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Executives

Daniel R. Feehan - Chief Executive Officer and President

Thomas A. Bessant, Jr. - Executive Vice President and Chief Financial Officer

Analysts

Dennis Telzrow - Stephens

Richard Shane - Jefferies

John Hecht - JMP Securities

Chuck Ruff - Insight Investment

Henry Coffey - Ferris Baker Watts

Liz Pierce - Roth Capital Partners

Eugene Fox - Cardinal Capital

Cash America International, Inc. (CSH) Q1 2008 Earnings Call April 24, 2008 8:45 AM ET

Operator

Welcome to the Cash America International, Inc. first quarter 2008 earnings release conference call. (Operator Instructions) It’s my pleasure to turn the conference over to Daniel Feehan, President and Chief Executive Officer at Cash America International, Inc.

Daniel R. Feehan

I’ll begin the call today with a brief overview of the quarter and then our Chief Financial Officer, Tom Bessant, will provide a more detailed view of our financial performance. Tom will also update earnings guidance for the second quarter and the balance of the year.

Before beginning our comments, please bear with me while I read our Safe Harbor disclosure. While on this call comments made by Tom or me may contain forward-looking statements about the business, financial condition and prospects of Cash America International, Inc. and its subsidiaries.

The actual results of the company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including without limitation, the risk and uncertainties contained in the company’s filings with the Securities and Exchange Commission.

These risks and uncertainties are beyond the ability of the company to control nor can the company predict in many cases all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this call terms such as believes, estimates, plans, expects, anticipates and similar expressions as they relate to the company or its management are intended to identify forward-looking statements.

In our press release issued earlier this morning we reported diluted earnings per share of $0.86, which is above the revised guidance range of $0.80 to $0.82 that we issued in the press release on March 24 and I believe above most of the analyst estimates for the quarter. The March 24 release referenced higher revenue growth and lower expected loan losses as the primary drivers for the upward revision of our original guidance range of $0.70 to $0.75, which was issued in January of this year. And needless to say, we are pleasantly surprised with our earnings performance this quarter.

There were three key business drivers that accounted for most of the upside surprise. First, consumer loan demand for our pawn loans was stronger than we had expected. Pawn loans written and renewed during the quarter were higher than we had modeled and consequently pawn loan balances and revenues associated with those loans were higher than we had expected.

Second, our merchandise disposition activities were more robust than we expected, both in terms of over-the-counter retail sales in our shops and the disposition of scrap gold. Our scrap disposition activities continue to outpace the other components of our pawn business in terms of revenue growth and the higher average price of gold in the quarter benefited both our lending and disposition activities.

The third factor positively impacting performance in the quarter was a very significant improvement in the marginal profitability of our internet-based lending platform resulting from lower loss rates and marketing cost than we had expected. These factors, among others, combined to drive consolidated revenue growth of approximately 13% in the quarter, which was leveraged into operating income growth of 31% and further leveraged with the help of lower interest rates and fewer shares outstanding to an earnings per share growth of 36.5%.

Now I suspect the question on your mind and one that we have grappled with internally is what portion of our success in the quarter is attributable to the changing complexion of the overall economic environment and what portion might be attributable to our own management of the business? And perhaps more importantly, what does the answer to that question imply for our performance in the coming quarters?

I can tell you that both Tom and I are fielding frequent requests from media outlets to comment publicly on the correlation between our business trends and the softening economy. The intuitive assumption being made by most in the media is that our business must be booming since the economic downturn is creating hardship all across middle America. The proposition advanced to us is that the combination of rising unemployment, falling home values, inflationary pressure from energy and food cost, and a contracting credit market has served to greatly restrict other credit alternatives for most Americans.

Consequently, the general consensus is that more people must be turning to specialty finance players like us for relief and while there is some element of insight in this proposition, the correlation of our business prospects with a changing economic environment is less linear and more complex than gut intuition might allow. We certainly play a role in helping people with short-term needs as they try to adjust their budgets and spending patterns to fit a changing economic landscape.

Our research indicates many of our customers often find our products and services more valuable than other alternatives, with value being sometimes judged on price, sometimes on convenience, sometimes on friendly customer service, and frequently on a combination of all three. And our customers know our products are not designed to provide long-term credit and they understand we’re not prepared to make long-term credit risk.

But the short-term role is one that we play well and I do believe a decelerating economy drives more people to our doors and websites seeking assistance as they adjust their spending patterns. This dynamic is particularly beneficial in our pawn segment, as increased demand and rising gold prices have provided us an opportunity to serve more customers with higher loan values than we had expected through the first quarter.

In pursuing this opportunity, however, we must maintain a healthy balance between the lending and disposition activities in our pawn segment so that we avoid finding ourselves upside down at a later date with more merchandise than we can sell. The theory here is that a softening economy that spurs loan demand will conversely slow retail demand unless we see sufficient crossover of non-traditional retail customers converting from buying new merchandise to buy pre-owned merchandise in order to stretch their limited dollars further.

We do believe a fair amount of crossover actually happens, but most of our data is anecdotal and it’s difficult to know just how much of a cushion that conversion might provide us. Consequently, as you evaluate our asset and revenue growth in pawn you should also be watching key metrics, such as loan yields, inventory turns and gross profit margins, all measures to help judge the balance of our business and I’m happy to report that these key metrics were all extraordinarily well positioned in Q1.

