Consumer Portfolio Services Inc (CPSS) 2003 Q2 法說會逐字稿

Good day everyone. Welcome to the Consumer Portfolio Services second quarter 2003 earnings release conference call. Today's call is being recorded.

Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Such forward-looking statements are subject to certain risks that could cause actual results to differ materially from those projected. I refer you to the company's SEC filings for further clarification. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. I will now turn the call over to your host, Charles E. Bradley, Chief Executive Officer of Consumer Portfolio Services. Sir, the floor is yours.

Thank you, and thank you all for joining us for our second quarter conference call this morning. Overall, we are very pleased with our quarter. We are continuing with our plan of modest growth and really working on the integration of our acquisition and building the infrastructure to go forward.

In talking about our operations, probably it's worth noting a few things, I guess. The revenue is down a little bit compared to the second quarter -- it's 23 million versus 27, but it's flat quarter-to-quarter versus second quarter versus first quarter at 23 million. Somewhat more importantly, that the expenses are down about 20%. 20 million versus 26 million in '02; and then they are flat first quarter versus second quarter.

But the bottom line is, we are not really trying to grow the company right now. We are, in fact, trying to build the infrastructure to go forward. We are cutting expenses. And we continue to work on the integration of the Mercury acquisition, and most recently, the TSC acquisition. Both of those acquisitions are going very well.

The Mercury one is fully integrated at this point, and the results from that acquisition have been great. The TSC acquisition, we completed that acquisition in May. That is going very well for us. It's everything we thought it would be. We are very pleased with our originations platform. As some people might know, when we bought the Mercury company, we discontinued their originations.

With TSC, we happened to like -- it took us a little bit to understand how they did originations, they're mostly military-based, but we think it's very complimentary to our program, so we have continued originating TSC paper and will continue to do so in the future. That's all worked very well for us. Other than that, in terms of the balance sheet and looking at some of these items, cash is at an all time high at 62 million versus 52 million.

As you can see if you followed the last few quarterly releases, our cash positioning continues to grow without us increasing our debt. You'll also notice that the receivables on balance sheet, as a result of the TFC acquisition, are up. They are 174 million versus 84, or about 90 million in additional receivables on balance sheet. Associated debt is only up about $80 million. So there's an extra 10 million in receivables there.

You can also notice the cash position has improved by $15 million with no increase in debt. What that really is, sort of those are the numbers. But what's behind the numbers is that Mercury acquisition was a very good deal in terms of the cash in the portfolio. And that cash is continuing to come out of that portfolio, which is why you see it on our balance sheet without us having to borrow money to come up with that cash.

So, again, that's all worked very well and pretty much exactly as we hoped and planned. Overall, in terms of the financial position of the company, you know, we're doing as well as we possibly could. We are all very pleased with what we've done. Like I said, both acquisitions have gone extremely well.

What we've done for the most part in doing the acquisitions, we've acquired portfolios. When we bought Mercury, the portfolio in that company was 450 million. When we bought TSC, the portfolio in that company was about 170 million. By buying those two companies, that basically doubled the size of our existing portfolio.

That produces servicing income, it puts lower cost structure in place. As we continue to finish the integration of those companies, we will become even more efficient in the future, but more importantly, we've been able to pick up a lot of talented people from both Mercury TSC who will help us in the future as we start to grow again.

Most recently, we did announce in this press release that we've added a new CFO. His name is Robert Rito [PHONETIC]. He has been with us since January in other capacities. He has at least ten years of experience in the sub prime auto industry. He's been a great addition and is working out very well, so we look forward to having him help us as we continue to grow again.

In terms of the market, the market's still very competitive. Because of the low interest rates, lots of banks and credit unions that in sort of a normal interest rate environment probably wouldn't be participating as strongly in this industry, because of the regulatory constraints on having sub prime loans on your balance sheet as a bank or even as a credit union, but with the low rates a lot of those kind of companies have come in and they are all looking to grow -- and this is a market as everyone knows, where the auto industry isn't growing particularly -- and so loans are a little harder to come by and people are still being very competitive.

For lack of a better way to say it, we've probably chosen to take the high ground in that area. We are not really looking to compete. Our portfolio is growing ever so slowly, not counting the acquisitions. With the acquisitions our portfolio is growing a lot. But in terms of us originating loans, we are originating just enough to grow the portfolio at a very modest pace.

