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

Cash America International, Inc. (NYSE:CSH)

Q2 2008 Earnings Call Transcript

July 24, 2008 8:45 am ET

Executives

Dan Feehan – CEO and President

Tom Bessant – EVP and CFO

Analysts

Dennis Telzrow – Stephens, Inc.

John Hecht – JMP Securities

Rick Shane – Jefferies & Company

Liz Pierce – Roth Capital Partners

Charles Ruff – Insight Investments

Operator

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2008 earnings release. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded Thursday, July 24, 2008. I would now like to turn the conference over to Dan Feehan, President and CEO. Please go ahead sir.

Dan Feehan

Thank you. And good morning, ladies and gentlemen, and thanks for joining our second quarter 2008 conference call. We’ll break slightly from tradition this morning and have our CFO, Tom Bessant, begin the call and review the financial performance for the second quarter and provide you updated guidance on Q3 and for the full year of ’08. I’ll then rejoin the call and add a little color commentary about our performance for the quarter, update you on the situation in Ohio and comment on the prospective management change at CashNet.

Before turning the call over to Tom, please bear with me a moment 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.

Okay. In our press release issued earlier this morning we reported diluted earnings per share of $0.67, which is above the revised guidance range that we issued in the press release on July 7. That release raised our guidance from the original range of $0.51 to $0.54 to a revised estimate of $0.62 to $0.64. The $0.67 reported for the second quarter is at 55% over the reported EPS for the second quarter of 2007.

I’d now like Tom to provide you the financial details of our second quarter performance. Tom?

Tom Bessant

Thanks, Dan, and good morning everyone. It’s certainly a pleasure to begin the financial review of Q2 2008 with the overall observation that we not only exceeded performance expectations from the outset of the quarter but also came in above our revised guidance, as Dan mentioned. The outstanding performance was a function of both the pawn lending activity as well as our online distribution channel for cash advances.

In the pawn business, the higher loan balances coming off of Q1 and a continuation of strong retail sales allowed net revenue levels in the pawn business to grow 16% and produce approximately a 20% increase in income from operations for the quarter. Complementing the pawn performance was the ideal development model of the online distribution channel, which is demonstrating its continued growth in customer account and a moderation of loss rates.

The strong contribution from the online channel is more critical than ever in the second quarter as the storefront cash advance business experienced a significant level of softness brought on by underwriting changes in 2007 and adjustments related to the potential changes in the State of Ohio, both of which calls revenue levels to fall year-over-year.

The storefront segment also incurred approximately $1 million of one-time charges related to store closures and other activities, which I’ll cover a little later in the call. But overall the cash advance segment performed extremely well in the quarter as income from operations was up over 200% on a 9% increase in revenue.

Pawn activities continue to dominate the overall business, as net revenue growth from pawn lending activities was up 16% due to the combination of increased gross profit dollars and higher service charges on pawn loans. Overall, Cash America’s pawn activities continue to comprise over 60% of the company’s consolidated operating income. And while we expected high growth from the online channel for cash advances, the high relative growth in the pawn lending business combined with lower than expected loss rates on cash advances to make the quarter very successful.

Consolidated net revenue in the quarter was up 16% year-over-year leading to a nice 56% increase in income from operations. As I mentioned, there were a variety of unusual costs in the quarter, so this 56% improvement in income from operations includes those deductions. Earnings per share were also up 56%, reaching $0.67 per share compared to $0.43 per share in the second quarter of 2007.

Now I’d like to turn to each of the segments, and I’ll start with pawn, which again had a very healthy quarter on all fronts, led by higher pawn service charges, which were up almost 17% to $43 million on a strength of higher pawn loan balances, which started the quarter up 10% year-over-year. Tax stimulus checks were likely responsible for a slight easing in pawn loan balances from the year-over-year levels of about 10% at the end of the first quarter versus up 8% year-over-year at the second quarter. However, this compares to only up 2% year-over-year Q2 2007 compared to 2006.

Same store pawn loan balances finished the quarter up 7%, a very solid level as we begin Q3. The overall portfolio performance in the pawn business remains healthy as the yields on pawn loans continued to trend higher reaching 129.3% compared to 121.7% in the prior year. Again we feel like the adjustment to shorter loan periods in the last half of 2007 in almost 200 of our locations has enhanced performance and driven more frequent cash payments into the portfolio.

Complementing the performance of finance and service charges, the pawn business’s proceeds from the disposition of merchandise continued its trend of higher year-over-year increases in the second quarter. Total dispositions were 26% greater than the prior year same quarter and a slight easing of gross profit percentage down two-tenths of 1% to 38.3% did little to slow growth in aggregate gross profit dollars, which were up 25% to $41.3 million.

The overall increase in gross profit was driven by both higher retail sales and the continuation of higher contributions from the sale of refined gold. Retail sales, excluding refined gold, were up 9%, and gross profit margin on those sales increased year-over-year to 41.6% compared to 41.2% last year. Refined gold sales continued to gain as increases in sales were up 60% year-over-year and stronger gross profit margins, which reached 33% compared to 32% last year due to the higher prevailing gold prices. This drove gross profit dollars on refined gold sales up almost 70% year-over-year.

