Conn's Inc (CONN) 2008 Q1 法說會逐字稿

Welcome to the Conn's Inc. conference call to discuss earnings for the first quarter ended April 30, 2008. My name is Audra, and I will be your operator today. During the presentation all participants will be in a listen-only mode. After the speakers remarks you will be invited to participate in a question and answer session. As a reminder, this conference is being recorded.

Your speakers today are Mr. Timothy L. Frank, the Company's CEO designate, President, and COO, and Mr. Michael J. Poppe, the Company's Chief Financial Officer. Additionally joining them for the call is Mr. Thomas J. Frank Sr., Chairman of the Board of Conn's and it's CEO.

I would now like to turn the conference over to Mr. Poppe. Please go ahead, sir.

Thank you, Audra. Good morning everyone, and thank you for joining us. I am speaking to you today from Conn's corporate office in Beaumont, Texas. You should have received a copy of our Earnings Release dated June 4, 2008 distributed before the market opened this morning, which describes our earnings and other financial information for quarter ended April 30, 2008. If for some reason you did not receive a copy of the release, you can download it from our website at Conns.Com.

I must remind you some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today.

I would now like to turn the call over to today's host, Tim Frank, Conn's CEO designate, President, and COO. Tim?

Thank you, Mike. Good morning, and thank you for joining us today. Mike, Tommy and I are going to speak to our sales, financial performance, current status of our credit and financing operations, the recently announced management transitions, as well as our outlook for the remainder of fiscal 2009.

Net sales for the quarter were up by 7.6%, while same-store sales increased by 1%. Consumer electronics and laptops lead to growth in our business, while opportunities still exist in appliances. We had mixed results in appliances finishing down 4.4%. Preliminary results for May showed net sales up 13.7%, and same-store sales increased by 5.7%. Appliance sales in May increased 12%, driven by special purchases and window air-conditioning.

In our electronics business for the quarter, LCD unit sales were up 167%, and retail sales for this category were up 198% over the prior year. We expect these trends to continue. We remain very price competitive in the market, in part due to our national buying group NATM, as well as recent special purchases from our vendors. Special purchase opportunities arise when other retailers cancel orders with vendors after the product has been manufactured.

Conn's is known for having an appetite for purchasing these products, which aids the vendor and allows us to purchase product well below the normal cost. This allows us to advertise and sell this product below the market, and maintain reasonable margins. We are able to move quickly and purchase cancelled orders on a regular basis. In many cases, the product is assembled in Mexico, and shipped to our Texas warehouses. This also aids the vendor in transportation and logistics costs, as we are generally the closest retailer.

Nationally, Americans are driving less and staying home more. We believe that this recent trend and the Federal mandate for digital conversion coming up in just over seven months, will continue to drive major electronic sales. We have also begun to see the impact of recent government issued stimulus checks. These monies are a help to both retail and credit sales. The overall impact is helpful but not a primary driver of business at this time.

Furniture for the quarter was down 6.2%, while bedding was up 10.6%. Preliminary results for May were up 2% for furniture, indicating that the improved brand mix of Lane, Broyhill, and Franklin are beginning to take hold. In addition our buys in furniture from China and Taiwan continue to do well. The bedding business continues to show improvements, as we have moved from a one brand store to a multiple brand format, which includes Simmons, Serta, Spring Air, and ComforPedic.

In May we added two new stores, bringing the total count to 71. During the quarter, we also had two store relocations. As a reminder from the last call, six of the seven new stores that were open this past year were opened in the last six months, allowing us to have the benefit of these stores for a longer period of this year. The Oklahoma location continues to perform at the higher end of our expectations for a new store. Two additional new stores are planned for this fiscal year in Oklahoma.

We are on track to open seven new stores plus completing three relocations this year, for a total of 10 stores this current year, which would bring our total count to 76 stores. We are reviewing our store opening plans for next year, in light of the current financial market conditions, and our conservative capital management.

Gross margin was down 320 basis points from 38.5% to 35.3%, primarily due to a very competitive retail market, and an accounting fair value adjustment. We expect that product gross margin will begin to face easier comparatives in July. Our earnings were impacted by a 3.1 million fair value adjustment, due to capital market conditions, not as a result of Company performance. Mike will discuss this in greater detail later.