So in answering my earlier question regarding the impact of economy versus management in the success of our pawn segment in Q1, I would say that both factors have played a role, with the economy carrying the greatest weight.

Now I cannot say the same for the success cash advance segment in the quarter. The significant improvement in marginal profitability in this segment is primarily attributable to the way we have managed our credit scoring in collections activities and the ongoing maturation of our online portfolio. And while we believe the softening economy is spurring demand for short-term cash advances, we have elected to process this demand cautiously and adjust our underwriting criteria in a way that hopefully limits our exposure to escalating loss rates.

Such a strategy obviously limits loan volume and revenue growth, but we believe focusing on marginal profitability is the smart approach in an uncertain economy, so in this sense one might argue that a softening economy may be working against us at the top line in our cash advance business.

Fortunately, however, we are in the enviable position of operating a relatively immaterial online channel that can provide significant revenue growth, even as our scoring model is being constantly tweaked to reduce risk and contract volume at the lower end of the credit scale.

Enhancements to our scoring model and the natural maturation of the online customer base have combined to provide great momentum in improving marginal profitability in our cash advance segment. This is likely the most significant component of the year-over-year profit improvement for the entire enterprise in the first quarter.

You may recall from my comments over the past few quarters that I have not been particularly pleased with the progress we had been making in the storefront component of our cash advance segment. Operating income for these 304 storefront units was flat year-over-year in the quarter after booking a small charge for closing of 12 stores, which we plan to close in the second quarter.

Absent that charge, operating income for our storefront cash advance units would have been up approximately 10% for the quarter, primarily as a result of improved loss rates. We will book an additional charge in the second quarter for closing the 12 stores, which is factored into the earnings guidance for the second quarter and balance of the year.

Now while we still have a lot of work to do in our cash advance storefront business I do believe we are beginning to make some progress with recent management changes and underwriting decisions. The new storefront scoring model I discussed on the January call was programmed and tested during Q1 and will be ready for rollout in May. I am optimistic that the model will enhance the marginal profitability of our storefronts for both the cash advance segment and the cash advance business in our pawnshops.

Now moving on I typically comment on unit additions each quarter and I can report that we did not have any new units added in the first quarter. Finally I’d like to address the issue of our cash advance business in Florida, which was the subject of a press release we issued on March 31. Rather than restate the contents of that release, I would refer you to our website at www.cashamerica.com where you can find the entire release.

We currently operate as a credit service organization in Florida arranging short-term cash advances for Florida customers with an independent third party lender. We do so both online and in our 68 pawnshops in Florida. We are continuing to evaluate our product offering in Florida and are considering registering under the Florida Deferred Presentment Statute for both our storefront and online operations so that we can write short-term cash advances directly to customers in Florida.

We expect the change from our Florida credit service product would reduce the amount of revenue and earnings related to the Florida portion of our cash advance portfolio and though we are still evaluating the possibilities of a different product offering in Florida our updated guidance for 2008 that Tom will discuss with you momentarily assumes that any expected reduction in revenue and earnings as a result of a change in Florida would begin on May 1.

With those comments I now turn it over to Tom for a financial review.

Thomas A. Bessant, Jr.

Once again the high level of earning assets at December 31 contributed to strong growth in all aspects of revenue during the first quarter of 2008. Higher average balances in both in pawn loans and cash advances led to a 13% and 9% increase in pawn service charges and cash advance fees, respectively.

In addition, the continued trend of growth in merchandise sales was again present in Q1, rising 16%. The preceding components led to a 13% increase in total consolidated revenue. Leveraging the increase in total revenue were lower loan losses associated with the cash advance portfolio and higher gross profit margins, producing a significant increase in what I’ll call net revenue net of loan losses at 19% or $24 million from $128 million in Q1of 2007 to $152 million in Q1 of 2008.

This led to a 31% increase in income from operations, a 34% increase in net income and a 37% increase in earnings per share, which reached $0.86 compared to $0.63 last year. As Dan mentioned, the earnings per share of $0.86 exceeded our top end revised upward guidance of $0.80 to $0.82 by $0.04 per share or 5%.

Moving onto the individual segments, I’ll start with the consolidated cash advance business which had the most significant impact on the quarter. However, the pawn business performed extremely well as it continued to demonstrate outstanding metrics and very solid growth dynamic. As I mentioned, total cash advance fees were up 9% to $85.5 million and the marginal profitability of that growth in revenue was improved by lower loan losses, which decreased to 31.8% of fees from 41.7% of fees in the prior year.

Cash advance loss provision expense fell by $5.6 million in absolute terms year-over-year on higher cash advance balances. This created a consolidated net fee contribution increase of $12.5 million up 27% year-over-year as consolidated cash advance fees, less the loss provision, was $58.3 million in Q1 of 2008 compared to $45.8 million in the prior year.

Cash advance fees, less the loss provision, were up 33% for the cash advance segment alone, which includes both the online distribution channel and our 304 storefront locations. Within the cash advance segment, losses as a percentage of fees were 32.6%, down from 43.7% in the first quarter of the prior year. The improvement in loss rates was experienced in both our online business and our storefront locations.

