Consumer Portfolio Services Inc (CPSS) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services first-quarter 2004 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 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 these 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.

Good morning, everyone. Thank you for attending our first-quarter conference call. As you can see from the press release, the numbers were actually probably better than we might have expected, but certainly in line with our expectations. We will run through those numbers and then go through a few comments before we take questions.

In terms of looking at the financials of the results, revenue was pretty strong at $27.5 million. That's down slightly -- excuse me -- that's actually up from the year-ago period of 22.5 (ph) (technical difficulty) and down (ph) slightly from $28 million for the previous quarter. Probably the most important thing to look at in terms of the revenue is the fact that in this first quarter, there is no gain on sale revenue. We're going to try and walk through yet again the differences between gain on sale accounting and on balance sheet accounting.

The first one of importance is that there is no gain on sale in this, the first quarter of 2004, whereas in the previous first quarter of 2003, the gain on sale was $4.5 million. This quarter it is zero. The interest income you can see, last year to this year. Last year was $9.3 million in the quarter. This year it is $20.4 million. That is really one of the numbers to watch, is the interest income. As the portfolio grows on balance sheet, that number will continue to increase, and that is all cash-on-cash earnings as opposed to the $4.5 million or the gain on sale earnings. So the quality of earnings is greatly improving as we continue to transition off of gain on sale to portfolio accounting. But overall, in the year-ago period, it's up $22 million to $27.5 million.

If you look at the employee expenses, the expenses are also up. It's $20 million for the first quarter of last year of '03 versus $28.9 million for the first quarter of '04. The largest number there again is the transition element of going from gain on sale to on balance sheet. The provision for credit loss in the first quarter was $6.7 million. Last year, there was no provision for credit losses. Obviously if you take that number out, your comparable number is something like 22.2 in expenses for the first quarter versus 20.2 for the year-ago period. So there is really only a $2 million difference in expenses. About $1 million of that would be related to the TFC acquisition, which we had for the entire year of '03. We bought TFC -- for the better part of '03 -- we bought TFC in May of '03, so we had a lot more expenses related to that Company to put in, in addition to our own expenses for the rest of '03 and also coming into '04.

So overall, we ended up with a net loss of $1.4 million versus the year-ago period gain of $6.2 million dollars. Again, the loss of $1.4 million compares very favorably to the last quarter loss of $5.7 million. We think we're slowly getting to where we want to go. As we said, during the transition from gain on sale to portfolio accounting, we would have losses. We think they are trending very well. With the way the portfolio is performing and the acquisition of SeaWest, we would expect probably a little bit of improvement in our expectation on the losses for this year.

In terms of the earnings per share, we had a 7 cent loss for the first quarter. That compares to a 28 cent loss for December of '03, that quarter, and a 31 cent gain for the first quarter of '03. Again, remember the enormous difference between '03 first quarter and '04 first quarter is the difference between gain on sale and portfolio accounting.

In terms of cash, we ended the quarter with $98 million in cash. That is down just a tad from $100 million in the previous quarter, but up significantly from $59 million in the first quarter of '03. Finance receivables continue to increase. The finance receivables is another number you will see in our balance sheet that is indicative of our transition from portfolio from gain on sale to portfolio accounting. Now that we're holding all the receivables on balance sheet, the finance receivables will continue to grow. One should not consider that debt. That’s the same loans we used to have off balance sheet that are now on balance sheet. But it is nonrecourse debt, so it's not like we're leveraging up our balance sheet with lots of debt. It's just the difference in accounting methodology. Anyway that number this quarter was $348 million or $349 million versus $302 million in the December quarter and versus $81 million in the year-ago quarter. Our allowances increased from $35.9 million in the fourth quarter to 36.6 in this quarter, and that's up from $19.8 million in the first quarter of last year.

In terms of our debt, the warehouse debt is up a little bit since we didn't do a securitization in the first quarter. We are actually in the process of doing a first-quarter securitization this week. There is no real magic to the timing of securitizations. Again, one of the things we used to have to do because of gain on sale was do a securitization every quarter to realize those results or those gains within the quarter. Without the constraints of gain on sale, you can do the securitizations whenever you need to or whenever it is markedly advantageous to do a securitization, rather than confine them to having to do one each quarter. So we're doing what would be arguably our first-quarter securitization this week. We will probably do a second securitization this quarter, getting us more or less back on track for one per quarter for the year.

Long-term debt was down to $87 million from $102 million the previous quarter, and actually down significantly from $106 million from the year-ago quarter. Probably the biggest difference again, as we mentioned in the fourth quarter conference call, is we paid down some of the senior debt. One of the other things we did is we did finish and complete a residual refinancing. Probably a point to make in the residual refinancing -- in terms of explaining the residual refinancing or the residual securitization, it is a lot like a securitization in that what we did is we took all of the receivables -- it's a securitization of the securitizations.

