Consumer Portfolio Services Inc (CPSS) 2004 Q3 法說會逐字稿

Good day everyone, and welcome to the Consumer Portfolio Services' third 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 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 statement, whether as a result of new information, future events or otherwise. I will now turn the call over to your host, Charles Bradley, Chief Executive Officer of Consumer Portfolio Services. Sir, you may begin.

Thank you all for attending this conference call. Let's see, to start off I would say we're very pleased with the quarter. We were probably -- and I hope we maybe hadn't lost quite as much money, but again we're still in the progress of getting our switching accounting from gain on sales to portfolio. And actually it is going very well. We would think that we should really start seeing some results in the next couple of quarters in terms of having that transition finally complete. With the September quarter we have now had five quarters since we had made that change. And usually it takes anywhere from a year to two years, so we're kind of the middle of that crossover.

But overall I think the results of the Company in terms of the operational performance, where we stand in the marketplace, getting our buying and more marketing spread across the country is really starting to show some improvement. And actually we think we're starting to see some real progress and results in terms of our geographic expansion of our marketing base.

And I think most of the numbers are actually very good for the quarter, and we will go through some of those numbers. And then I have got some comments on the Company, the future and the industry.

In terms of the quarter, the actual revenues was a bit flat quarter to quarter, but it is up 25 percent year-over-year. So we're pleased with that result. The expenses also are up slightly. The thing to remember in the expenses is we have a continuing lost provisional allowance as we -- and this is really sort of the crux of the change from doing a gain on sale to portfolio accounting, is that we have to take the loss up front and book it as an expense as we buy the loans, as opposed to actually taking a gain up front when we buy the loans. But over time as that portfolio builds, as you will see when I sort of go through those numbers, that process will reverse itself as the portfolio on balance sheet takes off more and more interest revenue. And the numbers clearly are indicating that process is getting father along and well on its way to changing over.

And where you can see that, as much as the loss provision quarter to quarter was 6.3 million in the June quarter, 7.6 million -- this is in the September to September quarter -- versus 4 million in the previous September quarter. So again that loss provision continues to grow. On the year it is now $20 million. That is a provision or a number that wouldn't have been there if we had done gain on sale.

And again it does impact our pretax income or our net income. We had a $2 million loss for the year. Again, versus the same quarter last year with a loss of 2.9 million, it is less. But again we're not happy with the loss. It is probably the only negative number on the entire sheet. And again we think over time, certainly in the next couple of quarters that will correct itself.

In terms of looking at some of the balance sheet numbers, the cash is actually improved from 85 million last quarter to 124 million this quarter. And again that is up from 89 million third quarter last year. So as we continue to grow and put out more portfolios we have a very -- a fairly significant cash element. So we have a lot of cash on the balance sheet. It continues to grow, and that will position us really well in the future.

In terms of looking at the other side of the cash, we have lowered our long-term debt by $33 million. Again, so we're doing sort of the right thing in terms of getting rid of some of the debt. We spent most of this year really refinancing the balance sheet. We have no debt due for a year. We're in a real good position to go out and raise cash if we need it, raise cash for expansion and growth if we need it. So the balance sheet is really looking very strong. We're quite pleased with those results.

In terms of the managed portfolio on balance sheet, it is now up to 486 million. That is up from 421 last quarter and 228 the corresponding quarter last year. So we practically doubled the on balance sheet portfolio. And I mentioned a minute ago that is something to watch. As that portfolio grows, that is really like an annuity asset that is going to kick off earnings over time as its continues to get bigger, and it will eventually outstrip us posting the loss provision.

In terms of the portfolio performance, this is probably one of the things we're very happy with. The portfolio is performing great. Our losses are doing well. The delinquencies are doing well. The overall pool accumulative loss statistics are significantly better than the Company expected. In terms of delinquency, delinquency was for the quarter -- it was 5.96. That is versus 6.14 from the previous quarter, so it is down slightly. And also it is down slightly year-over-year from 6.18.

