Conn's Inc (CONN) 2008 Q3 法說會逐字稿

Good morning. Thank you for holding. Welcome to the Conn's Incorporated conference call to discuss earnings for the third quarter ended October 31, 2008. My name is Lisa, and I will be your operator today. During the presentation, all participants will be in listen-only mode. After the speakers remarks, you will be invited to participate in the 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, Lisa. Good morning everyone. Thank you for joining us. I am speaking to you today from Conn's corporate offices in Beaumont, Texas. You should have received a copy of our earnings release dated November 26, 2008, distributed before the market opened this morning, which describes our earnings and other financial information for the quarter ended October 31, 2008. If for some reason you did not receive a copy of the release, you can download it from our website at Conn's.com. I must remind you that 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 best 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, and the current status of our credit and financing operations. In addition we will discuss the impact of Hurricanes Gustav and Ike on our credit and sales performance, and on the outlook for the remainder of fiscal 2009.

Net sales for the quarter were up by 2.3%, while same-store sales decreased by 5.8%. Sales were negatively impacted by two hurricanes and mandatory evacuations for most of the Gulf Coast. These storms necessitate two mandatory evacuations for employees located at our corporate office, and many of our stores within a 13-day time period. August and October both showed positive comp store growth, while September resulted in a negative 20.4% comp store impact.

The storms resulted in 144 store days lost in the month of September. In addition, sales velocity slowed as soon as the storms entered the Gulf of Mexico, and remained negatively impacted until many days after landfall. Taking the storms into consideration our sales performance was within our expectations. Strong growth in consumer electronics, flat-panel TVs, laptop computers, DVD and Blu-ray players, and GPS devices, lead the growth in our business while decreases occurred in appliances. In the month of October, we did see growth in our appliance business up 9.6%, much of this increase appears to be storm related.

In our electronics business for the quarter, LCD unit sales were up 63%, and retail sales for this category were up 69% over the prior year. We expect these trends to continue, due in part to an extremely price competitive market and holiday season, driving even more demand for this exciting product. Our markets continue to show stronger economic health than a majority of the country, with Texas enjoying an unemployment rate of 5.6%, well below the national average.

We continue to remain very price competitive in the market, due in part to our national buying group, NATM, continuing special purchases from our vendors, and improved product mix due to our training and in-store execution. Production capacity and product availability especially in flat-panel TVs, continued to drive a competitive marketplace. Furniture sales for the quarter were up 3.9% in a very challenging market segment. Generators and window air-conditioning sales increased by 60.8%, as our customers prepared for the two hurricanes.

This quarter we opened one new store in Oklahoma. In November we added the last two stores for this fiscal year, bringing our store count to 76, which completes our store opening plan. The stores in November were opened in North Irving and Oklahoma. In light of the current financial market conditions, and our conservative capital management, we have no new store openings planned at this time. Instead, we plan to focus on remodeling and updating many of our stores, allowing us to better display a broader selection of product to drive same-store sales, and leverage our existing infrastructure.

Gross margin was down 690 basis points from 36.4% to 29.5%, primarily due to a non-cash fair value adjustment impacting gross margin by 430 basis points. Product gross margin did show a negative impact on total gross margin of 270 basis points. We expect the competitive nature of the market to continue, and we are dedicated to both profitability and market share growth. We will continue to price products as necessary to achieve these objectives.

SG&A as a percentage of revenues increased 120 basis points, due to the non-cash fair value impact on revenues and hurricane expenses. Non-cash fair value impact on revenues was responsible for 200 basis points of the increase. Hurricane expenses of $1.3 million were responsible for 70 basis points of this increase. If you adjust SG&A for storm related expenses, SG&A actually improved by 150 basis points. We expect to continue to see SG&A improvements albeit to a lesser degree, due to our beginning these initiatives in the fourth quarter of last year.

Our inventory for the quarter was up 9%, with the addition of 11 new stores from the same time last year. As we look at our credit performance, there was a net charge-off of 3.4%, versus a 3.2% charge-off in the third quarter of last year. 60-day delinquency was 8.1%, versus 7.7% for the same period last year, and the percentage of the total portfolio re-aged was 19.7% at October 31, 2008, as compared to 16.67% at last October. Losses, delinquency and re-age were negatively impacted by the two hurricanes and mandatory evacuations that occurred in September.

