Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q4 2007 Earnings Call

February 14, 2008 9:00 am ET

Executives

Ken Compton – President & CEO

Patrick O’Shaughnessy – Executive VP & CFO

Jamie Fulmer

Analysts

Dennis Telzrow - Stephens Inc.

John Hecht - JMP Securities

Rick Shane - Jeffries & Co.

[Analyst] - Sidoti & Co.

Operator

Good day and welcome everyone to the Advance America, Cash Advance Center fourth quarter earnings results conference call. At this time for opening remarks and introductions I would like to turn the call over to Jamie Fulmer. Please go ahead.

Jamie Fulmer

Good morning everyone, before we begin let me remind you that during this call our comments will include certain forward-looking statements. All comments on this call other than those relating to our historically information or our current conditions will be forward-looking statements. For example any statements regarding our future expenditures or financial performance, our plans for product expansion and new center growth, our business strategy or expected developments in the cash advance services industry will be forward-looking statements. In this regard please keep in mind that our actual future results could differ materially from our expectations as of today and are subject to risks, uncertainties and other factors many of which are not within our control or may not be predicted. For a more detailed discussion of some of these factors please refer to the Risk Factor section of our Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, copies of which are available from the SEC, upon request from us or by going to our website at www.advanceamericacash.com. Now I’d like to turn the call over to our Chief Executive Officer, Ken Compton.

Ken Compton

Good morning. Also joining me on today’s call is our Chief Financial Officer Patrick O’Shaughnessy. Yesterday the company reported the results of the fourth quarter and year which ended on December 31, 2007. Before we discuss results in detail, I’d like to update you on some developments since our last call.

Yesterday our Board of Directors approved Advance America’s 13th consecutive dividend as a public company. This dividend of $0.12.5 per share is payable on March 7 to stockholders of record as of February 26. Through December 31 of 2007, the payment of our quarterly dividends together with our stock repurchase program has returned approximately $239 million in cash to our stockholders since we became a public company. During the fourth quarter the company repurchased approximately 4.4 million shares of its common stock in the open market for an aggregate purchase price of $40 million. For the year, the company repurchased approximately 6.5 million shares for an aggregate purchase price of $67 million. So far in 2008 the company has repurchased an additional 1.6 million shares for an aggregate purchase price of $13.6 million. Since December 31, 2006 the company has now repurchased approximately 8.1 million shares or 10.1% of outstanding shares. Also yesterday the company’s Board of Directors authorized an additional 75 million share repurchase program as well as a prearranged repurchase plan under Rule 10B51. As I commented in yesterday’s earnings announcement and on our previous call, our Board believes the continuation of this program will serve the best interest of the company and stockholders by returning capital to the company’s stockholders by providing an attractive use of the company’s capital.

As we mentioned in our earnings announcement the company continues to implement a strategy of grow in our geographic footprint through international expansion. During the fourth quarter the company completed one additional acquisition in the United Kingdom. We now have 12 company operated centers there in addition to 85 limited licensees. We have also begun the process of rebranding our centers in the United Kingdom. Going forward we anticipate all centers opened or acquired by the company will operate under our national cash advance brand.

In Canada as you note Federal Bill C26 which provides a specific legal framework for offering the payday advance product, came into force in May of 2007. Individual provinces continue to work through the process by passing enabling legislation of their own. To date four provinces have passed legislation, however it has not been proclaimed in any of these provinces and therefore is still not enforced as law. There are still two other provinces currently considering legislation and three others expected to introduce legislation in 2008. In addition the provinces must establish rates and set up licensing and regulatory infrastructure before operations can begin under the new laws. Manitoba continues to be the closest to proclaiming the legislation and establishing rates and setting up licensing and regulatory infrastructure although this process has been delayed. Final hearings on interest rates are now scheduled to be completed by the end of February. If hearings finish as scheduled we expect the licensing progress would begin sometime after March, 2008, with the full Manitoba law to be proclaimed and new rates go into affect around August, 2008.

We currently have ten centers open and operating in Canada and expect to have approximately 25 total by mid year. Including both centers in the United Kingdom and Canada we opened or acquired a total of 57 centers during the quarter and 221 during 2007. As of December 31, 2007 our overall total center count was 2,832. During 2008 we expect to open between 50 and 100 in the United States, UK and Canada. In addition we will continue to pursue our strategy of pursuing opportunistic acquisitions. The company closed a total of 242 centers in 27 different states including those centers in Pennsylvania and Oregon which were previously announced.

