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Executives

Julie Prozeller - Investor Relations, Financial Dynamics

Jeffrey Weiss - Chairman and Chief Executive Officer

Randy Underwood - Executive Vice President and Chief Financial Officer

Analysts

John Hecht - JMP Securities

Robert Napoli - Piper Jaffray

John Rowan - Sidoti & Company

Richard Shane - Jefferies

Jason Arnold - RBC Capital Markets

Henry Coffey - Sterne, Agee

Liz Pierce - Roth Capital Partners

Dollar Financial Corp (DLLR) Q4 2008 Earnings Call August 28, 2008 5:00 PM ET

Operator

Hello, and welcome to Dollar Financial Corp. Fiscal 2008 Fourth Quarter and Year End Financial Results Conference Call. All lines will be in a listen-only mode. At the request of Dollar Financial Corp., today's conference call is being recorded. After the speaker's remarks, there will be a question-and-answer period. (Operator Instructions)

I would now like to turn the call over to Julie Prozeller of Financial Dynamics.

Julie Prozeller - Investor Relations, Financial Dynamics

Thank you. Good afternoon, everyone. Joining us today from Dollar Financial Corp are Mr. Jeffrey Weiss, Chairman and CEO, and Mr. Randy Underwood, Executive Vice President and CFO.

Before we begin our conference call I would like to remind you that the remarks made during this conference call with reference to future expectations, trends, plans, forecasts, and the performance of Dollar Financial Corp and its subsidiaries and its markets are forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements reflect the company’s current beliefs, estimates, and expectations that involve a number of risks and uncertainties. Today a company will be providing guidance on expectations of future results.

As a reminder, these statements indicate the expectations of the Dollar Financial Management team as of this date. These statements supersede any and all previous statements made by the company regarding the matters addressed. These statements are forward-looking statements and cannot be guaranteed and may prove to be wrong.

This outlook is based upon various assumptions which include, but are not limited to the following: no material change in the products and services offered in all locations as of August 28, 2008; no material change in the company’s current store development and acquisition plan and no material adverse results in litigation or regulatory proceedings involving the company that currently exist or that may arise in the future.

Factors that could further affect results are outlined in Form S-3 or the company’s Senior Convertible Note offering filed with the SEC on September 20, 2007 which included in the Company’s annual report on Form 10-Q and 10-K.

The company’s statements will include a discussion of adjusted EBITDA, which is a non-GAAP financial measure. The most comparable GAAP financial measure to adjusted EBITDA is income before income taxes. The reconciliation between adjusted EBITDA and income before income taxes is consistent with the company’s reconciliation as presented in the company’s recent press release dated August 28, 2008, which is available on the web site at www.dfg.com

I would now like to turn the call over to Jeff for an over view of the recent quarter’s activities. Jeff.

Jeffrey Weiss - Chairman and Chief Executive Officer

Thanks, Julie. Good afternoon, everyone. Fiscal 2008 was another milestone year for the Company marked by the continuing strengthening of our U.S. business through two significant acquisitions, in southeast Florida and the Midwestern states, the opening of our first Euro zone store in the Republic of Ireland, and the continued profitable expansion across Canada and the United Kingdom. During fiscal 2008 we achieved record annual revenue of 572.2 million which represents growth of 25.6% over the prior fiscal year. We obtained a record 51.2 million of net income and increased our global store network by 235 locations through both de novo store expansion and acquisition.

Now I would like to mention a few highlights of our record fourth quarter. Consolidated revenue, excluding the loan loss provision, was 150.3 million, up 28.1million or 23% over the prior year's quarter. Total international revenue from our Canadian and U.K. markets increased by a combined 16.8 million, that's for the quarter, representing an increase of 18.5%, year-over-year. Revenue from our U.S. business increased by 36.1%, or $11.2 million, primarily as a result of recent acquisitions in that market.

Consolidated comparable store sales increased by 5.9% for the quarter and by 1.4% on a local currency basis primarily as a result of negative comparable in our U.S. store base. Internationally, comparable store sales grew by 5.2% on a local currency basis. Consolidated adjusted EBITDA was 39.4 million, an increase of 23%, or 7.3 million compared to the previous year's quarter.

Pre-tax income, which includes 2.1 million of store closing and severance costs, as part of an initiative to rationalize the Company's North American store network and support infrastructure, was 22.1 million, an increase of 24.7%, or 4.4 million compared to the prior year period. Net income was 12.3 million compared to 10.3 million for the prior year's quarter, representing an increase of 19.9% and fully diluted earnings per share was $0.50 for the quarter compared to $0.02 for the prior year period.

On a pro forma basis, excluding the store closure and other one-time charges, fully diluted earnings per share was $0.59 for the current quarter, compared to $0.45 for the same period in fiscal 2007. During the quarter, we opened nine de novo stores and acquired three additional stores.

I would now like to highlight some key achievements and developments from each of our business units for the quarter. Our Canadian business unit generated 70.2 million in total revenue, which represents an increase of 13.6% over the prior year's quarter. Check cashing revenue in Canada increased by 10.5% while consumer lending revenue increased by 9.6% for the quarter.

Money transfer fees increased by 31.4%, or $1.1 million for the quarter, while the other revenue category increased by $2.2 million or 33.6%, as a result of growth in the debit card business and other ancillary products.

As we had discussed in our last earnings call, with many of the Canadian provinces engaged in formulating their respective product regulations and rate structures, we thought it prudent to diminish the magnitude and tone of our marketing and advertising campaigns until the regulatory environment is more established.

We believe it is most appropriate for our input to provincial policy makers through the industry trade association in Canada, the CPLA, as opposed to running the risk of inaccurate inferences may be drawn by regulators and other interested parties who may misinterpret the mass media campaign. This decision, made in the spirit of establishing a viable and competitive payday loan industry for future years to come has resulted the temporary softening of new customer growth in Canada, although consumer lending revenue in Canada still grew by 9.6% over the previous year's quarter.

