Consumer Portfolio Services Inc (CPSS) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services third 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 facts maybe deemed to be forward-looking statements. Such forward-looking statements are subject to certain risks that could cause actual results to differ materially from these projected.

I refer to you the company's SEC filings for further clarification. The company assumes no obligation on 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, you may begin.

Thank you, and welcome to our third quarter conference call.

First, overall, as much --- from looking at the press release and the numbers, some people might be a little bit surprised that the results. They are exactly what we would have expected them to be. We will get into that as we run through them. But, overall, we think we had a good quarter.

The biggest change that you are now seeing in the switch from the company's accounting from using gain on sale accounting to going on balance sheet accounting, or on balance sheet accounting. We have talked about this in previous conference calls. This is the first quarter's results that actually reflect the accounting change, as you can tell from the negative number, it does have some impact. And over time, that should work its way through.

Let's talk about the numbers a little bit. In terms of revenue, the revenues are at $25.5 million, versus almost $24 million last quarter and $26 million last year. Revenues were down a little bit from last year. They are actually up quarter-to-quarter.

As I mentioned in the last conference, and even previous conference calls, once we are not looking to grow the company particularly. So the revenue number is not really something we would expect to see move up significantly at this time.

In terms of expenses, expenses up $28 million, versus $20.5 last quarter and $24 last year. They have gone up somewhat with the acquisition of TSC. As we move that acquisition through and consolidate more of the operations, we would expect to reduce and offset those expenses. And remember, the large piece of the expense of the $28 million is from taking a provision, the loss provision we now take as part of the gain on sale, or the on balance sheet accounting.

Results of all that of course is the earnings were negative $2.8 million, versus a profit last quarter of $3 million and $2.2 million last year. That results in negative 14 cents this quarter, versus 13 cents prior quarter and 6 cents year ago.

So what does that all mean?

That all means that we are now using on balance sheet accounting. We talked about if before. Probably one example of that would be Americredit. Americredit used to be the shining star in this industry, particularly in terms of using gain on sale accounting and being successful using that accounting. Obviously, they have had a bunch of problems in the past. They also chose to go off gain on sale last year. And they have some big losses associated with that change over, too.

I would point out, that being a large company as Americredit is, it would be a little bit easier to swing around in terms of the accounting.

For those that may not have heard on a previous call, I'll walk through the different change. Normally in gain on sale, is just that, you're selling contracts until you recognize a gain. With CPS, it's around $4-$5 million per quarter as you sell your contracts into a scrutinization. If you don't use Gain On Sale, you now use on balance sheet and you lose a piece of incremental revenue. In our case, $4-$5 million. So that's a negative right there.

Now on top of that, you have to take a provision because when you keep it on balance sheet, you have to provide on future losses on the day of acquisition. In our case, that's another $4 million, that you can see in the press release, that we have circulated. So the big change is, you have a loss of revenue of almost $4-$5 million and you have a gain -- excuse me -- an increase in expense in taking the provision.

To offset the those two numbers, you have interest income because, if you have the paper on your balance sheet, you record the interest earned on those contracts and run that through the P&L, and that would be different from gain on sale. So then you offset that.

It's a little bit of a complicated process, but over time, as your provision builds and you get things moving a little bit, it will sort out the right way. For anyone that is interested, probably the easiest way to look at it is, if you compare this quarter to last, the previous quarter, without gain on sale, or with gain on sale, it would be about the same.

We are still buying the same amount of contracts. The losses (inaudible) are about the same. Expenses are about the same. We would have a fairly similar quarter to the previous quarter if we had kept it on gain on sale. As we mentioned before, we were going to change and this would be the result and, in fact, that is what happened. So, it's what expect to see and we expect to see it for several quarters more.

Over time, you know, as the company completes the provisioning process and begins to grow a little bit, that number should start working out the way we expect it to.

In terms of balance sheet, cash is a little bit over inflated at $87 million, versus $67 million last quarter and $47 a year ago. We still, you know, continue to build cash. A lot of that cash is in a scrutinization so it's really, 67 would be more of a normalized number, again, much like last quarter. The debt has come down somewhat. We play paid off a little bit of debt, about $4 million, during the quarter. We continue, depending on the obligation, to chip away at some of that debt as time goes by.

One of comments, we've seen a little bit on one of the web pages and things like that, is that our debt is going up. Well, in fact, our debt is going up, but it's only going up because we're taking our scrutinization on balance sheet. When you are doing gain on sale, those scrutinization are off balance sheet so you don't see the scrutinization debt like you would normally. Now that it's on balance sheet, you will see the scrutinization debt, so that is, in fact, going up. But only as a result of the accounting change, not because we are borrowing more money. So that is probably something worth pointing out.

Our true long-term debt, or financed debt, actually continues to go down a little bit over time.

To the deliquencies, the deliquencies were 6.18% for the quarter, versus 5.4% in the previous quarter. The annualized losses were 7.3, versus 4.6. The DQ is up a little bit, but that's probably more seasonal in nature than in anything else. It's right about where we expect it to be.

