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QC Holdings, Inc. (NASDAQ:QCCO)

Q1 2008 Earnings Call Transcript

May 1, 2008 2:00 pm ET

Executives

Don Early – Chairman and CEO

Darrin Andersen – President and COO

Doug Nickerson – CFO

Analysts

Dennis Telzrow – Stephens, Inc.

Henry Coffey – Ferris, Baker Watts

Daniel O'Sullivan – Utendahl Capital Partners

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 QC Holdings, Inc. earnings conference call. My name is Erica and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions)

This presentation contains forward-looking statements within the meaning of the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the company's current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements.

These risks include among other changes in law or regulations governing consumer protection or payday lending practices. Litigation or regulatory action directed towards volatility in our earnings, the increased leverage of the company as a result of a $48.5 million special cash dividend in December 2007 and other risks detailed under Item 1A Risk Factors in our 2007 Form 10-K.

QC will not update any forward-looking statements made in the presentation or on the conference call accompanying this presentation. Also, if you would like to follow along with the slide presentation, please access the QC Holdings website at qcholdings.com and then click on the microphone webcast icon on the homepage, which will direct you to the slides.

I will now like to turn the presentation over to your host for today's call Mr. Don Early, Chairman and CEO. You may proceed, sir.

Don Early

Thank you. Good afternoon and welcome to our first quarter earnings conference call; thanks for your interest in QC. I am joining today by our President, Darrin Andersen and our Chief Financial Officer, Doug Nickerson. Each of them will provide more detail regarding our financial operational performance. We are pleased with our first quarter results including our 12.2% quarter-to-quarter revenue increase and our $0.29 per share earnings. We are also pleased to provide a $0.05 dividend to our shareholders and who have repurchased close to 1 million shares of our own stock.

These results serve as a testament to the strength of our business and the excellent job of field managers have done in balancing revenue growth and loan losses. We will continue to take advantage of acquisitions and consolidations, local branch openings and other growth opportunities. We are well positioned to continue delivering value to shareholders, customers, and employees. Thanks again for your interest in QC and I now would like to turn the call over Darrin Andersen. Darrin?

Darrin Andersen

Thanks, Don. Welcome again to everyone on the call and thanks again for your interest in QC Holdings. Today, I will review our first quarter financial and operational highlights before turning the call over to Doug for a more detailed review of our financial results. Then we will open the call up for questions.

As Don mentioned, we are pleased to report first quarter revenue increased by 12.2% quarter-to-quarter to $54.4 million with comparable branch revenue up 10.6%. These revenue increases demonstrate continued strong demand for our products and a healthy balance of growth among our newer and more established branches.

Branch gross profit increased a healthy 13.4% and solid earnings of $0.29 per diluted share up from $0.26 per diluted share in the first quarter of 2007. We are especially pleased to have generated these results in a challenging economic environment that included softening retail sales declining consumer confidence and turmoil in the credit and debt markets.

Operationally, our performance was solid. Underscoring, the strong consumer demand for short-term credit, our loan volume continues to increase with loan originations up 9.1% over the first quarter 2007. Our average loan size, including our fee increased slightly to $371.32 and our average fee also increased slightly to $53.62.

Our losses were up to $9.1 million and $7.5 million, and our loss ratio was up to 16.8% from 15.4% in the first quarter of 2007. While these levels are within both historical ranges and our range of expectation we are seeing the impact of larger economic downturn in our collections and returns. Our returns were up from 43% to 45% of revenue quarter-to-quarter and our collections were down from 59% to 55% of returns quarter-to-quarter.

We know our customers have been impacted by the economic downturn in rising crisis at the gas pump and the grocery store. We are confident customers will continue to meet short-term small dollar credit, as they deal with these and other financial challenges. Regarding regulatory issues, activity in state legislatures as expected has been busy but consistent with our explained in prior years.

Media coverage of our industry, both positive and negative has increased as various parties comment on our industry in print broadcast and a growing number of websites. 26 states remain in session included Illinois, Ohio, and California three of the 11 states would build that would impact our business while reducing the consumer credit options.

Notably for us the Kansas and Missouri legislatures will adjourn May 9th. Virginia's new law will impact the industry but not consumer demand for short-term credit. In Ohio the bill that would prohibit payday-lending passed the house yesterday and will move onto the Senate. As you know this is a dynamic process and we intent to work to it.