We did not experience notable personnel turnover during the evacuations, as we have in the past with Rita. In addition, our San Antonio collection site which manages 65% of our collection volume, was not impacted by the storms. Receipts of payments through the mail were not disturbed during the month of September, as our payment processing has been moved to Dallas. Although we did lose several collection days during the evacuation for servicing a portion of the portfolio, the business continuity site in Dallas, was set up and running the day after mandatory evacuation.

We experienced a high participation rate of 86% of our credit employees, and relocating to the Dallas site during the storm. We believe that the worst losses due to the storm impact have been absorbed in this quarter, and we expect to see continued improvement over the next few quarters.

I am optimistic about sale sales growth in the fourth quarter of this year. Our merchandising and sales teams have been an excellent job in preparing for the holiday season. Store traffic and our initial sales have been brisk for the month of November, and we look forward to this holiday season.

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

Thank you, Tim. In the face of the myriad of challenges that we confronted this quarter from Hurricanes Gustav and Ike, to intensified macroeconomic headwinds, to the transition to our new financing facility, we were able to generate pre-tax profit each month of the quarter, excluding the impact of fair value accounting.

This performance demonstrates the resiliency and adaptability of our operating model under varying operating conditions. Because of the continued turmoil in the financial markets, we did record a large fair value adjustment during the quarter, largely due to an increase in the discount rate we estimated a market participant would require, when valuing our residual interest in the securitized receivables portfolio. As a result on a GAAP basis, we recorded a net loss for the quarter.

The increases in net sales and finance charges and other for the quarter were achieved despite the 144 store days lost as a result of the hurricanes, the negative impact on sales before and after the storms as our customers prepared for and returned from the storms, the reduction in the retrospective profits earned under our credit insurance program as a result of higher claims, due to the storms, and the negative impact on our credit portfolio performance as a result of the hurricanes.

The increase in finance charges and other excluding the fair value adjustment benefited from the different accounting applied to the receivables being retained on our balance sheet, as compared for the accounting for the receivables transferred to our QSPE. For the on balance sheet receivables, bad debt expense and interest expense are presented below revenues, as opposed to being presented net in finance charges and other as is the case for the securitized portfolio.

We had a solid profit contribution on a total portfolio basis, as the growth in the managed portfolio net of higher net charge-offs drove a 13.3% increase in the net portfolio yield. That is interest income minus net charge-offs and borrowing costs on a 14.6% growth in the average portfolio balance. The fair value adjustment is primarily the result of an increase in the discount rate risk premium input used in the discounted cash flow evaluation, due to the continuing turmoil in the financial markets, and not as a result of any Company specific performance.

Also impacting the fair value adjustment was the negative effect of shrinking the sold portfolio to match the committed funding level, and an increase in the net loss rate input based on our expectations of what a market participant would use, given the recent performance of other consumer credit portfolios, and the impact of the hurricane on our credit portfolio. As a result of this adjustment, the fair value of our interest and securitized assets is now approximately $15 million less than our cost basis. At this time, we believe our total investment will be fully recoverable.

As Tim mentioned previously excluding the fair value impact in both periods and the impact of the direct hurricane related expenses, SG&A expenses declined by 150 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 percentage of revenues, as well as lower advertising expense, and other store operating expenses as a percent of revenue.

As Tim indicated, we do expect to be able to maintain this cost structure. We incurred uninsured hurricane-related expenses of approximately $1.3 million, for relocation and housing of our employees, damages to our facilities and inventory, and expenses to operate our stores while utilities were being restored. This does not take into account the indirect costs related to lower productivity as our employees moved between locations, and worked to get the operations set up at our business continuity site, and then relocated back to the corporate headquarters for both hurricanes.

As a result of the entering the new asset based lending facility in August, we began retaining receivables on our balance sheet during the quarter, and funded them through the use of our invested cash balances and borrowings under our new credit facility. As such we are now recording a provision for bad debts, to reserve for future expected net credit losses on receivables held by us, and not transferred to our QSPE. As a reminder, the net charge-offs on sold receivables are recorded in finance charges and other.

During the three months ended October 31, 2008, we recorded a provision for bad debts of $2.8 million, as compared to $582,000 in the prior year. Approximately $2.5 million at the current year expense was directly related to the new receivables retained on our balance sheet. Additionally as we anticipated we used our invested cash balances and borrowed $33.4 million under the credit facility to fund receivable growth on balance sheet, resulting in an increase in net interest expense during the current year quarter.