Some of the gross margin decline was offset by a 120 basis point reduction in SG&A expense. The fair value adjustment negatively impacted our SG&A savings by 40 basis points. The cost control initiatives that drove this reduction continue to be very active in our Company. This includes reductions in personnel based on attrition and performance, and the review of all costs within our Company. As an example, as a standard practice, executives must present multiple cost savings upon entry of any corporate meeting.

The benefits of the reduction in SG&A expense should hold throughout the remainder of this fiscal year. These positive effects will combine with lower gross margin comparatives in July. Efficiencies continued to build in our business from improved management involvement, as well as increased leverage on infrastructure, including advertising costs. Our inventory for the quarter was up 9.4%, with the addition of seven new stores from the same time last year, and the volume increase of 7.6%.

We have not purchased any more stock in the first quarter, and do not expect to purchase stock in the near future. This decision is based on our conservative cash management philosophy.

As we look at our credit performance, there was a net charge-off of 3.2% for the quarter, consistent with our previously announced expectations. The trend however, is going in the right direction. As the April charge-off number was 2.7%. We expect to achieve another year of net write-offs at or below 3%. Delinquencies are down 6.4% from the 7.6% reported at January 31st, 2008. Delinquencies are up slightly from the same period last year from 6% to 6.4%, or 40 basis points. Due to the fair value accounting impact in this quarter, we are revising guidance at $1.76 to $1.86, and again Mike will give further insight into our guidance shortly.

The position changes that occurred yesterday afternoon are a result of years of transition. Tommy has given over 50 years of service to our Company, and we are all very thankful that he is remaining involved in our day-to-day operations. These title changes, CEO designate, President of Credit, and President of Retail, including the CFO position that Mike took this year, indicate the vote of confidence the Board has in our longstanding team. I see these changes as very positive because the Company is growing our leadership internally, and our leader Tommy will continue to be involved with us in shaping the future success of Conn's.

I am now going to turn the program back over to Mike, so that he can share additional financial information with you.

Thank you, Tim. The performance of our core operations this quarter gives us two solid quarters back to back. Our ability to deliver this earnings performance in the first quarter, excluding the impact of fair value accounting, was due to our ability to drive same-store sales growth and control expenses, delivering a 120 basis point decrease in SG&A as a percent of revenue, an expansion of the 50 basis point improvement we saw in the fourth quarter.

Total revenues were up 6.5% to $218.6 million, made up of an increase in net sales of 7.6%, partially offset by a decrease in finance charges and other of $460,000. The decrease in finance charges and other was driven by a $3.1 million fair value adjustment that I will discuss in a minute. As Tim mentioned net sales growth was driven by strong sales in consumer electronics, especially LCD televisions, computers, and video game equipment.

Finance charges and other decreased despite continued growth and consistent performance of the credit portfolio. The growth in the portfolio in lower short-term borrowing rates, drove total servicing fees received, gains on sales of receivables, and interest earned on our retained interest up 13.6%; however the $3.1 million reduction in the fair value of our interest and securitized assets more than offset these increases. The fair value adjustment is primarily the result of an increase in the discount rate used in the discounted cash flow valuation, due to continued volatility in the financial markets, as we have not changed our expectations about the future performance of the credit operations.

As a result of this increase in the discount rate, the fair value of our interest and securitized assets is now only approximately $2.1 million greater than our book basis. Relative to credit portfolio performance in the quarter, the net credit charge-off rate for the quarter was 3.2%, up from 2.7 for the prior year, however the 3.2% charge-off rate was in-line with our previously stated expectations. Also the 60 day delinquency rate was down seasonally from 7.6% at January 31st, to 6.4% and is only slightly higher than the 6.0% delinquency rate at April 30, 2007.

The percent of the portfolio re-aged at April 30 dropped to 15.5%, as compared to 16.6% at year-end, and 16.8% last April. I should note that we made a minor adjustment to the calculation of the re-aged percentage to be more consistent with others in the industry. The change was applied to all prior periods, and did not have a significant impact on the reported amounts. They decreased by only 20 to 30 basis points.

