarter and we are a little bit above that in the six months, so let us take 14% to 14.5% of revenue. It is probably a good number. I do not think it eludes us to indicate how much money we are spending on lobbying. I do not think that is serving the purpose of the company, so if you will allow me not to answer that question, I will not.

Operator

Our next question comes from Liz Pierce from Roth Capital Partners. Please go ahead.

Liz Pierce – Roth Capital Partners LLC

I came in late to the call so I am sorry if you guys already addressed it, but just a couple of things I wanted to ask. Did you comment or would you comment if you had not commented on the internet side of the business in the UK or in California and then second to that is the NOL balance, did you give an update of that?

Jeff Weiss

Vis a vis the internet business, what we have said was, we regard the US internet business as kind of ancillary to our retail business. We have very cautiously entered that business and continue to be extremely cautious. It is very, very early for us. We are much more optimistic, but again, it is still very early days in the UK, but we think there is a more significant business opportunity there. You are able to have a national platform. We think the rate environment is extremely favorable there, so we think the potential is significantly higher in the US. We think there will be interesting potential in Canada once the regulation or regulations, but then they the point of view comes to the provincial level.

Randy Underwood

The NOL remains at $99 million. I did comment quite extensively on that with the difference between book and taxes and I am sure to inform everybody. Maybe you could give me a call and we can just kind of answer that one offline.

Liz Pierce – Roth Capital Partners LLC

That is fine. I can read through the transcript or we can do both. I just was curious.

Randy Underwood

It is still $99 million since we have been here today.

Liz Pierce – Roth Capital Partners LLC

And Jeff, just to follow up, did you say that you thought that the UK was going to be more productive than the US on the internet.

Jeff Weiss

Eventually, yes I do.

Operator

We have run out of time for our Q&A session. I would like to turn the floor back over to Mr. Jeffrey Weiss for any closing comments.

Jeff Weiss

Thank you very much for joining us in this session. I appreciate it. If there are those of you who have questions that we are not able to get to, please do not hesitate to call any of us. We will be glad to answer your questions offline and as always, our business happens in our retail branches with our retail associates and I want to thank them yet again for they are doing an incredibly dedicated and diligent service to our customers. Our stakeholders obviously are our customers and we appreciate their custom and again, we appreciate the support of our shareholder base. So thanks, we look forward to speaking with you in the next quarter.

Operator

Thank you everyone. This does conclude tonight’s conference call. You may disconnect your lines at this time and please have a wonderful evening.

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Source: Dollar Financial Corp. F2Q08 (Qtr End 12/31/07) Earnings Call Transcript
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