During the fourth quarter, our UK business contributed revenue of $37.7 million, growing by 28.7% over the previous year's quarter. Consumer lending revenue growth was very strong at 55.8%, while the other category increased by approximately $900,000, or 44.7% primarily as a result of increased revenue from foreign exchange products.

Along with growth in a single payment loan product, the UK consumer lending business continues to benefit from increased pawn lending activities, which primarily consists of loans on collateralized gold jewelry. The increase in the price of gold has enabled the UK subsidiary to increase the amount loaned on pawn gold stock and has also increased the resale and smelting value of the collateral jewelry.

Interest income from pawn loans in the UK essentially doubled versus the previous year's quarter growing by $1.7 million. We see this is an ongoing growth area for the UK business unit and believe we are now the third largest pawn lender in the United Kingdom.

Additionally, we opened seven multi-product stores in the UK in the fourth quarter in addition to acquiring two stores. Although it appears that the UK economy is slowing a little from its recent strong growth pace we have not yet seen any significant slowdown in our business thus far. However, we will continue to monitor our operations in the United Kingdom for signs of a slowing economy and make adjustments to our loan risk exposure and de novo store plans in that market if deemed appropriate.

Turning to our domestic business for the quarter, our US operations generated $42.4 million in total revenue representing growth of $11.2 million or 36.1%. On a year-over-year basis, check cashing fees in the US increased by 33.8% or $3.9 million, while consumer lending revenue increased by 33.4%, or $5.5 million.

US operations include the results of recent acquisitions of 45 financial services stores, principally located in the Midwest and Hawaii, as well as the acquisition of 81 stores in Southeast Florida in December 2007. We continue to be very pleased with the operating performance of these two acquisitions.

Despite our solid performance in fiscal 2008, we continue to actively monitor for potential changes in the regulatory and macroeconomic environment across all of our geographies. While our customers, who primarily work service sector job, have thus far fared better than other areas of the economy, indeed the job reports today were encouraging. There is a widespread concern that employment declines in other sectors could bleed over into our customer base.

For example, employment in the leisure and hospitality sectors could soften as consumers reduce their spending on travel and other discretionary activities, such as eating out. While all of our customers are spread over many, many categories in the service sector, we are not immune to macroeconomic trends.

In response to today's uncertain economy, we believe it's prudent to take cautious approach to managing our business until the economic picture is clearer. That entails sensible underwriting practices, a greater focus on debt collection and loan servicing, continuing improvements in the operating performance of our existing store base, and a judicious employment of capital.

As such, while taking into account the fact that a number of store leases were coming up for renewal in fiscal 2009, we reexamined our North American store network and support infrastructure with an eye towards enhancing efficiencies and the customer experience, while at the same time eliminating nonessential costs in overlapping territories which primarily resulted from acquisitions and into our build-out. As a result, we have instituted a plan to close 53 underperforming, overlapping financial services stores in the US and another 17 stores in Canada which represent less than 5% of the Company's store base.

Employees in 24 of the US stores were notified in the fourth quarter that their stores would be closed in the month of July with the remaining 46 US and Canadian stores anticipated to close by September 30. We're working very closely with all affected customers and employees to transition them, as many of our customers as possible to the newest store location, which in some cases do principally to acquisition is less than one mile away and to work with our employees in this difficult change.

The Company recorded a charge of 2.1 million in the June 30, 2008 quarter for severance and store closing costs and 3.0 million for the entire 2008 fiscal year. We anticipate another 4 to 5 million in charges in the first quarter of fiscal 2009 associated with the plan to rationalize our North American platform.

Looking to fiscal 2009, we continue to be the most diversified company in the industry in terms of both geographies, platform and product offerings, which we believe places us in an excellent position to take advantage of a wide spectrum of growth opportunities, while at the same time it minimizes the potential effects of unfavorable regulatory or economic changes in any single state, province or shire. With our strong cash flow and liquidity position, I'm very confident in our ability to further penetrate both on our existing and new markets as we venture forward.

As always, I would like to thank our more than 5,000 employees worldwide for an excellent fiscal 2008 as we look forward to an even better fiscal 2009. I will now ask Randy to provide an update on regulatory matters and to comment in more detail on our fourth quarter and our fiscal 2008 full year financial results. Randy?

Randy Underwood - Executive Vice President and Chief Financial Officer

Thanks, Jeff. I would like to begin with a few comments on recent developments with respect to regulation in Canada. A few weeks ago, the Nova Scotia Utility and Review Board issued its recommendations regarding the regulation of the payday loan industry within the province. As part of their evaluation, the UARB recommended the maximum costs of borrowing be set at $31 per $100 loaned inclusive of all fees.

We are pleased that Nova Scotia recognizes the real consumer need for this product and is taking the necessary steps to ensure healthy competition amongst the industry participants. Even though the $31 per $100 maximum fee structure would present an opportunity to increase our rates in Nova Scotia, we expect to continue to provide payday loans below the stated maximum in light of our strategy to remain the lowest cost provider and the first choice for consumers looking for a short-term loan.

As of June 30, 2008, the Company has nine corporate stores in Nova Scotia. On April 4, 2008, the Manitoba Public Utilities Board provided the new rate and fee structure for issuing payday loans in the province. Some of the definitions and specifics of the new regulation have yet to be clarified by the board. In addition, a number of our competitors in Canada are currently appealing the Utilities Board's decision and one has commenced legal action.