Our total gross margin declined by 320 basis points. This is primarily due to a 270 basis point reduction in product gross margins, which drove 220 basis points of the total gross margin decline. The drop in our product gross margins versus the prior year period, was due primarily to the highly competitive retail market we operated in during the quarter, and the change in our product mix, as consumer electronics became a larger proportion of product sales, relative to higher margin appliance sales. The fair value adjustment drove 90 basis points of the total gross margin decline.

As I mentioned previously, SG&A expenses decreased by 120 basis points as a percentage of revenue. This decrease was driven primarily by lower payroll and payroll-related expenses in absolute dollars, and as a percent of revenue. The ratio of SG&A as a percent of revenues would have shown an additional 40 basis points of improvement had the fair value adjustment not been required.

While the net interest income has dropped, as invested cash balances in the prior year were used to execute our stock buyback program, current quarter reported diluted earnings per share benefited by about $0.02 due to the repurchase program. Net other income declined as we had recognized $800,000 in gains on the sales of two store locations in the prior year, which benefited prior year earnings per share by approximately $0.02. While our core operations turned in a solid performance this quarter, net income declined approximately $2.4 million to $10.6 million, driven primarily by the $2 million fair value adjustment net of tax, and the reductions in net interest income and net other income.

Earnings per diluted share decreased to $0.47, net of a $0.09 per share reduction, due to the fair value adjustment from $0.54 in the prior year. As a reminder the fair value adjustments are non-cash, and not a result of changes in the underlying economics, or expected cash flows of the credit portfolio. Taking all of the adjustments discussed above into account, we believe we grew earnings per share by approximately 4% in a very challenging economic environment.

Turning to our liquidity and cash flow, we generated $39.5 million of cash flow from operations for the quarter ended April 30, 2008, compared with cash used of $5.6 million in the prior year period. Both periods were impacted by the timing of inventory receipts, and payments by the QSPE on it's 2002 series of bonds.

The current year period was impacted by the receipt of inventory later in the quarter, which increased payable balances, and decreased investment in Accounts Receivable, due to the QSPE's pay-off of it's 2002 series of bonds. The pay-off of the bonds resulted in an increase in the effective funding rate since January 31st, as additional collateral became available for borrowing under the QSPE's variable funding note facility.

The improved funding rate and release of cash reserve balances related to the 2002 series of bonds positively impacted operating cash flows by approximately $9.9 million. An additional $6 million was available to be drawn under the variable funding note facility at April 30th. The prior year period was negatively impacted by the timing of receipts of inventory, and the effective pay downs on the 2002 series of bonds, which reduced the effective funding rate during that quarter.

Cash used in investing activities totaled $5.3 million in the current year period for investments in property and equipment. This compared with $6 million provided a year ago, as proceeds of $8.7 million from sales of property, offset $2.7 million invested in property and equipment. Financing activities provided $242,000 in the current year from proceeds of stock issued under employee benefit plans, compared with cash used of $4.1 million in the prior year, primarily for purchases of Treasury stock of $4.6 million, and net of proceeds from issuances of stock under employee benefit plans.

We have no bank debt on our balance sheet, and after completing the ex expansion of our syndicated credit facility on March 26, we have $105.6 million net of letters of credit available under our revolving lines of credit, to be drawn for working capital or capital expenditure needs. Given the ongoing volatility in the securitization market, we are unsure at this time when we might be able to complete a fixed rate term bond issuance. However, we are continuing to review available options for financing our Receivables portfolio with our financial advisors, and expect to complete financing arrangements in the coming months.

Additionally, we expect the borrowing costs under these new or revised facilities to be higher than we are currently experiencing under the QSPE's variable funding note, or our revolving bank facility. At this time, we believe the QSPE and the Company have sufficient combined liquidity to maintain consistent operations for at least 12 months. The sources of this liquidity at April 30, 2008, included $41.3 million of invested cash available to the Company, $105.6 million available under the Company's revolving credit facility which mature in 2010, and $115 million of available capacity under the QSPE's existing variable funding note.