A few comments on growth before I turn the call over to Doug. As always we continue to consider a variety of Domestic and International acquisitions that would complement our business strategies and / or geographic footprint. In addition we continue to explore the potential of buy-here/pay-here auto dealerships, to capitalize on our core confidences of lending and collecting money. Our second auto dealerships will open in Kansas City area later this month.

Finally, we continue to evaluate the potential of online lending and we are confident in our ability to responsibly offer a high quality online products and services that meet consumer needs and exceed consumer expectations. We continue to evaluate a number of other smaller products including debit cards, scrap gold and signature loans as well. Now I would like to turn the call over to Doug.

Doug Nickerson

Thank you, Darrin and thanks to everyone, for taking your time today to join us. I am pleased to discuss in more detail the quarterly financial results and for those following along on the web, we are now on slide 10, which is our income statement for the first quarter. As usual there are several items on which to comment for the quarter and I will start with revenue growth, which is 12.2%, it rose to 54.4 million from 48.5 million. Pay day revenue represented about 80% of the total revenue for the quarter, down from 85% in prior year.

Our other revenue component grew significantly due to the addition of our installment loan product in New Mexico. We now are offering installment both in Illinois and New Mexico and for the quarter these revenues totaled 4.6 million versus 1.5 million in prior year's first quarter. As Darrin mentioned, customer demand drives our revenues and all indications of that demand is striving. With respect to branch expenses, operating expenses were approximately $800,000 higher than prior year's first quarter, after consideration of the branch closing cost in 2007.

This increase is essentially due to inflation and as indicative of attention to appropriate costs levels given loan volumes in the branches and the collection needs. In addition the current year period includes cost of sales on vehicles and our buy-here/pay-here group, which are all new this year compared to last year. Darrin, shared some details about our loan loss experience during the quarter. As he mentioned the 16.8% loss ratio is within our typical seasonal first quarter range, which is an important improvement given that in third and fourth quarters of 2007 we experienced significantly higher rates versus previous years.

In first quarter of '07, we received about 1 million from the sale of over debt. As many of you know the market rates bet a debt is pretty dry now, so particularly with the amount of past due credit card debt beginning to pile up around the nation as result we don't expect any meaningful sales in the future. Branch gross profit improved $4 million over the first quarter of 2007 reaching $21.2 million. Pulling out the branch closing costs and prior years number, gross profit improved $2.5 million or 13.4%.

This improvement was attributable to our standard revenues and well managed expenses. Our all in margin for the quarter was 38.9%. Moving to below the line regional and corporate expenses were up about 10% primarily due to public education and governmental affairs spending in first quarter 2008. As well as to higher compensation at a regional level quarter-to-quarter due to pay out arises. As for any unusual undertakings the rest of this year we do not expect significant increases in these components.

An area that we discussed in the fourth quarter is one that will stand out this year's interest expense and the $1.1 million quarter-to-quarter, which is attributable to the indebtedness utilized on the special dividend in December of '07, offset much of the gain from the higher branch gross profit during the quarter. Obviously this type of difference will continue throughout the year as our income statement adjusts to a more leverage balance sheet.

The other net component for 2007 includes about $1.5 million related to branch closings. Excluding this amount, from the prior year the remaining level of expense, which is primarily depreciation and amortization, is similar quarter-to-quarter. Finally, down to diluted earnings per share, the diluted EPS were $0.29 versus $0.17 last year. When you exclude the prior year branch closing costs, EPS would have been $0.26, in 2007.

As you may notice, earnings per share in 2008 reflect the benefit of our stock repurchase activity over the last year. If we use diluted share account from March '07 to compute the current year quarter, we would have reported just $0.27. And as a final comment on this income statement, the first quarter adjusted EBITDA improves 12.4% to $12.7 million for the quarter, which is a little more than 23% of total revenues.

Obviously, first quarter is the high watermark for our EBITDA margin, but it is a good starting point for the rest of the year. To moving on, with respect to our balance sheet, we finished the quarter with about $14.4 million in cash, which is about as thin as we can run given the current size of our branch network. Loans receivable were down about 17% from year end balances reaching $60.8 million as of March 31.