Because of the fair value adjustment and impacts of the hurricanes, we reported a net loss on a GAAP basis of $7.7 million, and a net loss per share of $0.35 in the current year quarter. Adjusted net income excluding the fair value impact in both periods was $2.5 million in the current year, as compared to $ 6.6 million in the prior year. Adjusted diluted earnings per share excluding the fair value impact in both periods was $0.11 in the current year quarter, as compared to $0.28 in the prior year.

Also affecting the EPS comparison were the direct hurricane expenses, higher credit insurance claims affecting our retrospective profit commission, and the provision for doubtful accounts on retained receivables, which combined totaled approximately $2.9 million net of taxes, or $0.13 per share. If you allow for these adjustments, earnings per share for the current year period would have been only $0.04 lower than in the prior year period. All-in-all a good performance considering the circumstances and this analysis does not begin to take into account the negative impact on earnings of sales lost due to the hurricanes, the impact on credit portfolio performance, or other related indirect costs.

Looking at our performance for the nine month period, after strong sales and earnings growth and improved credit portfolio performance trends during the first six months of the fiscal year, as discussed above, we faced greater challenges during the past quarter that negatively affected our operating results. GAAP diluted earnings per share was $0.58 for the first nine months of the current year, compared to $1.11 for the prior year, while adjusted diluted earnings per share excluding the fair value impact in both periods was $1.15 per share this year, compared with $1.23 last year.

The current year was negatively impacted by approximately $0.13 due to the hurricane expenses, reduced insurance retrospective commission, and bad debt expense on the new on balance sheet receivables, and the prior year period benefited by approximately $0.06 per share, due to $500,000 after-taxes of one-time gains realized on the sales of two properties, and a $900,000 one-time reduction in the provision for income taxes. If you allow for these adjustments, earnings per share would have been $0.11 higher than the prior year period.

Turning to our liquidity and cash flow, we used $23.3 million of cash flow from operations for the nine months ended October 31, 2008, compared with cash used of $11.6 million in the prior year period. The current year period was impacted primarily by the use of cash to grow the credit receivables portfolio on balance sheet, from $9 million at year-end to $89 million at October 31, 2008. This increase was funded through the use of invested cash balances, and $33.4 million in borrowings under our revolving credit facility, which are included in cash flows provided by financing activities.

Historically, all credit receivables were transferred to our QSPE, and the increase in our credit portfolio minus cash received from the QSPE upon transfer of the receivables, was reported net in cash flow from operating activities. The use of cash in the prior year period was driven by increases in inventory, and the effect of the QSPE paydowns on the 2002 series of bonds, which reduced the effective funding rate during that period.

Cash used in investing activities totaled $14.8 million in the current year period for investments in property and equipment. This compared with $3.1 million used a year ago as investments in property and equipment of $12 million, were partially offset by proceeds of $8.9 million from sales of property.

Financing activities provided $31.3 million in the current year, primarily for borrowings under our revolving credit facility, to fund the increase in receivables held on balance sheet, and the proceeds of stock issued under Employee Benefit Plans, partially offset by the costs incurred to complete the new credit facility. This compares with cash used of $18.8 million in the prior year primarily for purchases of Treasury stock of $20.7 million, and net of the proceeds from issuances of stock under the employee benefit plans.

We have borrowed $33.4 million under our revolving credit facility as of October 31, 2008, to help fund the new receivables being retained on our balance sheet. During the month of September, as expected the QSPE completed it's paydown of the $50 million due under it's expired funding facility, using the proceeds from the principal payments received on it's receivables portfolio. It is important to note that the fair value adjustments are excluded in determining all of our credit facility covenants, and we are currently in compliance with all of the covenants.

As previously reported, during the month of August we completed two significant financing activities. First, we entered a $210 million asset based loan facility, to finance the growth of the Company and the credit portfolio. Second, we announced the completion by our QSPE of the renewal of it's $100 million 364-day variable funding note.

These facilities in addition to the existing $200 million variable funding note committed until 2012, and the $150 million of medium term notes that began repayment in September of 2010, give us $660 million of total financing commitments, with $560 million of those commitments being long term in nature, up from just $450 million of long term commitments at July 31. Additionally the ABL facility gives us a presence in a second debt capital market, helping us diversify our funding sources, and mitigate our exposure to a credit crunch in a specific market, as we have experienced in the securitization market.