However, at this time, due to the temporary nature of $150 million of the QSPE's funding structure, we do not expect to be able to renew more than 100 million of the $250 million traunch of the variable funding note maturing this July. As such, given the $200 million variable funding note traunch committed until 2012, and assuming we renew 100 million of the maturing traunch, or complete a replacement financing arrangement for a similar amount, then the current variable funding note balance of $335 million would have to be reduced by $35 million.

Had a renewal or replacement financing arrangement been in place at April 30, 2008, we would have had $146.9 million of funding capacity from our cash balances and revolving credit facilities before repayment of the $35 million, leaving us $111.9 million for future growth. At a 15% growth rate, we would use approximately $100 million of our funding capacity to fund growth in the portfolio over the next 12 months.

In addition to the funding capacity discussed above, among other sources we have future cash flow from operations, flexible inventory payment terms, the ability to modify certain capital investment programs, and other financing alternatives. As Tim discussed, because of the non-cash fair value adjustment this quarter, we revised our EPS guidance for fiscal year 2009 to a range of $1.76 to $1.86 per diluted share, excluding future potential fair value adjustments. This adjustment is not a result of changes in our expectations about the performance of our core operations.

As we indicated on our year-end conference call, we expect the first quarter comparison to be the most difficult, and while we performed well this quarter, we remain cautious about the remainder of the year, due to the uncertainty in the economy and the financial markets. All of this analysis and much more is available in our Form 10-Q for the quarter ended April 30, 2008, to be filed with the Securities and Exchange Commission later today.

Tim, that concludes our prepared remarks. If you are ready we will open up the lines for questions.

Sounds good, Mike.

(OPERATOR INSTRUCTIONS). We will go first to Rick Nelson at Stephens.

Thank you and good morning.

Good morning, Rick.

Mike, can you address what you anticipate the spread to be on this $100 million renewal?

You know what? I will tell you right now, Rick, is right now the variable funding note is 80 basis points over commercial paper. Our existing revolving bank facility, the range is 125 to 175. We do expect that the spreads will be north of those two facilities, but exactly where it is going to land, we are still working on that.

Is there any way to put a range around it?

It would be so big, Rick, I don't think it would be valuable to you.

Okay. And I want to follow-up too on the sales strength in May. How much of that is driven by opportunistic purchases, and is that growth sustainable in your view?

Rick, it is sort of hard to categorize it, although I think on the appliance side when you look at the 12% increase, probably about half that 12% is from special purchase behavior, and another half of that 12% is from window AC units.

That being said, it is sustainable as there are always special purchase opportunities out there. There is a lot more special purchase opportunities right now, because of economic conditions throughout the country, and so we are in a much higher environment, but if they were to reduce, it would probably be a good thing, because it would mean there would be more of a stabilization of the market, but there is always some special purchase opportunities.

So your EPS estimates, what sort of comp guidance goes along with that?

We are staying in the low to mid single digits, consistent with our historical performance, and what we talked about on the last call.

Got you, and just to follow back up on this revolver that is coming due, is that contemplated in your guidance, or is there a potential for a revision when it gets completed?

We have contemplated borrowing cost increases in our guidance, Rick, but certainly there could be revisions if it comes in significantly different than our expectations.

Got you. And then the product margin erosion, the 270 basis points in the quarter driven by mix, am I to assume that appliance sales continue to be soft, and that margin pressure will continue over the near term, but then as the comparisons get easier in the back end of the year, the gross margin pressures would ease?

I think I agree with almost everything you said, except really we were up, unless I misunderstood you, we were up in appliances so is it more competitive, yes. Is it a softer market for the markets we operate in?

It really depends more on our execution, and on the continued as you pointed out availability to special purchases. We have competitors out there like Sears, that are getting extremely price competitive when they offer more than 15% off on three appliances or more. The special purchases allow us a way to combat that, and so we will continue that.

Thank you, Rick. If we can move on to the next caller, to make sure we give everybody an opportunity this morning.

We will go next to David Magee at SunTrust Robinson Humphrey.

Hi, this is Chris Rapalje on the call for David today.

Good morning, Chris.

