Advance America, Cash Advance Centers, Inc. Q2 2009 Earnings Call Transcript

| About: Advance America, (AEA)
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Advance America, Cash Advance Centers, Inc. Q2 2009 Earnings Call July 30, 2009 8:00 AM ET


Jamie Fulmer – Director of Investor Relations

Ken Compton - Chief Executive Officer

Patrick O’Shaughnessy - Chief Financial Officer


David Burtzlaff – Stephens Inc.

John Hecht – JMP Securities

Rick Shane – Jefferies


(Operator Instructions) Welcome to the Advance America, Cash Advance Centers Second Quarter Earnings Results Conference Call. At this time for opening remarks and introductions I’d like to turn the call over to Jamie Fulmer.

Jamie Fulmer

I’d like to remind everyone that during this call our comments will include certain forward looking statements. All comments on this call other than those relating to our historical information or our current conditions will be forward looking statements.

For example, any statements regarding our future expenditures and financial performance, our plans for product expansion, our business strategy or expected developments in the cash advance centers industry will be forward looking statements. In this regard, please keep in mind that our actual future results could differ materially from our expectations as of today and are subject to the risks, uncertainties and other factors, which may not be within our control or may not be predicted.

For a more detailed discussion of some of these factors, please refer to the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2008, copy of which is available from the SEC, upon request from us, or by going to our website at

Now I would like to turn the call over to our Chief Executive Officer, Ken Compton.

Ken Compton

I’m joined on today’s call by our company’s Chief Financial Officer, Patrick O’Shaughnessy. Yesterday the company reported the results of the six months and quarter which ended June 30, 2009. Before we discuss our results of the quarter in detail, I’d like to update you on a few developments since our last call.

Yesterday our Board of Directors approved Advance America’s 19th consecutive dividend as a public company. This dividend of $0.0625 per share is payable on September 4, 2009, to stockholders of record as of August 25, 2009. For June 30, 2009, a payment of our quarterly dividends together with our stock repurchase program has returned approximately $363.6 million in cash to our stockholders since we became a public company.

Legislative session has begun to wind down in states across the country. As of today, Legislators in 28 of the 37 states we’re monitoring have adjourned for the year. During the course of the current legislative year we’ve monitored a total of 173 bills across the country. Generally speaking, the legislative session has been a constructive one. We’ve sought to educate lawmakers about the value of cash advances and have been largely successful in sharing our company’s perspectives as well as those of our customers who continue to report a high level of satisfaction with our products and services.

Legislators in Idaho, Kentucky, and Montana all passed new laws with moderate changes that we approved. More significantly, in South Carolina, where we’re headquartered and have approximately 140 centers, the General Assembly approved compromised legislation that seeks to balance protections with reliable access to our service. We think this bill creates sound regulations designed to help consumers manage their debt and adhere to their financial obligations. This new law will go into effect January 1, 2010.

While we are supportive of this reform effort its also important to point out that these new regulations will significantly impact the way lenders operate in our state and may have negative effects on South Carolina’s contribution to our company’s bottom line results. While most legislatures have already adjourned for the year, key states such as Wisconsin, Ohio, and California remain in session. We continue to closely monitor the activity in those states.

On our last call we discussed that in addition to legislative activity at state level this year, the United States Congress has been paying particularly close attention to the consumer credit market. There are a number of bills that have been discussed or already introduced that would affect a variety of financial services including cash advances. Approximately 15 bills in various stages of the legislative process would ultimately have an effect on the way the credit products, including cash advances, are offered to consumers and are otherwise regulated.

As you are aware, certain of these bills propose interest rate caps and other limits that would adversely affect our financial results. Also included in this list of bills is the well publicized proposal to create a central regulatory authority for consumer financial protection. As always, this remains a very fluid process but at this point there’s been little movement on any of these bills and the likelihood of them becoming law remains unclear.

I do think it’s important to point out that many of the current bills contain a number of consumer protections that would promote the simplistic flexibility and transparency of all credit products. We support such features and already provide similar protections, including our extensive disclosure requirements to our customers voluntarily or as part of state laws. We’ll continue to carefully monitor Federal legislation activity and look forward to working with lawmakers in Washington to develop meaningful protections related to consumer credit, while ensuring continued customer access to cash advances.