The losses are up 7.3, versus 4.6. The last quarter was probably an abnormal quarter in terms of performance. The last four or five quarters before last quarter, were all in the 7s or 8s. So our losses are expected, are where we expect them to be, as well.

Terms of the acquisitions, the Mercury acquisition continues to perform very well. We are very pleased with how that's worked out. That portfolio continues to run off, continues to provide cash flow to the company. It's been everything we expected and more. We are very happy with the results.

The TSC acquisition, which we completed in May. We did the the integration of that system and that company into our company in August, and that went very smoothly. It certainly helped that we had just done it with Mercury, but it went very well and now we've been able to consolidate and cut some costs. That performance is also going very well and we're now just about to the point we have our hands around the operation and, actually the originations process, and we'll probably be able to begin growing that company as well, or that program.

People may or may not know, TSC mostly originated military paper, something CPS did very little of, so we think it's an opportunity there, and we will start looking at growing that a little bit.

Overall, in terms of the company, CPS and how we sit in the market, the market continues to be very tough with the economy just beginning to recover. Car sales are not particularly great. The recovery rates on car sales, cars sold at auction, are still down. They are not falling anymore, but not recovering dramatically by any stretch. So overall, the marketplace isn't the best thing in the world.

There also appears to continue to be a lot of competition. Right now, as much as people think having low interest rates in this industry is very good, it's not the greatest thing for subprime players. Because what happens is, with very low (inaudible) banks, credit unions and anybody else with a pile of money to put out, gets into subprime, and as a result, they end up buying somewhat poorly and very aggressively. And that is not a market we are particularly interested in playing in. So having the rates go up at some point will certainly help that because banks, as much as they like to buy this stuff, when the rates get higher and they have to put loans in their books that look like prime loans with higher coupons, they will get out of the business as they have in the past. That would help us somewhat more.

We continue to look for more acquisitions or things to do. Other companies out there continue to have problems. (Inaudible) into the company that wouldn't subprime, they filed for Chapter 11 a couple of weeks ago, or maybe last week week. So, you know, some of the competitors continue to have problems. That may open up some opportunities for us.

But, you know, the easy answer is we are still in the midst of an a shake out. I think that over the next year or so it will really stack up to where some of the big competitors will pull out. A lot of our large competitors seem to be going upscale, buying nonprime or prime versus subprime as they realize the credit risk is too much in subprime. So I think over time the market should come around to something that certainly helps us. But, you know, as I've said in the past, the whole name of this game in this industry is patience. And, you know, that's what we are going on do.

Right now our focus is to continue to set up our operations so when we have an opportunity to grow, we will be able to do it well and in a controlled the fashion. We are switching our accounting around and we are, you know, opportunistically looking for acquisitions or for new markets to grow in.

We think, you know, everything else is working great. Originations model continues to work well. Performance of paper is fine. So, you know, we are not unhappy with what is going on. We would like to see the market change so we can get back in and start growing. But, again, the one thing you don't want to do is go into the market and compete aggressively when no one who has done that has ever survived, or managed to do it for very long.

So you know, even Americredit at one point bought a little too deep or maybe a lot too deep and, you know, got bit as well. We don't want to make that mistake. We just (inaudible) keep doing what we are doing and correctly and take our time.

Having said all that, we expect our results to look somewhat like this for a little bit and as we get used to the portfolio on balance sheet accounting, if we can grow a little bit that might help. But, overall, it's status quo for us for the time being. These are, in fact, results we would have expected and are happy with them.

With that, I'll open up the floor for questions.

Thank you.

The floor is now open for questions. If you do have a question or comment, please press the numbers 1 followed by 4 on your touch tone telephone at this time.

Once again, the floor is open for questions. If you do have a question or a comment, please press numbers 1 followed by 4 on your touch tone telephone at this time.

Please hold while we poll for questions.

Our first question is coming from Douglas Kern, RE Advisors.

Hey, Brad, are you considering doing a deal to take out the public debt maturity in early '04 or are you just basically going to pay it off with cash, which you seem to have a fair amount right now?

We are in somewhat of a negative position to be able to do just that. With a year to pay it off with cash, we are looking around for different refinancings or ways to raise the money, depending on --. The situation is, we have the money to pay it but the rate are kind of real low right now so, depending on rates and money and refinance rates, that's also an option.

Fair enough.

Thanks.

Thank you.

Thank you.

Our next question is coming from John Tomlinson, JMT Associates.

Can you give us any earnings guidance for next year?

At the moment, given the fact we are trying to get our arms around the accounting change, we probably would not like to give guidance. I think as another quarter goes by, or so, we have an idea of how the provisioning is going to work. Well, right now the problem we have is, we're trying to figure out exactly how the provision is going forward, you have to kind of work through with your auditors and that takes a little bit of time. Once we have that straightened out and we are confident with how that is going to look, we will probably would be willing to give guidance.

Yeah, because I think about it and I'm -- I guess the next CPA -- it appears really what you are doing is essentially a timing difference, wherein not recognize the gain now, but recognize it in the future.

So I guess I don't know if I'm seeing that correctly. Is that correct? Where you get more gains later as against now?

That's in fact true. I'll give you an example what could be a problem, as much as it wouldn't sound initially like one.