As I stated in previous conference calls, we are really waiting for two things. One, we are waiting for the competition within the industry to quiet down. It's still a little irrational at times, and there's no point in us chasing bad paper. It's really plain to see any company in this industry that's chased bad paper in the past has had all sorts of problems, and eventually, more than likely, gone out of business. So we've really never chased paper and we won't start now.

Secondarily, what we're really waiting for is our portfolios -- the ones we originated in 2002 and 2003 -- to grow, or to age and show their performance. Because as their performance shows, our ability to do new deals with less cash reserves and better execution will continue to grow. And so we are very pleased with our portfolio performance to date.

In looking at the delinquency, our delinquency was up a little bit over the quarter,from 3% in the first quarter to 4% in the second quarter. That's mostly seasonal, based on the summer. But even so, 4% delinquencies is great. We are very happy with that.

Somewhat more telling in some ways is the annualized loss number continues to go down. It went down rather substantially from the first quarter to the second quarter. It went down from 7.2 annualized charge-offs to 4.6. Now, that's a little bit of a combination as we are starting to add paper again, so that sort of, you know the old story is, if you grow a lot it starts to hide your loss numbers. But we've already been in the absolute opposite of that where we don't grow, and you get to see what your losses are.

And now that we're starting to grow again, as our portfolio grows, that loss number becomes even less, and obviously, that increases our earnings capabilities. But it's a very nice trend from 8.6 in the fourth quarter to 7.2 in the first quarter to 4.6 in the second quarter. So we're very pleased -- overall the portfolio performance is great.

It's probably worth mentioning, we are not in any danger of hitting any triggers at all. Obviously, that's something everybody should be concerned about. Certainly we are, and we watch them very carefully. But the portfolio performance is exactly what we expected it to be, and if nothing else, it's probably better, so we are very pleased with how that's all working out.

And as that continues to happen, remember that when you -- we were out of the securitization market for a couple of years. So coming back in, everyone's a little bit hesitant and doesn't -- and conservative in terms of how they structure securitization. But as the portfolios, as the securitizations we have done continue to perform, then we get to have a little bit better execution, lower cash requirements as we go forward, and that's the time when we can take the cash we are building and us it to our best ability to grow. That's when we sort of get the most bang for our buck in terms of growth.

Until then, as I said, we have spent a lot of time in retooling our acquisition platform, putting the controls in place so when we do grow we will be able to grow at a conservative or an easy pace, without having to worry about the credit performance falling off. In the end, that's the name of this game and how it all works.

Now, finally, what probably everybody is interested in is, we've also made the decision, effective with the beginning of the third quarter, to go off of gain on sale accounting. And as anyone that follows the industry, almost everyone has made this decision.

The reasoning behind it is it's much more transparent for both Wall Street and accounting the way you do your accounting. For the people that don't know how it works: Gain on sale accounting basically implies or entails taking an estimate of future income when you sell your -- or do your securitization, and you take that estimate into income or revenue day one, and then as the portfolio performs, you kind of amortize that off or offset it.

But you're basically recognizing revenue up front, rather than over the course of the life of the portfolio as it performs. This is all according to GAAP if you're doing gain on sale. What happened is, in this industry, lots of people took some aggressive assumptions on how their portfolio would perform in order to boost their gain on sale. As a result of that, when the portfolios didn't perform, many companies had to restate their earnings and it caused massive problems. As a result of all of those things, using gain on sale has really fallen into disfavor, especially on Wall Street.

Many, many analysts funds have no interest in a company that uses gain on sale, because it makes the earnings somewhat front loaded and it also makes it much harder to understand how the portfolios perform. So as a result of all that, we just think it's also more conservative, we have decided to stop using gain on sale, effective with the third quarter.

What's that really mean? It means the following: Instead of recognizing revenue up front on the sale of your loans, what you do instead is you recognize the same revenue over the life of the loan as the loan performs. That's one thing. So you have a negative revenue element up front.

The second thing is, all of your loans now stay on balance sheet. Which is sort of the real norm in terms of a finance company, and certainly the way all the large [INAUDIBLE] like Ford, GMAC, would do their accounting. In terms of Wall Street, all the people that follow those large companies, it will be much easier for them to understand in looking at us because the accounting they're used to is on balance sheet accounting.