Refined gold gross profit dollars represent about a third of total gross profit dollars. So notwithstanding the positives, the in-store sales remained the dominate contributor to gross profit dollars. Commenting on the refined gold trend, this increase is consistent with the use of higher percentage of jewelry as collateral as our customers continue to be attracted to the alternatives available to them for pawn loans during this difficult economic cycle.

Higher gold prices have caused our collateral related to jewelry loans to increase year over year as a percentage of the total. This is a strong fundamental trend for the pawn business because, as you know, jewelry does not run the risk of obsolescence or breakage like general merchandise. The increase year-over-year is not overly significant as jewelry now comprises 71% of inventory compared to about 67% of inventory at the end of the second quarter of 2007. Nevertheless this dynamic allows our customers to find more collateral value in their jewelry items, which supports their need.

Finishing up on the pawn business, cash advance fees continue to be a non-factor for pawn activities as revenue levels are down slightly and contribution after loan losses is basically flat. However, I would report that the losses as a percentage of fees dropped to 31% compared to 37% last year, and we view the opportunity for incremental contribution to be a little more positive in the second half of 2008. But the dominating factors are higher gross profit dollars and pawn service charges is what led to 16% increase in net revenue and, as I mentioned earlier, the 20% jump in income from operations related to the pawn segment in Q2. I would note the same store pawn net revenue year-over-year was up 15% in Q2 ’08 compared to Q2 ’07.

Now I’ll move over to the cash advance segment, which as I said contributed a high level of incremental profitability as operating income jumped 212% on a 9% increase in total revenue. The strong contribution is due solely to the development of the online distribution platform, which has really come to its own. Leveraging the trends we’ve spoken about for the last year, as revenue growth is now a more normalized level of 24% and the business is able to leverage its operating cost to provide more incremental profitability while experiencing a decrease in its reserve for loan losses, which fell to 45% of cash advance fees in the quarter compared to 63% in the second quarter of 2007.

Therefore the online distribution channel, excluding storefront activities, posted almost a 350% increase in income from operations on a 24% increase in total revenue. This strong performance allowed the overall cash advance segment to overcome the softness in storefront cash advance business during the quarter. Because during the quarter one-time charges hitting storefronts totaled $1.1 million, which included cost related to the closure of 12 storefront locations, mostly in California but two in Texas, which we announced at the end of the first quarter; additional costs related to promotional activities in Ohio and some other less significant direct costs, which were also incurred during the quarter.

In addition, the changes to underwriting to mitigate loss activities, which were implemented at the end of 2007 depressed revenue levels that did lead to the desired results as the loss provision as a percentage of fees in the storefront business dropped to 24% compared to 32% in the prior year. In addition, tax stimulus checks likely slowed the normal seasonal growth in cash advance balances in the second quarter impeding revenue growth.

In addition, we went through multiple changes to limit loss exposure upon the initial announcement in Ohio that stores would possibly close. We have since adjusted that activity which we believe will cause the storefront cash advance business to recover from these year-over-year declines assuming some alternatives in Ohio are reached.

So summarizing the storefront cash advance business, revenue is up 13%, and excluding one-time charges, operating income was down 9% year-over-year. Also for those with interest about how an Ohio store absence would affect Cash America’s consolidated results, I would note that in Q2 there was virtually no contribution from store cash advance business as operating income for the quarter was only $275,000.

Looking at some of the overall cash advance metrics during the quarter, consolidated cash advance fees were up 7% although the cash advance segment itself rose 9%. And the online distribution channel by itself was up 24% indicating the magnitude of offset provided by the online distribution channel. Bear in mind, again, the 12 stores were closed during the quarter and there were a variety of underwriting changes as well as the disruptions in Ohio, which impacted those fee numbers.

The same trend can be observed in cash advances written which increased 5% to $531 million in the quarter, which understates the underlying fundamentals as the online platform increased 29% and storefront activities fell 15% in the quarter.

Consolidated loan loss provision expenses as a percentage of fees dropped in the quarter to 37.4% compared to 48.7% in the prior year, down 23% creating a net fee number of $58 million, which cash advance fees less the provision expense. And it’s up 30% year-over-year. Loan losses as a percentage of loans written were 6.5% compared to 8.4% last year, down nicely. And likewise net charge-offs as a percentage of loans written were 5.2% compared to 6.5% last year.

And I would note the return to a more normal trend of provision expense being greater than net charge-offs. As a sidebar, for those who were concerned about the loss provision in Q1 being 5.5%, I’d point out that the net charge-off figure in Q2, which is what the Q1 provision expenses are designed to cover, was 5.2%. The slight excess provision could be a function of the tax stimulus checks during the quarter that were not factored into the loss provision expense at the end of Q1.

And while talking about loss activity, I believe we will return to the normal business trends at the lowest level of loan losses in Q1 and Q2, the sequential increases in Q3 and Q4. I mentioned this because the unusual trend last year where losses were higher in the first half of the year because of the influx of new customers, weaker performance histories, which created sequential losses that went down in Q3 and Q4, an unusual trend that we commented on at that time.