So what we really did is we securitized the future cash flows of a handful of securitizations on our balance sheet and basically monetized those today. We used about half of the portfolio to create that securitization; it produced about $44 million in money. What it is not, though, it is not another securitization. It is not a securitization of loans, like all of our previous securitizations. Basically, it's what I said, was a securitization of the other securitization assets, or the residual assets from those other securitizations. People should not be confused. It is not a normal securitization.

Anyway, it worked out very well. Only one or two companies in sub-prime auto have ever been able to do a residual securitization. So we were very pleased with the results and our ability to do one. And also it allows us the opportunity to do future residual securitizations, which we feel can be very beneficial to our ability to raise capital in the future.

In terms of the portfolio performance numbers, our delinquency at the end of the quarter was 3.72. That is down from 6.22 in the December quarter. Remember that the December quarter is always a very tough quarter for collections, so it has generally a much higher delinquency of at 6.22. Even so, the results are very good. They compare very favorably with last year's first-quarter results of 4.45, so delinquency is down year-over-year and it is also down quarter-to-quarter.

The net losses for the quarter were 6.95, which were up a little bit from the fourth quarter losses of 5.34. Again, you tend to have losses in the first quarter and not that many losses in the fourth quarter because you don't really liquidate a lot of cars in the December month. So those loss numbers would be what we would expect, and again, they compare very favorably to the first quarter of '03 loss numbers of 7.26. So year-over-year, it is actually a decrease from 7.26 to 6.95, even though it's seasonally up from the fourth quarter of '03. Our total portfolio ended at $736 million, down slightly from last quarter of 741, but again, up significantly from year-ago quarter of 595.

In summary, the results financially were all very good. We think the portfolio is performing very well. We did a lot of debt refinancing this quarter. We have now completed all of that so our balance sheet looks a lot stronger. One of the other things we did is we redeemed the public notes for $20 million that were due this past April. We redeemed those a few weeks ago, so that debt is also off our balance sheet, but you won't see that until the second-quarter results come out.

And again, getting the residual financing done and refinancing some of our senior debt with our senior lender also really helped out the situation in terms of our overall debt position today. We now have really no debt that is due -- we have one more debt piece that is due in June, but other than that, we don't have any debt that is due until the end of '05 and the beginning of '06. So from having the vast majority of our debt due in the first quarter, we're now in a very much stronger position on our balance sheet in terms of the debt and our cash position remains strong as well.

Probably the other thing to talk about on this call is the acquisition of the assets of SeaWest. As we put out a press release, we bought the majority of the assets of SeaWest the first or second day of April. That would be a lot like our other past acquisitions. The only difference was instead of buying the stock of the company we bought the assets of the company. Again, we saw an opportunity. We are familiar with the SeaWest Company. We like the portfolio, we think we can make it perform and overall we think it was a good acquisition. It adds more portfolio. Now our managed servicing portfolio is about $945 million, a good part of which is the SeaWest portfolio.

Again, we think it was a very strategic, opportunistic acquisition. We always say we are not really looking for acquisitions, and every time we say that, one seems to show up. Again, we still aren't looking for them. To the extent we find one that works, one that makes sense, the Company will continue to look to do those acquisitions.

In summary, in terms of looking at the market, our originations have actually improved somewhat significantly. From October through this past February, we are averaging around $25 million per month. In the last two months, we pushed up to about $33 million to $34 million per month. So as much as originations and the market probably is the only disappointing thing for the Company today, we still think over time that should work to our advantage. We had hoped to maybe grow the portfolio, to grow the originations volume on a monthly basis a little bit more. But given the market, we think we're happy with what we have and we don't really want to compete.

Right now, what we've seen in the last six months or so, and maybe a little bit longer, is there's a lot of banks and credit unions who have money to put out and are looking for places to deploy it, who are entering the market and they are probably doing it not with the best guidelines and best-buying practices. We think they're really reaching for a lot of paper. Obviously, we don't want to be in that paper. We don't want to reach for it and we're not. As a result of that, it is hard for us to compete against some of those people or those companies, credit unions and banks. On top of that, because the credit unions and banks are aggressively buying paper, the (indiscernible) continue to add incentives and 0-percent financing to combat that financing.

And so the net-net is it's a very busy marketplace out there and not one we're going to want to be aggressive in. Even so, having said all that, our portfolio has managed to grow in terms of month-to-month originations about 33 percent, which isn't all that bad for a very competitive marketplace. We think over time, the credit unions -- maybe even very soon -- a lot of the credit unions and some of the banks are going to have some results come in that are going to make them back up in terms of how much they buy, thus creating an opportunity for us to grow far more easily.