Hi. I had a question about the new stores. You mentioned that the Oklahoma store in particular was at the higher end of expectations, and I was wondering if you could comment on any of the other new locations?

Yes. We have got two more locations coming up in Edmonds and then Walnut Square, and we are very much looking forward to opening those stores. It has been a very positive market for us.

But as far as I guess the new store productivity as some of the stores that opened, or the productivity at some of the stores that opened last year, how those are performing relative to plans?

They are all I would say consistent with our expectations at this point.

Okay. And then the sequential improvement we see in the delinquency rate, is that something that you would expect to continue to improve going forward, or what are you seeing with your collections efforts?

If you look back over time, Chris, delinquency fluctuates seasonally and we always get meaningful drops in the first quarter, and we had as good of, if not one of the best drops in the first quarter, we have had in a long time, so we had very good performance, but do not look for meaningful improvement over what you saw at April 30. Typically, we have slight increases throughout the next couple of quarters, and then we, again it will drop again at the beginning of the next year.

Okay, thanks very much.

You bet.

Next we will move to Anthony Lebiedzinski with Sidoti & Company.

Good morning. A couple of questions. The same-store sales comment you had regarding May, how does that compare to May of 2007?

One minute.

Okay.

Let me look that up.

And also as a follow-up to that, as you know, as you can see the same-store sales for the second quarter last year, they were up 5%, so just wondering how does the quarter look from a comparative point of view for the rest of the quarter?

Okay, so for May, same-store sales last year were essentially flat. They were up 0.3%, and I apologize, Anthony, could you repeat the second part of your question?

Okay, so it seems like based on your comment, so May comps last year were flat, and then for the entire quarter you reported a 5% same-store sales increase, so it seems like the comparisons will get more difficult as the quarter progresses.

Yes, in June I show, these are operational reports, they are a little different than the financial ones, but I show 8% and July shows 7%, but one of the things that is happening that is different this year, is we are selling a lot more air conditioner units, at least out of the gate for this quarter, and I would hope that would continue.

Okay. And also when you look at the first quarter product margin performance, how much would you say if you look at the product margin was down 270 basis points, how much would you attribute that to the mix shift, and how much was it do you think was because of competitive pressures?

I think, hold on just a second. The majority would be primarily competitive pressures, but obviously the change to higher LCD sales, which is a good thing puts pressure, and then also we had an increase in laptop sales of just over 12%.

Okay. Also, the delinquencies as you mentioned earlier, they were up year-over-year. What would you say is the main reason for that do you think as far as the delinquencies and charge-offs increasing year-over-year?

Well, keep in mind, Anthony, delinquency at year-end was, January over January was 100 basis points higher this year than last year, and so now that gap is is only 40 basis points, so we made significant improvement in that area, so we would say that is a very good trend, and what you are seeing is very positive.

Okay.

And then the charge-off as we talked about on the year-end call, we expected about a 3.2% charge-off rate this quarter, and we see that number coming down, and as Tim indicated we had a 2.7% charge-off rate in the month of April in the quarter.

Okay, and I think earlier you said the delinquencies will kind of fluctuate because of seasonal things. Is it because I guess people, some of your customers get the income tax refunds that they use to pay down their outstanding balances? Is that the case, or what would you attribute the seasonality changes in the delinquencies?

Sure, that is one of the primary drivers. I would also tell you as some color commentary is that this May, we were able to bring down delinquency although slightly, and that is the first time in seven years, that a May trend went down, and that is again part of the seasonality, so we had improved efficiencies, and I would also say some of the stimulus checks probably helped, but the tax refunds are definitely part of that.

We should also comment on the re-age being down, because that tends to increase delinquency a little bit.

As Mike reported I think the re-age is down over 100 basis points, is it not, Mike?

That is correct.

So as that re-aging goes down, then you may have a little increase from that 6% to 6.4, just based on the fact that we did not re-age as much of our portfolio, which is also a positive thing.

Okay. That is helpful, okay, thank you.

Next we will move to Laura Champine at Morgan Keegan.