So in 2008 I believe we'll return to a more normalized trend of lower losses with a sequential increase throughout 2008, before we return to the first quarter of 2009 with a typical drop in loan losses driven by tax refunds. As I conclude my comments on the historical results from the quarter, again a 56% increase in earnings per share to $0.67 from $0.43 last year on a strength of very solid pawn lending fundamental evidenced by higher pawn service charges and a significant increase in sales and gross profit dollars, with the added benefits of the expected development and enhancements to the marginal profitability online distribution channel for cash advances, which posted an impressive 24% operating margin for the second quarter.

Now as I turn our attention to management's outlook for the remainder of 2008, we are of course sensitive about the uncertainties related to the locations providing cash advances in the State of Ohio. The company continues to evaluate alternatives in an effort to continue to serve those customers in need of the product in that state, and Dan will provide his perspective on this topic in a few minutes.

However, the expectations and guidance for Q3 2008 are based on the elimination of Ohio locations for the remainder of the year through a wind-down during the third quarter. Nevertheless non-Ohio storefront activity in general likely remains soft due to the slow build in asset levels during the second quarter particularly due to changes in Ohio, but also due to tax stimulus checks.

We expect launch exposure to be lower than the prior year, but greater than Q2, following a normal business cycle. Pawn activities are anticipated to remain robust with pawn loan balances finishing 8% above the prior year at the end of the second quarter, providing earnings leverage as we move into Q3. We expect retail sales to remain at its heightened levels, although probably not at the extraordinarily high growth rate of 26% experienced in Q2.

With these underpinnings in mind, we are initiating guidance for the third quarter of 2008 of $0.62 to $0.66 per share compared to $0.55 per share for the third quarter of 2007. Excluding the unusual gain in the third quarter of 2007 of $0.13 per share related to the sale of notes receivable in that period. Likewise, this leads us to adjust our full year guidance upward to $3 to $3.20 per share which compares to $2.48 per share for fiscal year 2007, again excluding the $0.13 gain in 2007.

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

Dan Feehan

Thanks, Tom. When I typically prepare for these calls, I will routinely review my comments from the previous quarter. I’ll make sure I’m accurately reflecting any changing trends, which may not be really apparent in our press release that went out later this morning. Quite frankly, in this case, I could have just as easily replayed my comments from Q1 since our trends in this quarter are very consistent with those we reported in the first quarter.

The pawn segment, as Tom segment, exceeded our expectations in the second quarter just as it did in the first quarter. And clearly this segment continues to benefit from a softening economy and elevated gold prices. And the only differential this quarter, which Tom mentioned in his comments, was the introduction of the Federal stimulus checks, which were dispersed in May and June. Clearly it appears those checks ramped out our retail business without doing too much to throttle the growth in our pawn loan assets. And consequently, when you look at our pawn segment, you’ve got conclude we are well positioned for the second half of 2008.

The online portion of our cash advance segment also produced earnings ahead of expectations in the quarter. The improving marginal profitability and revenue growth of the online business have been a great catalyst for earnings growth over the last 12 months. Loan volume and revenue growth continue to ramp at rates of 20% to 30% over the previous year, while losses as a percentage of revenue were declining.

And as you know, that combination creates a powerful dynamic for driving earnings growth. All the key metrics we watch in that business such as initial defaults, collection efficiency, marketing cost, etcetera, are all showing favorable trends. As Tom indicated, the storefront component of our bricks and mortar business did not fare well this quarter having underperformed our expectations. Its earning performance was negatively impacted by a number of factors, as Tom highlighted in this comments.

We did show a nice improvement in loss rates during the quarter and our storefront business, but that was not enough to offset the decline in revenue. And I think we are now at a tough inflection point in our storefront cash advance operation of trying to reach the right balance of risk and reward.

Given the strength of our other business units, both pawn and the online segments, we have elected to err on the side of taking less risk with our storefront operation, given the uncertainty around the impact that inflationary pressures may have on our customers ability to repay their loans. The new scoring model for our storefronts that I referenced in previous calls is now in place in many of our locations, but is not yet ripe enough to provide any casual benefits.

Regardless the outlook for our current storefront cash advance business is largely tied to what happens in Ohio. That brings me to an update on the situation in Ohio, which we first alerted you too in our press release issued May 15. That release is available in the Investor Relations section of our website at www.cashamerica.com.

In May, the Ohio legislature passed House Bill 545, which was signed by the Governor on June 2. Absent any challenge, that law becomes effective on the 1st of September. The law contains numerous provisions, which will reduce revenue on the current short-term cash advance product in Ohio to the point that the current product will no longer be economically viable for Cash America to offer its customers in Ohio.

Our May 25 release indicated that we would evaluate the viability of offering alternative financial services in Ohio in an effort to mitigate the negative impacts we currently expect the new law will have on our customers, coworkers and lending locations. We are continuing to evaluate alternatives, including operating under other small loan statutes already in place in Ohio. We have in fact applied for other lending licenses in case we elect to operate under one of the existing statutes, and we are also considering introducing some elements of the pawn operation in certain locations.

