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Advance America, Cash Advance Centers Inc. (AEA)

Q1 2008 Earnings Call

April 24, 2008 8:00 am ET

Executives

Jamie Fullmer – Director of Public Affairs

Ken Compton – President, CEO

Patrick O’Shaughnessy – CFO

Analysts

Dennis Telzrow – Stephens Inc.

John Hecht – JMP Securities

Richard Shane – Jefferies & Co.

John [Rollen] – Fidelity & Co.

Operator

Please stand by. We are about to begin. Good day everyone and welcome to the Advance America Cash Advance Center first quarter earnings involved conference call. As a reminder, today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over the Jamie Fullmer. Please go ahead, sir.

Jamie Fullmer

Good morning. I would like to remind you that during this call our comments will include certain forward looking statements. All comments on this call, other than those relating to our historical information or our current conditions will be forward-looking statements. For example, any statements regarding our future expenditures and financial performance, our plans for product expansion and new center growth, our business strategy, or expected development 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, they 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 10K for the year-end December 31, 2007, a copy of which is available from the Securities and Exchange Commission, upon request from us or by going to the Investor Relations section of our website at www.advanceamericacash.com. Now I would like to turn the call over to our Chief Executive Officer, Ken Compton.

Ken Compton

Good morning. Thank you for joining us this morning. Also joining me on today’s call is Chief Financial Officer, Patrick O’Shaughnessy. Yesterday, the company reported results for the first quarter, which ended on March 31, 2008.

Before we discuss the results in detail, I would like to update you on some developments since our last call. Yesterday our Board of Directors approved Advance America’s 14th consecutive dividend as a public company. This dividend of 12.5 cents per share is payable on June 6 to stockholders of record as of May 27. Through March 31 this year, the payment of our quarterly dividends, together with our stock repurchase program, returned approximately $284 million in cash to our stockholders since we became a public company.

During the first quarter of 2008, the company repurchased approximately 4.8 million shares of its common stock in the open market for an aggregate purchase price of $36.8 million. Through April 18, 2008, the company has repurchased an additional 2.2 million shares for an aggregate price of $17.8 million. Since 2005, the company has repurchased approximately 16.3 million shares or 20% of outstanding shares.

In the area’s state legislation, the most closely watched state so far this year has been Virginia, where we have 150 locations. After much discussion and debate on both sides of this issue, the general assembly passed, and the governor has signed, a series of comprehensive reforms that will allow us to continue operating there. The new law will go into effect in January 2009, so it is obviously too early to measure the overall impact it will have on our operations. However, based on the outcomes we have observed in other states with major regulatory changes, we expect that the economics of the business will be affected.

In other state developments, the attorney general of Arkansas issued letters to 60 companies operating there under the Arkansas Check Casher’s Act, including Advance America, and demanded that they cease and desist offering deferred presentment transactions. We want to be clear about this situation. Advance America operates on a regulated environment in Arkansas and has operated in strict compliance with Arkansas law.

While we disagree with the attorney general’s interpretation of the law, and no legal determination has been made, that the Check Casher’s Act is unconstitutional or that our practices violates any state law, we are in full compliance with his demands. We are currently examining our options for offering short-term loan products in our 30 Arkansas to consumers in that state. In the interim, we have decided to service our existing customers who are in good standing with interest-free loans.

With regard to international expansion, we remain committed to our strategy of developing opportunities in both the United Kingdom and Canada. In the United Kingdom, the company completed one additional acquisition of a former licensee in the first quarter, and that has 13 company operating centers and 84 limited licensees. We continue to invest in the growth of our business in the UK, and will purse acquisition opportunities, as well as adding up to six additional centers through the NOVA development, over the next several months.

In Canada, individual provinces continue to work through the process of passing enabling legislation and establish in the guidelines for offering the Payday Advance product. Earlier this month, the Public Utilities Board in Manitoba announced that it had set the rates and guidelines for payday loans. We continue to [unintelligible] with these guidelines to determine exactly how these will affect current operations in Manitoba. Proclamation of the full law is expected around August of this year.

We opened three new centers in Canada during the first quarter, and we now have 10 open and operating. We expect to have approximately 20-25 centers operating in Canada by year-end. Including centers in the United Kingdom and Canada, we opened or acquired a total of 28 centers during the quarter and closed 6 under-performing centers in 6 different states. As of March 31, 2008, our total center count was 2,854.

On the new product front, our card program, which is available in more than 2,600 of our centers, continues to meet our expectations. During the first quarter, over 44,000 cards registered and a total of $28 million was loaded on these new cards. Overall, we now have a total of 109,000 registered and have loaded of $44 million since this new card program was launched.