At this time given the current facts and circumstances we believe the QSPE and the Company have sufficient combined liquidity to maintain consistent operations for at least 18 months, before considering renewals or expansions of existing facilities. The sources of this liquidity as of October 31 include approximately $154.3 million of unused capacity under the Company's new ABL facility, of which $53.2 million was available to be drawn at October 31, and the remainder will become available, based on the growth in the receivables portfolio held on our balance sheet.

Approximately $18 million of unused capacity under the QSPE's borrowing facility that will become available subject to growth in the receivables portfolio held by the QSPE, $10 million available under a new unsecured line of credit, and among other sources, we have future cash flow from operations, flexible inventory payment terms, the ability to sell or finance owned real estate, the ability to modify certain capital investment programs, and other financing alternatives.

As we mentioned in our press release, we are temporarily suspending the provision of earnings guidance due to the high degree of uncertainty in the economy, though Tim did comment on our expectations for sales, gross margin and credit portfolio performance during the upcoming quarter. Additionally while we do not expect we will achieve our previously reported annual earnings per share guidance, we do expect to be solidly profitable during the fourth quarter. Much of this analysis and more is available in our Form 10-Q for the quarter ended October 31, 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.

Let us take some questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question comes from David Magee from SunTrust Robinson. Please go ahead.

Yes, hi, good morning.

Good morning.

Just two questions. One is a two-parter though. Can you talk about the relative demand you see right now of poor credit within the stores, and does that enable you the fact that you are getting that business to enable you to be even more price competitive, and therefore, what we see in the product margins might be reflective of that as well?

Well, I think, David, the demand is consistent with what it has been historically. That may change as credit continues to tighten, but we have not seen that as yet. We see a consistent trend at that, and as far as our pricing goes, we learned a long time ago that our pricing, we really have to be very competitive, regardless of the strength we have in this credit, and so we have to make sure that we are competitive so they are really two separate items in our mind.

But if you get the credit of sale though does not ultimately lessen the pain of the product margin being squeezed?

Yes, certainly.

And then the other question, Mike, is I wasn't writing them down fast enough, you talked about the $2.9 million impact because of the hurricanes, and you mentioned some other items in there too. Could you just hit on those again from the quarter, that if you add all that back you get $0.24.

You bet. There were three items I mentioned. One, the 2.9 was the net of tax. I will give you the pre-tax numbers here. The hurricane expenses net of the insurance proceeds was 1.3 million in the quarter. The bad debt expense, now that we are recording this allowance, where as if everything were still being transferred to the QSPE, we wouldn't be recording this provision, that was $2.5 million, and then because of higher claims, credit insurance claims related to the hurricane, there was a $700,000 impact, and so those totaled 4.5 million pre-tax, or about 2.9 net, and that is the $0.13, that comes to about $0.13 on a diluted EPS basis.

Great. Thanks a lot.

Yes, sir, thank you.

Our next question comes from Anthony Lebiedzinski with Sidoti. Please go ahead.

Yes, good morning. I do have a few questions here. As far as store openings, did I hear correctly that you are not planning to open any new stores next year?

Anthony, at this time, it is a wait and see attitude. We want to be as judicious with our capital and our liquidity as we can right now. We have got some opportunities to update some stores, which will allow us to display more furniture, appliance vignettes, and even flat-panel TVs, so hopefully that will drive more same-store sales.

Okay, so what are your CapEx plans then for this year, and possibly do you have any comments for next year as far as your CapEx?

You saw in the press release our CapEx are about $15 million so far this year. As Tim mentioned, we have completed our store opening plans, so the pace of CapEx should slowdown somewhat, but we will turn to doing some updating, but we don't do a lot of that during the holidays, and then just dependent on where the market, the capital markets go next year and capital availability will determine our store opening plans, which will be a big driver of next year's capital expenditures.

(OPERATOR INSTRUCTIONS).

Our next question comes from Rick Nelson with Stephens. Please go ahead.

Thank you, good morning. You mentioned October sales were up 9.6%. Can you provide what the same-store was, and also what is happening in November in terms of same-store growth?

I am sorry, Rick. Can you say that one more time?

Yes. October I think you mentioned that sales were up 9.6% wondering what the comp or the same-store growth was in October, and also any comments on November?

Sure. The 9.6% I was talking about was specifically appliances first of all, and we obviously saw a bump in appliances, a lot of that was driven by the recent storm activity.

So if I if I was to look at comps for appliances for the month of October, I can give you a rough, hold on just a second. In fact that was, for appliances it was about 2%.