As Dan discussed earlier, we modified our underwriting in our storefront locations earlier in 2007, which led to lower revenues in the fourth quarter of 2007, but improved loss rates. This trend continued within our storefront operations in the first quarter of 2008 as revenue in storefront locations were down by 4% compared to the prior year. However, losses as a percentage of fees dropped to 15% compared to 24% in the prior year, leading to slightly higher marginal profitability and flat reported operating income for the quarter.

However as Dan described, we absorbed about a $600,000 in charges in Q1 related to 12 store closures in Q2 in the storefront cash advance business. As Dan noted, excluding this charge, operating income for storefront cash advance would have been up 10% year-over-year due to the benefit of lower loan losses.

The online cash advance channel, which has experienced sequential improvement in loss rates since the third quarter of 2007, continued this positive trend in the first quarter of 2008 as losses as a percentage of fees declined to 43% compared to 59% in the prior year. The improvement in loss rates and a 23% increase in revenue to $47.5 million caused the online cash advance business operating income to nearly triple in the first quarter of 2008 to $11.7 million from $4 million in the prior year.

Operating profit margin in the online segment was 24.6% compared to 10.3% in the prior year, which lead the combined cash advance segment to a 22.3% operating profit margin for the first quarter of 2008 and a 76% improvement in operating income year-over-year for the aggregate cash advance segment.

The improvement in loss rates is a function of a couple of factors. First, in our storefront operations we adjusted underwriting in 2007, as noted earlier and second in our online cash advance business we’ve seen the anticipated migration in weighting to a higher percentage of customers with proven credit histories as a percentage of the aggregate portfolio.

These customers who have proven the ability to borrow and repay their loans successfully as they’re needed to satisfy their obligations have higher performance histories than customers who are first-time borrowers and who generally have higher credit risk. You will remember that in the first half of 2007 our online business entered two new market places, bringing a disproportionably high percentage of first-time borrowers into the portfolio, driving loss rates to historically high levels.

As we discussed in our January call, we have now moved to a more normalized level of growth and loss rates. Given that I’m speaking of loss rates, this will be a good time to spend a few minutes as I normally do on our quarterly conference calls to mention the intricacies of the loan loss metrics and review the anomalies of the loss provision expense and net charge-offs as both are measured as a percentage of loans written during the period.

In the first quarter of 2008 we returned to the normal Q1 seasonal metric of a higher net charge-off figure in the first quarter compared to the loss provision expense figure in the first quarter. This typically occurs in the first quarter because asset levels declined due to tax refunds. Therefore the charge-offs, which are a function of the outstanding balances at the end of the year when balances are higher, are measured against a lower loans written number in the Q1 period, while the provision for future loses are based on a lower level of quarter-end asset balances.

However last year in the first quarter, as I commented on the call at that time, there was a business that was not following the normal trends because of significant growth in the online business, which brought asset levels up sequentially from December to March. In 2007, as you’ll see in the materials attached to your press release, the loss provision of 7.4% was greater than the 6.5% net charge-off figure in the first quarter. This typical relationship of loss provision greater than charge-offs is generally reserved only in the remaining three calendar quarters of the year as asset levels are building throughout year-end.

Likewise, our loss provision expense as we ended the 2008 first quarter of 5.5% is based on assets at quarter end and is anticipated to manage loss levels moving into the second quarter of 2008. Whereas the 6.5% actual net charge-offs experienced during the first quarter of 2008 was associated with the assets at year-end and correlated to the loss provision expense of 6.8% in the fourth quarter of 2007.

I invite those interested to refer to our Form 10-K, which provides quarterly financial metrics of loan loss activity for the periods of 2006 and 2007. I will discuss forward-looking matters in a few minutes, but will add because it’s germane to this part of the discussion that we would anticipate year-over-year loan loss provision expense as a percentage of loans written in the second quarter of 2008 to be lower than the second quarter of 2007 because of the customer mix and underwriting criteria that I mentioned before, but higher than the Q1 current period because of the normal seasonal trend.

Now I’d like to spend a few minutes talking about the pawn segment, as our pawn lending activities continued their trend of strong performance year-over-year. As we discussed in the end of the fourth quarter, pawn loan balances have shown a nice increase to finish December up 8%. Pawn loan balances sustained this momentum and ended Q1 of 2008 up 11.4% year-over-year and on a same-store basis were up 10.3% at the end of the first quarter.

This was driven by both an increase in the number of pawn loans outstanding, as well as a slight rise in the average amount of pawn loan written. In addition, the pawn loan yield increased from 131.8% in Q1 of 2007 to 135% in Q1 2008, which combined with the significant increase in average pawn loan balance during the quarter to generate a 13% increase in pawns service charges.

This increase in pawn loan revenue was complemented by an 18% increase in gross profit from the disposition of merchandise, as gross profit margin rose to 38.7% compared to 38.2% in the prior year. These dynamics lead to a 13% increase in net revenue from pawn activities during the quarter. The same-store increase in net revenue in the pawn locations was up 12.4% year-over-year.

Liquidation of refined gold during the quarter added nicely to the improvement in gross profit margin as refined gold proceeds generated a 34.4% margin compared to a 31.8% margin in the prior year. The percentage of gross profits dollars attributable to the profit on the liquidation of gold during the quarter was about 29%, about the same level as Q4 of 2007, but up slightly from 21% in Q1 of 2007 as the prevailing market price of gold continues to work in our favor.

