Cash America International, Inc. (CSH)

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Cash America International (CSH)

Q3 2012 Earnings Call

October 25, 2012 8:00 am ET


Daniel R. Feehan - Chief Executive Officer, President and Director

Thomas A. Bessant - Chief Financial Officer, Principal Accounting Officer and Executive Vice President


John J. Rowan - Sidoti & Company, LLC

John Hecht - Stephens Inc., Research Division

William R. Armstrong - CL King & Associates, Inc., Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Bill Carcache - Nomura Securities Co. Ltd., Research Division

David M. Scharf - JMP Securities LLC, Research Division

Gregg Hillman



Ladies and gentlemen, thank you for standing by. Welcome to the Q3 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, October 25, 2012. I would now like to turn the conference over to Mr. Dan Feehan, President and CEO of Cash America International. Please go ahead, sir.

Daniel R. Feehan

Thank you. Good morning, ladies and gentlemen, and welcome to our earnings call for the third quarter of 2012. Chief Financial Officer, Tom Bessant, is joining me this morning, and we will be discussing our third quarter results and a few other topics with you this morning. I will provide some very brief overview remarks to begin the call and then Tom will provide the second quarter financial report. We'll then open the line for questions.

Before proceeding with our prepared remarks, I'd like to remind you that all statements made during this call, that relate to future results and events, are forward-looking statements that are based on current expectations. Actual results and events could differ materially from those projected in the forward-looking statements because of a number of risks and uncertainties which are discussed in our SEC filings and in the cautionary statement on our website under Investor Relations. We assume no obligation to update our forward-looking statements.

I also want to mention before we proceed that a reconciliation of any non-GAAP information provided on this call to the most directly comparable GAAP information is available on the Investor Relations section of our website at Non-GAAP financial information is not meant as a substitute for GAAP results but is included solely for informational and comparative purposes.

Now with that out of the way, we can proceed with our prepared remarks. And I'll begin my remarks with an acknowledgment that dissecting the financial results of this quarter will be a bit more difficult than normal, primarily due to the reorganization charges, the impairment charges and deferred tax asset valuation allowances, all relating to the reorganization of our Mexico-based pawn operation, which was previously announced in the press release issued on September 27. The financial components of the reorganization appear in multiple line items in our consolidated statement of income, and Tom will walk you through those details during his quarterly financial report. However, in summary, I will refer you to the third quarter earnings release issued earlier this morning, which highlights that all the financial components of that reorganization, aggregate to reduced consolidated earnings per share by $0.59 in the third quarter. We also expect to incur additional charges in the fourth quarter related to the reorganization, and Tom will cover those numbers with you in a moment as well. In addition to the reorganization cost recorded in this quarter, our press release this morning also discloses an additional $0.06 of cost incurred in the quarter related to the write-off of deferred costs and transition expenses associated with the previously announced withdrawal of the registration statement on form S-1, for the proposed initial public offering of our wholly-owned subsidiary, Enova International, Inc. Our registration statement was withdrawn on July 25 of this year. So with the pro forma exclusions of these 2 unusual line items, our non-GAAP adjusted EPS, for the third quarter would have been $1.02, which was within our guidance range of $0.95 to $1.05, which we first initiated and disclosed in our July earnings press release.

Before commenting on current business trends that produced that $1.02 per share, let me first take a moment to provide a little more color on the reorganization plan for our Mexico-based operation.

We began the second half of 2012, operating 195 pawn lending locations in Mexico, at which approximately 75% were jewelry-only lending locations. The balance of the store portfolio was comprised of full-service locations, which offered pawn loans on not only jewelry collateral but also a wide range of other collateral much like we do in our shops in the U.S. Our reorganization plan, which has just been launched during the third quarter, provides that we will discontinue operating jewelry-only lending locations in Mexico and focus all of our energy and resources in managing our full service operations. With a goal of first, achieving profitability with our current stable of full service stores, and then moving forward with the expansion of that format in both existing and new markets in Mexico. We will be discontinuing and liquidating the assets of approximately 147 jewelry-only locations and we will be left with approximately 47 full-service locations. Our goal is to complete liquidation of assets by the yearend and we may have some activity leak over to the first quarter of next year.

As we indicated in the September 27 release, we believe this reorganization strategy will significantly reduce the loss from operations related to our foreign pawn lending business in 2013, while preserving the opportunity for us to serve customers in Mexico with a format that better aligns with the core competencies of our management team and the legacy pawnshop business that we operate here in United States. And Tom will provide additional financials on that on the reorganization during his comments.

Now setting unusual items aside for a moment, let's take a look at the ongoing operational aspects of our business trends in Q3. And I will begin with the domestic component of our retail services segment, which now includes 815 lending locations in 23 states in the U.S. The business trends of our U.S. bricks and mortar business have not changed much from the trends we discussed with you in July as part of our second quarter earnings report. The challenging year-over-year comparisons for asset growth and margins that we had unexpectedly experienced in Q2 of this year have continued into the third quarter. On a positive note, the average pawn loan balance outstanding in this third quarter was up on a year-over-year basis, which helped generate an increase in pawn service charge revenue. But our transactional volume of both pawn loans and consumer loans written, in the retail services segment during this quarter, reflect the same sluggish trends that we experienced in the second quarter. Admittedly, we had a very difficult year-over-year comp due to third quarter of 2011, when pawn loans written and renewed were up 32% over third quarter 2010 and consumer loan loans written were up over 6%. We had expected the year-over-year growth in loans written to moderate and then later half of 2012, but we have not forecasted, early in the year, that our volume will be down here in the third quarter. The competitive shopping analysis that we're routinely perform on our field operation for pawn lending, indicates that we're being very competitive with loan-to-valuation ratios. But I've heard consistently, from store managers over the past several months that customers were frequently electing to take a lower loan amount than their collateral will support. And I view this as an anecdotal data point that our customers are currently very cautious about getting too extended with credit. Our customers have also curbed their appetite for selling jewelry and general merchandise from the elevated levels that we saw in 2011. Purchases were up dramatically, last year at this time, and up a respectable amount in Q1 of this year. But we saw them begin to contract significantly in Q2 and were actually down here in the third quarter when compared to the third quarter last year.

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