This decline is very consistent with prior years and we expect receivable levels during 2008 to trend very similarly with past experience. That is we will see receivables begin to reach year end levels sometime between June and August. On the liability side, we have total borrowings of about $52.5 million as of quarter end compared to $74.5 at year end. The ability – we paid that much debt, approximately $22 million in first quarter is a prime example of the level of cash flow generated by our business in general and particularly within the seasonally favorable first quarter.

Typical of our cash flow seasonality, however we have already increased our facility usage this month to help fund the growth in receivables and pay income tax liabilities. As of March 31, 2008 we had total stockholders equity of $49.7 million. During the quarter we repurchased about $1 million shares of QC stock for $8.5 million. As of today after having spent roughly $47 million for about $4.1 million of our shares or 19% of outstanding shares, we have about $12.7 million left under the $60 million repurchase program.

As a point of reference we currently have about $17.8 million outstanding shares, compared to about $19.5 million as of March 31, 2007. On our revenue by Branch Vintage slide, which is slide 12 if you are following along, I will draw your attention to the percent change column, where we have had a pretty good story to tell. While our pre 99 group declined slightly quarter-to-quarter the rest of the Vintage Groups are positive.

For the 2000 year Group of Branches, an 8.2% increase in revenues rose the strength of the Illinois and New Mexico Branches in the success of the installment product. Looking at the 2004 and 2005 group of branches they experienced strong double-digit growth. The 2005 branches, which now average above 33 months of age are generating $23,000 of revenue per month up about $4,000 per month compared to last years first quarter.

It's also nice to see the 2006 de novo branches which are about 19 months on average as well as the acquired branches in 2006, growing well and jumping to a strong per month average revenue. The bottom of this slide, you may note that the closing consolidated branches from 2007 contributable about $1.4 million in revenues. With respect to the 2008 number in that category it basically all relates to our buy-here/pay-here location

As we noted on our year-end call, we expect revenue growth this year of between 6% and 10%. Obviously, we exceeded that rate during first quarter, but that's not a unexpected given the tale remaining with the 2005 branches. We continue to maintain the 6% to 10% solid revenue for '08. With respect to profitability by branch vintage, we can see in the gross margin column of slide 13 that our 2004 and prior branch groups all reported to greater than 40% margin.

Naturally, given the seasonally low loss ratios, we would expect to see higher first quarter margins than in the other quarters this year. With respect to gross profit by branch, our more established branches generated an excess of $15,000 per branch per month in gross profit. As we have discussed in prior calls the $34,000 we see for the pre 99 branches is not a realistic goal for our branches. As a result, we use the $15,000 total as of target for our newer branches.

With respect to the loss ratio, we are not surprised when we see a lot of low percentages. A couple of items to note here; first, the 2000 group of branches is higher than what we expected, as this is attributable to the new installment product in New Mexico. As our customers and our employees become more acquainted with the product, loss experience will improve, but during the initial transition months much like our experience in Illinois, we will have higher losses.

Second item, I noticed is the 2004 groups of branches, where our loss ratio is extremely low. One third of these branches are located in Oklahoma, a state with database restrictions on the number of loans a customer may have outstanding. As a result our revenue upside is limited in Oklahoma, so our field personnel have focused on minimizing losses.

And finally, we got a new slide here; the last slide of the presentation and it is pretty interesting. What we have is information as of March 31, 2004 and March 31, 2008 and it uses trailing 12 month for each of those days as well as the point in time data. We have about twice as many branches as four years ago twice as much revenue and twice the receivables. Branch gross profit and EBITDA are both significantly higher and our debt to equity mix is more balance now compared to what we had in March of '04 and we have achieved these larger and improved totals while returning approximately $100 million to shareholders over that period.

As you will know, we went public four months after these March 2004 numbers at about $14 per share. We are currently trailing in seven, eight's and nine, so more than anything just the slide for a starting point for consideration as we move forward from this point on. With that, I believe we are ready to open this discussion up to questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Dennis Telzrow from Stephens Inc. You may proceed.

Dennis Telzrow – Stephens, Inc.

Good Afternoon, Darrin and Doug. Great quarter.

Darrin Andersen

Thanks, Dennis.

Dennis Telzrow – Stephens, Inc.

Darrin, refresh my memory, when did you convert over to the installment loan in New Mexico was it the beginning of last year?