If you start to grow, let's assume for the moment next year, you know, and the market turns around a little bit and we do start growing. Well, all of a sudden our loan volume is going to pick up substantially with the growth and we're going to have to actually provision more. So, in fact, as much as we were buying loans that are going to produce more income in the future, we would be creating more losses up front because we have to take the provision faster.

And that's one of the reasons we are a little bit hesitant to do anything just yet. We really don't know how it's going to work just yet.

But your initial comments are exactly right. By going off the gain on sale, you are not taking the revenue up front you are going to recognize it over time with the additional kind of a whammy of having to provision for it the day you now book it.

Thank you.

Our next question is coming from Claire Bond, Wachovia Securities.

Yes, hello. First of all, I'm glad you are doing what you are doing on the handling of the provision for credit losses.

Just so I get an understanding, the $4.2 million, now that is, that would be the credit reserves for the scrutinizations made in time around. And is it a fair proposition to say that any earnings derived from, should we say, from overreserving, would come back into the company within the next two years or is that not correct?

That would be exactly correct.

Way we work, and you also said it exactly right, whatever scrutinization we did in the third quarter, which was about $80 million, when you buy or actually do that scrutinization you need to take a provision for what the anticipated losses are for the next two 12 months on that paper.

And, you know, if you ballpark it at 5%, then you have $4 million, and that is how you get to the number.

Very good.

Now, if at the end of the day, if that paper performs better and you didn't really need 5%, you know, the first year was only 4%, that extra percent would come back in at the end of the year.

Are those reserves specifically for the scrutinizations you have out there, or is it more of a large fund you can apply to any of the scrutinizations?

Initially, since we only have one out there all reserves but that one, but as the scrutinizations pile up, you would, you know, theoretically you could moved reserves amongst the different pools.

Okay thank you very much.

Thank you.

Thank you.

We have is a question coming from Dan Knoll, Goldsmith and Harris.

Good afternoon, Brad.

I was wondering what kind of loss rates you're assuming as we go through the seasonal difficult part of the year here, next couple of quarters.

Well, we go into loss rates, they may creep up a little bit, but we would think they may stay about where they are at, you know, 7%, between 7% and 8% annualized. Probably 9 would be on the very high end for us. But we would expect them to stay right around 7 or 8.

I mean, usually though, they are a little worse in the fourth quarter, but not much. You know, they are in line with the expectations on the paper, for the life time of the paper.

Thank you.

Thank you.

Once again, the floor is open for questions. If you do have a question, police press numbers 1 followed by 4 on your touch tone telephones at this time.

You have a follow-up question coming from Claire Bonds from Wachovia Securities.

It's an easy one. What is the going interest rate on the loans to the car buyers?

That's a good question.

Whether the, you know, whether the lending, the federal lending rates are low or high, our lending rates to the borrower is still 21%. And so, you know, like I said, if the rates went up, the bank -- well, two things to can comment on I guess.

One, our average coupon to our borrower still remains right around 21% and it has for a long time. Rates came down. We didn't lower the rates because you don't need to, and so our spread's widened. Problem you have with that, is banks who have cost of funds, you know, substantially lower when they can lend at -- if the spread is so large, they can actually afford to put the paper on the books at a little bit of a cheaper rate than us.

Having said all that, scrutinizations are about as cheap as they ever could be with an all (inaudible) cost of about 3%. So, you know, it's all pretty good across the board.

The banks, you know -- with a big bank with a lot of money, they can could put a loan on the books for about 9% because the cost of funds is so low it looks almost like a prime loan to, say, a federal regulator.

To the extent the prime rate drifts up a little bit, that loan is going to have to go up as well and now all of a sudden, it's going to be 13% or 14%. It might not look so prime at that point and they would have to back off. At which point our 20% loans would do just fine.

That's kind of how that game works.

Thanks.

Thank you.

Thank you.

We have another follow-up question coming from John Tomlinson, JMT Associates.

In looking at your website and at your company, there doesn't seem to be much analyst or investor relations coverage. Do you plans to try to beef that up in the future?

Certainly in the fourth quarter we're going to start making a real push in the investor relations' and analysts' area.

I would expect, hopefull, you know, to really sort of coincide that with next year. We spent a lot of time this year in sort of establishing what we are going to do, getting our infrastructure put together and completing, or integrating the Mercury acquisition, completing the TSC acquisition. (Inaudible) next year everything should be about where it should be in terms of our financial position. Our infrastructure position and everything else. And so, you know, at that point it's time to work on getting the stock price up, and that will be the focus next year.

Thank you, Mr. Bradley.

There appears to be no further questions at this time, on the phone lines.

In closing, as I said, much as the quarter is a little bit different in term of the loss. It is, in fact, what the company expected and it is entirely involved in our switching accounting from gain on sale to on balance sheet.

Other than that, the quarter has worked just the way we expected all the other numbers should fall in line to what I think most people expect. I think, you know we are doing what we are supposed to be doing. I think over time it will pay off rather well. You know, like I said, part of it is the industry. Once you get things going the right way, patience becomes a real virtue and the watch word to be success.

Thank you all for attending. We look forward to talking with you next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.