We’ve not yet made any final decisions on an alternative business model in Ohio, but we are highly doubtful that we could keep all of our locations open in Ohio under any of the current alternatives. Also our best guess today is that we could only hope to retain approximately 20% to 30% of our current earnings stream in Ohio under the alternatives we are now considering.

I’d also like to point out that it would be highly unlikely that we would make any new investments in Ohio based upon the alternatives available to us today. But since we already have a substantial fixed investment in Ohio and a great team of coworkers, we are trying to find a way to make the most of the potentially bad situation. We will not make a final decision on what alternative we might lack, if any, until shortly before the effective date of the new law.

In addition to evaluating alternative business models in Ohio, we have joined with other interested parties in Ohio in support of a potential referendum that will allow the citizens of Ohio the opportunity to vote on a portion of House Bill 545 in the November general election. This group will hopefully be asking the citizens of Ohio to vote no on Section 3 of House Bill 545, which is the section that repeals the current Ohio check cashing lender law.

In order to qualify for the ballot in November, the group must submit the Secretary of State 241,365 valid signatures by registered voters in Ohio supporting the referendum. These signatures must by submitted by August 31. Signature gathering firms have been engaged and are currently gathering signatures and hopes of meeting that deadline. If successful in qualifying for the ballot, the effective date of the new law will be postponed from the 1st of September until a date shortly after the November election.

In that case, we would likely continue to operate under our existing business model in Ohio through the election date, pending the outcome of the referendum. If we are unsuccessful in qualifying for the ballot, we would be forced to cease operations under the current check cashing lender law on September 1 and we would either close our shops or convert to an alternative model or some combination thereof.

The guidance that Tom provided to you for the balance of 2008 assumes that our current earnings stream from our Ohio business disappears on September 1, and we have not included any potential earnings from an alternative product. The guidance also excludes any estimates for the impact of store closure cost or write-off of major assets.

Additionally, we assume the referendum successfully qualifies for the ballot and therefore we continue operating under our existing business model in Ohio during September and October, we believe that most, if not all, of our Ohio earnings during those two months would be offset by our share of the cost in supporting the referendum effort. Consequently, under either scenario, we do not expect to generate any meaningful earnings in Ohio during the months of September and October.

If the referendum is successful making it to the ballot and the citizens ultimately vote in our favor, then we would likely continue operating under our existing business model in November and December, and any earnings from those two months are not in the guidance Tom provided. We believe the likelihood of winning a referendum is much too speculative at this point to include any post election earnings in our ’08 earnings estimates.

Now I know that this means the possibility for Ohio operation maybe hard to follow, and I’ll be happy to clarify the timing and guidance issues in the Q&A session. I need to warn you that I will not be answering any questions regarding our strategy on the referendum effort.

I’d like to also update you on the status of our cash advance business in Florida, which was a subject of the press release we issued on March 31, followed by a discussion in our first quarter conference call on April 24.We no longer operate as a credit service organization in our Florida storefronts and we are now providing short-term cash advances to our storefront customers under the Florida Deferred Presentment statute.

Our online operation has applied for a license under the same statute and intends to convert to this model when a license is issued. The impact of these changes in Florida have been included and reflected in Tom’s guidance that he provided to you a short time ago.

On a separate topic, we also issued a press release this morning regarding a prospective management team at CashNet USA, our Internet services division based in Chicago. The current President of CashNet, Al Goldstein, and the current CIO, Alex Goldstein, will be leaving CashNet in October of this year following the last measurement date for the CashNet earn-out period. Al and his brother Alex were significant shareholders of the selling group and they have decided to pursue other interest with a proceed from our acquisition of CashNet. Both gentlemen are parties to certain non-compete covenants established in connection with the closing of the original asset purchase transaction and have indicated they will not be pursuing anything remotely associated with CashNet’s current business model.

Additionally, Cash America’s Board of Directors has agreed to nominate Al Goldstein for a seat on our Board at our regularly scheduled annual shareholders’ meeting next April and Al has agreed to serve on the Board assuming he is elected by our shareholders. Adding Al to our Board will be a major win for our shareholders giving his knowledge of the online lending business and his team strategic vision for serving the financial needs of the unbanked and under-banked segments of the market. And I certainly look forward to his ongoing counsel.

I’m also thrilled to report that the other four members of CashNet senior management team have committed to remain with the organization and lead the effort in expanding the company’s geographic reach and product offering. Tim Ho, the current Senior VP of Strategy Development, will ascend to the role of President of CashNet upon Al’s departure in October. Tim has been with CashNet since January of 2006 and has been a key contributor to the success we’ve enjoyed since the acquisition of CashNet in September of ’06.

Mark Friedgan, the current Senior Vice President of Research and Development will take on the additional role of Chief Information Officer. Mark has been with CashNet since May of 2005 and has played an integral role in building and supporting the current online platform. He has as much, if not more, institutional knowledge of our online operating systems as any one else in the organization.