Darrin Andersen

No, we started the conversion in late second quarter early fourth – I am sorry late third quarter, early fourth quarter and we are pretty much by and running by the end of the fourth quarter.

Dennis Telzrow – Stephens, Inc.

So you still have a couple more quarters which are truly comparable so to speak?

Darrin Andersen

Yes.

Dennis Telzrow – Stephens, Inc.

Within Mexico anyhow?

Darrin Andersen

Correct.

Dennis Telzrow – Stephens, Inc.

And secondly, on the online, I think again you were testing that business just in Missouri or was it Kansas, I can't remember.

Darrin Andersen

We started Missouri, we are in Missouri and Kansas now and we continue to very, very slowly roll that into some other states. We are doing that right now all internally through our website. We continue to evaluate whether to – how to move forward that in the US or other countries as well as how we might mix that with our stores.

Dennis Telzrow – Stephens, Inc.

I assume it's still sort of on a go volume test basis; does that appear –?

Darrin Andersen

Very low volume.

Dennis Telzrow – Stephens, Inc.

Okay. All right, thank you very much.

Darrin Andersen

Thanks, Dennis.

Operator

(Operator instructions) Your next question comes from the line of Henry Coffey from Ferris, Baker Watts. You may proceed.

Henry Coffey – Ferris, Baker Watts

Good afternoon everyone. Yes, it was a good showing. I was wondering if you could Darrin give us a kind of – do a very short version of a blow-by-blow what happened in Virginia and kind of compare it to what's going on in Ohio, so we can kind of bench mark the likely outcome of it. I mean I knew that still letting – I mean the first step was last year, you paddled that belt to a standstill and then it seems like this year they showed up all full of fire and brim stored and – who is to sponsor the bill in Ohio, was it the governor or the speaker the house? How does that affected the disposition of the senate etc and what was the – how do you compare the original proposal in Virginia with the final outcome?

Darrin Andersen

That's a good question, Henry, and I'll try to give my best to bring in the history. I'm certainly – we as you know have activity in a number of states. You picked a couple of the states were it's extremely heighten. Virginia was the state that really went on for a couple of years, last year I think there was a reasonable compromise that didn't make it through the governor's desk, this year there was a compromise bill that they were supported by just about everybody in the state and that'll take affect 1 of January in 2009. Ohio is a little bit different and that this is the first that I can really remember, first year that we've had much activity in the state. It has gotten a reasonable amount of steam with primarily because this got fairly strong meeting coverage in the state. The bill that was passed through the House yesterday, I believe the sponsor was the chairman of financial institutions. It is a more restrictive bill and that the rate is lower rate than what the governor had endorsed last week or week before last, whenever that happened. The governor is a Democrat, the house and the Senate are both Republican. The control of the house by the republicans is thinner than the margin that they have, the republicans have in the senate. The bill was move into the senate – this coming week and they'll they need to have committee hearings to move through committee and then through the rest of senate. The process as you know is very dynamic and involves daily and hourly and would anticipate that the industry will do all thinks we can to explain everyone that 28% is a probation to make sure everybody understands that that is the case and continue to fight for our consumers rights to choose pay day as a credit option.

Henry Coffey – Ferris, Baker Watts

And are you not prepare to speculate of the outcome yet or?

Darrin Andersen

No, no. As I said, it's dynamic and there's certainly a lot of activity. In Colorado, I'll through this out to as a potential. Colorado, a bill passed the house if I remember correctly and then was amended and ultimately died before it went anywhere and it was at similar momentum and support as this. It's hard to compare state-to-state but right now I can tell you, if you look at most of the research and you talk to customers they clearly want the products, research shows customers are better off when they have it. Ohio has appeared to be a reasonable state in the past. Ohio stands to lose in over 6000 jobs should this bill end up passing and it doesn't seem like Ohio could afford to give up that many jobs, but again a lot of different issues that people have to weigh over the next month or period of time probably.

Henry Coffey – Ferris, Baker Watts

Well, we'll see thank you.

Darrin Andersen

Thanks, Henry.

Operator

Your next question comes from the line of Daniel O'Sullivan from Utendahl Capital Partners. You may proceed.

Daniel O'Sullivan – Utendahl Capital Partners

Yes, thank you. Good afternoon, everyone. Doug, can you give us a outlook of how many monoline storage you think you can open up this year payday?

Darrin Andersen

QC, we talked about opening in 20 stores. It will be in upside within that range.