The second element, which is somewhat painful, is that as you buy those loans when you are doing on balance sheet accounting is, you have to take a reserve. So you have to take that reserve up front. So that is, of course, an expense or a negative in terms of your ability to produce earnings. So it's somewhat of a double whammy.

In one sense, you are lowering your revenue because you're not taking a gain up front; in the other sense, you are increasing your expense because you're taking a reserve. Now, over time as your portfolio grows, it takes a couple of quarters, maybe -- anywhere between two to four quarters for this to roll over to where you all of a sudden start recognizing a lot more revenue as the reserves have all been built. But there is an initial phase where you have a little bit of a negative.

That's what we are going to experience over the next couple of quarters. Depending on how we grow and how it works, that could be, you know, for a couple of quarters or even a little longer. The important part is, it doesn't change the business. The cash flows remain exactly the same. It just is really an accounting change in terms of how we recognize revenue. The reasoning to do it is, like I said, probably on the one hand it's because most companies that have used gain on sales have not done very well with it.

Secondarily, it's much more transparent and easy to understand, and thirdly and somewhat important down the road, it probably will give you a better multiple or better revenue expectation from Wall Street. And as I said, we're not really in this to grow the company real quickly, drive the stock price up and have it fall down. We are in this for the long haul, we're going to build a big company, we're going to have a long earnings history, and hopefully a very profitable future.

So in the end, having us use portfolio accounting will be far more profitable and far better for the company in terms of transparent accounting, how we're understood on Wall Street, and the kind of following we can get on Wall Street. Many firms, as I mentioned, don't even want to look at companies that use gain on sale. And also, as I mentioned earlier, most everyone else has already gone off of gain on sale, so it's really the thing to do.

Other than that, you know, as I said, the company's running very well. We are becoming more efficient every day. We are putting the controls in place for our future growth, and we are building up a lot of cash. The portfolio performance is doing great. Just what we expected. We think it's all working the right way. It takes some patience in this industry.

The hardest thing is to be patient to build a company everybody wants to see. The easy thing is, the management of the company today has the patience to do what it takes and do the right things to build a company that will be very successful in the future. With that we'll open it up for questions.

Thank you. The floor is now open for questions. If you have a question, please press the number 1 followed by 4 on your touch tone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you pick up your hand set to provide optimum sound quality.

Once again, to ask a question, please press the number one followed by four on your touch tone phone at this time. Please hold while we poll for questions. Once again, if you do have a question or a comment, please press the number one followed by four on your touch tone phone at this time.

Thank you. Our first question is coming from Maury Miller from Wells Fargo Securities. Please go ahead with your question.

Are there additional acquisition opportunities out there for us, as they seem to be an effective way for us to go forward?

We continue to look for them. It's one of those things where, if you actively go run around and looking for them it's probably much harder to find them, or the price of the potential acquisition is much higher.

We continue to look for acquisitions, sometimes we hope they find us, but given the time we're going to have going forward, doing an acquisition would be a great way to supplement our income for the next couple of quarters. So the easy answer is yes, we are actively looking for acquisitions. We are certainly in a very good position to do one if we can find one. We have been very successful with the two we have done so far.

Thank you.

Thank you.

Thank you. Our next question is coming from Dan Knowles from Goldsmith and Harris. Please go ahead with your question.

Hi, Brad. Do you have any interest rate swaps to hedge any of your assets that might be an issue for you these days?

We do not. We do do swaps in the warehouse. But on the securitization, once you do the securitization the rate is locked, so we don't need a swap. We do have a swapping requirement on our warehouse. Since we empty the warehouses every quarter, give or take, you don't really have a big problem with swaps.

Is there an accounting issue on those warehouse swaps where you have to -- you have to make the kind of choice that Americredit did recently?

Theoretically, if we had a huge warehouse and we held it longer and the rates moved dramatically in a three-month period, you might have some swap losses or something. But the easy way to look the us compared to them is, we really don't have any kind of swap exposure that way. It would take a very dramatic interest rate swing. If you think about a three-month period, the warehouse is virtually empty day one. So you're only going to be swapping, you know, some amount for the middle -- you know what would be the average part anyway.