With regards to money transfer services, which are offered through Money Gram in over 2,700 centers, results also met expectations with approximately 175,000 transactions as a part of the program to date. Participating centers offer four Money Gram products, consumer sends, receives, express payments to business and money orders. We have also introduced an online applications process by which customers can apply for a payday loan and have the information transferred to the nearest center. We believe this process will provide added convenience for our customers and drive new traffic to our centers. Preliminary indications have been promising.

As we stated on past calls, we expect our marketing expenses to fluctuate quarter-to-quarter. During the first quarter of 2008, marketing expense was $3.1 million or 1.9% of revenue compared to $5.3 million or 3.2% of revenue in the first quarter of 2007. We expect total annual marketing expenses to be between 3 and 3 ½% of revenue. The average amount of the cash advance made during the first quarter increased to $367 from $358 in 2007. The average fee on all cash advances made was approximately $57 for the quarter ended March 31, and $56 for the quarter ended March 31, 2007. The average duration of all cash advances completed was approximately 16.6 days for the first quarter of 2008 compared to 16.4 days in 2007.

In Illinois, we originated 5,464 installment loans to consumers in that state during the first quarter of 2008 compared to 5,649 during the same period in 2007. In response to competitive pressures in Illinois, we have made modifications to enhance our product offering there. Now I would like to turn the call over the Patrick O’Shaughnessy for an overview of our financial results for the first quarter of 2008.

Patrick O’Shaughnessy

Good morning. For the first quarter of 2008, total revenues were $165.5 million, representing a 1.6% decrease over 2007. Obviously regulatory events continue to occur and affect profitability and comparability, and the first quarter comparison reflects the impact of center closures in Pennsylvania and Oregon. If you exclude the $13 million in revenue generated by these two states during the first quarter of 2007, revenue is increased by 6.7% quarter-over-quarter.

Looking at same center growth, the quarter-over-quarter growth rate in total revenues for centers open prior to January 1, 2007, and still open as of March 31, 2008, was 4.8%. This compares favorably to 2.8% last quarter and 2.6% in the third quarter of 2007. The provision for losses for the quarter was 12.6% of total revenue compared to 9.4% for the same period in 2007.

As you know, loss provision during the first quarter is historically lower than any other times throughout the year. During the first quarter, our collection rates tend to improve as we recover a significant portion of previously charged-off attempts. This is due primarily to customers receiving their income tax refunds and using the proceeds to repay us.

During the first quarter of 2008, we collected significantly less of the previously charged-off accounts than we had in previous years. For example, if we had collected this debt at the same rate we did in the first quarter of 2007, it would have resulted in $3.5 million less in losses, or approximately 2.1% of revenue for the first quarter of 2008. Excluding the poor results of our tax season collections, losses do generally continue to tent higher year-over-year, and we seem to be experiencing some additional effects from the worsening economic conditions with regard to loss rates. Also with regard to loss rates, but have lesser impact, the company did not sell any bad debt during the first quarter of 2008, while we had a sale during the first quarter of 2007 that reduced provisions by $328,000.

Corporate G&A was up approximately $3.1 million compared to the same quarter last year. Included in this line item was a $1.6 million increase in government affairs spending, $800,000 in legal fees, and $600,000 related to our UK operations. The increased government affairs spending was primarily related to legislative battles in Virginia and other hotly-contested states. We expect government affairs spending to come down during the second half of 2008, as legislative sessions wind down in many states around the country.

During the first quarter of 2008, the company’s tax rate was 42.3% compared to 42% during the same period in 2007 as a result of losses from its foreign operations that were not deductible in the United States. Net income for the quarter was $14.8 million compared to net income of $22.3 million for the same period in 2007. As Ken mentioned earlier, diluted earnings per share were $0.21 for the quarter compared to diluted earnings per share of $0.28 for the same period in 2007.

Cash flow from operations, after the changes in advances and fees receivable was approximately $54.6 million for the quarter ended March 31, 2008. During the same period we paid $8.9 million in dividends, we purchased approximately $36.8 million worth of company stock, and funded expenditures related to center openings, upkeep, and acquisitions of $3.7 million.

In March, the company announced that it has entered into an amended and [recent] credit facility. This amended facility provides a $270 million revolving credit line with the option to increase the credit line by an additional $95 million. The facility matures in 2013 and provides the company with additional flexibility with regard to share repurchases and potential acquisitions. Given the current uncertainty in the credit markets, we were extremely pleased to secure this agreement and feel the additional flexibility included in this agreement will position the company to take advantage of the create opportunities. As of March 31, 2008, we have $127.2 million borrowed under this facility.

I will now turn the call back 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

Thank you. (Operator instructions). We will go first to Dennis Telzrow with Stephens Inc.

Dennis Telzrow – Stephens Inc.