Notwithstanding the improvements in refined gold proceeds, retails sales activity, excluding refined gold, performed very well in the quarter as retail sales, excluding refined gold, were up 4.5% during the quarter and the gross profit margin on sales, excluding refined gold, was up to 40.8% compared to 40.3% in the prior year. Retail disposition of merchandise in our stores remains the dominant element of gross profit dollars and comprised 71% of gross profit dollars during the quarter.

Inventory turnover levels were flat year-over-year at 3x for both the first quarter of 2008, as well as the first quarter of 2007. Cash advance products in our pawn locations did not contribute incremental dollars during the quarter due to tightening of underwriting, which lowered revenues. However I would point out that losses as a percentage of fees were down slightly to 24.4% compared to 28.1% last year. Income from operations from the pawn loan segment was up 12% to $26.3 million, contributing about 60% of consolidated operating income for Q1 2008.

So to summarize the first quarter 2008 from a financial perspective, first we experienced a significant improvement in loss rates in all lines of business, consistent with the trends leading into the quarter. Second, pawn loan balances maintained their strong year-over-year growth levels.

Third, retail sales and gross profit percentages were above expectations and finally the online cash advance segment continued to demonstrate the strength of that model and produce significantly higher marginal profitability in growth well above expectations.

As we look toward the second quarter of 2008 we continue to experience the same positive metrics coming off of year-end 2007, which produced the outstanding results in the first quarter. Specifically, higher levels of earning assets, both pawn loans and cash advance loans, higher disposition of merchandise sales within our stores and refined gold market, as well as improved levels of profit contribution due to improved year-over-year loss rates.

We would expect these trends to continue as we move into the second quarter of 2008 as demand for our loan products remains high. We’ll continue to be mindful of loss rates and diligent in underwriting practices and collection activities during the second quarter and we would anticipate lower year-over-year loss rates, as I’ve articulated earlier in my comment.

Pawn operating activity, which contributed 60% of consolidated operating income in the first quarter, will remain strong in the second quarter, although it’s the seasonally lowest earnings quarter for pawn lending activity. The cash advance segment will continue to build on its momentum of higher balances in the online business.

Therefore we’re initiating guidance for the second quarter of 2008 of between $0.51 and $0.54 per share, which will lead us to our revised upward guidance for the full year of 2008 of between $3.00 and $3.15 per share compared to $2.48 per share in the prior year.

As I try to anticipate the effect of the economic stimulus program to our customers and our business, I feel it could provide for a slightly more robust Q2, which could potentially cause a slight moderation to growth and trend in Q3. At this point it’s very uncertain due to the smaller levels of payments and drawn-out timing of the payments, so this is anomaly is not heavily weighted into the guidance at this point.

So now I’ll turn the call back over to Dan.

Daniel R. Feehan

We’ll open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dennis Telzrow - Stephens.

Dennis Telzrow - Stephens

Tom, is inventory still being impacted by the transition from the 90 to 60-day loans in Texas?

Thomas A. Bessant, Jr.

Dennis, actually we saw an improvement in our forfeiture rate in the first quarter. Inventory levels are up, again that would be, as you conclude, a function of the shorter inventory period. The disposition activities are very strong in the quarter and actually profits on a sequential trend were up from Q4 to Q1, up about 100 basis points. So our mix of inventory to loans remains very positive.

Dennis Telzrow - Stephens

And obviously the loss rate at the storefronts was tremendous, the reduction, is there any feeling that you’re getting a little too tight or are you are happy what’s going on or are you going to just wait and see for this new scoring model to see how that works?

Daniel R. Feehan

I think our strategy that we’ve adopted, Dennis, is continuing to be cautious. We’re going to roll out the scoring model as I indicated in our comments here in May and get that out into all of our storefront locations, not only on the cash advance segment, those 300 plus locations. But as well as the pawnshops and so I think we’re going wait and see how that impacts our business.

Our expectations are that we’ll get obviously improved marginal profitability from that scoring model. We would expect that we would lose some volume of business on the lower end of the scale, but have an opportunity to mitigate or fully offset that at the upper end of the scale perhaps by higher average loan amount to customers that we judge to be a solid risk.

So I’m pretty optimistic about given the performance of similar modeling in the online platform, I’m pretty optimistic that we can manage our way through this economy successfully, again focusing primarily on profitability.

Dennis Telzrow - Stephens

Tom, some of your competitors have or saw loss rates impacted by the fact that previously charged-off cash advance loans were not paid off like they were in the past from tax refunds. Were you able to measure that or is that a metric you look at?

Thomas A. Bessant, Jr.

We don’t really measure it from that perspective, Dennis. We’re looking at absolute performance and I can tell you our collections activities during the quarter were very strong particularly from our storefront operations, but as well in our online business, so I can’t say that we observed that same trend.

Operator

Your next question comes from Richard Shane - Jefferies.

Richard Shane - Jefferies

First in terms of what’s going on with online payday lending, it really, a lot of this seems to be driven by a mix shift between new customers and returning customers. Can you give us some sense as to where you are in right now? Obviously a year ago it was 100% new customers. What percentage would that be today?