Steve Young, the current Senior VP and Chief Operating Officer, will continue in that role. Steve has been with CashNet since February of 2005. CashNet’s current Senior VP of Finance, Ken Schultz, who has been with the company since March of ’06, will continue in his current role. All four of these individuals have contributed significantly to the growth and development of CashNet and had helped to create significant value for Cash America over relatively short period of time.

Now we’ll undoubtedly miss the individual contributions of Al and Alex, but I’m absolutely confident that our remaining management team at CashNet is highly motivated and fully capable of creating significant new value for our shareholders in the future.

Now as I look forward to the last half of 2008, I think we are really in great shape despite the disruption we have experienced in Ohio and Florida. I hope it’s not lost on anyone that our current earnings estimates for 2008 are still ahead of our original estimates for the year in spite of some unforeseen disruptions to our business plan.

We are enjoying really good momentum with our pawn business and it’s hard to see any external factors that might seriously disrupt that momentum. As I mentioned numerous times, our internal challenge in the segment will be continuing to maintain a healthy balance between our lending and retail components of the pawn segment. We are exceptionally well balanced today and I’m confident we can handle a challenge of keeping it balanced in the coming few quarters.

Additionally, the ramp of marginal profitability of our online business has outstripped our expectation and it's hopefully finally convinced the skeptics of the online platform is not only a viable but a vibrant distribution channel for our short-term cash advance product. And I also don’t see anything on the horizon to disrupt the momentum of the online business over the next few quarters.

Beyond that, we are optimistic about the opportunities to broaden the scope of our online business with a variety of initiatives designed to expand our geographic coverage in our product offering. We will be adding significantly to our professional staff in Chicago over the next year to pursue these initiatives.

Finally, as I mentioned earlier, the future of our storefront cash advance business is largely tied to what happens in Ohio. We will be spending a lot of time and resources on our challenges in Ohio for the next few months and we will be prepared for all possible outcomes. Regardless of what happens there, I believe the stability of our pawn business and innovative capacity of our online business will continue to be the main ingredients for building future value of our enterprise.

And with that, I’d like to now open it up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Dennis Telzrow from Stephens, Inc. Please proceed with your question.

Dennis Telzrow – Stephens, Inc.

Good morning, Dan and Tom. Great quarter.

Dan Feehan

Good morning, Dennis.

Tom Bessant

Good morning, Dennis.

Dennis Telzrow – Stephens, Inc.

You didn’t say much about the UK, I sort of have a sense you are getting ready to crank that up. Any comments? I know you’ve been testing it and want to get comfortable over there.

Dan Feehan

Yes. We continue to ramp in the UK, Dennis, and this could benefit anybody else anybody else on the call to reference to our online operation in the UK that we started last year. We are on plan for that. That business unit is not yet profitable, but we are making great progress with it. And as we’ve mentioned on the last year, or probably last couple of calls, we really view that as an ’09 growth vehicle. So we are on plan to where we hope to be. We are ramping not as quick as we had ramped when we opened Texas and Florida with the online business, but we are ramping cautiously and having good results. We are pretty happy with our progress.

Dennis Telzrow – Stephens, Inc.

And I know you’ve talked about driving other products through the Internet. Is that still sort of in the think tank stage or do you think in ’09 or 2010 time frame–?

Dan Feehan

Yes, it’s still in development stages. I would tell you that we are spending a fair amount of timeline. This is not a sideline activity for us, it’s a mainstream activity with our group in Chicago. I would really be hopeful of having some products available for us in ’09.

Dennis Telzrow – Stephens, Inc.

And last question to Tom, I presume after the final payout for CashNet in the fall or looking into next year, cash flow will go probably more back to paying debt down, is that a fair assumption?

Tom Bessant

We’ll certainly increase cash flow significantly after the earn-out payments are completed. We’ll look for opportunities to put that money to work, whether it be transactional based or store based. But in any event cash flow will certainly increase, and then we do obviously have the opportunity to reduce debt going forward as well.

Dennis Telzrow – Stephens, Inc.

All right. Thank you very much.

Tom Bessant

You bet.

Operator

Our next question comes from the line of John Hecht from JMP Securities. Please proceed with your question.

John Hecht – JMP Securities

Morning. Thanks for answering my questions.

Dan Feehan

Good morning, John.

Tom Bessant

Good morning, John.

John Hecht – JMP Securities

Thanks. I missed about the five minutes of the call, so forgive me if I’m being redundant in some of the questions. But in the pawn, the metrics across the board in your pawn division appear to be pretty positive. Two questions. One, are you getting any lingering or any of the metrics continue to be affected by the change from 60 to 30-day inventory holding period? And then what explains the nice jump in the annualized yield in the pawn loans from the quarter ended ’07 to ’08.

Tom Bessant

Yes, good point, John. And a couple things going on. To take the last part of that question, if you remember during 2007 we phased-in 60-day loan periods in our Texas stores, which was again roughly 200 locations. We’ve made that change about a year earlier in our Florida stores. And what we found is that more frequent or shorter period of time allows customers to keep merchandise – I’m sorry, keep pawn loans more current, which increases the cash flow and also moves items that would have potentially defaulted in that last 30 days in the inventory a little bit quicker. So it really just drives yields up, which is a positive. Also we’ve seen just healthy performance in our pawn business and overall inventory levels, it puts more assets in our inventory levels, which puts them in our shelves and in our jewelry counters quickly, more quickly, allowing us to sell them and also driving cash up. It has a lot of benefits to our customers, to our reported yields and to our overall pawn business.