Patrick I think you mentioned that if the loss rate… if collections hadbeen the same as last year, is that the collections of the delinquent previously charged off that would have been impacted by the tax refunds?

Patrick O’Shaughnessy

That is correct. Last year we collected about 8.8% of our previously charged-off debt, and this year we collected about 6.6%. The dollar difference had we collected at the level we collected last year would have been $3.5 million or 2.1% of total revenues.

Dennis Telzrow – Stephens Inc.

So obviously if you look at that, the loss rate was not as severe a change relative to what would have been, correct?

Patrick O’Shaughnessy

That’s correct. Instead of, I think, 320 basis points it would have been 110 basis points.

Dennis Telzrow – Stephens Inc.

And no change in the store opening goals for the year. As recall I think it was roughly 50, is that about right?

Ken Compton

Yeah, Dennis, including the UK and Canada all in, we have said between 50 and 100, and there is no change on that.

Dennis Telzrow – Stephens Inc.

And stores in Canada that you have opened, are they primarily in Manitoba now or are they also in Alberta?

Ken Compton

We have 10 as of today, 7 in Manitoba, 3 in British Columbia, and we have got about 10 leases signed ready to roll out whenever we decide to pull the trigger. As you know, Dennis, we are waiting on final proclamation in Canada. It is moving a little bit slow, but we are geared up and ready.

Dennis Telzrow – Stephens Inc.

Okay. All right, thank you very much.

Operator

We will go next to John Hecht with JMP Securities

John Hecht – JMP Securities

Good morning, guys. Thanks for taking my questions. Patrick you mentioned the credit issues primarily appeared to be related to collection levels. Can you compare your gross charge-off levels in this quarter versus last year’s, so we get a sense for year-to-year changes in the regard.

Patrick O’Shaughnessy

Let me get that for you. The gross charge off in 2007 was $38.5 million and in 2008 first quarter was $43.7 million.

John Hecht – JMP Securities

So that that is certainly a higher volume, so a little bit of a pickup in gross charge-off activity, but not quite to the degree you saw in the net charge-off activity?

Patrick O’Shaughnessy

That’s right. Recovery is a big portion of that, but there is no question that the trend continues that we are experiencing higher charge offs, higher delinquencies.

John Hecht – JMP Securities

Okay. I know you are reasonably new into Canada, but can you give us a sense for the maturation of those stores? Is it, at a store level, is the growth and break-even period, is it similar to what you saw in the US back maybe five or six years ago?

Ken Compton

I think you are right. It is awfully early to tell. We have just gotten these centers up and running, and you know the way we operating. We are operating at a rate structure of 59%, which is kind of different where it is going to end up. I think that is a question that is better answered after the laws are proclaimed and we are operating at the rate that is going to be approved.

Patrick O’Shaughnessy

At the rate we are charging now, there probably is not a break even.

John Hecht – JMP Securities

Okay. Are you operating then under current [unintelligible], you know Code 347 where you do the check-cashing fees with the no low annualized interested rate and then sort of try to combine a few different fees to get your return?

Patrick O’Shaughnessy

Just the first part, John. We are operating under that law, but we are not tacking on any fees to try to bring the return up.

John Hecht – JMP Securities

Okay, so the goal there is to just get the stores in place and then deploy these fee structures once the laws are updated?

Ken Compton

The goal is to get the stores in place, train our people, get comfortable in the market, and stay under the fee rate until it is approved.

John Hecht – JMP Securities

Okay, so we should see, I know you don’t have many stores there, but at a time where the fees get rationalized, you should see some material upside to Canada?

Ken Compton

You will certainly see the upside in the fee structure. And, again, depending on what you read it is August or September or some time frame that we expect those rates to be proclaimed.

John Hecht – JMP Securities

Yeah, sometime in the latter part of the year.

Ken Compton

That’s correct.

John Hecht – JMP Securities

The final question is, forgive me if you referred to this in your earlier comments, I missed the first couple of minutes. Your ad expenses and marketing expenses were a little bit lower than we had modeled. I think you gave some sort of guidance to what that would be in percentage of revenues. Is that still the same? In other words, should we see a pick up through the course of the year?

Ken Compton

What we said in the opening comments that the full year we expected to be between 3 and 3 ½%. So you should expect, after the 1.9%, obviously some of the subsequent quarters will be somewhat higher. I can tell you if you compare 2008 to 2007, it is almost a timing issue that makes up the difference. We have a major mail drop, direct mail drop, last year in March. This year it went into April, and that is $1.4 million. So it as much timing between quarters, and it is not a rethinking of our strategy. We expect we will be in the 3 to 3 ½%.

John Hecht – JMP Securities

Thank you very much, guys.