On the legislative front sessions have now begun in states all across the country. This year, 2008 is another active year and we’re currently tracking 72 Bills nationwide. As in the past those critical of our industry continue to be vocal and active in several states. There goal in many of these states is to eliminate our industry or to make it unprofitable for us to operate through the passage of restrictive rate caps or other elements that would force industry out of business. We continue to believe the value and benefit to customers of short term advances will ultimately prevail over the misleading and inaccurate information promoted by these critics. Our efforts legislatively are focused on working with reasonable parties to find ways to provide additional protections for the very small number of consumers who misuse the payday advance product without taking it away from the overwhelming majority of consumers who use it responsibly. We will be able to provide insight into the 2008 legislative session on our next call.

With regard to new product offering we are pleased to report the successful rollout of our new prepaid debit card program across 2,600 centers. A new card program rolled out on schedule mid way through the fourth quarter. We are pleased with the initial results. In the months of November and December over 65,000 were registered and a total of $16 million was loaded on these cards. We believe the performance of this program validates our commitment to create a stronger value proposition for our customers through the addition of new features and benefits. We plan to continue to build on the strength of this program by adding enhancements that should expand revenue by driving increased frequency of use, incremental customer growth and improved customer retention.

Also during the fourth quarter we completed our rollout of money transfer services offered through money gram to over 2,700 centers. Our centers offer four money gram products; customer sends, receives, express payments to businesses and money orders. Here again we’re pleased with the initial results with the demand for express payments being particularly encouraging. In addition we are currently offering tax preparation services in over 2,000 centers nationwide.

Our marketing expense continues to fluctuate from quarter to quarter, however our total marketing expenses for the year were $26.8 million or 3.8% of revenue in line with our previous expectations. For the fourth quarter of 2007 the total marketing expense was $7.3 million or 4% of revenue compared to $7.2 million or 3.9% of revenue during the fourth quarter of 2006. For 2008 we expect total annual marketing expenses to be between 3.0% and 3.5% of revenue. The average amount of a cash advance made during 2007 increased to $361 from $353 in 2006. The average fee on all cash advances made was approximately $55 for both the year ending December 31, 2007 and December 31, 2006. The average duration of all cash advances completed was approximately 16.5 days compared to 16.2 days in 2006.

In Illinois we originated 31,209 installment loans to consumers in that state during 2007 compared to 29,000 during 2006. Now I’d like to turn the call over to Patrick for an overview of our financial results for the quarter and the year.

Patrick O’Shaughnessy

Thank you and good morning. For 2007 total revenues were $709.6 million representing a 5.5% increase over 2006. For the quarter we reported total revenues of $183.6 million which represents a 1.1% decrease from the same period in 2006. This was Advance America’s fourth consecutive year of year over year revenue growth as a public company. Despite disruptions to and ultimately the loss of our business in both Pennsylvania and Oregon the company’s core business was able to grow to overcome these losses during the year.

The quarter over quarter growth rate in total revenues for centers open prior to October 1, 2006 and still open as of December 31, 2007 was 2.8%. As you will recall the company announced in September that it was closing 31 centers in Pennsylvania, 45 centers in Oregon and 27 underperforming centers in various other states. At that time the company incurred charges of approximately $11 million which were all recorded during the third quarter. At that time we decided to keep 67 centers open in Pennsylvania in hopes of a favorable ruling from the Supreme Court of Pennsylvania on our appeal of a lower court’s decision in July 2007 which directed us to suspend operations and discontinue the choice line of credits in Pennsylvania.

Due to an uncertain timetable for the court’s ruling the company decided in December to close all remaining centers in Pennsylvania and recorded additional charges of $1.7 million in the fourth quarter for center closing costs and disposal of fixed assets. Because we decided to keep the centers open in Pennsylvania, despite not making new loans there we incurred operating expenses including the previously mentioned one time charges [inaudible] of $2.2 million in that state during the fourth quarter.

You may note that we have changed our presentation regarding the provision for losses. We had previously shown provision for losses as a net against revenue and we now show it as a center expense. Provision for losses for the fourth quarter was 23.4% of total revenue compared to 22.1% for the same period in 2006. For the year the provision for losses which included the write down of receivables of $6.8 million from center closings in Pennsylvania and Oregon as a percentage of revenues was 19.8% compared to 18% in 2006. Excluding the write down of receivables due to the center closing the provision for losses as a percent of total revenues was 18.8% for the year an 80 basis point increase year over year. The company believes excluding the write down of receivables facilitates an understanding of recurring operating results and a comparison of period over period performance.

The company sold approximately $1.8 million of previously written off customer receivables during the quarter ended December 31, 2007 compared to $2.6 million during the same period in 2006. For the year net income was $54.4 million compared to $70.2 million in 2006. Net income for the quarter was $11.5 million compared to net income of $18.9 million for the same period in 2006. The previously mentioned write down of receivables, center closing costs and loss on disposable fixed assets reduced net income by $7.4 million for the year and $0.9 million for the quarter ended December 31, 2007.