John Hecht – JMP Securities

Okay. Next question would be related to effects from the stimulus checks that your customer base was receiving during the quarter. I mean, did you see any correlation between those and the credit performance in those and maybe increased demand for bargain pricing through your pawn shops and maybe any behavioral response in terms of loan demand at the pawn shops and seeing any change in the wake of the stimulus program?

Dan Feehan

John, we – part of our comments that you may have missed was that clearly we think the stimulus checks had a positive impact on our business in Q2. I think it led to perhaps higher retail activity in our pawn segment than we may have otherwise seeing although if you look at our first quarter retail activity across over-the-counter sales, it was up pretty substantially as well. So we had a good trend – a good trend of retails for the first six months, which appears – may appear counterintuitive to a lot of people given what’s going on in the economy. But clearly the checks helped on the retail side of the business in the pawn segment. It also – so that was a positive. I think it had a negative impact on demand for our short-term cash advance product. We saw pretty widespread and consistent softness all the states where we offer the short-term cash advance product on storefronts. It was pretty consistent, which we attributed to some degree to the stimulus checks. Obviously we’ve also tightened our underwriting going into 2008. So that would obviously have some impact on that as well. But pretty clear to us that the stimulus checks impact the demand for that product and on the flipside of that coin, probably helped on the collection side of our business as well. We viewed it as a positive impact. The good news is, particularly on the pawn side of the business is, as I said in my comments, we got the benefit on the retail side without really have those checks create much of a throttle on our pawn loan growth. And we ended the quarter with pretty strong pawn loan balances going into Q3. So I feel like we are well positioned. Here in July based upon the numbers we look at on a daily basis, I can’t tell you that I’m seeing a lot of hangover effect from the stimulus checks. Our view is that most of that came out in last half of May and in June, and probably June was a month that was impacted more than any at this point.

John Hecht – JMP Securities

All right. Thank you very much.

Tom Bessant

Thanks, John.

Operator

Our next question comes from the line of Rick Shane from Jefferies & Company. Please proceed with your question.

Rick Shane – Jefferies & Company

Hi guys. Two questions. One is sort of a detailed question and one is a little bit bigger. When we look at the model, we compare the line items for the model, there were a lot of variances versus what we are looking for and most of them were revenue upside. And I think we understand what drove all those strength. The administrative expenses were also substantially higher than what we were looking for. Has that been driven by lobbying efforts and government affairs?

Tom Bessant

You know, Rick – and thanks for that question because I was going to point that out in my prepared remarks, but – we did post higher admin cost during the quarter. A couple of things went into that. And to answer your question directly, the higher cost related to our activities in Ohio were in operating expenses, not in administrative expenses. So the admin doesn't pick up that as much as it picks up some other things we did during the quarter. I’ll maybe go ahead and talk about first the fact that we are well in excess of our budget because of the success in the quarter, which is driving incentive payments higher. So it has to be fully accrued on that. Also last year in the quarter, it makes the differential look bigger because our health insurance and workers’ comp insurance experience was very favorable and it allowed us to, in our normal views, to adjust those reserves downward. We didn’t do that in the quarter, not that our experience is materially worse, but we – I think we accrued a little more appropriately there. Those two factors were actually quite significant. You also may remember we made some changes in our storefront management, which we announced at the end of June, picked up some severance related cost there and a few other ancillary items that really drove that up, and mostly one-time type adjustments actually.

Rick Shane – Jefferies & Company

So realistically where do you think this drifts down into the third quarter and is that embedded in the guidance that you’ve given?

Tom Bessant

I’ve embedded virtually kind of a flat level expectations to continued strong performance out of our company.

Rick Shane – Jefferies & Company

Okay, great. Thank you for that. Dan, in talking about what was going on in Ohio, it sounds like you are reevaluating storefront payday lending more broadly depending upon what the outcome is in Ohio. And I again I realized you are dealing with a couple of things here. Obviously your comments about employees in Ohio, you are clearly focused on trying to do as much for them as possible and protect jobs, and probably don’t want to comment more broadly. But given the slowdown in storefront payday lending and the rapid acceleration of online payday lending, could that business look materially different a year or two from now that we are suggesting with those comments that you may reevaluate the whole business?

Dan Feehan

Is your question related to the storefront component?

Rick Shane – Jefferies & Company

Yes, exactly.