Good morning. Just wanted to make sure I understood what was going with the QSPE financing. So now you are contemplating just renewing 100 million of what had been 250 million on the QSPE's variable funding. Is that accurate?

That is one of the things on the table is we don't think the 150 is really going to be available. That was a temporary bridge to help us as we worked through the struggles in the market last year, and we have got the 100 million option, plus we are looking at other potential financing alternatives.

Okay, so for the moment that is 150 million less in potential funding, which you don't feel you will necessarily need to replace?

Correct, which as I walked through in my comments, without that 150 we still have ample liquidity to fund 15% growth in the portfolio, before we even talk about using cash flow from operations or other funding alternatives.

Got it, and then on your inventory levels I did notice they grew faster than your sales did during the quarter. Is that driven by product cost inflation or change in mix, and how do you feel about those inventory levels as we move into the summer?

There is a slight increase I think with the new stores that it is within range. Certainly we can manage it a little bit tighter, but there is a point at which you start having out of stocks, and I think overall, it is fine and there are probably some potential improvements there.

Got it, thank you.

Next we will move to Bill Massey, Adage Capital Management.

Good morning, guys, how are you?

Good morning, great, how are you, Bill?

Good, thanks. A couple questions. First, Mike, you mentioned on the balance sheet the write-off of the change in the retained interest, gets you within I think you said $2 million of book value?

Yes, of our book basis, correct.

I just wanted to get a little clarity so I can understand a little better. My assumption and tell me if I am wrong, is that book value or book base is really almost an irrelevant number when you are adjusting based on the cost of capital, which is to say if the cost of capital were to continue to spiral up, you might continue to write down that asset to below book value, or for accounting purposes, does book value sort of stop the write down for some change in the accounting treatment I am just not familiar with?

So you are correct. It could end up if the market continues the path it has been on the last few quarters it could be written down below book value. I think the point we want to make with that, is there are not significant gains recorded to be earned in future periods. We basically are booking the earnings as the receivables pay down.

Okay, and that is kind of what, it was my follow-up question was what you are really saying is the book basis is cash. There is not a lot of assumption in it, right? You just clarified that statement. Can you tell me how quickly, or what the sort of rate of turn of that book is? In other words what is the longest dated asset in that book? Is it 30 days, in the calculation of book value, that is to say?

In the Receivables portfolio, the longest term contracts were 36 months, but the portfolio turns on an average 14 to 16 time period.

14 to 16 month time period?

Yes, is the average turnover for the portfolio.

Okay, so the book value is just the remaining interest. It is not like you have taken some incremental level of conservatism in classifying what is the book value which is the remaining balance?

Book value is just our residual interest in the portfolio. Receivables minus the borrowed balances at the QSPE.

And then on the sort of gain spread, or whatever you would characterize the valuation over book, how many times in your Company's history, have you seen the spread essentially reduce to nothing, and typically where does the spread, I don't know if you want to say normalize, but typically, I presume there is a spread value that you carry on the balance sheet that is pretty stable, obviously notwithstanding extreme environments like the one we are in right now, so can you just paint a picture of how you are thinking about the fact this has been basically written down to book, and just put that in the context of your operating history?

Well I guess I would start off with Bill. Fair value accounting is only about a year and a half old for us at this point, but we have valued the asset at fair value under the rules that were existing at the time we went public. And typically we were discounting it at a low, call it 13 to 14% weighted average discount rate, and we are at about a 19% discount rate today.

Has your discount rate typically stayed at, I am sort of assuming your cost of money if you are at a mid-teens discount rate your cost of money might have been historically mid 20s or low 20s, so you had a net spread 800 to 1,000 basis points as sort of a standard operating procedure.

Is it pretty rare that your spread would actually compress to what I am assuming is only a few hundred basis points, without obviously without changing the cost of money to the consumers? I would assume that is pretty exceptional.

Let me make sure I understand your question, Bill because keep in mind the discount rate is not our cost to copy capital.

Right, I know.

It is a market driven formula. Okay?

But I guess I am wondering if the cost that you charge your consumers, if we assume that that is over time is in the sort of low 20s, just my assumption?

Right.

