Cash America International, Inc. (CSH)

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Cash America International, Inc. (CSH)

Q1 2009 Earnings Call

April 23, 2009 08:45 am ET

Executives

Dan Feehan - President and CEO

Tom Bessant - CFO

Analysts

David Burtzlaff - Stephens, Inc

Bill Armstrong - CL King & Associates

Elizabeth Pierce - Roth Capital Partners

Jordan Hymowitz - Philadelphia Financial

John Hecht - JMP Securities

Henry Coffey - Sterne Agee & Leech, Inc

John Rowan - Sidoti & Company

Rick Shane - Jefferies & Co

Gregg Hillman - First Wilshire Securities

Ted Allen Mayor - Northstock Partners

Presentation

Operator

Welcome to the Q1 Quarterly 2009 Earnings Release Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator instructions). As a reminder, this conference is being recorded Thursday, April 23, 2009.

I would now like to turn the conference over to Mr. Dan Feehan, President and CEO. Please go ahead sir.

Dan Feehan

Thank you, and good morning ladies and gentlemen. Welcome to our first quarter call. Joining me this morning is Tom Bessant our Chief Financial Officer, who will lead of with the review of the first quarter financial performance and updated earnings guidance for the second quarter and full year of 2009. I will then rejoin the call to provide my perspective on the current condition of our business. We will then open the call for questions following my remarks.

Before beginning our comments, please bear with me while I read our Safe Harbor disclosure. While on this call comments made by Tom or me may contain forward-looking statements about the business, financial condition and prospects of Cash America International, Inc. and its subsidiaries. The actual results of the company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including without limitation the risks and uncertainties contained in the company’s filings with the Securities and Exchange Commission.

These risks and uncertainties are beyond the ability of the company to control, nor can the company predict in many cases all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.

When used in this call, terms such as believes, estimates, plans, expects, anticipates and similar expressions as they relate to the company or its management are intended to identify forward-looking statements.

Now, I would like to turn it over to Tom for the financial report.

Tom Bessant

Thanks, Dan, and good morning everyone. As we explained in the January call, we expected a difficult quarter in the first quarter of 2009 with heavy headwinds associated with the changeover in our storefront product offering in Ohio, the economic pressures on customers leading to potentially higher year-over-year loss rates on our cash advance product, and the absence in 2009 of certain profitable markets which contributed in 2008 to our online cash advance earnings in that period.

As a result, we issued guidance in January of between $0.61 and $0.65 a share down from the prior year earnings per share of $0.86. Two weeks ago, we were pleased to report to you that our actual performance in the first quarter of 2009 came in well above expectations, then we revised our earnings guidance between $0.75 and $0.78 a share.

In our press release this morning, we reported that we came in a penny above the top end of that range at $0.79 a share, and I will spend some time talking about the components of the $0.14 per share difference from the top of the initial range as well review each of the company's business activities for the first quarter.

A big part of the first quarter was the strong pawn service charges produced in our pawn loan balances that finished year end 2008 up 11% domestically and 23% overall. Pawn service charges were up 22% in the first quarter and pawn loan yields continue to perform well as redemption rates have been healthy and positive year-over-year.

Aggregate pawn loan yield was 138% for the first quarter of 2009, compared to 135% last year. We concluded the first quarter of 2009 with aggregate pawn loans up 19% year-over-year and inventory up 9%.

Bear in mind that the first quarter of 2009 results include the acquisition of Prenda Facil completed in December 16, 2008, which contributed to our performance in the first quarter. However, our domestic pawn business performed well in its own as operating income was up 9% to $28.8 million on a 3% increase in net revenue for the quarter.

Same-store domestic pawn net revenue was up 3.4% in the quarter and domestic pawn on balances finished Q1 2009, 5% higher than Q1 2008.

Our Mexico's city based pawn operations produced operating income in U.S. dollars equivalent to $1.8 million and added 15 locations during the quarter. For the nine months ended March Prenda Facil has 30 new locations ahead of a quarter-end total of 127 stores, representing a 31% growth rate in new locations since June of 2008.

Because of this high level of recent unit growth over the last nine months my expectations were that Prenda Facil subsidiaries would not have much incremental earnings per share in the first quarter.

However Prenda Facil contributed nearly $0.2 a share in the quarter, which is one of the reasons we exceeded our performance. Likewise, the US pawn operations came in about $0.2 higher than expectation, so it’s safe to say that the performance of both are U.S. and Mexico based operations in the pawn business was stronger than our expectations.

Leading to a 16% increase in operating income from pawn activities in the first quarter compared to the prior year on a 10% increase in net revenue. The pawn segment contributed 71% of the company’s consolidated operating income for the quarter.

Marginal profitability of pawn business also increased nicely during the quarter increasing to 28.2% of the net revenue notwithstanding the number of started stores driven mostly by performance of the pawn on portfolio.

But this position of merchandise was [at 11%] creating a 5% increase in gross profit dollars. Gross profit margin for the quarter was down compared to the prior year at 36.4% compared to 38.7%. However, this is in line with our expectations.

And is actually up from the fourth quarter of 2008, 34.3% sequentially. Continuing the trend we’ve discussed in the last half of 2008. Our silver refined gold continued to add incremental profitability in the gross profit margin lines that blended down the aggregate gross profit margin.

Retail sales and store locations excluding refined gold was up 2% in the quarter, and margins eased down to 39.4% compared to 40.8% last year. As a continued emphasis on inventory management led to greater discounting.

Merchandise turnover increased and reached 3.14 times, compared to 2.97 times in the first quarter of 2008. Likewise, as you can see from the ageing chart attached to our press release aged inventory continues to improve year-over-year and goods over one year old reached an all-time low of 8% as of March 2009.

As I begin my discussion, the cash advance business line, I remind you that the expectations were significantly down year-over-year first quarter through the absence of certain markets as well as the change to a much lower yield product offering in Ohio.

As I talked about in the January call, our expectations for the store front cash advanced business, where that it would be marginally profitable during the first quarter and unprofitable in the second quarter of 2009.

The store front business performed slightly better than we expected as loss rates in the portfolio improved significantly year-over-year leading to a $1 million operating income number from store front activities in Q1 2009. But well off the $6.1 million operating income figure of Q1 2008.

Part of the reason for the improvement in loss rates was likely due to the lower cost of borrowings of the new product in Ohio, but also because of underwriting changes we made during the third and fourth quarters of 2008.

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