Dan Feehan

Yes. I think it’s safe to say, Rick, that we have a large base of our storefront business in Ohio. Of those 139 locations, if you look at the entire base of our storefront business, those 139 locations in Ohio were disproportionately profitable relative to the entire change. So as I said a couple of times in my comments, our storefront business is really dramatically impacted by what happens in Ohio. So I think at the end of this year, probably – I don’t know that we’ll be in a position on the October level to discuss it further about the future of the business, but by the end of the year I think we’ll have a better perspective on where we are heading with the storefront component of our short-term cash advance business. Let me suffice it to say at this point that we are not in the market trying to adding locations today. Again, I think the success that we’ve had in the online channel and the opportunity to continue to expand that, as I’ve indicated both with a little bigger geographic footprint hopefully, not only here in the US but perhaps in Canada when laws permit us to do so there, as well as other places outside the US. I view that investment in the growth of the online business is probably better business strategy and better long-term returns than continue to add storefront units today. So I’m not trying to send the signal that we are working our way out of the storefront cash advance business, that’s not my intention. But I also want to be clear that I don’t see in the immediate horizon us doing a lot to expand in that business.

Rick Shane – Jefferies & Company

Got it. And so the strategy in terms of, for example, in Texas of offering payday within the pawnshops where the incremental costs are relatively low to do that isn’t going to change?

Dan Feehan

No.

Rick Shane – Jefferies & Company

Okay. Yes, great. Thank you very much guys.

Dan Feehan

Thank you.

Tom Bessant

Thanks, Rick.

Operator

Our next question comes from the line of Liz Pierce from Roth Capital Partners. Please proceed with your question.

Liz Pierce – Roth Capital Partners

Good morning and nice to all of you guys, congratulations.

Dan Feehan

Thank you.

Tom Bessant

Thanks.

Liz Pierce – Roth Capital Partners

Rick kind of touched on one of my questions and I’d follow up with you offline about this. But I also wanted to know about if you have already taken the underwriting, do you anticipate based on what you are seeing and maybe performance in the quarter further tightening on the underwriting going through the rest of the year and into early ‘09?

Dan Feehan

It’s probably a contrary. As I’ve said in my prepared comments, I think we are at an inflection point where we need to reassess the risk-reward equation on particularly the storefront cash advance business. Fortunately with the success we’ve had online of growing that product revenues and profitability from that, we have had the opportunity to be relatively conservative with the underwriting on the storefront business. We have, as also indicated, just rolled out and we are in the process of completing the rollout of the new model that's been developed by our analytics group in Chicago with our storefronts that we're optimistic, we will optimize the revenue side of the business while managing loss rates at levels they are today. And so I think – I’m not trying to signal that we are going to be tighter on the underwriting side of the business, I think we need to be realistic at this point and make sure that we haven’t gotten too conservative and are not damaging the topside line of that business in our attempt to be cautious with loss rates. So we’ll be looking at that right balance between now and the end of the year. And we may make some adjustments. I doubt that we would make any adjustments to get more conservative at this point.

Liz Pierce – Roth Capital Partners

All right. So it’s really about optimization?

Dan Feehan

It is.

Liz Pierce – Roth Capital Partners

That makes it much more clear.

Dan Feehan

Yes.

Liz Pierce – Roth Capital Partners

And then I know that you said you don’t want to talk about your strategy. I think you alluded to gathering signatures for Ohio, but are you willing to just talk about what other alternatives you are exploring in the state?

Dan Feehan

Well, there are some other short-term consumer loan statutes that exists and have existed in Ohio that – as I indicated that we’ve applied for licenses under one of those statutes with the possibility of trying to convert our customers from the existing short-term cash advance product under the current law to one of these existing statutes. I would tell you that, again, if I was going – if I was looking at an investment in Ohio today, I’d never make it based upon the economics of these other models as they are not going to give us the sort of return that it would take to justify a new investment. But we have an existing customer base center. We have experienced and great work force in Ohio. And as I indicated, if we can find a way to key 20% to 30% of our current profitability in Ohio, in my mind it’s a better business decision than just totally walking away from our investment there. And again I don’t think anything that I think is a sustainable alternative in Ohio that would allow us to key anything more than, say, the 20% or 30% of our existing profitability there. That would also – when I give that estimate that also assumes that we are able to implement some pawn activity in some of those shops, primarily oriented around buying gold, buying and selling refined gold in Ohio. So it’s not a great solution, but it’s better than – at this point, it looks better than just totally walking away from the business. We’ve got a lot still to uncover in Ohio about those options. We don’t have licenses yet. So again we’ve not made a final decision there and probably won’t do that for sometime.

Liz Pierce – Roth Capital Partners

I noticed the press release, it said you only phased-out storefront in Ohio. Is that just because the online isn’t necessarily a big component?

Dan Feehan

Well, the only is not a big component in Ohio. Obviously this law affects both the storefront and our online business. But the online business is a very, very small segment of our profitability in Ohio. The vast majority of all the earnings we get out of Ohio comes from those 139 storefront operations. They are the best that we’ve got in the company. And quite frankly when I stack those units up against other average units I see from other public companies in the payday business, the cash advance business, they are better performers, greater volumes, higher margin profitability than the averages I’ve seen from any other operations.

Liz Pierce – Roth Capital Partners

Great. Do you have any kind of comments on the Senator Durbin’s Bill that was I guess introduced last week?