And it is a relatively sticky number compared to changes in the discount rate we are observing right now, if the discount rate is normally in the low teens, and now it's gone as high as 19, I guess my question is if you are spread between what you would discount the asset at, and what you would actually potentially produce in terms of yield on the asset, has always been even though those aren't related numbers, has always been 1,000 basis points, and now it's 300 or 400, typically I guess my question is would that cause a change in the cost of money to the consumer, or would you expect that the discount rate would tend to come back to a more normal level over time? If something has got to give over time, if the new discount rate and the new cost of money has actually gone up?

Let me answer for you. This is Tommy. The first question you asked was how many times in the past did that spread go away.

Yes.

It went away essentially once under Jimmy Carter's administration, I forget the years, but essentially it went away, and we were able to operate our business successfully. In order to prevent what you just described of 200 to 300 basis points differential, we have used caps and swaps and other devices, to control or fix if you will our interest rate subjectivity, and so we would not anticipate that that would get to a 200 or 300 basis point spread, that we would use financial devices to hedge, or make sure that those rates remained at a differential, so that we could operate our business profitably.

That has been our practice in the past, and we don't use hedging or caps or swaps as a way to create income. We use it as a way to fix costs of money. We have done it in the past, and it is a vehicle that is available to us today.

Got you, great. Thank you for the clarification.

(OPERATOR INSTRUCTIONS). We will go next to [Alexandra Jennings] at Greenlight Capital.

Hi guys, just to make sure I understand as you walk through your liquidity, the 41.3 million of invested cash and the 105.6 million, those are both on the balance sheet, and as you look forward to this 150 million potential reduction in the variable note, that your continued liquidity presumes that you use that on balance sheet funding availability to work through that 150 million reduction, right?

Correct.

Okay.

It just shows that we have in the total Company, we have the liquidity available to continue to run the business. We will continue to work on other facilities as needed.

Okay, and so then you forecast trying to go to market in this next quarter to try to get that back off the balance sheet?

No, I don't think we forecasted that we would try to get it back off the balance sheet in the next quarter. We are working with our financial Advisors on financing alternatives that make the most sense for us, and whether things are on or off balance sheet is not a key driver in our funding decisions.

Okay. Can you walk me through the way you changed your re-aging calculation this quarter?

You bet. There is a subset of our bankruptcy accounts that are in the portfolio, that were being included in the calculation, but that is inconsistent with the way most people calculate re-age, so we pulled that subset of accounts out. As I said, it had a very minor change in the re-age percentages that we had previously reported. They dropped 20 or 30 basis points from what we had historically dropped.

Did those bankruptcy accounts move from the re-age calculation into charge off?

No. They are still part of the portfolio.

Okay, and so --

It was just inconsistent with how others report the number.

Those were reaffirmed bankruptcies.

Okay, and so they went bankrupt, and they stopped paying and then they started again, and now they are are not considered a re-age?

Correct. They never should have been considered a re-age.

Why not? Didn't they stop paying at some point in the interim?

That doesn't make them a re-age. A re-age is an active account that is not bankrupt, that you have extended the term for whatever reason to help that customer continue to pay. It is the standard definition.

Okay. As you, thinking back about bringing all of these accounts on to the balance sheet, how is that going to change the Income Statement accounting for them going forward?

You are presuming they come on balance sheet?

I thought you said that as this portion of the variable note does not renew, you expect to bring some of these receivables on to the balance sheet as your way of funding them.

We might have some of the funding on our balance sheet, whether or not the receivables themselves would be on our balance sheet or not is a separate issue, and it depends on what financing arrangements we end up completing.

Okay. And so looking forward if you do not complete a finance arrangement in this next quarter, you are going to drawdown on that on balance sheet Credit Facility, right?

Yes. We would, after the QSPE would pay out of the collections of the receivables, we would use those collections to pay on the variable funding note as it needed to be paid down to the committed amount, and we would draw on our existing cash flow and available facilities for new receivables.

Okay. And so would that then, as you draw on your existing cash flows, would that then decrease the way that finance income is recognized because you are not transferring to the QSPE, but rather drawing down on your cash flows to finance?