The annualized net loss for the quarter was 5.72. That is up a little bit from the previous quarter of 4.24, and down from last year's corresponding quarter of 5.84. Again, that is a seasonal thing. The third quarter and the fourth quarter are a little bit tougher collection quarters than the first two. So we're very pleased even with the 5.72. Again, it is better than last year's quarter at this same time.

The consolidated portfolio sits at about $900 million. That is up from last year quarter over same quarter of 750. As I mentioned at the top of the call, one of the real goals of what we're trying to do with the Company is to grow. We want to be able to grow and still be able to buy the quality paper that make us successful. And it is easy to say that the paper we're currently buying is the quality paper we're looking for, as you can tell by the performance numbers.

The growth has been a little slower than we expected. But probably the good news for this quarter is for the first time in probably several quarters we have been able to see some real growth in the marketplace in terms of our expansion, both nationally and within the individual areas. So we think we can have some real progress, and more importantly the third and the fourth quarter are generally very tough quarters to grow in. So the fact that we're showing some growth in those quarters, in this third quarter, and hopefully maybe even the fourth quarter, really bodes well for next year in terms of us being able to grow.

Having said that, we're not particularly disappointed in the amount of originations we're doing. Last year we averaged about 27 million per month. We're going to average at least 35 million per month for this year. So that is about 20 percent growth year-over-year. It is not the wild days of 5 or 6 years ago where you could grow 50 or 60 percent year over year. 20 percent growth is probably exactly the kind of growth we want. It is really easy to control. It is easy to make sure we're getting the quality performance in paper we want to buy. So we are growing at a nice pace, and we're very happy with those results as well.

In terms of the marketplace, as I mentioned, we think we're beginning to really have some progress in establishing some markets on the different states. On a national level I think some of the competitors have backed off a little bit, so the market is a little thinner in terms of competition. People -- a couple of people have seemed to have gone up credit a little bit. So it is also very beneficial for us. And I think something I mentioned in prior conference calls, as the interest rates go up it is going to put some pressure on some of the other lenders. And we think we're beginning to see a little of that effect, which also will have a benefit to us in the marketplace.

In terms of the recoveries and the option pricing, the option pricing in used cars has really stayed pretty flat. So we think down the road that should improve and that would be an added benefit for the performance of the Company, and also the cash and the recoveries we get from repossessed vehicles.

Overall like I said, other than the slight loss for the quarter we think the overall results for how the Company is doing are very good. And also we're going to begin a $5 million stock repurchase program. We think of the stock as undervalued, and we're going to do something to try and buy some of that stock back in.

And also the other thing I mentioned is we do have a change in auditors. We released Pete Marwick and hired McGladrey & Pullen, who is going to start with the audit over the fourth quarter and the audit for the year. We thought that given the change of the Sarbanes-Oxley and all the expenses involved, that McGladrey would probably be less expensive and be able to do a little bit better job in terms of working with the Company. And Pete Marwick has lost a lot of their support in this area. So it really wasn't a very good fit for us any longer.

So overall I think we have a very good future coming. I think '04 is going to still be a year of giving ourselves squared away a little bit. But I think '05 is looking like it could be very good year for us. So with that we will open up for questions.

(OPERATOR INSTRUCTIONS). Larry Miller of Reagan McKenzie.

Listening to your observations it would appear that you're kind of progressing on all fronts, kind of step-by-step. Is there any one area that might be particularly helpful to us as we go into '05 that would make our Company more prosperous?

I would think the growth in originations, our monthly volume is a very good indicator. One of the things we have been carrying all along is a fairly significant infrastructure internally, so that when we get the growth, we will be able to service it very efficiently. And so as we grow, the more portfolio we put on, the results really come straight to the bottom line. So to the extent we can start building portfolio that would show some very quick improvement in terms of the overall numbers.

So I think -- I would guess, and certainly the indicator I watch somewhat carefully is the monthly growth in originations. As I said, we have grown about 20 percent from 27 million on average last year to around 35 million per month this year. And I would love to see that number get up into the '40s, '50s and '60s during '05. And if we could accomplish that, I think the Company is really going to be going in the right direction.