Patrick O’Shaughnessy

Thank you, John.

Operator

We will go next to Rick Shane with Jeffries

Rick Shane – Jefferies & Co.

Thanks guys for taking my questions. Two things: in terms of what you are seeing from the impact of tax refunds, do you think there is a behavioral shift here that is going on being driven by things like inflation, or do you think that there was some sort of delay in terms of tax refunds because anticipation loans are less available or delays in tax refunds this year? I am just trying to figure out what is going on here.

Patrick O’Shaughnessy

Rick, I will try to answer that. I think, answering the second part first, early on we may not have collected the delinquent debt as early as we normally had due to some delays, but that should have all been caught up by March. We will continue to collect some into April, but overall, we are just collecting less than we have in the past. I do think that, to the first part of your question, points to the fact that our customer is being squeezed and does not have as much liquidity to pay us back for old debt that they have in the past.

Richard Shane – Jefferies & Co.

Okay, great. I appreciate the answer. The second question, obviously you guys have been very aggressive in terms of repurchasing shares, buying over $4 million last quarter and already $2 quarter-to-date. What is strategy here? Are you targeting a certain number of shares per quarter? Is there some objective for the year? How should we understand what you guys are thinking about as you approach this?

Patrick O’Shaughnessy

We have an authorized $75 million repurchase program, and we are executing that under a 10B5 plan that is in place. They are buying under the safe harbor volume for us every day, so we do not manage that. It is set up and outside of our jurisdiction, but we plan to continue that at the continue time. When we have used our authorized facility, we will re-evaluate and see where we are at that time.

Richard Shane – Jefferies & Co.

Got it. In being new to the story, if you would just remind me when did that plan go into place, and how far into the $75 million are you at this point?

Patrick O’Shaughnessy

The plan went into place earlier this year. We have had a share repurchase plan for some time. We increased the new $75 million authorization. It went into place earlier this year. Through the end of the quarter, we have about $50 million still available under that plan, and today we have about $34 million still available under that plan.

Richard Shane – Jefferies & Co.

Terrific guys. Thank you very much for your answers. I appreciate it.

Operator

Going next to John [Rollen] with Fidelity & Co.

John [Rollen] – Fidelity & Co.

Can you give us any more information as to the level of revenue that you have received from the money transfer services?

Patrick O’Shaughnessy

I would tell you that it is minimal when you look at all of our new non-credit product revenue, which includes money transfer as well as our card program. That is approximately $1.3 million in revenue during the first quarter. So it is still very minimal, and we hope that those become more meaningful, and we will probably giving more metrics when they do become more meaningful.

John [Rollen] – Fidelity & Co.

Thanks, and as for the repurchase plan you said you had, was it $40 million left?

Patrick O’Shaughnessy

About $34 million.

John [Rollen] – Fidelity & Co.

Did that include or exclude what you already repurchased in the second quarter?

Patrick O’Shaughnessy

That is through today.

John [Rollen] – Fidelity & Co.

That is through today. Okay. And then just to talk about Arkansas a little bit. At this point, you are issuing no-interest loans. How long do you wait out a change in your product while, I assume, you are having operating losses in the state?

Ken Compton

I would think that we would have a pretty clear vision of Arkansas in the next 30 days. When we are on our next call, this thing will be resolved, I believe.

John [Rollen] – Fidelity & Co.

Okay. And do you care to issue any comments or talk about what is going on in Ohio at all?

Ken Compton

Ohio is like a lot of states this time of year. It is very active, a lot of negotiations on both sides. I think as, I am sure you can appreciate, I just do not comment on the specifics of any given state, at least while it is still in session.

John [Rollen] – Fidelity & Co.

Fair enough. Two more questions. The Manitoba rate structure, is there any clarification. I know there were some issues with exactly how it was going to be implemented. How are you interpreting the laws?

Ken Compton

We are still going through the interpretation. I think that probably the big… You may be referring to the definition of a rollover and what you would charge on the second loan, and that type of thing. We are looking at it, I think at this point, I am not at a level I want to say that we have got the final determination on how that law is going to look. I can probably give you some more update on that in our next call as well.

John [Rollen] – Fidelity & Co.

Depending on which way it goes, it is not going to change your strategy in terms of moving into Canada, correct?

Ken Compton

No, I do not think it will.

John [Rollen] – Fidelity & Co.

Okay, thanks for taking my questions.

Operator

And that does conclude the question-and-answer session today. At this time I would like to turn the call back to our speakers for any additional or closing remarks.

Ken Compton

Well, I would just like to say thank you again for your participation in today’s call, and we look forward to speaking with you when we announce the results of the second quarter.

Operator

Once again, that does conclude today’s call. We do appreciate your participation. You may disconnect at this time.

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