On our last call we discussed new products and services that we’re now offering to consumers in two states of importance to our company, Ohio and Virginia. In Ohio, at the suggestion of many lawmakers, and after consulting with state regulators, we adapted our operations to comply with the Ohio Small Loan Act. As a result, we’re now offering small loans in addition to our existing MoneyGram services, pre-paid Debit Cards and Visa Gift Cards. During the second quarter we began to see some modest improvements in the overall performance of our centers there.

Consumer acceptance of our products and services in Ohio remain strong and we continue to see significant growth in new customers. However, per transaction revenue from these new offerings is significantly less than the Pay Day model we offered in Ohio through November 2008. Therefore, the overall results from Ohio continue to have an adverse impact on our profitability.

To improve efficiency and reduce costs we’ve closed 63 underperforming centers in Ohio, which we hope will improve our bottom line results in Ohio. However, we continue to monitor our performance in Ohio carefully and may consider closing additional centers.

In Virginia we continue to offers consumer’s cash advances, in addition to secured lines of credit. While the acceptance of our product offering in Virginia by consumers continues to show strength we have seen a dramatic increase in losses which negatively affects the bottom line contribution from our operations in Virginia. We’re implementing several operational changes in Virginia to improve these products.

I would also like to focus briefly on the expansion of new product offerings to our customers. We continue to be pleased with the development of our online cash advance application process via which allows customer to choose between one, initiating the application process online and then visiting one of our centers in person to receive a cash advance, or two, completing the application process online and receiving a cash advance as a direct deposit in the customer’s bank account from a third party lender.

We believe the expansion of this delivery channel is a natural extension of our industry leading brick and mortar footprint as well as another way in which we continue to meet the short term credit needs of the under bite consumer. We are currently offering online cash advances through cash net in 28 states including four where Advance America does not have an existing brick and mortar platform. Through the end of the second quarter more than 32,000 loans have been originated on the online since the initiative began in the second half of ’08 with an average principal amount of $317.

Our pre-paid Visa, debit cards and MoneyGrams continue to show promising growth and we are pleased with the progress of both. During the second quarter we registered over 27,000 pre-paid cards and loaded over $34 million. During the second quarter we recorded over 287,000 MoneyGram transactions. All services offered through MoneyGram including sends, express payments received, and receives experienced growth over the first quarter of 2009.

As many of you are aware, our marketing expenses tend to fluctuate from quarter to quarter. For the second quarter of 2009 the total marketing expense was $8.9 million or 6% of revenues compared to $6.8 million or 4.2% of revenues during the second quarter of 2008. We believe that the timing of our marketing expense during the second quarter of 2009 will maximize the efficiency of each dollar we spend to support our initiatives to drive new customers to our existing loan platforms.

While it is still too early to measure the full effect, the initial results are promising. At the end of June loan volume and new customer in mature centers were both higher then the same period in the prior year for the first time in over a year. As for the full year, our expectations remain that the company’s marketing expense for the full year will be approximately 3% to 3.5% of revenue.

Now I’d like to turn the call over to Patrick for an overview of our financial results for the quarter and six months ended June 30th.

Patrick O’Shaughnessy

For the quarter ended June 30, 2009, total revenues decreased 7.4% to $150.1 million compared to $162.1 million for the same period in 2008. These comparisons include the results of operations in Arkansas and New Mexico, New Hampshire, and Ohio. Excluding the results of these states from both years’ revenues decreased by 2.7% for the quarter ended June 30, 2009 compared to the same period in 2008.

For the quarter ended June 30, 2009, total revenues for centers opened prior to April 1, 2008, and still open as of June 30, 2009, deceased 4.1% compared to the same period in 2008. The provision for doubtful accounts as a percent of total revenues for the quarter ended June 30, 2009, was 22% compared to 18.6% for the same period in 2008.

The provision for doubtful accounts continued to be affected by the larger loss reserve related to the secured line of credit product that we began offering the consumers in Virginia at the end of 2008. In response to the high loss rates on this Virginia line of credit we have made modifications to the product that we are offering. We are also currently working with our delinquent and default customers to better meet their individual needs.

During the second quarter the company sold approximately $2.2 million of previously written off receivables compared to $0.5 million during the same period in 2008. Excluding both the revenue and losses from the Virginia line of credit and the sale of debt from both periods the provision for doubtful accounts as a percent of total revenues for the quarter ended June 30, 2009, would have been 19.6% compared to 18.9% for the same period of 2008.

As Ken mentioned, advertising expense was $2.1 million higher during this quarter compared to the same period in 2008. Excluding the provision for doubtful accounts and advertising expense, center expenses decreased by $5.7 million or 6.3% compared to the same period in 2008 primarily due to center consolidation and cost saving initiatives.

The company closed 105 centers during the quarter. The company had approximately $1.7 million of center closing costs during the second quarter of 2009. We had previously taken an asset impairment charge for centers that we intended to close during the quarter so this $1.7 million of center closing costs primarily consists of lease terminations, fees and de-imaging costs and is therefore included in center expenses. During the second quarter of 2008 we had approximately $0.2 million in center closing costs.

General and administrative expenses for the quarter ended June 30, 2009, were $13.8 million compared to $16 million for the same period in 2008, a decrease of 13.8%. This decrease is largely due to a reduction in public and government relations expense and other cost controls.

During the second quarter of 2009 the company’s provision for income taxes was 23.5% of pre-tax income compared to 43.8% during the same period in 2008. The decrease in the current quarter’s effective tax rate is primarily due to the reduction in state taxes as the result of claims filed for recovery of taxes recognized in prior years.

Net income for the quarter ended June 30, 2009, decreased 28.4% to $6.6 million compared to $9.3 million for the same period in 2008. Diluted earnings per share were $0.11 for the quarter ended June 30, 2009, compared to diluted earnings per share of $0.14 for the same period in 2008.

During the six months ended June 30, 2009, the company generated cash flow from operations after funding of advances receivable of $45.1 million compared to $53.5 million during the same period in 2008. As of June 30, we had $158.2 million borrowed under our revolving credit facility.

With regard to some of the key operating metrics for the second quarter and year to date, the average amount of cash advance made during the first six months of 2009 excluding installment loans in Illinois and lines of credit in Virginia, decreased from $366 in 2008. The average fee on all cash advances made was approximately $53 during the first six months of 2009 compared to $56 during the first six months of 2008.

The principal amount of cash advances originated during the first six months of 2009 was approximately $1.8 billion excluding installment loans and lines of credit. The average duration of all cash advances completed was approximately 17.4 days for the first six months of 2009 compared to 16.7 days for the same period in 2008.

As of June 30, 2009, the company had an operating network of 2,635 centers and 78 limited licenses in 33 states, the United Kingdom and Canada. During the second quarter we closed 105 centers. For the year we have closed 165 centers in 26 different states including the centers in Ohio that Ken mentioned earlier. In addition, we closed one center in the United Kingdom.

Now I will turn the call back over to Ken.

Ken Compton

At this point we’ll conclude the presentation and turn it back to the operator for any questions you have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from David Burtzlaff – Stephens Inc.

David Burtzlaff – Stephens Inc.

Can you give a little more color on what you did differently in advertising this quarter?

Patrick O’Shaughnessy

Specifically if you compare it to the prior year we did a second very large direct mail drop of about $1.4 million the last week of June, trying to get additional customers in for the July 4th weekend. As you know, this is typically one of our largest spend quarters for advertising, it was just larger then last year this year.

David Burtzlaff – Stephens Inc.

The $1.7 million in costs where does that show up?

Patrick O’Shaughnessy

It is in a few different places. Part of it will be in severance but only about $100,000. Most of it will be in other center expenses for de-imaging and actually tearing down the centers. A bit would also be in the occupancy cost for lease termination.

David Burtzlaff – Stephens Inc.

How much of the loss rate increase is due to Virginia?

Patrick O’Shaughnessy

Most of it, I think I gave you the numbers.

David Burtzlaff – Stephens Inc.

What were those numbers again?

Patrick O’Shaughnessy

If I take out both the debt sale and the revenue and losses for Virginia the loss rate would have been 19.6% in the quarter compared to 18.9% for the same period last year. The other thing affecting the loss rate when you exclude the line of credit, as Ken mentioned we have a big tick up in new customers and overall loan balances right at the end of the quarter and that’s going to affect the provision as well.

David Burtzlaff – Stephens Inc.

Given the tax rate was much lower this quarter, what do you think the tax rate is going forward or what should we look for?

Patrick O’Shaughnessy

This was obviously a large benefit in this quarter, we may have some additional benefits but I would expect it to be in the 42% range for the year. I think for this quarter we calculated that the effective tax rate would have been 42.7% without those benefits.


Your next question comes from John Hecht – JMP Securities

John Hecht – JMP Securities

On credit, you mentioned you’re kind of learning through the product in Virginia and I guess enhancing underwriting. Do you expect the credit losses for that product to come down or is that just inherently a product that has more credit losses?

Patrick O’Shaughnessy

We expect they will come down over time and I think we’ll have a much better sense of that as the year progresses. Certainly we didn’t launch it with this anticipation.

John Hecht – JMP Securities

On a net income basis in Ohio can you tell us are you breaking even, a goal of breaking even or making money with the new economic, the new products there?

Patrick O’Shaughnessy

We do obviously have a goal of making money there. We did not make money during the quarter in Ohio.

John Hecht – JMP Securities

In South Carolina, trying just to assess the potential impacts of the legislation there. Can you maybe reference the state that went through similar changes and what happened there historically, maybe on a same store sales basis or an operating income basis?

Patrick O’Shaughnessy

I think there are a few states that we’d seen where were established, very few, when they added a state wide database. I think generally speaking we saw a decrease in held checks of 25% to 30% at the initial implementation of that database. Again, we’ve been able to grow through that over time.

John Hecht – JMP Securities

An initial impact then smoothing out back to normal over time?

Patrick O’Shaughnessy

Exactly. In most of the states where we’ve seen a database initiated we’ve also seen a decrease in competition over time.

John Hecht – JMP Securities

Could you give us an update of how things are going in both Canada and UK and maybe strategic objectives for growth in those areas?

Ken Compton

Let me first talk about counter, I’ll tell you where we are. I think I’ve reported before we’ve had some centers open, we just established a footprint, you know that we’re operating under the federal usury and are waiting for the different provinces to proclaim, which as we all know, seems to have been a very long process.

We have about 10 centers currently open; I think we’ve got about eight more in line that are ready to open, that would give us 18. We think there’s growth there but I just have to tell you it’s been a very long time since we’ve been predicting that the provinces would proclaim the rates and we’re still taking a cautious approach until they do so. Eighteen or so at the end of the year primarily in British Columbia, Manitoba and Alberta.

The UK is a little different situation. I think everyone knows the difficult market conditions there. We’ve got 21 centers in place and as Patrick said 78 licensees. We’ve added other products, they were primarily as you know, check cashers that we bought and then added payday lending to it. We’ve opened some de novos and we’ve got the de novo opening on hold right now as we wait on that economy come back.

We’re doing some gold in those centers and Western Union and card products and all the other stuff that people do. That’s a very difficult economy for us at this point and we’re going to hold our growth until we see some pick up in that economy.


Your next question comes from Rick Shane – Jefferies

Rick Shane – Jefferies

I want to ask a little bit about the expense structure and where things are going as you cut back stores in Ohio, etc. Obviously the advertising spiked this quarter and I think the assumption is that will pull back. Where do you see the trends in terms of salary and in terms of occupancy, in terms of lease rates?

Ken Compton

I think that we are for the first time seeing reductions on rental rates in centers that we’re renewing. That does take some time to filter through because we renew about a third of the centers a year. If we look at the stores that we’ve renewed in this quarter we probably had about a 3% savings on rent but that won’t be meaningful for some period.

In terms of salaries and related payroll costs certainly I don’t see salaries and payment per individual basis coming down. What we’re trying to do is maximize our utilization in terms of the numbers of loans we have out per employee in the field. We continue to just monitor how many employees and the individual store needs based on its loan volume.


Having no further questions in queue, I’d like to turn the conference back over to Ken Compton for closing remarks.

Ken Compton

On behalf of Patrick and I, we appreciate your participation in the call today and look forward to talking to you next quarter.


That does conclude today’s conference. We appreciate everyone’s participation today.

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