And then are you also seeing replacement demand in any other categories, electronics, and some feel for November would be helpful as well?

Okay. I think that what we are starting to see is a little bit of a slowdown in reference to storm related benefit, as people in this area are becoming much more, we have learned a lot, taking food out of our refrigerators, putting electronics up high that sort of thing, when these storms roll in, so we will continue to see some benefit, but it is pretty minimal in my belief.

Now what we are seeing in November is a pretty good start, a brisk start, and it is a little difficult to do a true comparison, because as the way November falls out this year, Black Friday would already be in our numbers from last year, and we haven't experienced Black Friday this year, and a lot can turn on that one day, but the momentum in November appears to be very good.

All right, a question also on the credit business. Is it possible to look at the credit stats in the non-hurricane affected regions, to see how they are tracking year-over-year or sequentially?

I don't have those numbers in front of me. That is something that we can get to you, but everything that we show, as Tommy just mentioned, you may not have heard him, he just mentioned it to me. They are tracking very well.

And we have a follow-up question from Anthony Lebiedzinski with Sidoti. Please go ahead.

Yes, thanks for taking the additional questions. I am just wondering what was the reason behind the increase in portfolio re-aging?

The increase, Anthony, is this storm, these two storms, but specifically this last one, had a very high storm surge in areas like Galveston, Texas, Bridge City, in Bolivar Peninsula, there were whole communities that were wiped out. Smaller communities but whole communities, and it was essentially a one-time extension that we did. They had to provide FEMA documentation. They had to provide documentation to us, that they were in fact, not just in an impacted area, but that they were personally impacted, so we were very careful and very judicious with those, but it did inflate, and we have been watching the 0 to 14 day trend, we have been watching first payment defaults, the early indicators very closely, and what we see are good signals that they are in fact now paying.

And if I may add-on to what Tim just said, if you look back to Hurricane Rita, we over a period of time after Rita, offered extensions to help our customers as they got back on track with their payment stream, and as you have seen over the last three years since that occurred, we have maintained good credit portfolio performance, maintained the charge-off in that 3% range, and turned the portfolio over several times, so we feel very good about our ability to make this work, and continue the long term performance trends we have seen in the portfolio.

And this is Tommy. And the trends we are seeing today in recovering from these two storms, the results are much more encouraging. They are occurring much quicker, and we really are headed towards our normalcy a lot quicker than we did with Rita, which really took us six to nine months. We feel like within the next 30 to 60 days, it will be tracking towards a more normalized pace, which is very, very encouraging to us.

Okay. And also, if you assume that you are profitable as you said in the fourth quarter, is there any chance that you will be able to generate positive cash from operations, because year-to-date, it is cash used so far is about 23 million.

Well, keep in mind as we talked about in the comments, Anthony, now with this on balance sheet funding, on balance sheet receivables, the compare and contrasts what we used to do, before when everything went through the securitization, all of the borrowings at the QSPE that came to us as cash payment for those receivables was included in operating cash flows. Okay?

Now when we borrow on our new revolving facility, that is showing up down in financing activities and so to get to an apples-to-apples comparison, you would need to add that $33.4 million to your operating cash flows, but yes, from an operating standpoint, we will have the same kind of cash flow generation that we have had historically.

And our next question comes from Jeff Blaeser from Morgan Joseph.

Good morning. Thank you for taking my question. Quick question on the hurricane impact, net charge-off ratio, delinquency. Is that more a factor of consumer dispersion following the hurricane, and you just can't get in touch with them, or are they just delaying their payments, as they are probably strapped a little bit more under current conditions?

It is a little bit of both, and Jeff, when you look back at Rita, the main issue we had is we just lost our employees, we lost a large group of them, that took us a long time before we were able to hire back, and get them back really productive.

This time, because of the secondary call center in San Antonio, we really didn't lose a lot of production time, and we had a much higher participation rate as I said in my remarks, and so really on the employee side, if you think about it, evacuating twice in 13 days, just to get to Dallas in some cases took 14 to 18 hours, and so we lost probably about four days in each one of those evacuations, getting up there and getting back, but that was, that would only represent about 34% of the collection activity on our portfolio. The other part of it never missed a beat in San Antonio.