Daniel R. Feehan

Well a year ago it wasn’t 100% new customers, obviously CashNet had been in business for quite a few years before we purchase them in the fall of ‘06, so the mix has changed year-over-year. And I think particularly this first quarter probably if we’re going to evaluate the entire year of 2008 and the coming quarters, this first quarter probably reflects the biggest mix change that we are going to see on a year-over-year basis, Rick primarily because you’ll recall in the first quarter last year is when we brought on Texas and Florida online.

And we did so in a way that pretty much opened the spigot for new customer acquisition, so we had a significant influx of new customers in the first quarter last year from those two states, two very highly populated states and great demand coming from both in that business. So the mix is I think at this point we have moderated the mix in such a way that given the existing geographical footprint that we’re on that I would think we’d have a pretty steady mix of existing and new customers as we move forward here.

Now you’re going to see that change anytime that we potentially add new territory. Obviously in the UK where we opened last year we have a much different mix, if we’re able to get into Canada you’ll see a mix shift, if we’re able to get into some additional states that we’re not in today you’ll see a mix shift. But if you give the geographical footprint we’re on today, I think we’re on a fairly steady state.

Richard Shane - Jefferies

I’m not going to get a more specific answer on what that mix might be at steady state.

Daniel R. Feehan

You’re right.

Thomas A. Bessant, Jr.

We’re going to continue expand markets, Rick, and you’re always going to be attracting new customers from a variety of sources, whether it’s search engine optimization or new entrants coming into this market. And we continue to see that opportunity grow and we’ve talked about in the past penetrating people who may not go to a storefront location, but will use the online solution. So our goal is to continue that level of growth and we’re optimistic that we’ll always have a mix of new customers in there.

Daniel R. Feehan

Yes, I’ll add to that too, one of the initiatives that is on a plate of our team in Chicago is testing some traditional marketing outlets, which we have not done since we acquired CashNet.

And at this point, all the work that we’re doing to acquire new customers has been through the lead generation channel, as well as our own search engine optimization activities, but we think that we may have, it’s a pretty significant potential if we can break the code on the traditional marketing component to drive people through direct mail and electronic advertising. And some things we’re doing in our storefronts even to drive more traffic online.

Richard Shane - Jefferies

Obviously rising gold prices have been beneficial to the business, I don’t want to overstate it, but it’s certainly been a good contributor to the acceleration you’ve seen. How do you manage that? I’m not say bullish or bearish on gold, I don’t have a view one way or the other, but at some point everything that goes up probably comes back down. How do you manage that and how does that impact your outlook?

Daniel R. Feehan

Well I think at this point as we look at the business out over the next three quarters for the balance of the year particularly in terms of the guidance that we have put out, we’re not expecting any dramatic or significant change in the price of gold. So our numbers are predicated on the assumptions that the gold values remain basically where they are today.

We hedge some of our gold activities from a disposition perspective. We have forward contracts on our disposition of scrap gold that we try to again mitigate any future price fluctuations as it relates to the disposition activities, but from a management perspective we have to be competitive in the market place from a standpoint of our loan values.

And the rising price in the gold has been a great benefit to our customers, quite frankly, because they’ve got more value in the jewelry that they have at home and they’re able to higher loan values today than they may have gotten last year or the year before. But again, you’ve got to continue to look at this, as I said in my prepared comments, in balance and you have to continue to look at the yields.

You don’t want to drive, regardless the price of gold, you don’t want to drive your loan balances up so high that people are going to just leave it with you. We’re not in the business of buying and selling gold, we’re predominantly a lending business and we don’t want to get ourselves in a situation where all we’re doing is buying and selling merchandise, that’s not in my mind it’s not a long-term viable economic model.

So we’re careful that we’re not driving loan values up to the point where people are going to leave it with us, we constantly monitor our forfeiture rates, as Tom mentioned in his comments. We’re really pleasantly surprised this quarter even with our higher loan values that our forfeiture rates were better than they were last year, marginally better than they were last year and that’s all a very positive sign to us.

If we had a precipitous drop in the price of gold we would have to adjust our loan values accordingly. That would impact obviously the asset levels and the revenues in our business, but again we don’t see that on the horizon and we’re assuming that values are going to remain about where they are today.

Operator

Your next question comes from John Hecht - JMP Securities.

John Hecht - JMP Securities

Dave, you referred to looking out for anecdotal data that would suggest your changing behaviors at the pawn level, maybe some crossover of customers. Specifically, what do you look for, how do you monitor that or are you seeing any of the signs of that at this point?

Daniel R. Feehan

It’s difficult to obviously have any sound empirical data that tells you that the person buying the diamond ring or the guitar or a stereo unit, TV today is not somebody who’s ever been in a shop before and is not somebody that’s ever purchased with us before. So again, a lot of what we do is talk to our field management teams and our store managers about what they’re seeing because they obviously are familiar with their customers and can tell us if they’re seeing a lot of that activity.

And I think the reports that I get back are that we’re seeing people in the shops buying today that aren’t necessarily our regular traditional customer set, again, I can’t give you an empirical data to support that. I think we also look at the growth in our over-the-counter sales, clearly in our public information in our Qs, in our K, we break out the over-the-counter sales versus the scrap disposition as part of our overall retail activity.

And we’re seeing and continue to see pretty solid growth in that, which tells me that if I’ve got people who are struggling out there with the economic environment and it’s creating greater loan demand that those same people probably are creating a lot of the extra retail demand. So there have got be to be some crossover traffic coming into our shops. I wish it was more scientific than that, but that’s about as good as we can do at this point.