Well, the receivables may still be transferred to the QSPE, but it may just have some different classification in the Income Statement, but ultimately pre-tax earnings would still be, it would just be a classification in the Income Statement, and if we need to talk about this more offline, I would be happy to take a call later. We have got a few more people in queue that would like to get in, so I would like for us to go ahead and move on and give them an opportunity.

Thank you.

Thank you.

Next we will go to [Neil McConnell] at Walker Smith Capital.

Good morning guys, just to clarify something you just said about the bankrupt accounts, do you currently have bankrupt accounts in the current portfolio?

Yes.

Why aren't those charged off?

Because they are paying typically. We are receiving, they are being reaffirmed and we are working with them, or they are on payment plans, and we are working with them to collect those balances. It is not --

Tell him the definition of reaffirmation, we have been to court.

Well, reaffirmation, these bankrupt accounts have either pledged the product to return back to us, or they are making a payment stream.

But those wouldn't be included in the re-age bucket?

No. Again it is a court action, so they are ordered to do that, and it is very consistent with what we have been doing in the past and as Mike pointed out, it is a 20 to 30 basis point impact on the re-age.

Got you, and what percent of the total pool would be in that reaffirmation bucket?

Bankruptcies are approximately 1% of the portfolio. They aren't a significant portion of the outstanding balance.

Got you, okay. And then the guidance of the $1.76 to $1.86, getting back to Alexandra's question as well, does that assume you use the on balance sheet cash to fund the receivables past the July timeframe?

That guidance assumes that regardless of what borrowing facilities are in place, that we do have some increase in borrowing cost.

Okay, so you are accounting for an uptick, okay, great. Thank you very much.

Thank you.

We will move next to [Clare] Davis at Perennial.

Hello. A lot of my questions have actually been covered. I did want to ask if you can give us any color on what amount of the fair value adjustments you are expecting for the rest of the year, given that we have had a couple of quarters of this so far?

Clare, I would love to be able to predict that, but I have no idea what the financial markets are going to provide for us over the next few quarters, and so that is just something that is very hard for us to estimate. When we adopted fair value accounting, if somebody had told us what the financial markets were going to do over the third and fourth quarters of last year, and this first quarter, nobody had any idea we were going to have the kind of volatility we have experienced, so it is just really not something we can predict, since it is not based on specifically or only on Company performance.

To clarify your updated guidance right now is ex any future adjustments?

Right. What we are trying to focus on is here is our expectations of core operations, and we still feel good about our core operations, and what fair value is is what fair value is, and we are going to focus on running the business.

In early April, Moody's put you on watch for possible downgrade, and I was curious if you had any conversations with them, or knew what the status of that was, and how you anticipated that affecting your future financing options?

Certainly we are talking to them about working through their review process. Where they will ultimately end up on their decision is too early for us to tell, and we may not know until they are ready to make a call.

Have they given you any indication as to what their timeline on this might be?

They have indicated that they will continue to work with us, and when they feel like they know everything they need to know, then they will make their decision. There is no hard and fast deadline as to when they are going to conclude on their rating.

Does being on watch, without any resolution in that area, does that hamper your ability to get financing, these options that you are considering right now?

No. The securitization market even before that issue has already been a challenge and a struggle, but outside of the securitization market, we do have, are having some good conversations and have some good interest, but it does make the securitization market a challenge.

When you say good conversations is that with your existing bondholders?

I can't go into details right now, but with the conversations we were having with our financial advisors.

Okay. All right, thank you.

We have a number of alternatives.

Thank you, that is it.

Thank you.

That does conclude the question and answer session. Mr. Poppe, I will turn the conference back over to you.

Well, this is Tim. I would like to make a couple of quick closing statements. Overall we continue to see positive trends in just about every area of our business, and this is especially true of cost control initiatives, the improving credit portfolio performance, and sales growth. So these improvements are occurring despite the headwinds of a challenging economic environment.

I would also like to thank Tommy for continuing to be involved very much on a day-to-day basis with our business. So, Tommy did you you have any comments?

No. I think that concludes it.

All right, thank you for your time today. This concludes our call.

And again that does conclude today's conference. Thank you for your participation. You may now disconnect.