Since we are only doing 100 million -- or 90 million to 100 million -- a quarter, you're talking about a $45 million average balance for the quarter and a swap for some percentage of that. It would be very hard, you know, for us to get into a swap problem at this point. In some ways, the spreads are so large in our warehouse that we only -- actually of the two, I think we only have a swap requirement in one of them.

But the bottom line is, the insurer requires enough coverage within the warehouse, and to the extent the rates would close down, you would have to purchase a swap. But we don't have the kind of [INAUDIBLE] such as Americredit. They were doing a lot of stuff much more complicated than that. We don't have that kind of exposure.

Thank you.

Thank you.

Once again, if you do have a question or a comment, please press the number 1 followed by 4 on your touch tone phone at this time. Please hold while we poll for questions. Thank you. Our next question is coming from Ken Liedy from Prudential. Please go ahead with your question.

Hi, guys. Congratulations. This was a great quarter.

Thank you.

Just wondering if you could give us a little bit of guidance as far as revenue targets and earnings going forward?

Well, it's a little hard because as we switch accounting, we had talked about it the last time on this call giving earnings guidance, say this quarter or next quarter. Given the fact that we're going to change accounting, probably until we get a handle exactly on how it works -- on how it's going to work -- it wouldn't be particularly prudent for us to give the guidance. However, the easy answer is, to make the switch, as we said in the press release we probably would not expect to be profitable for the next two quarters. Or if we were, it would be marginally profitable.

Beyond those two quarters, it's a little bit up in the air as to how fast we could turn it around. The rule of thumb for changing accounting is probably anywhere from two to six quarters to make the switch over from gain on sale to portfolio accounting. You know, like I said, the easy answer -- and one of the reasons I'm somewhat hesitant. But if we go out and do another acquisition, that could change the landscape somewhat dramatically in terms of how soon we could make money. But for the moment, it is safe to say we are probably break-even or negative for the next two quarters, and then after that it's a little bit up in the air.

What's the current average portfolio like, as far as the loans right now?

About two and a half years.

About 2 1/2 years. And your acquisition you made of Mercury a year and a half ago, is that completely -- is that portfolio completely gone at this point?

Oh, no it's about, I think, half gone.

Half gone.

But, like I said, that's doing exactly what we hoped it would do. So...

Okay. Well, congratulations on a great quarter. Great to see things looking good.

Thank you very much.

Thank you. Our next question is a follow-up question coming from Maury Miller from Wells Fargo Securities. Please go ahead with your question.

In the -- recently -- recent quarter, you've talked about the poorer condition of the used car market, and because of the zero percent financing on new cars, et cetera. Is that going on about the same?

It's actually sort of bottomed out. It hasn't particularly -- it's probably leveled off, bottomed out, whatever you want to call it, maybe slightly starting to tick up. It hasn't made any huge move upward, but certainly hasn't gotten worse for several quarters now. So we think at this point, it's probably established the bottom. I mean, I think our results have probably ticked up a little bit, but not enough to get overly excited about.

Okay. Thanks.

And I think that will improve. As the economy recovers, new car sales pick up, that will all change. Probably the more important part is, it shouldn't get a whole lot worse to the extent we've gotten to where we are with no problems, then we wouldn't expect it to be a problem for us. It should only be an improvement, because as the numbers go back up we're going to make a lot more money as we have to sell cars.

Great. Okay.

Thank you.

At this time, there are no further questions in the queue. I'd like to turn the floor back over to the presenter for any closing remarks.

As I said, we are very pleased with the quarter. We think, you know, we've got a real good business plan here. As a company, CPS is well positioned in the market place, where other companies -- I'm not going to certainly pick on Americredit -- but Americredit is going through some issues in terms of their portfolio performance.

You know, in many ways, they are doing what we did. They have had some issues with the portfolio performance, which caused a liquidity problem. It's easy for us to understand and empathize with them in terms of what they are doing.

We don't have those problems today. We don't have any trigger problems, we don't have any liquidity problems. So we're going to try and drive a steady course through the sub prime mine field that it is.

At the end of the day, I think we can build a very strong company that will take advantage of the marketplace and the last man standing kind of attitude. It will be certainly more than just us, but we will certainly be one of the strong players a year or so from now. Thank you again for attending the conference call. We look forward to talking to you again next quarter.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a a wonderful day.