John Hecht - JMP Securities

On that same discussion topic you did see your non-scrap margins improve during the quarter. Is that a reflection of maybe more conservative loan to value levels or is that potentially you had a higher supply of buyers in the store that’s driving the retail price up?

Daniel R. Feehan

Yes, I think it’s more on the demand side than the buy side quite frankly, John. Our cost basis in the items has not changed dramatically. We’ve made a few adjustments during the course of ‘07 on our gold values to actually raise them modestly during the course of ‘07, so to some extent not only on our scrap activity, but our over-the-counter jewelry sales are going to carry a little higher cost basis. So I think clearly it’s another sign that we maybe getting a little different mix of customer, non-traditional customer in there.

If you go in our shops today our values are still substantially below what people can buy items new for. If you looked across the board at our over-the-counter jewelry activity and cost basis, our retail pricing of that jewelry we’re going to be probably 35% to 40% of what you’d have to pay for that in a jewelry store as a new item.

And as I’ve said a thousand times, gold is gold and diamonds are diamonds and it’s just as valuable in a pre-owned piece as it is in a new one. So we do have an opportunity here I think as the economy continues to decelerate hopefully to drive more customers into our shops.

John Hecht - JMP Securities

The online division, can you give us an update on the lead purchasing, are you seeing any changes in the competitive dynamics out there? Are you discovering some competitive advantages as you just age in that business and grow?

Daniel R. Feehan

I can’t tell you that we’re seeing a shifting environment in the lead generation channel at this point, John. I think we believe quite frankly that we have a competitive advantage based upon the models that we developed, our team in Chicago has developed and the quality of the analytics team that we have.

With the online platform we’re believe we are able to quite frankly when there’s a universe of leads presented to various online providers we believe that we’ve the capability to identify the best candidates in that and therefore when you look at the actual acquisition cost of the customer we believe we’ve got a serious competitive advantage over the rest of the market. So in terms of the price of leads, the volume of leads and things of that nature, we’re not really seeing anything dramatically shift today in that world.

John Hecht - JMP Securities

Can you just highlight the recent expansion strategies, I know you talked about expansion on the online division into the UK and Canada and maybe you just could give us a little update on those?

Daniel R. Feehan

Yes, we started this year with a plan in our entire enterprise to not add a lot of bricks and mortar units. We’ll add in our plan we’ll probably add maybe 20 or 25 units this year predominantly in the pawn side of the business. We’re not real anxious to add any additional bricks and mortar or payday units, cash advance units. In fact as I mentioned in my comments we’re actually going to close 12 locations, ten in California and two in Texas.

In the online segment we did move into UK last year, we’re awaiting on the relative provinces in Canada to adopt enabling legislation for short-term cash advances. Our intelligence, which is public to anybody, is that hopefully that a number of those provinces will pass legislation later this year, early in 2009, at which point we would move into Canada.

We’re also looking at opportunities in Australia, there are other opportunities in the US today, states that we’re not in that have enabling legislation, but there’s certain nuances in state laws that don’t allow us to operate online in those states and we’re working, trying to work our way through with the state agencies and state regulators to clear those new nuances to allow us to operate online. So we’re continuing to try to expand that geographical footprint with the online channel and that’s an important part of our long-term strategic objective.

Operator

Your next question comes from Chuck Ruff - Insight Investment.

Chuck Ruff - Insight Investment

In your February ‘07 letter to shareholders you talked about your vision for a diversified multi-product multi-channel company and then in the February ‘08 letter you talked about a search for new products and services that may transform the business. Can you talk more about what you’re thinking about here and how large an acquisition is possible?

Daniel R. Feehan

Yes, a lot of that is visionary stuff that we’re constantly trying to evaluate and understand where we think this market is heading and how customer’s needs and wants and desires are going to evolve over time. I think I have mentioned in the past that we think a installment loan product needs to part of our offering at some point, installment loan product being something probably in the six-month maturity and lower APR rates that we currently charge on existing products.

We’ve also worked on trying to find additional channels to deliver products and services, whether it be alliances with other retail organizations or other products that to a large extent in my mind would be electronic transactional activity, perhaps card-based products, and things of that nature.

So there are things that as we look out over, anytime I’m on these calls people’s horizons are over the next quarter or the next few quarters, when I write those shareholders letters my horizon is over the next five years as I look out and I think we have to evolve our products in such a way that we can reach more people with greater scale through greater channels than we do today.

And again that may involve alliances with other retail organizations. I do think it’s going to involve different product design than we have today, that a higher dollar amount, a longer term, a lower APR.

It’s going to involve again electronic transactional products that we don’t really offer today and one of the things I have charged our team with is being on the forefront of that, trying to be on the front end of getting those products developed and in place. So I don’t necessarily see us moving in that direction through some major acquisition. Some of this is going to be organic activity and initiatives that we develop ourselves hopefully.

Chuck Ruff - Insight Investment

In the fourth quarter call and again in your February ‘08 letter to shareholders you expressed a lot of frustration and confusion as to why our stock was down so much earlier this year. Given that view I was surprised at how little stock you bought back this quarter. Can you reconcile those things?

Thomas A. Bessant, Jr.