We will continue to monitor that situation. We will continue to look for other acquisitions like SeaWest that fill the gap of not having originations grow so quickly. But overall, I think in terms of CPS and where we stand today, we have now been able to say this for several quarters if not for five or six in a row -- the Company is continuing to improve across the board. Our financial position continues to improve all the time, and our future looks very good.

Having said that, we would expect the transition from gain on sale to portfolio accounting to probably take the rest of this year, with probably negative results to our earnings, but we are working to see if we can maybe make that a little bit better. Overall, the picture is very bright and we think everything is going very well. With that, we will open it for questions.

Thank you. (OPERATOR INSTRUCTIONS) Ken Liddy (ph) of Wachovia Securities.

Congratulations on the great quarter. You are really well on your way. I saw that the cash assets right now, as of the end the quarter, were 98 million. Where are they with the acquisition of SeaWest?

In terms of what cash we have in SeaWest?

Cash on your balance sheet right now, after the acquisition.

We didn't really acquire any cash with the acquisition of SeaWest.

You had $98 million at the quarter end, correct?

Right.

Was that drained at all with the acquisition? How did you pay for SeaWest?

Probably there's about 8 million in SeaWest.

Okay. So you roughly have about $4.5 a share in cash at this point?

If you do the math that way, that would probably make sense. In terms of doing the acquisition of SeaWest, we sold some D (ph) pieces and things, and so we invested both the proceeds from that and also an additional $8 million to make the acquisition of SeaWest. We would expect to get a large piece of that back when we do a securitization of some of those assets (ph) later this month.

It is a little hard to put apples-to-apples in that comparison, but again, we will have something like 8 to 10, maybe as much as $12 million invested in SeaWest for a year or so. But I think your calculation of $4 to $4.5 is probably accurate.

As far as driving force for the second half of this year, with higher interest rates, do you foresee -- again, you've mentioned several times that some of the banks will probably back off with higher interest rates. Do you see that happening in perhaps the latter half of this year?

We haven't seen that happening yet, though we would stand by what we would say, that to the extent the interest rates go up, we could push ours up a little bit if we wanted to. But somewhat more importantly, we would expect it to put more pressure on the banks and the other players in that market more so than us.

At the peak in your market, particularly the interest in your company, back -- I guess it was '98, before everything melted down in the industry -- where was your portfolio? How big of a portfolio were you managing?

At that point, the portfolio was about $1.3 billion, give or take. We're getting there. One of the things we have set as a target for the Company is to get back to that portfolio size of $1.3 billion, and we're getting there at 950. Also though, to get back to $100 million a month in originations, and we're lagging that target a little bit. The problem you have is as the market evolves and changes -- we have now been the business for over 10 years -- you see what people are doing.

And as much as we would like to grow and as much as we are growing probably pretty well anyway -- we thought maybe we'd grow a little bit more -- you just can't chase the bad paper. And a lot of people -- there's always a new group of people to chase the bad paper, and the smart thing is not to chase them, and so we are not. But we think as the rates go up and some of the performance comes home to roost with those players, they are going to back up somewhat substantially.

One last question. As far as supporting the stock and getting more investor interest, are you actively participating in any conferences or are you looking to?

We are very much -- now that we've got all the refinancing done and I have more time and things like that -- we are looking and talking to as many analysts as -- we are beginning the process of getting in touch with analysts and funds and doing a lot more of that. We would think that would be a very large focus in the coming quarters.

Do you think it is reasonable that you will be able to attract some of the brokerage firms that had covered you in '97/'98 once again?

I think over time -- I think certainly you can get some. I think that that $5 stock price is somewhat of a magic number for those people, for a lot of that group. As our stock continues to drift on up, we're probably getting close. Once you get to 5, you have a lot of different people who can cover you, and so it really depends on when that happens. (indiscernible) a little bit of coverage might actually get us there, and then you pick up some more. It's a little hard to predict, but we know that a $5 stock price is the threshold for many firms to initiate coverage or to think it's not too risky to initiate coverage. Until then, we have to look for more people. Being how the stock is thinly (ph) traded, getting funds interested and maybe one or two analysts certainly would get us on our way.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Mr. Bradley, there seem to be no further questions at this time.

I'll take that that we had a very thorough and informative call. Anyway, we think the quarter went very well. We are looking forward to the rest of the year. We are looking forward to some of these big players to get out of our market and go back to what they are good at and let us do what we are good at. So until then, we will hopefully talk to you again next quarter. Thank you for attending.

As a reminder, if you missed any portion of this call, it will be available for digital replay until May 12, 2004. You may access this replay by dialing 877-519-4471 for domestic parties, and 973-341-3080 for international dialers. You may also input the pin code 4751645. Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.