Dan Feehan

Yes. It’s not surprising. Senator Durbin has a track record of really supporting these sort of activities. Clearly we are in a hot political season. People that we’ve seen, a variety of folks take the opportunity during this period leading up to the elections in November to say and do and follow all sorts of things. That bill is, if you look at it as extraordinary comprehensive bill, it affects all consumer credit, would impact everybody in the world who is provided consumer credit of any sort to folks here in the US. There will be everybody who does that will obviously be an opposition of the bill of this nature. Again I’m not surprised at all to see that. I haven’t lost any sleep over since it came out, quite frankly. I’m not being naïve to say that there isn’t risk there, but I think that probably the people on this call are just as capable of assessing what the likelihood of something like that getting passed in this particular legislative section, in particular Congress. Certainly capable of making that assessment as well as I am.

Liz Pierce – Roth Capital Partners

Okay, great. Thanks and good luck.

Tom Bessant

Thanks, Liz.

Operator

(Operator instructions) And we do have a question from the line of Charles Ruff from Insight Investments. Please proceed with your questions.

Charles Ruff – Insight Investments

Good morning.

Dan Feehan

Good morning.

Charles Ruff – Insight Investments

I apologize if I missed this. Did you quantify any non-recurring expenses in the second quarter for the Ohio situation or closing the 12 cash advance stores in Texas and California?

Tom Bessant

Yes, we did. The total non-recurring or kind of one-time unusual charges in the quarter was about 1.1 billion pretax.

Charles Ruff – Insight Investments

Okay. And the third quarter, does that assume – or what’s assumed in there for expenses for litigation or referendum expenses etcetera?

Tom Bessant

I think what we’ve done in the expectations is assume that we reduce and eliminate the storefront activities.

Charles Ruff – Insight Investments

Right.

Tom Bessant

You are really looking at virtually no incremental contribution from anything in Ohio, or that’s driven by expenses related activities or close-down of stores.

Charles Ruff – Insight Investments

Okay. I guess I understood that. I was just wondering if there was additional assumed expenses for – even going out and getting all the signatures etcetera on top of that, or if you are just leaving it as assume Ohio as a breakeven?

Tom Bessant

I think for purposes of analysis, that’s the best way to look at it. Obviously we are assuming those costs in there, but it’s the function of Q3.

Charles Ruff – Insight Investments

Okay. And the $56 million earn-out that’s on the balance sheet, when will you pay that?

Tom Bessant

That will be measured and updated again in September. That earn-out reflects the 12 months ended June, any incremental amounts owed to the sellers after deducting amounts previously paid. We look at that again on September 30 based on the 12 months ended and we will pay that out in the middle of November.

Charles Ruff – Insight Investments

Okay. So that number is going up.

Tom Bessant

I would also mention the provision for mixing up the 25% of the company’s stock in that payment doesn’t necessarily mean that it’s all cash. That’s solely at our option.

Charles Ruff – Insight Investments

Okay. I understand some of the cautiousness about what you kind of can’t say about Ohio. Can you talk at all about how likely you feel it is that you will be able to get it on the – be able to get the referendum – in other words, get the signatures?

Dan Feehan

At this point, it’s really too early to tell. We have theoretically by a matter of law 90 days to gather those signatures and get them submitted. And that process is underway and we discuss the approval from the Attorney General on a petition language about I guess two weeks ago. So we're underway gathering signatures. I’d say that we’re making good progress, but it’s really too early to say for sure whether we have any degree of confidence and we'll be get on the ballot.

Charles Ruff – Insight Investments

Okay. And I understand it’s too speculative to indicate whether you think you could win the vote or not in November. But if we get there, if you are able to get the signatures, get a vote and you win the vote, does everything kind of stay as is the way it was or will there have to be some changes anyway?

Dan Feehan

If we theoretically get on the ballot and theoretically succeed in the vote in November, basically the existing Ohio check cashing lending statute would stay in place and we would continue to operate under that statute. I need to caution you that, however, that winning the referendum in Ohio does not give us constitutional protection against new legislation that could put us back in the same spot we are in prior to referendum. The practical realty of that we believe is that if the referendum is successful in November, that the industry will be back at the table with the legislature negotiating some sort of legislative changes to the existing check cashing law.

Charles Ruff – Insight Investments

Okay. So it’s likely that it wouldn’t go back the way everything was a few months ago that there will some sort of change going forward?

Dan Feehan

Yes, as a practical matter that – I mean I think you’ve got to work your way through the various aspects of this. As a practical matter, that’s what I would think. We’d be again back at the table with the legislature coming up with some changes in the existing law that will allow everybody to continue in business there and continue in the business there very profitably hopefully.

Tom Bessant

I mean initially you revert back to your existing law with a very powerful message from the citizens of Ohio to further discussions.

Charles Ruff – Insight Investments

Right. Okay, thank you very much and congratulations on a strong quarter.

Dan Feehan

Thank you.

Operator

And we have no other questions at this time.

Dan Feehan

All right. Thanks, ladies and gentlemen, for joining us this morning. I appreciate your attendance. Have a great day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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

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

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

Source: Cash America International, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts