Advance America, Cash Advance Centers, Inc. Q2 2008 Earnings Call Transcript

| About: Advance America, (AEA)
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Advance America, Cash Advance Centers, Inc. (NYSE:AEA) Q2 2008 Earnings Call July 24, 2008 8:00 AM ET


Jamie Fullmer

Ken Compton - Chief Executive Officer

Patrick O’Shaughnessy - Chief Financial Officer


John Rowan – Sidoti & Company

Richard Shane – Jefferies


Welcome everyone to the Advance America, Cash Advance Centers second quarter earnings results conference call. (Operator Instructions) At this time for opening remarks and introductions I’d like to turn the call over to Mr. Jamie Fullmer.

Jamie Fullmer

Before we begin let me remind you 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 and new center growth, our business strategy, or expected development in the cash advance 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 risks, uncertainties, and other factors, many of which are not within our control or may not be predicted.

For a more detailed discussion of some of these factors, please refer to the risk factor section of our Annual Report on Form 10-K for the year ended December 31, 2007 and our quarterly report on Form 10-Q for the quarter ended March 31, 2008, copies of which are available from the Securities and Exchange Commission, upon request from us or by going to the Investor Relations section of our website at

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

Ken Compton

Also with me on today’s call is our Chief Financial Officer, Patrick O’Shaughnessy. Yesterday the company reported the results of the second quarter and six months which ended on June 30, 2008, and we’ll discuss these results in detail but first I’d like to give you an update on developments since our last call.

Yesterday our Board of Directors approved Advance America’s fifteenth consecutive dividend since becoming a public company. This dividend of $0.125 per share is payable on September 5, to stockholders of record as of August 26. Through June 30 this year the payment of our quarterly dividends together with our stock repurchase program has returned approximately $335 million in cash to our stockholders since we became a public company.

During the second quarter of 2008 the company repurchased approximately 5.5 million shares of its common stock on the open market for an aggregate purchase price of $43.1 million. Through July 22, 2008, the company has repurchased an additional 1.7 million shares for an aggregate price of $9 million and has now nearly completed the $75 million authorization for share repurchase approved by the company’s Board in February 2008. Since 2005 the company has repurchased approximately 23.2 million shares or 28% of outstanding shares.

On the legislative front sessions have now concluded in 44 states across the country. In New Hampshire and Ohio new bills were signed into law which will reduce the fees we can charge in both states to less than $0.10 per day for each $100.00 bard effectively eliminating the regulated payday cash advance option for citizens in those states.

In New Hampshire where the company operates 24 centers the new law is scheduled to go into effect January 1, 2009. As we stated in yesterday’s press release we’re exploring other options and product lines to meet demand in New Hampshire for credit options that would meet our customer’s needs.

In Ohio where the company operates 246 centers the new law is scheduled to go into effect on September 1, 2008. For the six months ended June 30, 2008, our centers in Ohio contributed approximately $29 million in total revenue of $7.3 million in center gross profit. Advance America joined with other payday lending companies in Ohio to support a referendum effort designed to allow citizens not their government a choice in deciding whether to have access to a regulated payday advance product in Ohio.

We already have an aggressive and organized effort underway and if we’re successful in getting the referendum placed on the ballot the legislation will be stayed pending the outcome of the November 4, 2008, general election. Once on the ballot we will educate voters so that they’re well informed about our service and the people we help before they cast their vote. If the referendum is not successful and we are unable to develop other options or product lines to meet customer demand in Ohio we may close our centers in Ohio.

In addition to the loss of revenue and center gross profit the company will incur one time closure costs and possibly an impairment of goodwill. We are also working with payday lending companies in Arizona on a ballot initiative in that state to remove the Sunset provision to the existing payday lending law currently scheduled for 2010 and put into place a series of customer friendly reforms. We expect certification of this Arizona ballot initiative by mid-August.

While we believe that both the Ohio and Arizona initiatives represent positive long term opportunities for our industry by allowing voters and our customers to directly express their opinions on the availability of payday advance options. These initiatives will be costly in the short term and will significantly impact our G&A expenses for the remainder of the year.

During the quarter we opened or acquired a total of 10 centers and closed eight centers. As of June 30, 2008, including centers in the United Kingdom and Canada our total center count was 2,856. We continue to see positive acceptance of our pre-paid debit card. During the second quarter we registered 46,000 cards and loaded a total of $31 million, a 10% increase over the prior quarter. Overall we now have a total 155,000 cards registered and have loaded over $75 million since this new card program was launched.

In the third quarter we plan to begin testing a unique alternative to traditional check cashing. We call this new program Check to Card. The Check to Card program we utilize automated risk assessment tools to allow customers to obtain a pre-paid debit card and transfer value to that card with their third party government or payroll checks. The Check to Card initiative is an extension of our strategy to broaden the range of financial products and services for our customers without disruption to our core business.

We believe the size of our retail footprint combined with the strength of our pre-paid card platform and the simplicity of the Check to Card process have the potential to make Check to Card a viable alternative to check cashing. We will have a better understanding after the test and we’ll update you on future calls.

Marketing expenses were $6.8 million or 4.2% of revenue for the second quarter compared to $7.6 million or 4.4% of revenue in the second quarter of 2007. Please remember these expenses may vary from quarter to quarter. We still expect annual market expenses to be between 3.0% and 3.5% of revenue.

The average amount of a cash advance made during the first six months of 2008 increased to $366 from $357 in 2007. The average fee on all cash advances made was approximately $56 for the six months ended June 30, 2008, and $55 for the six months ended June 30, 2007. The average duration of all cash advances completed was approximately 16.7 days for the first six months of 2008 compared to 16.4 days in 2007.

Now I’d like to turn the call over to Patrick for an overview of our financial results for the second quarter of 2008.

Patrick O’Shaughnessy

For the second quarter of 2008 total revenues were $162.1 million representing a 6.8% decrease over 2007. As we said in our press release yesterday we believe there are two primary factors that impacted our top line revenue. First, the effect of the Government’s economic stimulus payment which caused demand for short term advances to decrease during the quarter. These stimulus payments were issued beginning in May averaged $867 and went to more than 130 million households.

Specifically when we look at the number of held checks in our centers compared to the same day of the week in the prior year we were averaging just over a 5% increase throughout the year through the end of April. On May 2, the day people began receiving direct deposits of stimulus checks the year over year held check increase dropped to zero.

On May 16, the day after the first stimulus checks were mailed our held check comparison became negative. It has remained negative into July as our consumers continue to receive these government checks.

Second, the impact of disruptions caused by regulatory events in certain key states, the largest being Ohio. In Ohio we ceased offering loans to new customers for a brief period of time following the passage of the new law in that state while we evaluated its effects and potential options for the company going forward. We have since resumed offering new loans to new customers in Ohio.

We also stopped offering loans to new customers for a brief time in Arkansas while we changed our business model there. In addition to these regulatory disruptions the loss of the 100 centers in Pennsylvania which ceased offering loans on July 31, 2007, and ultimately closed, and the closure of approximately 50 centers in Oregon during the third quarter of 2007 negatively impact our comparisons for the six months and the quarter.

If you excluded the $25.9 million and $12.8 million in revenue generated by these two states during the first six months and the second quarter of 2007 respectively revenues would have increased by 3.6% and 0.7% for the same periods in 2008.

For the quarter ended June 30, 2008, total revenues for the centers opened prior to April 1, 2007, and still open as of June 30, 2008, decreased 1.4% compared to the same period in 2007. The provision for losses for the quarter was 18.6% of total revenue compared to 17.7% for the same period in 2007. The company sold approximately $500,000 of previously written off receivables during the quarter compared to $3 million for the same period in 2007.

Excluding the benefits of the sale of receivables in the second quarter of 2008 and 2007 the provision for loss is as a percentage of revenue would have been 19% and 19.4% respectively. Also included in the loss provision is a one time charge of $485,000 for a write off of receivables in Arkansas associated with changing our business model there.