Chuck, what we do on a stock buyback basis is we constantly evaluate the opportunities to participate in market changes. We obviously want to be on the bid side when we think our stock’s performing poorly, but we put almost $3 million into stock buybacks in the first quarter and that’s not exactly a small amount of money from our perspective.

So we’ll continue to be there on the bid side when it makes sense. We bought a significant amount of stock back in last six months of the year last year and again we’ll continue to watch it and participate in the market when it makes sense for us.

Chuck Ruff - Insight Investment

How many shares did you buy in the first quarter?

Thomas A. Bessant, Jr.

I want to say it was about 60,000 shares.

Chuck Ruff - Insight Investment

We have a difference of opinion of what’s a meaningful amount. You seem to think that’s a meaningful amount?

Thomas A. Bessant, Jr.

Evidently we do have a difference of opinion on that. And again, we’ll evaluate our resources and buy stock when it makes sense to us. About 95,000, it was 55,000 last year, so we doubled the number of shares we purchased in the first quarter.

Daniel R. Feehan

So the other factor, Chuck, we did discuss the fact that we have ongoing earn-out payments associated with the CashNet investment and we’re obviously in a difficult credit environment. So we also want to make sure that we have sufficient capital not only for the earn-out, which is not a problem this early, but also pursue other opportunities.

We want to make sure we’re in a position if there is a very attractive acquisition that we can pursue that and not have to rely upon what is today a difficult credit market of trying to go out and raise additional debt. So we’re a little bit cautious from that perspective as well.

Thomas A. Bessant, Jr.

In 2007 we bought back about 670,000 shares or about 2%, 2.2% of the diluted share count, so I think our past history is pretty strong on that side.

Chuck Ruff - Insight Investment

The earn-outs that are on the balance sheet as of March 31, the $63 million, I think it is, is that going to be about it or should we expect to see more cash out-flow beyond that?

Daniel R. Feehan

No, if you get into our public documents, get into our K or our Qs, you’ll see that the information we’ve provided indicates that the earn-out runs, the measurement dates for earn-outs run through September. So the last measurement date for the earn-out will be the trailing 12 months ended September 30, 2008 that payment is due to be made in mid-November.

Operator

Your next question comes from Henry Coffey - Ferris Baker Watts.

Henry Coffey - Ferris Baker Watts

I know you mentioned the number 10%. Can you quantify the impact financially in terms of revenue and cost of the 12 closed stores in dollar terms?

Thomas A. Bessant, Jr.

Henry, in the first quarter we absorbed about $600,000 of closing cost. We’ll have at least that much and potentially as much as $1 million of additional cost, the predominance of which will hit the second quarter as those stores are actually closed and we have severance and writing down of assets that type of thing. That is incorporated into the guidance of the second quarter.

Henry Coffey - Ferris Baker Watts

And then in terms of shifting the business model in Florida how do the pieces of that work? I understand how the fees could change, but maybe the customer mix changes as well?

Daniel R. Feehan

Florida has a Deferred Presentment Statute that other people operate under and what we’re evaluating and still considering is converting from our credit service organization product to the deferred presentment product where at that point we’d be writing loans directly to customers in Florida and not with a third party lender.

So when you make that shift Florida has a database as well. We’d be subject to the database. We’d be subject to the fee structure in the Deferred Presentments Statute, which is a lower effective yield than currently exist with our credit service products.

And again the intent would be to if we elect that strategy, we’re still evaluating it, the intent would be if we move in that direction to convert our pawnshops in Florida, and there are 68 of those, as well as our online business to that Statute and again, the estimates that we provided in the guidance that we’ve given you would assume that we made that conversion as of May 1 and we’ve had to make a lot of assumptions relative to an impact on revenue and earnings associated with that.

Henry Coffey - Ferris Baker Watts

Looking at your balance sheet here, if we look at cash advances funded by third parties, that’s obviously mainly Florida and Texas right now and is it a 50/50 split between the two states?

Thomas A. Bessant, Jr.

We don’t get into breaking out the specific state metrics, Henry, so the CSO model is a function of three states that we operate the CSO product in. Yes, I think that just from a population density and a current store count per capita number I think most people would logically conclude there’d be a much higher weighting in Texas.

Henry Coffey - Ferris Baker Watts

In looking at reserve levels should we compare the reserve levels against the gross portfolio or is it better to think in terms of reserves as they apply to the owned portfolio?

Thomas A. Bessant, Jr.

Well, yes, we always publish reserve levels because it seems to resonate with people. I tend to focus just on absolute loss rates as a percentage of loans written. But if you were to measure it, I’d measure it on the gross portfolio, the $124 million and that’s the statistics that we report because in my mind that aggregate portfolio is where we had the loss exposure to all elements of those assets.

Operator

Your next question comes from Liz Pierce - Roth Capital Partners.

Liz Pierce - Roth Capital Partners

Dan, a question for you about you mentioned that on online you’re seeing migration and so does that imply cannibalization from the stores more than you anticipated or are these in fact new customers?

Daniel R. Feehan

Liz, to a large degree our belief is that these are primarily new customers. I think the cannibalization issue is one that we’ve discussed before and we continue to monitor in the states where we’re both online and we have bricks and mortar location we’re able with our data to monitor what crossover in our business we’re getting between our stores with people moving online.