Daniel O'Sullivan – Utendahl Capital Partners

Okay and what are your thoughts on closings. Would you look to close some stores in Virginia, size up that state before the new law goes into effect?

Darrin Andersen

I think that – I would not anticipate that we close many stores in Virginia prior to the end of the year. We want to see how that law pans out and how any other alternate products are received in the state most likely before we do much kind of refining of that. As far as the rest of country, we closed a number of stores last year. Really the only remaining stores will be out this year – any handful of locations will remain or face pressure with here and there with leases changing or real estate changing. It's really just kind of consistent with prior years 1% to 3 % of comp store base, so I wouldn't anticipate we do anything in Virginia, but – before next year.

Daniel O'Sullivan – Utendahl Capital Partners

Okay. And taking you over to the buy here/pay here, just so – taking a look back, I mean the other dealers should you have, I have to believe you acquired that and you just opened up a new one, correct?

Darrin Andersen

In the process of opening a new one, yes, it should open sometime by the end of the month.

Daniel O'Sullivan – Utendahl Capital Partners

Okay. Can you give us your thoughts, I other words kind of a test bag and you want to put your arms around the service, the industry, are you guys pretty comfortable with that or are you going to move forward and open up more dealerships, what are your thoughts on the growth of that business?

Darrin Andersen

I like the business, it seems to have potential. We are still fairly young, into it and that we haven't kind of hit the potential 6 to 9 months period of time of some of those receivables going bad, but generally it's gone about as we had expected. We are going to open up the second store in a little bit different part of town. We haven't done much marketing; as we do a little more marketing then we are going to try to evaluate how the business is and before we open up more on past that, but generally right now it is – we are still encouraged by it and I still like the prospect of it.

Daniel O'Sullivan – Utendahl Capital Partners

Okay. So I mean it is safe to say, at this point, we are not going to see you guys open up three or four dealerships this year then.

Darrin Andersen

No, we have got the two, we might open one more before the end of the year but I would not anticipate you to see more than you know three or four by the end of the year.

Daniel O'Sullivan – Utendahl Capital Partners

Okay and looking back to Virginia, have you guys taken a look at alternative products as far as installment loans, things like you have done in Illinois and New Mexico. Do you think there is a possibility of doing something along those lines?

Darrin Andersen

We are continuing to evaluate you know some of the various options there. All of the state laws are different and the types of alternative products you can offer. We do have more exposure and a little more experience with some of those products. Virginia we haven't started off on any other products, but we continue to feel encouraged by some of the options were looking at in the state.

Daniel O'Sullivan – Utendahl Capital Partners

Okay, that's helpful and one last one. Doug, taking a look at you – I don't know if I caught it or not, did you saw any debts around the quarter?

Doug Nickerson

We did not, Dan. Last year, we did; this year, we didn't and the prospects or not great for the rest of the year. We might something on there but nothing to the size of it last year.

Daniel O'Sullivan – Utendahl Capital Partners

Okay, one last one and I'll hop off. A lot of your competitors have mentioned when they reported earnings this quarter that the collections environment has been much more difficult for them. Your losses were pretty good, what are your thoughts there, what do you guys seeing?

Darrin Andersen

Well, it's certainly more challenging as we had talked about. We – if you look at our returns, we get a little higher percentage return and we actually collect a little bit less. I don't know that it was necessarily as significant as some of the other competition, but there certainly is increased challenge out there. We've been doing – as you know we talked last year about a number of improvements we made to our collection process and training and some of the tools we got, certainly that helps us kind of weather some of these more challenging times.

Daniel O'Sullivan – Utendahl Capital Partners

Okay. I post them in – you guys really have been growing store base that much to, so I'm sure that's helping out a little bit as well, correct?

Darrin Andersen

It's certainly the age – newer stores have a much higher loss rate and as it matures you would anticipate it would level off and so that surely helps us well.

Daniel O'Sullivan – Utendahl Capital Partners

Okay, thanks a lot guys.

Darrin Andersen

Thanks.

Operator

This concludes the question-and-answer portion of the call. I would now like to turn the call over to Mr. Darrin Andersen for closing remarks.

Darrin Andersen

Right. I just want to thank everybody again for the interesting QC. We appreciate your time and look forward to catching up with you at the end of the second quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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