Would you think that that possibility might indeed present itself in '05, because that would the big increase if you could get up to say 50 or 60?

I think given the indicators of this past quarter that about as long as the economy doesn't fall apart, and I think there's a chance the economy might grow a little bit that yes, those numbers are possible.

I wish you Godspeed.

(OPERATOR INSTRUCTIONS). I'm showing no other questions at this time. I would like to turn the floor back to Mr. Bradley.

Okay. Given that I might try and answer a couple of potential questions for people who may listen to this later. One, we're probably not ready to announce estimates yet. I think next year starting in the first quarter we will try to put out some estimates.

In terms of when we could become profitable, I think within the next couple of quarters we should be able to turn the quarter. We're certainly focused on that aspect of the business. And I think all other indications are going in the right direction, as we have mentioned. And as much as it sort of works that way, the last number to come around is going to be that profitability number. But we have high hopes for it over the next couple of quarters, certainly next year.

As I mentioned, I think the general market is very favorable for us. I think the Company is very well-positioned. As much is there are -- you know there is some competition out there. We are beginning to get our name around again as sort of a good player, and some of these people want to do business with. That is going to have a real effect in the dealership network, and I think is very positive for us.

One thing I didn't mention that people may have seen was the acquisition of Onyx, or the pending acquisition Onyx by Capital One. We think wonderful things of Onyx and are hugely inspired by the price that Capital One was willing to pay for Onyx. We think with that kind of evaluation there is a very bright food future for CPS on a comparative basis.

In terms of our long-term plans, I think we're getting there in terms of where we want to go. We're hoping for sort of a break out quarter at any point. But for the most part, at the end of the day, as we have told everyone for several years now, we have the potential to build a very large Company here. And I think the way to do it is to do it in organized fashion, a conservative fashion with moderate growth as opposed to trying to really lean out ahead of ourselves and cause any problems.

And we have stayed true to that for the past few quarters. As much as it has been sometimes painfully slow for the Company, it is the right course and over time -- when we get our portfolio -- as a comparison Onyx had a $2 billion portfolio, or maybe a little bit more. When we can get to that portfolio size we would be a very attractive company. I think Onyx was trading at about $13 when it was announced and the stock went out at 27. So with those kind of things coming along as encouragement, we think we're doing the right thing, and we're very encouraged for the future of the Company.

Excuse me, Mr. Bradley, a question has just come up from Mel Barnes of UBS.

It sounds very good your report and your calm and steady way of operating. When you mentioned the -- reaching profitability, I thought there may be a little bit more explanation there in the manner in which it happens. It doesn't just roll off and then start at 100 percent of where you are. Does it not have to roll off quarter by quarter and pick up more and more of the trailing business that has been put on?

That is exactly right. I think what we have done though there is it a crossover point for the amount of loan portfolio you have on balance sheet will exceed -- if you kind of think about it, we are currently building our portfolio on balance sheet, and taking the relatively earnings painful provision along with it. On the same token our gain on sales portfolio is running off. And when those two cross over then you're going to have some real profit. And so we're nearing where the size of those on balance sheet portfolio is going to start out numbering the off balance sheet portfolio, and that is when you start seeing a profitable effect flow-through.

And so it is certainly a matter of time. Depending on the growth, as I mentioned, our sort of keynote thing to look at is the monthly production, because that is going to show when we get there. And again the problem is, as much as I would love to grow twice as fast, that wouldn't be the prudent thing to do. And so we can't really gauge exactly when the crossover could happen, but when it does, that is when we should see a profit. And profit won't come, as you said, suddenly and in large numbers. They are going to grow over time as well.

Thank you very much.

So that's pretty much where we stand today. We're happy with the quarter. We think things are going the right way. And we look forward to a good fourth quarter and a very good 2005.

Thank you all for joining us this morning, and we look forward to talking to you next quarter. Thank you.

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