The other difference between Rita and this storm, is that this storm impacted a larger geographical area with Houston, and of course Southeast Texas, but it was not nearly to the same extent except in a few isolated communities, like Galveston, like Bridge City, so as those customers are coming back into the major markets, we are seeing payment rates right back to where they are falling back into place where they need to be, so this storm we were better prepared. The customers came back quicker, even though it was a larger area, and so things are falling back into place more quickly. Did that answer your question?

I believe so. So it sounds like you are in communication with most of your customer bases at this point?

Yes, absolutely.

Okay.

And I will take it a step further, Jeff, is that we have initiated a program really tightening our verification standards, and we have seen an increase in, I will give you an example, home number, home phone number. We were in the mid-70% where we would have a good home phone number, and now we are up about 86%, so we are seeing an improvement in the information that we are getting, because we knew that would be an issue.

Okay, and have you made any adjustments to credit requirements, down payments on certain items for new customers looking for credit?

The very lowest end of the scale we have tightened things up a little bit. We think it is the smart thing to do right now. Certainly our down payment pretty is much in-line with what we have always done. I will give you an example of where it may have upticked a little bit was with the generator the and air-conditioning units that we sold during the storm, we increased down payments a little bit there.

One of the reasons though is sometimes some people will buy a generator, use it for the storm and then just turn around and try to give it back to you, so these things put a little bit more equity into it, but overall I would say that we have really pretty much kept it stable.

(OPERATOR INSTRUCTIONS). Our next question comes from Alexandra Jennings with Greenlight Capital.

Hi. So first of all, what is the new credit loss estimate that is being used in the fair value calculations?

The estimate being used in the fair value calculation now is a 4% net charge-off rate. That is what we believe a market participant would use, not what we expect our performance will be.

Okay, and so that is based on comparing to your competitors you said? Which ones do you think are the right ones?

We look generally at performance in credit card portfolios and the trends in consumer credit card portfolios, and then secondly, at the trends in our portfolio performance, to try to estimate some risk premium we think that an independent investor might add when they are doing, if they were doing this valuation on their own.

Okay, and so you are expecting them to add a premium, both in the discount rate and in the credit loss assumption then?

Absolutely.

We would be very disappointed in ourselves though, if that is what the actual loss rate came in at.

All right, and so have these assumptions gone through an audit, or is that something that is going to happen next quarter?

Certainly our auditors and Audit Committee take a look at our assumptions, and for reasonableness, then at year-end we will have our final year-end audit, but to date, everybody has been comfortable with the methodology that management is using in valuing the assets.

All right, so they have not yet been done through that audit?

Not this year, but this methodology has been audited in last year's financial statements.

All right, thank you.

And there are no further questions. I would like to turn the conference back over to our speakers for any additional or closing remarks.

We are noticing there is one more person that popped up in the queue, if we could pick up that last person.

And our next question comes from David Silverman from Creditntell.

Yes, thank you for taking my question. Previously, you made a mention about your borrowing capacity, and I am confused about the two numbers you used. You said I believe 154 million in unused capacity, and 53 million available to be drawn. What I am trying to get at ultimately is the amount of your borrowing availability. Is it that the 154 is more or less a borrowing base amount, and the 53 is the amount remaining that can be borrowed?

No. It is a $210 million facility, if we are talking about just the revolving credit facility. We have borrowed $33.4 million, and have $22.3 million in letters of credit outstanding, which leaves 154 million in total capacity remaining.

Of that, we can borrow $53 million as of October 31, and then as we grow the borrowing base, that would be primarily the receivables portfolio, the 154 minus 53, or $101 million that we can't borrow today, will become available as we grow the portfolio. Okay, but the amount that you can borrow today though is the smaller number, the 53?

Exactly. That is the total availability, though we have capacity beyond that as we grow the portfolio.

(OPERATOR INSTRUCTIONS). I show no further questions. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, Lisa. In my closing statements, although the new non-cash fair value system has negatively impacted our numbers for this quarter, we see many positive signs. Our liquidity is more than ample to support our operating plans for the foreseeable future. We have consistently maintained profitability month after month for more than 10 years, exclusive of fair value adjustment, and I am proud of our team doing this in the face of not one, but two hurricanes in 13 days.

We continue to see opportunities not obstacles in the current economic environment, and we are dedicated to taking responsibility for insuring continued success. I am thankful for our 3,300 determined, hard-working associates that stood by us during these storms, and know they are dedicated to the success of their Company.

Thank you for your time today.

And that concludes today's teleconference. Thank you for your participation. Have a good day.