We believe we are the lowest cost and most efficient payday loan provider in Manitoba and that the newly proposed legislation will provide additional growth opportunities for Money Mart in the future. As of June 30, 2008, the Company operated 20 corporate stores in Manitoba which generated approximately 4% of out total net consumer lending revenue in Canada for the fourth quarter.

In Alberta, the province believes its existing legislation already complies with the requirements of the Federal Law. In Ontario, the provincial government recently passed its respective payday loan legislation in June, while British Columbia and New Brunswick passed their legislation this past October and April respectively. These provinces, along with Saskatchewan, are now engaged in the rate and regulations phase of the regulatory process.

In general, we are pleased with the continuing process of establishing provincial regulation in Canada. We believe that it will bring clarity to the marketplace, and that it will present longer term growth opportunities for our Canadian business. We are extremely supportive of the CPLA, which is very involved in every provincial rate setting and legislative action, as we believe that any approved regulation must openly balance consumer protection while enabling a viable and competitive industry. Such a solution would ensure that our industry's products will continue to be available to the many consumers that use them to better manage and balance their day-to-day finances.

Now with respect to regulatory activities in the US, the recent State Legislative processes appear to be winding down for this year. We do not expect any significant impact on our operations from any of the regulatory changes that were enacted in the various 2008 US State Legislative sessions. As in Canada, we support the US industry association, the CFSA, in its role as the voice of the industry and are very active as a Company within this organization.

As we look to the immediate future the current payday loan law in Arizona is scheduled expire on July 1, 2010. Industry representatives have made significant progress on an industry-sponsored ballot initiative known as the Payday Loan Reform Act and have garnered more than the required number of signatures that are necessary to place this initiative on the ballot for the November 2008 general election. A grass roots educational campaign that is targeted to likely voters began in April and will continue through the November election.

In the UK, the regulatory environment is very stable. Our short-term consumer loan products are governed there by the Consumer Credit Act of 1974, which governs all consumer lending transactions that are under 25,000 pounds.

I would now like to make a few comments with regard to the consolidated financial results. We achieved record revenue this past quarter of $150.3 million with our total global revenue growing by 23%, over the prior year's quarter.

Our consolidated check cashing business grew by a very solid 14.5%, while consumer lending revenue grew by 25.1% which was again bolstered by strong growth in our UK pawn lending business.

Demand for our consumer lending products in Canada has moderated somewhat from the very high historical levels, although we still achieved a very respectable year-over-year growth rate of 9.6% for the fourth quarter. We believe this decline is largely attributable to some confusion in the marketplace brought about by the pending and evolving regulatory changes as well as our decision to significantly reduce the magnitude and tone of our Canadian advertising and marketing programs as the regulatory processes ensue. We believe these trends will improve with the advent of regulatory change and the expected ensuing clarity in the marketplace.

In the US, many of our customers used their government tax stimulus checks in the fourth quarter to repay outstanding loans. This had the effect of both reducing our loan portfolio, and our gross lending fees, while at the same time improving our collections performance for the quarter.

Additionally, taking into consideration the uncertain economic environment, we took action over the last several months to reduce our risk exposure to certain customer segments by lowering the maximum amount we are willing to loan. As a result, our consolidated loan loss provision, expressed as a percentage of consumer lending revenue, declined to 17.6% for the quarter. This is compared to 19.1% for the third quarter of fiscal 2008 and 21.3% for the fiscal 2007 fourth quarter.

Additionally, in light of the weakening economy, we have stepped up our collections activities by placing additional emphasis on pre calling customers prior to the due date of their loan in order to establish a convenient time for them to come into the store and make their repayment.

Store and regional margin increased by 23.0% to a record $52 million for the quarter on revenue growth of 23%. On a percentage of revenue basis, our corporate costs increased 4.3% as compared to the prior year's quarter of 11.6%. This reflects the previously announced increased investment in global management capabilities and infrastructure to support our enhanced store and product expansion plan, as well as our continuing acquisition strategy.

For example, in this past fiscal year we added three new global positions to help pay the way for our future global growth. First, a managing director of global strategy and development, as well as a chief information officer, as well as the addition of a chief credit officer. All of these positions were filled with individuals that are deeply skilled and tenured in their respective specialty. They and the departments they are presently building are key elements of strategy to further our global expansion.

Furthermore, additional management time and cost were also incurred relating to our continuing investment in the ongoing consulting and lobbying activities related to the evolving regulatory environments in the U.S. and Canada.

Net income was near $12.3 million for the quarter, and this compares to $10.3 million for the previous year, and fully diluted earnings per share were $0.55 compared to $0.43 per share for the prior year's quarter. As previously discussed, the Company incurred $#2.1 million of severance and store closing costs in the fourth quarter of fiscal 2008 as part of its plan to close 70 underperforming stores across the U.S. and Canada over the next several months.

The geography of these store closings was quite varied with no market having more than a handful of stores close. On a pro forma basis, excluding one-time costs, net income and fully diluted earnings per share were $13.4 million, or $0.59 per share for the quarter, which represents a pro forma increase of 49.9% and 31.9% respectively over the prior year's quarter.

For the fiscal year, consolidated revenue was a record $573.2 million representing an increase of 25.6%, or $116.5 million when compared to fiscal 2007. On a year-over-year basis, fees from consumer lending increased 28.6% while check cashing fees increased by 17.9%. As a result of our ongoing effort to enhance the operating efficiency of our store network and infrastructure, store and regional margin as a percentage of revenue for the fiscal year improved to 34.8% as compared to 34.1% for fiscal 2007.

Due to the substantial one-time charges incurred in fiscal 2008 as well as in 2007, we are presenting pro forma earnings amounts in order to facilitate comparability between the two years. Accordingly, pro forma income before income taxes, which excludes $61.4 million of one-time charges in fiscal 2007, and $3.4 million of one-time charges in fiscal 2008, increased by $23.7 million, or 45.4% to a total of $90.6 million. This 35.4% increase in pro forma pre-tax income was achieved off of a 25.6% increase in revenue for the 2008 fiscal year.

Pro forma net income, considering the fiscal 2008 actual effective income tax rate of 41.3% applied to both years, was $53.2 million for the year ended June 30, 2008 as compared to $39.3 million for the prior fiscal year, likewise an increase of 35.4%. Accordingly, pro forma fully diluted earnings per share were $2.70 for fiscal 2008 as compared to $1.62 for the previous fiscal year.

With regard to the Company's financial position, the Company ended the quarter with cash available for investment and for future acquisitions of approximately $70 million. Additionally, we had substantial free cash flow that the Company generates from its operations and we also have approximately $100 million in revolving credit lines that were un-drawn as well as little near-term debt repayment obligations in the future. We believe the Company has ample liquidity to not only fund its present and anticipated future operations and development, but to support the expected continuing growth and the future expansion of the multi-product, multinational business platform.

Regarding our thoughts on the expansion of our store base in fiscal 2009, currently we are anticipating opening between 45 and 40 de novo stores. From a geographic distribution, we expect to open between 10 to 15 stores in Canada, between 15 and 20 stores in the U.K, and up to five de novo stores in the U.S. market in fiscal 2009. We will continue to look for accretive acquisitions in all of our current geographic markets, as well as potential new global markets which may augment our present de novo store build plan. Recently, the values of the Canadian dollar and British pound have depreciated significantly relative to the U.S. dollar when compared to the average currency exchange rates for fiscal 2008.

In the fourth quarter, nearly 75% of the Company's total consolidated revenue was generated outside of the U.S., in Canada, the United Kingdom, and the Republic of Ireland. As a result, even though the operating performance of our foreign business units is expected to continue to be very strong in fiscal 2009 in constant dollars, if the currency rates were to remain where they have been recently we would anticipate an unfavorable impact on our fiscal 2009 consolidated reported results after translating the financial performance of our foreign subsidiaries into U.S. dollars.

Likewise, the currency values of Canada and the U.K. may strengthen during the balance of fiscal 2009, which would obviously have a favorable impact on the Company's reported results. The Company does purchase currency hedging contracts, however, these forward contracts are typically purchased at exercised rates that are out of the money, and are primarily meant to ensure against a severe decline in the value of either the Canadian or the U.K. currency.

In addition, as previously mentioned, we expect to incur another 4to $5 million of severance and other restructuring and store closure charges in fiscal 2009 in association with the North American store rationalization plan which translates to a charge of between $0.09 and $0.12 per fully diluted share in fiscal 2009.

As a result, considering the recent volatility in the value of U.S. dollar in relation to the Canadian and U.K. currency, the uncertain direction of the U.S. and global economies, as well as the potential costs associated with the North American store rationalization plan, we anticipate for fiscal 2009 that revenue will be between 595 and $625 million, adjusted EBITDA between 153 and $163 million, and fully diluted earnings per share of $2.10 to $2.35. As we believe it is not prudent to speculate on the pace and form of provincial regulatory change in Canada, we are not currently projecting any changes in performance at this time from potential changes in regulations for fiscal 2009.

Finally, additional information on the operating results for the fiscal fourth quarter and fiscal 2008 can be found in the news release issued by the Company earlier today which can be found on the Company's web site at www.dfg.com.

Now operator, we would like to invite our listeners to ask questions they may have.

Questions-and-Answers Session

Operator

(Operator Instructions). We will pause for a moment to compile the Q&A roster. Your first question is coming from John Hecht of JMP Securities. Please go ahead.

John Hecht

Afternoon, and thank you for taking my questions. Just a couple related to the model. Just to make sure, I think I know the answer to this, but your forecast includes the 9 to $0.12 earnings charge for the store rationalization next quarter?

Randy Underwood

Yes. That charge is included in the EPS range that we have given. If you were to exclude that charge, the range would be 9 to $0.12 higher.

John Hecht

Okay. What tax rate, Randy, is in that guidance?

Randy Underwood

As you know, John, it's always a little bit challenging for us to understand exactly where the income is going to be earned. And the charges to rationalize the U.S. business, we believe will likely flow the U.S. into a slight operating loss position. As I know you are aware, we don't to date, get to recognize the tax benefit from the small losses we would incur in the U.S. When we factor those things in, as well as expected variability of where the earnings will come from geographically, we are using a range of between 40 and 45% as an effective tax rate. I understand that's a little broad, but it's early in the year. I would hope we could narrow that down a little bit for everybody later on.

John Hecht

Okay. And then in trying to calculate your free cash flow for next year, what kind of cap, required CapEx or maintenance CapEx do you guys envision?

Randy Underwood

Required meaning, for example, to keep the stores maintained?

John Hecht

Yes, the maintenance type Cap Ex.

Randy Underwood

And not build any stores?

John Hecht

Correct. No building or no acquisitions.

Randy Underwood

I would say probably about $10 million, John. And from there it's store builds, acquisitions, et cetera.

John Hecht

Okay, and I know you don't give this, you may not be able to answer this, but is sort of the 60 to $70 million of free cash flow range consistent with the way you're projecting the business?

Randy Underwood

Yes. I would say that's a good number.

John Hecht

Okay. Final question is if you can comment on, you mentioned there were some efficiencies and some overlapping nature of the stores, can you give a little bit more color on, particularly in Canada, because we know there is certain -- observing some slowdown in certain products in the U.S., but in Canada, maybe a little bit more description of what you were seeing in the stores that were underperforming and why you chose to shut some of them down?

Jeffrey Weiss

Let me comment in general. In general, retail is, we know through the store base every year and try to eliminate the underperforming stores or marginal stores or overlapped stores as leases come up for renewal. In Canada, as in other areas of our store base, we had stores whose leases were coming up for renewal which overlapped with acquired stores when we bought in some franchisees. We had a couple of stores that we opened, I think, prematurely in anticipation of regulation moving quickly essentially kind of territory protection stores which we don't think right at this moment are necessary. And simply a couple of stores that over time our customers moved away from. I think it's kind of all of the above and very similar to the U.S. with the exception of the regulatory issue.

John Hecht

Okay. Final question, a bolt-on to that one, what are you seeing in terms of vintage analysis for the general newer stores up in Canada in relation to maybe the stores that were a couple of years, opened a couple of years ago?

Randy Underwood

John, as you know, stores ramp up, over several years, and we are pleased with the performance of our stores we've opened in the last couple of years. To emphasize Jeff's point, some of these closures were known to us at the time we did some acquisitions in the past year. They were on top of other stores. We took a few months to transition customers across and get them used to Money Mart as opposed to where they had been.

John Hecht

Outside of a few exceptions you're generally seeing favorable patterns in your store ramp-ups and in Canada?

Randy Underwood

Canada is still a very good market for us, yes.

John Hecht

Okay. Great, thank you guys very much.

Operator

Your next question is coming from Bob Napoli of Piper Jaffray. Please go ahead.

Robert Napoli

Good afternoon.

Jeffrey Weiss

Hi Bob.

Randy Underwood

Hey Bob.

Robert Napoli

Couple of questions. Do you have the revenue from the stores that you're closing? And were they losing money? How much were they losing or can you give me some of those metrics?

Randy Underwood

Bob, I didn't come prepared with those numbers for this call. Maybe we can think up a little bit in the future. The revenues were not substantial. That's probably an indication of why we're probably closing them. And, likewise, there were not any huge losing stores or we would have closed them before. So again, I think as Jeff alluded to and we said on the call, a number of leases come due as they do for anybody. We typically have three-year leases. Five is kind of the maximum we tend to go. Every year we have roughly about a third of our stores coming up for renewal.

Robert Napoli

Do you view these stores as modestly below average revenue per store or materially?

Randy Underwood

I think they were off quite a little bit from what our average is. In many cases, as I think Jeff alluded to, the centers that they were in had kind of lost their glamour over the last 15 or 20 years we may have been there. Anchors had moved out. And obviously their performance had declined along with that as one would expect. So the decision for us is why renew in a center that's on its way to go dark, perhaps, or in an area where the gentrified around the store. So…

Robert Napoli

Yeah. I'm just trying to get a feel for what effect it had on your revenue guidance on the revenues from those stores.

Jeffrey Weiss

Modest.

Robert Napoli

Okay.

Jeffrey Weiss

Yes.

Robert Napoli

The assumptions for currency in your guidance, is the midpoint of the range. When you think about where currency is today or the high end of the range, how would we think about that just broadly? I know there is no perfect way but if you can give some feel?

Randy Underwood

Well, obviously we chose a fairly broad range for revenue, so that should indicate that we had a fairly broad range in currency in mind. And I guess I just would give you a couple of benchmarks that we had in mind as we put this together. One, if you look at the average currency exchange rate for last fiscal year, fiscal 2008, the British pound averaged about $2 to one U.S. dollar. And the Canadian looney was about $0.995 to one U.S. dollar. That was the average for performance last year. This year since June 30, the rates really were near that same level that they averaged for the past fiscal year. Since then in the last nearly two months, I didn't check today, but I think the pound was probably about $1.83 and the looney was probably about $0.95 or $0.945.

Robert Napoli

Pretty close, 95.5.

Randy Underwood

Okay. Well, maybe it went up a little bit today. In any event, I think we are considering that the pound may go down further. There is a lot of speculation out there of what the ECB might do and what [Trouche] will do and what the Bank of England may do. You get into what the price of oil will do, and many many factors. And the looney seems to trade quite a little bit up and down based upon the fortunes of commodities and oil prices.

Jeffrey Weiss

And the weather.

Randy Underwood

And weather. That’s exactly right. So we try to take all those in consideration and we really don't have a midpoint in mind, Bob, we just kind of gave a broad range based upon whether the dollar strengthens or the dollar continues to weaken.

Robert Napoli

But broadly the dollar -- the low end of the range the dollar continues to strengthen from here, the high end of the range the dollar weakens from here?

Randy Underwood

Yes.

Jeffrey Weiss

That's right, and, Bob, as we said in the call, in previous years I think we felt pretty comfortable about visibility about macroeconomic trends. Not anything per se affecting our business specifically. But I think what we have all seen is the incredible volatility in the economy. The revision of GNP growth to 3.3%. The report today of good jobs report which could be revised dramatically tomorrow makes it extremely difficult to anticipate not only broad business trends, but the currencies as well. As Randy mentioned, they seem to move with tremendously more swing in volatility than they have in the past decade.

Robert Napoli

Okay. Of the 70 stores you are closing, are they all company owned?

Jeffrey Weiss

Yes.

Robert Napoli

Okay. And just a couple of more real quick ones. The U.K. check cashing was slower growth than check cashing, the lending. Was there any reason for that?

Jeffrey Weiss

I think it indicates a modest slowing in the U.K. economy.

Robert Napoli

Okay. Now the pawn shop business looks to be doing extremely well in the U.K. I think we talked about this before. But is that model something that could be replicated in the U.S.?

Jeffrey Weiss

I think there are aspects that quite possibly could be replicated. Obviously, in the U.S. we are not going to go into competition with full line pawn shops and taking a variety of merchandise. But we are exploring some adaptions that might make it interesting in North America.

Robert Napoli

But you are nowhere near yet actually going to make that happen?

Jeffrey Weiss

I think we have -- we said that -- at only at late stage testing will we announce anything, primarily for competitive reasons.

Robert Napoli

Okay. Thank you.

Randy Underwood

You are welcome.

Jeffrey Weiss

Thank you.

Operator

Thank you. Your next question is coming from John Rowan of Sidoti & Company. Please go ahead.

John Rowan

Good afternoon.

Jeffrey Weiss

Hi John.

John Rowan

Few questions, Randy, just quickly what line item was the severance cost in on the income statement?

Randy Underwood

Other expense.

John Rowan

Other expense. And on the allowance, should we expect it to be at this lower level relative to the portfolio going forward?

Randy Underwood

I think it's probably prudent to expect it might be a little higher. I think as I stated we think we got a little bit of tick from the tax stimulus check. I think I would plan on more like a 19%, maybe as high as 20%, for the year just depending on where the economy goes.

John Rowan

Okay.

Randy Underwood

I think 17.6 is a tad low but we will see. I'm not ruling that out either.

John Rowan

Well, I meant your actual allowance on your balance sheet was a lot lower relative to last year in the portfolio. Is that also based on the refund checks?

Randy Underwood

Certainly, we had some benefit from the refund checks. Also we tend to run lower losses in the U.K. than we do in the U.S. for example. And we had very strong growth in the U.K. Have had for a couple of years. The U.K. is just performing very very nicely for us. And so, therefore, the growth in the U.K. as a percentage of the total in terms of the consumer lending revenue with the lower losses that thus far we have been able to achieve over there helped to bring that down to your question.

John Rowan

Okay. In regards to free cash flow, you mentioned potentially 60 to 70 million in free cash for the year. You also have 70 million of cash available that’s on your balance sheet and plenty of liquidity from your revolver. If the growth continues to stay pretty low in terms of your store expansion, can you turn around and increase your share repurchase program, do you have debt covenants that restrict that and would you look to pay down debt if you are generating enough cash flow and look to put it somewhere?

Jeffrey Weiss

Let me begin by saying that we think that the turbulent economic times have also given rise to opportunity. We have a very full acquisition pipeline in all geographies, and some are interesting, and we think there has been a rationalization of the prices that sellers expect. We think that there may well be opportunities in that regard as well. In terms of share repurchase, we are restricted by our bank line.

John Rowan

Okay. And as far as your term debt, can you pay back any of that or there are prepayment penalties on that?

Randy Underwood

We can pay that back John. Our only required principal payments actually are $900,000 a quarter. So very very nominal in terms of what we are required to pay back on that term debt. We could repay it back. I think our expectations would be that we will find better uses to put that money you referred to the work as opposed to paying down debt. It's got a pretty attractive interest rate. It's about a 7% blended rate.

John Rowan

Okay. And then last question, regarding the new accounting rules for the convertible debt. Have you evaluated what the impact is going to be? And I would expect -- I mean is that something that’s only going to affect fiscal 2010? Obviously, you'll have to restate, but when are you going to start showing those new accounting rules?

Randy Underwood

Yeah. We are really at the tail end of the cycle. Most of the companies that are calendar year end are going to have to do that here in the next year. And I think we will have the benefit quite honestly of kind of seeing how they do it and how the market reacts. And I think by the time it gets to us, everybody is probably going to be pro forma in that cost because it is fictitious, obviously, there is no cash involved, and by the end of the term it's all washed out and gone away. So I have a feeling probably everybody will pro forma that back in just like they pro forma stock option expense, for example, back in. And a lot of hope -- brouha -- over something that has no cash impact whatsoever.

Jeffrey Weiss

Like, since we are incredibly independent thinkers, we are going to see what everyone else does.

John Rowan

Okay. Thanks a lot.

Jeffrey Weiss

You are welcome. Thanks John.

Operator

Thank you. Your next question is coming from Rich Shane of Jefferies. Please go ahead.

Jeffrey Weiss

How are you?

Richard Shane

Hi guys. Three questions. In response to John Hecht's question you talked about a pro forma tax rate of 40 to 45%, the earnings guidance you give has a $0.25 range. Running back the envelope numbers that range of tax assumptions basically explains about $0.20 of the $0.25 variance from the top end to the bottom end. I assume that there are a lot of other business variables that there is a lot more sensitivity to. What are the other really key assumptions there that drive the difference between your sort of bull case and your bear case?

Jeffrey Weiss

I think, Randy, chime in, I think the first big assumption is with the currencies.

Randy Underwood

Absolutely. I mean I think, as we indicated, the macroeconomic considerations that we are trying to do our best to balance is what are the economies going to do in the U.S. and Canada and the U.K.? They've been slowing down a tad. What is the volatility of currency going to be from top to bottom? And is it going to be volatile all year or will it kind of settle into a range?

Jeffrey Weiss

And again coming back to it. Our view is that the ability to give out money is not what distinguishes a well run business, the ability is to get it back. And that is a continuing judgment on our part on underwriting standards, and we are not going to chase revenue growth at the expense of our losses. And if the economy softens and if it softens precipitously, fortunately, we have the ability to adjust our underwriting standards virtually mid-morning, to end of day, and we are looking at that very very closely. We have seen a very modest effect on our customer base thus far. But the volatile swings in pricing, in employment, in currency make us very very uncomfortable pinpointing anything at this point beyond the broad range we have given.

Richard Shane

Okay. That's very helpful. Second question, you had mentioned that you closed 24 stores during the fourth quarter. How many of those stores were in Ohio? And what -- are you -- is the assumption that -- and you have limited exposure to Ohio, but will you close all of your Ohio stores?

Randy Underwood

Rick, this is from memory, but I think only one or maybe two of those stores were in Ohio. I'm getting the sign that only one was. So I was right to start with. So again, as I said in my comments, they were all across the United States. No market. These were more location of the store, and how the store was performing within the competitive marketplace in the particular location that it was at.

Jeffrey Weiss

And again, fortunately, our multi-product offering enables us to weather various regulatory challenges.

Richard Shane

Okay. And I guess what I'm trying to drive at is of the, my recollection is you have 16 stores in Ohio plus or minus. In that case, of the 48 stores that are contemplated to be closed in the next quarter, are you assuming that Ohio was shut down…

Randy Underwood

No.

Richard Shane

You are not. So you are assuming that you will continue to provide alternative products there?

Randy Underwood

Correct.

Richard Shane

Okay, great. That's helpful.

Randy Underwood

We just want to reiterate as we've said many many times before. One of the benefits of having our multi-product platform is that consumer lending is just not a major driver for our U.S. business. It's a nice contributor, but the check cashing business, the Western Union business, the currency exchange, the wires, on and on and on is the beauty of the concept that we operate around the world. Let alone in the United States.

Jeffrey Weiss

And we continue to believe that the consumer demand for lending products, particularly in the U.S. which may be hampered by regulatory activity, although it would be very interesting to see the results of the Ohio and Arizona referenda, that that demand enterprising companies such as Dollar, would have now started to build a very, very strong management capability in devising and analyzing lending products will find a way to fill that consumer demand.

Richard Shane

Okay. And actually, that's a good segue into the third part of my question which is this, Jeff, you made the comment that you have a very full acquisition pipeline at this point. And you had indicated it is in all geographies, you'd given the guidance in terms of store growth in Canada, store growth in UK, which are modest, but I think somewhat uncertain given the Canadian regulatory time frame more than the Canadian regulatory environment, but very conservative US growth. Are you contemplating acquisitions in the US and when you're looking at acquisitions in the US given the diversity of the product set, are you putting any value given the regulatory uncertainty in the US on payday lending prospects or are you buying them exclusively for the ability to drive alternative products through that channel?

Jeffrey Weiss

I think in the US, if you look at our area of focus they are in geographies that we have been very successful in with a federal regulatory climate because of call it endemic circumstances. California for example has the lowest lending rate, the lowest amount allowable in the country. We think that's a pretty settled environment. Florida has the lowest rate for example. So we think there are US geographies where opportunistic, minor acquisitions are extremely attractive. We've never articulated a guidance position on the assumption of any significant acquisition being part of those numbers because, first, they are too opportunistic. Secondly, too many things can go awry in due diligence or negotiation process. So when we say -- what we have seen though, is a much larger offering of acquisition possibilities across all geographies.

Richard Shane

And again, I think that's what I'm driving at, which is that you know, with at least the Durbin bill out there, again, we're a very, very long way from that gaining any momentum at this point, but with concepts like that out there, when you, when your M&A guys come back to you and say, hey Jeff, we were looking at this, and it's a state where we are comfortable, et cetera, is your response well let's weigh in the fact that this product could change at a federal level and let's make sure these economics work without this product?

Jeffrey Weiss

I think that our appetite for US payday lending for those reasons is very modest. And I'm not sure we have ever acquired a US payday lending store. We are only interested in multi-line stores.

Richard Shane

Okay, thank you. That’s very helpful.

Jeffrey Weiss

Okay.

Operator

Thank you. Your next question is coming from Jason Arnold of RBC Capital Markets. Please go ahead.

Jason Arnold

Hi. Good afternoon, guys.

Randy Underwood

Hey Jason.

Jason Arnold

I was wondering if you could offer a little bit of color on general credit trends and perhaps some geographic perspective as well. It looks like the write-offs on check cashing and the net charge-offs were up on the consumer lending side, too, which I guess that seems like it's coming from fewer recoveries, but just if you could offer a little color there, please?

Randy Underwood

Well, I think basically our performance improved in all of the geographies that we operate in. And I think that's back to what we indicated. We work very hard to not chase revenue. As I think were the words that Jeff used. And to focus harder on vetting who we should make loans to or throttle back a little bit the size of the loan we might make to somebody vis-à-vis times when we were not as concerned about what the developing credit environment was. So I think generally speaking, trends in -- our performance improved in the business as well, the environment got a little bit tougher to collect in.

Jeffrey Weiss

And I think, kind of add some nuance to that, we thought we were being cautiously proactive in firming underwriting standards in amount lent and in increasing collection activities through pre calling and so on and that was productive. Anecdotally we said in previous calls, our collectors are reporting across all geographies that it's more effortful to get people to repay than it has been in the recent past.

Jason Arnold

Okay. That's helpful. I was wondering if you could also offer, if you have it handy, the percentage impact of the currency changes on lending revenues for the U.K. and Canadian businesses?

Randy Underwood

I'm not sure I understand the question? Did you…

Jason Arnold

I was looking for, given there was some adjustment during the quarter, if you had on a same currency basis, the impact?

Randy Underwood

Currency was fairly flat in the quarter.

Jason Arnold

Okay. There wasn't a lot of impact there. I think maybe a little bit of a change. I thought perhaps there was something there.

Randy Underwood

I just don't remember the actual average rates for the fourth quarter versus the third quarter in the pound and looney. I don't think there was a material change in the average there.

Jason Arnold

Okay, okay.

Jeffrey Weiss

Deceleration in the value of the U.S. dollar has ramped up pretty aggressively since the beginning of July.

Jason Arnold

Yes. Okay. Got it. Then, I was wondering if you could offer some perspective on the out of money currency hedges that you have? What's the strike price on those on average? Do you have that handy?

Randy Underwood

I believe on the looney, we're at about $0.98 and on the pound we are at $1.95, if I remember right. And we are hedged out for six months. Through the end of the calendar year is what I mean.