For the year ended December 31, 2007 diluted earnings per share were $0.70 compared to $0.87 for the same period in 2006. Diluted earnings per share were $0.15 for the quarter compared to diluted earnings per share of $0.24 for the same period in 2006. Diluted earnings per share for both the year and the quarter included the write down of receivables, center closing costs and loss on disposable fixed assets related to the 103 center closings. These charges reduced diluted earnings per share for the year by approximately $0.10 and for the quarter by $0.01.

Corporate G&A was up approximately $1.8 million compared to the same quarter last year. Included in this line item was in increase in legal fees of approximately $1 million. We also had expenses related to our operations in the United Kingdom of $700,000 and severance costs of approximately $300,000 primarily associated with the elimination of 31 positions in our corporate office. These positions were eliminated to adjust for the slower pace of our new center rollout strategy which we have discussed on previous calls. Interest expense was $3.3 million during the fourth quarter compared to $3.1 million for the same period in 2006.

In December we changed CSO lenders in the state of Texas. As a result of this change we no longer consolidate our lender as a variable interest entity on our books. This deconsolidation should provide a more clear representation of our operating results in the future. The balance sheet at year end reflects this deconsolidation and our advances and fees receivable of $221.5 million at year end does not include the consolidated receivables of the variable interest entity. For comparison purposes, the advances and fees receivable at year end 2006 included $33.7 million of advances and fees receivable of the consolidated variable interest entity.

Cash from operations after the funding of the increases in advances and fees receivables and the variable interest entity was approximately $60.1 million for the year ended December 31, 2007. During the same period we paid $38.8 million in dividends, repurchased approximately $67 million worth of the company’s common stock and funded expenditures related primarily to center openings, upkeep and acquisitions of $21.8 million. As of December 31, we had $142.3 million borrowed under our $265 million revolving credit facility. Now I will turn the call back over to Ken.

Ken Compton

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

Question-and-Answer Session

Operator

Your first question comes from Dennis Telzrow - Stephens Inc.

Dennis Telzrow - Stephens Inc.

Good morning Ken and Patrick. Patrick a question on salaries and payroll, we’ve closed I guess over 200 during the year and I thought we’d get a little benefit in the fourth quarter from some of that, any comment and I guess we also had $2.2 million in Pennsylvania, is that part of it I guess?

Patrick O’Shaughnessy

The $2.2 million in Pennsylvania to be clear was what it cost us to operate those stores during the fourth quarter. In addition, we took severance charges during the fourth quarter for the closing of those centers as well and that’s included in the $1.7 million charge that we took.

Dennis Telzrow - Stephens Inc.

Okay.

Patrick O’Shaughnessy

Does that answer your question?

Dennis Telzrow - Stephens Inc.

Yes I think so, but we should see obviously that will be absent on a go forward basis, okay.

Patrick O’Shaughnessy

That’s correct. I think the drag, obviously we stopped making revenue in Pennsylvania in July but our decision to continue to keep those centers open was an expense that we continued to incur through most of the rest of the year but we will not incur going forward.

Dennis Telzrow - Stephens Inc.

And Ken the 50 to 100 stores that you mentioned as a range for this year should I assume any feel for how that breaks out between the three countries?

Ken Compton

Probably Dennis at this point no. You know we’ve got, we probably have about half of those, let me answer it this way. We have about half of those on the rollout for the US. In Canada we have ten open now, we’re I think I told you we’re looking for 25. So that’s 15 there. And what we don’t know is how quickly our de novo will ramp up in the UK although we’re beginning to get started there and we’re pretty interested so it’s probably equally spread with Canada being the lesser of the three areas.

Dennis Telzrow - Stephens Inc.

And I guess Canada you’re really waiting more so for the final rate regulations before you get a little more aggressive, is that a fair assumption?

Ken Compton

Yes Dennis, you know this time last year I think if you probably looked at what we said in the script, we were expecting the setting of rates and everything to happen and so it’s gone very slow so I think it’s probably appropriate for us to be somewhat conservative until we get our rates structure in place.

Dennis Telzrow - Stephens Inc.

Thank you very much.

Operator

Your next question comes from John Hecht - JMP Securities

John Hecht - JMP Securities

Morning guys, I’m wondering if there’s any comments you can give us on the revenue growth and you we saw a quarter to quarter decline going into a seasonally stable period historically, same store sales slowing, you know what are you seeing. Is this a vintage issue, is this a new customer issue or is it a saturation issue or what would you describe it as?

Patrick O’Shaughnessy

First to address the quarter over quarter decline, recall obviously in the fourth quarter of 2006 we had stores operating in Pennsylvania and Oregon that were not operating or not producing any revenue in the fourth quarter 2007. In 2006 in the fourth quarter Pennsylvania and Oregon were approximately $13 million of revenue so if you exclude them there was sequential quarter over quarter growth. To address the same store sales growth on the last call, I believe we reported it that 2.6% and this call about 2.8% so it seems to be consistent on trend there and as we noted on the last call it is come, and you noted it, its come down very quickly over the last year and there may be a lot of things affecting it but we tend to believe its primarily increased competition. I think that if we were seeing an economic impact we would notice this in the loss rate before we noticed it in the revenue line.