And that continues to be in the very low single-digits, so as it relates to strictly our business, I don’t think that we’ve seen any significant degree of cannibalization. So our belief is that most of the customers that we serve today online, the vast majority of them are not people who have yet migrated from bricks and mortar. It’s still our belief intuitively that over time that with our presence in the market and with some traditional marketing opportunities, with increased Internet penetration people are going to be moving over time.

And I’ve always said I thought it would be slowly, but I do think we continue to believe people will migrate from bricks and mortar to the online channel. So in that respect, for instance, back to the question on Florida, we don’t think that if we converted our online business in Florida necessarily that there would be a significant number of our existing customers that already exist in database for bricks and mortar people in Florida.

Liz Pierce - Roth Capital Partners

Does that imply there’ll be more store closings as you see people shift to online?

Daniel R. Feehan

The store closures that we’re doing today are not associated with any online migration, quite frankly. I’ve been talking about not being particularly happy with our progress in Southern California with our storefront operations for much too long and I think we’re probably passive in taking action to closing stores in Southern California, quite frankly. So it really is unrelated to any online migration, but I don’t see that in the near-term, Liz, near-term being the rest of this year or ‘09 even. I don’t see that opportunity from a cannibalization perspective at least for our storefronts.

Liz Pierce - Roth Capital Partners

I presume the two in Texas that you’re closing, just lease expiration or just under-performing.

Daniel R. Feehan

They’re under-performing. One of the strategies that we’ll employ here is as we close these stores, which will be over the next 30 to 60-days we’ll obviously where we have additional stores nearby will try to migrate customers. But quite a few of these stores do not have another one of our locations in proximity.

We will be working hard to get that customer base converted to an online customer, so we’re hopeful that we’ll be able to keep a fair amount of that business when we close that location if we’re successful in getting people to log online and do business with us. So this will be the first time we’ve really given that a test to see how successfully we can convert people, so I’m really interested to see how this turns out.

Liz Pierce - Roth Capital Partners

Yes, but particularly you would think with and here in Southern California with gas prices, trying to convince people to go online might be, driving to the next one may not be as easy as you think.

In terms of you talked about new marketing features, did you give a timeline on when you thought you might start using some of the direct mail or some of the more traditional marketing initiatives?

Daniel R. Feehan

Yes, we’re developing the pieces now and the production work I think we’ll probably try to start spending some marketing dollars towards the end of the second quarter, get some direct mail out and test some perhaps electronic advertising. Intuitively I believe there’s a strategy there that could make a significant difference long-term in terms of driving people to our sites.

And it becomes a question what is the acquisition cost of that and how does that impact the long-term profitability of a given customer? So we’ve got to play with that model and make sure we get it right before we scale our programs and spend a lot of big bucks. But I’m pretty optimistic that we ought to be able to get that figured out I’d be surprised if it had much of an impact in ‘08, but it could begin in ‘09 and 2010 to have a pretty significant impact for us.

Liz Pierce - Roth Capital Partners

Could you just comment on any update in Ohio?

Daniel R. Feehan

I don’t have anything in addition to stuff that has been circulated publicly about Ohio and I know that particularly Stevens, Dennis Telzrow, Stevens publishes updated regulatory information and has commented on Ohio. Ohio is a big state for us. We’ve got a lot of store base in Ohio. We do a fair amount of business online in Ohio, so we’re certainly as interested as anybody in what happens in Ohio.

Things are very fluid there and very dynamic. I’m still optimistic that the industry and detractors there in the state are ultimately going to be able to agree on a law going forward that makes sense for everybody. So I remain optimistic, but I would encourage you if you’re really concerned about Ohio to do your own research there. Again, there’s plenty of public information about what’s going on in Ohio, but I’ll tell you we spend a lot of time and energy staying on top of it on a daily basis.

Operator

Your last question comes from Eugene Fox - Cardinal Capital.

Eugene Fox - Cardinal Capital

It looks like you generated really good cash flow because you paid down what appears to be over $50 million in debt.

Thomas A. Bessant, Jr.

Yes, it’s typical in the first quarter, Gene, with a significant shift in working capital our debt balance has come down significantly. I’d point out that they also ratchet right back up very significantly as well.

Eugene Fox - Cardinal Capital

It would have been substantially better than last year it appears.

Thomas A. Bessant, Jr.

Well again, last year we had the unusual phenomena of asset level s on the online business actually driving our consolidated cash advance balance up from December to March. So rather that source of funds, our working capital was a use of funds last year. This year again we’ve returned to our more traditional measure of working capital sequence.

Eugene Fox - Cardinal Capital

Tom, also looking at your balance sheet it looks like you have $63 million of incremental supplemental payment, is that expected to go out in April.

Thomas A. Bessant, Jr.

That will go out mid-May, Gene. And that’s the accrual to the measurement date of March 31 and as Dan alluded to earlier, we’ve got another measurement date in September of this year.

Eugene Fox - Cardinal Capital

That gets us through the measurement date in March and September is the last one we have?

Thomas A. Bessant, Jr.

That’s correct.

Operator

There are no further questions.

Daniel R. Feehan

We appreciate everybody’s attendance so early in the morning on this call and as always if you’ve got some follow-up questions please give us a call here at our office in Fort Worth. Thank you and good morning.

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Source: Cash America International, Inc. Q1 2008 Earnings Call Transcript
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