Jason Arnold

Okay. What's the notional value on those contracts?

Randy Underwood

I don't remember, Jason.

Jason Arnold

Okay. Thank you very much.

Randy Underwood

Thank you.

Operator

Thank you. Your next question is coming from Henry Coffey of Sterne, Agee. Please go ahead.

Henry Coffey

Yes, hello. Can you hear me?

Jeffrey Weiss

Yes Henry.

Henry Coffey

Great. First question, just looking at your balance sheet, when you look at your available cash balances, what would you describe to float and how much of it is sort of unincumbered accessible cash?

Randy Underwood

I think as we alluded to earlier, there's probably about $70 million in that amount that is available for investment in opportunities that basically one would think left over from the $300 million convertible that we did about a year ago.

Jeffrey Weiss

That excludes inventory cash, Henry.

Randy Underwood

Yes.

Henry Coffey

And so the rest of the cash balance is inventory cash?

Jeffrey Weiss

Yes. That’s correct.

Randy Underwood

Hopefully, $140 million to $150 million there.

Henry Coffey

Of cash that's being used in the stores?

Randy Underwood

Yes. Within the system. Not all sitting in the stores. But it's float in the system.

Henry Coffey

Okay. And just to make sure I had it right, the EBITDA figure you included, you offered, includes or excludes the store closing costs? I think I get it but I wanted to double check.

Randy Underwood

The EBITDA for what period, Henry?

Henry Coffey

For 2009. The guidance.

Randy Underwood

The guidance for 2009 would have really just hardly any of that included in it.

Henry Coffey

The EBITDA number you've got store closing costs of $5 million to $4 million. Should we be adding that $5 million to $4 million back to the EBITDA number you're putting out there?

Randy Underwood

No. No. It's considered within that range.

Henry Coffey

So the 153 to 163 is a true operating number?

Randy Underwood

Basically, yes. There is some, it's hard to estimate exactly

Henry Coffey

There's a lot of moving parts, I get it.

Randy Underwood

Is your, I'm not going to overcomplicate this. As you're familiar, we have to go through and determine whether we can sublease the properties or buy them out. It's a little difficult this early in the process to hone in on what is actually going to happen there.

Henry Coffey

So on an operating basis, we can, if we're looking to establish operating numbers we can add back the $0.09 to $0.12 to the EPS figure? But we shouldn't be adding back the $5 million to $4 million to the EBITDA figure?

Randy Underwood

Yes that’s correct.

Henry Coffey

Thank you very much. I think I have the rest of it. If you have it available, constant currency stuff, you broke it down for U.K., Canada, combined. Do you have it for the two companies separate?

Randy Underwood

For the two companies separately?

Henry Coffey

Yes.

Randy Underwood

I'm going to do this by memory, but I think in Canada it was about 4%. Maybe as much as 5% for the last fiscal year. And U.K., as I remember, was somewhere between 16% and 18%, I think.

Henry Coffey

Thank you very much.

Jeffrey Weiss

All right.

Henry Coffey

Excuse me, the sales data you gave earlier was for the quarter or the year when you were putting out the same store sales info?

Randy Underwood

That I just gave you?

Henry Coffey

No. The stuff you just gave me was for the year.

Randy Underwood

Right.

Henry Coffey

The information you gave earlier in the call was that for the year or the quarter?

Randy Underwood

There was a number in there for the quarter for the international businesses. I believe it was about 5%.

Henry Coffey

Thank you very much.

Operator

Thank you. Our last question comes from Liz Pierce of Roth Capital Partners. Please go ahead.

Liz Pierce

Thank you. Most of my questions have been answered. I do have a philosophical question. At what point with Canada do you have to start out, stepping up the advertising? Just in terms of protecting market share, or I realize the sales gains have been pretty impressive. So you certainly aren't there now.

Jeffrey Weiss

I wish we could put our arms around that, Liz. We have continued to be baffled by the pace and process on a provincial basis. So I think we are just kind of waiting to see how the events unfold. I think probably once some province actually has a working program that will give us some clarity. Thus far, even though there has been legislation, no province has actually articulated a working program.

Liz Pierce

Okay. So at this point we should continue to expect you're going to hold the line until you get some kind of visibility or clarification?

Jeffrey Weiss

Yes.

Liz Pierce

Okay. Then, Randy, quickly on the 9 to 12 falls in Q1, correct? The hit?

Randy Underwood

I think most of it will, yes.

Liz Pierce

Okay. And that is in other, in store expenses?

Randy Underwood

Well, the severance costs will probably be in store labor. The closing costs will hit in occupancy costs. We will see how we do it for you in the first quarter. We will lay it out for you. But we will probably reclass all that to other expense as we did in the fourth quarter here.

Liz Pierce

Okay, so really, because it looked like maybe that was some of it was in the fourth quarter was in sales and occupancy. I'm trying to figure out when you said earlier in the line item it was other, so you moved it down?

Randy Underwood

There may have been a little in there, Liz. I'd have to go back and check.

Liz Pierce

Okay, okay. We can talk about it offline. Thank you very much and good luck.

Randy Underwood

Thank you.

Operator

Thank you, there appears to be no further questions at this time. I would now like to turn the call back to Jeff Weiss for any closing comments.

Jeffrey Weiss

Thank you, operator. I just want to reiterate our appreciation and gratitude for the dedication of our more than 5,000 associates globally and the wonderful and thoughtful customer service they give to our customers. Thank you all for taking the time to dial in on this conference call. We will be back in touch with our next call. Thank you.

Operator

Thank you. This concludes today's conference call. You may now disconnect, and have a great day.

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Source: Dollar Financial Corp. Q4 2008 Earnings Call Transcript
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