Corporate, general and administrative expense was up approximately $325,000 compared to the same quarter last year despite savings in certain areas that affect this line item. G&A expense continues to be negatively impacted by additional expenses on government affairs which were up $1.6 million compared to the same period in 2007.

Also included in G&A was an increase of $544,000 related to our UK operations. The increased government affairs spending was primarily related to legislative battles in Virginia and Ohio and other hotly contested states. We previously had expected government affairs spending to decrease during the second half of 2008, however, as Ken mentioned earlier expenses related to the ballot initiatives in Ohio and Arizona will continue to impact the G&A line.

During the second quarter of 2008 the company’s income tax expense was 43.8% compared to 40.2% during the same period in 2007, primarily as a result of losses from foreign operations and higher government affairs expenses that are not deductible for tax purposes. The higher tax rate had a net effect on earnings per share of approximately $0.01.

Net income for the quarter was $9.3 million compared to net income of $14.8 million for the same period in 2007. As Ken mentioned earlier diluted earnings per share were $0.14 for the quarter compared to diluted earnings per share of $0.19 for the same period in 2007. Cash used by operations after the changes in advances and fees receivable was approximately $1.2 million for the quarter ended June 30, 2008.

During the same period we paid $7.9 million in dividends, repurchased approximately $42.1 million worth of the company’s stock and funded capital expenditures related primarily to center openings, upkeep and acquisitions of $2.6 million. As of June 30, 2008, we had $187.9 million borrowed under our $270 million revolving credit facility.

Now I will turn the call back over to Ken.

Ken Compton

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Rowan – Sidoti & Company.

John Rowan – Sidoti & Company

In Arkansas, can you explain what you’re doing to change your business model that is complying with what the Attorney General has asked of you?

Patrick O’Shaughnessy

We basically changed the model to become primarily a check casher in that state.

John Rowan – Sidoti & Company

As far as the buy back obviously I don’t think you have much left under your current authorization but are you also maxed out on the buy back in regard to what you’re allowed to do under the revolver?

Patrick O’Shaughnessy

Yes, when we authorized the buy back program we asked the banks for the same authorization so they dovetail exactly.

John Rowan – Sidoti & Company

Did you plan on going back to your bank to ask for more?

Patrick O’Shaughnessy

We’re going to just continue to evaluate what we think the best use of our capital is. We would have to go to both the Board and our banking group to get approval for a new authorization.

John Rowan – Sidoti & Company

Out of the stores that you opened did you do any openings in Canada or the UK?

Ken Compton

Canada no. I think we’re still sitting with 10 centers, seven in Manitoba, and three in British Columbia. I think we had two additional centers during the quarter. In the UK we have 14 centers and 82 limited licensees in the UK.

John Rowan – Sidoti & Company

Are you waiting for provincial rates to be set before you would consider making a more aggressive move into Canada?

Ken Compton

We are. We’ve been pretty consistent on that. We all know it’s much slower than what we might have anticipated but yes we are waiting until the rates are set.


Your next question comes from Richard Shane – Jefferies.

Richard Shane – Jefferies

What was the actual dollar value of advances during the quarter?

Patrick O’Shaughnessy

The total advances, let me see if I can get that.

Richard Shane – Jefferies

While you’re looking, because this may be in the same vein. You said the government affairs spending was up about $1.6 million year over year. What percentage of G&A is government affairs spending just so we have some context around that $1.6 million?

Patrick O’Shaughnessy

The total payday loans that we advanced during the quarter was just over $1 billion. The G&A, government affairs as a percent for the quarter, I don’t have the quarter but it’s about 20% of our expenses year to date if you look at the total G&A.


At this time we have no further questions in the queue. I’d like to turn the conference back over to your presenters for any additional or closing remarks.

Ken Compton

Let me say thank you again for participating in today’s call and we look forward to talking to you when we announce our third quarter.

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