John Hecht - JMP Securities

Okay and Patrick you mentioned you had a $1.8 million recovery in Q4 on the loan loss provision, is that accurate?

Patrick O’Shaughnessy

In the sale of the charge off debt? Is that what you’re asking?

John Hecht - JMP Securities

Yes.

Patrick O’Shaughnessy

Yes, $1.8 million in the fourth quarter.

John Hecht - JMP Securities

Was there anything else affecting the provision, was there any write down, you referred to some write downs, those were outside the provision line though. Is that accurate too?

Patrick O’Shaughnessy

No, the write downs we took related to the closures of the centers.

John Hecht - JMP Securities

You mentioned some other write downs on the loan balance and I can’t remember if that was outside of Q4 or was that in Q4.

Patrick O’Shaughnessy

That’s right; it was primarily in the third quarter.

John Hecht - JMP Securities

Okay. Can you guys describe the economics of the pre paid card, you gave us some numbers for the balance outstanding and how many but is there, can you give us the fee structure so we can start bringing that into the model?

Patrick O’Shaughnessy

I wouldn’t talk about that on this call except to say that right now we’re excited about these new products but the financial impact is going to be very minimal in the near term. But we could go in at a later time if you’d like to talk about the actual fee structure.

John Hecht - JMP Securities

Okay, the last question I have is you know given where we are in the calendar year and usually you start seeing a behavior toward the customers get their tax refunds and begin paying down debt, are we seeing a normal seasonal credit environment from that perspective in your minds?

Patrick O’Shaughnessy

Yes it seems to be but we, for the most part our checks held up fairly strongly from December through January but in the last couple of weeks we’ve seen quite a bit of payoff.

John Hecht - JMP Securities

Okay thank you very much.

Operator

Your next question comes from Rick Shane - Jeffries & Co.

Rick Shane - Jeffries & Co.

Most of my questions have been answered but in terms of what’s going on in Canada with the ten stores you have there currently and with the incremental 15 stores that you want to add by mid year, what rate structure are you using there and then ultimately where do you think we could be once the legislation is enacted?

Ken Compton

Well, where we are currently is we’re utilizing a 59% rate structure. Because that is the only rate structure that has been legislated in Canada. As far as where the rate structure may go forward I tell you it’s probably inappropriate for me to predict, I don’t know. Everyone’s got their opinion and that’s the reason again on one of the earlier calls the question was, you know, why are you being conservative, are you being conservative with your openings, the answer is yes until we know the answer to the question you just asked. And I don’t know that today.

Rick Shane - Jeffries & Co.

Fair answer guys, thank you very much.

Operator

Your next question comes from [Analyst] - Sidoti & Co.

[Analyst] - Sidoti & Co.

Morning, can you just go over again the rollout of the money transfer, is it in all of your stores and what revenue did you receive from that in this quarter?

Ken Compton

I will go over the rollout, we started I think on our previous call, you know we said that we had started the test in the third quarter. We expected the full rollout during the fourth quarter and so we have rolled out to approximately 2,700 centers across the country. As far as specifics on the revenue, I just think it’s a little early for us to talk about that. We’ll try to give you some color in a future call. It’s immaterial at this point.

[Analyst] - Sidoti & Co.

Okay and the new stores in Canada were they all in Manitoba?

Ken Compton

There are seven in Manitoba and three in British Columbia of the ten that are open now.

[Analyst] - Sidoti & Co.

And just one last question the 1.8 million shares you repurchased so far in 2008 does that close out your previous 100 million authorization and then you start the new 75 million authorization or did that come out of the 75 million?

Patrick O’Shaughnessy

That came out of the prior authorization. I believe our last purchase date was January 30 and we were in a quiet period but now we have a reauthorization to purchase an additional 75 million.

[Analyst] - Sidoti & Co.

And what kind of speed do you expect, is there a time limit on that and the speed you expect to repurchase those shares?

Patrick O’Shaughnessy

There’s no time limit except by the Board on when we can use that. We expect to begin purchasing as soon as possible and the speed at which we utilize it depends on our volume limitations as well as the price.

[Analyst] - Sidoti & Co.

Thank you.

Operator

That will conclude today’s question and answer session. At this time I’d like to turn the conference back over to Mr. Compton for any additional or closing remarks.

Ken Compton

Well first off thanks for your participation in todays call and we look forward to talking to you again when we announce the results of first quarter. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Advance America Cash Advance Centers Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts