Consumer Portfolio Services Inc (CPSS) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services fourth quarter 2004 and full-year 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 and 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.

Thank you. And welcome, everyone, to our call, and first thank you for working with us and attending the call today rather than Friday. We did switch the call to have a little more attendance in lieu of Friday's holiday.

First, some overall comments on the Company's performance for the quarter and the year. On the one hand, the Company and management wasn't particularly happy with the earnings results but we were happy for the year the results of the Company has been able to achieve, and we'll get into that after running through some of the technical numbers, but overall the Company is doing everything we can hope for with the earnings being the only area that needs to catch up.

So in looking at the revenue for the quarter, it was 37.6 million. We think that's a nice increase from December of '03s revenue of 30.5 and also a little bit of an increase from approximately 35 million for the third quarter September '04. For the year we had 105 million in '03, this year we have 133 give or take, again we're showing a nice revenue gain as we continue our conversion from off-balance sheet accounting to on-balance sheet. Those numbers should improve along the way as well, but it's all in the same process and it's all coming along the way we would like it to.

In term of expenses, expenses for the quarter were 49.8 million that compares to the September quarter of 37 million, and also the December of '03 quarter of 36.2 million. For the year we had 148 million of expenses. That compares to 108 million for December of '03. What we should look at in looking at those numbers is the very significant increase in loss provision or loan loss provision in that number, and again the loan loss provision is probably the predominant factor in the changeover from off-balance sheet to on-balance sheet accounting, and that number was up 4.8 million for the quarter, and up 21.2 million for the year.

There's really three probably main elements in the change in those two numbers. It's probably easier just to look at the full year number. Having the loan loss provision go up $21 million is over half of the change in that expense number for the year. We also have written down the residual to the tune of 7.7 million and, again, that number should be non-re-occurring so you can almost eliminate it. The other number of interest is in fact, interest expense which is up 8.3 million.

As you go to on balance sheet accounting, both the loan loss provision and the interest expense will be the real functioning numbers that go back through the P&L. Obviously we'd expect interest rate to continue and the loan loss provision to continue. The writedown of the residual will not, but if you take and net those numbers together the expenses actually did not go up that much, compared to the very strong increase in revenue. And, in fact, that's what we're trying to achieve. The revenue is going to go up but we can maintain -- as we've said all along, we've tried to maintain our infrastructure in the Company, because we were a relatively big company before, we've been able to maintain infrastructure and waiting for the growth to come back, now the growth is finally starting to come we will be able to absorb much of the growth without increasing our expenses.

As I mentioned, the loss provision for the quarter was 12 million. That compares to the third quarter of 7.6 million and a fourth quarter a year ago of 7.2 million. Also, for the year loss provision, the loss provision for December of '03 or for the year '03 was 11.4 million. The loss provision for this year was 32.6 million. That's a very large jump in the loss provision.

As the Company continues to grow, it's somewhat of an unfair practice in that if you grow, since you take a lot of your loss provision immediately as you book the loans, if you're growing quickly or rapidly, you're going to book more provision, which actually hurts your earnings even more, but the good news is, once you slow down a little bit after you achieve somewhat rapid growth, then your earnings will catch up rather quickly. So there's as much as booking loss provision is not the best thing in the world. In the long run it should work out quite well for the Company.

And lastly the pretax income 12.3 loss for the quarter versus 2 the last quarter, and compared to 5.7 for the fourth quarter last year. And the overall year numbers of 15.9 versus 3 for last year. Again, the Company is not particularly pleased in those numbers but we thought it was a prudent thing to do, and we think in the long run it will pay benefits to the Company. That results in an EPS calculation of fourth quarter loss of $0.57 versus $0.10 for the third quarter, and $0.28 for the year ago quarter. For the year the numbers are $0.75 loss versus a $0.02 profit in the '03 year. As I mentioned, we think those numbers will change as the Company finishes its conversion from being off-balance sheet to being on.

In looking at some of the balance sheet numbers, the cash and restricted cash ended up at 139.5, that compares nicely with the third quarter of 124 -- [audio break]

Ladies and gentlemen, we ask that you please remain on the line. Your Consumer Portfolio Services conference call will resume momentarily. [Audio difficulties]

All right. I apologize for that. We had a small technical difficulty and lost, or at least I lost the call. Back to where we were.

So the cash numbers, 139.5 for the fourth quarter that compares favorably with 124.8 for the third quarter, versus 100 million for the year end last year. Again, as we continue to grow, we're posting more cash into the securitizations resulting in large amounts of restricted cash, as much as we would like as the Company's performance improves to lower that cash posting, we do end up having a very strong cash position as a result of posting the cash into the securitizations.

In looking at the finance receivables the finance receivables ended at 550 million. That compares to 486 for the third quarter and 266 million for the year end '03. You can see a very large jump between those numbers, particularly in the year-over-year 266 to 550. This is, in fact, the receivables or the loans we are now putting on-balance sheet and those numbers will continue to grow.

In looking at the debt, the long-term debt as now stands at 74.8 million and that compares to 74.8 million for the third quarter and 102.5 million for the fourth or a year ago. The other thing you see on the balance sheet is the overall debt is now at 674 million versus 596 for the third quarter, and 381 for the year ago period. As we continue to put loans on-balance sheet in the securitizations, you'll see the debt number going up, and I think when we first started doing this, a lot of people thought we were, in fact, increasing our debt and we actually are not. We are only putting -- we are putting all of the securitizations on-balance sheet so you'll see that debt, those loans as debt.

In looking again at some of the performance characteristics, the delinquency ended at 5.14 for the fourth quarter. That compares nicely to 5.23 for the third quarter, and down from 6.18 for the year ago period December of '04. In looking at the annualized losses, they ended at 7.12 for the quarter, or the year, compared to 6.03 for the third quarter, and 5.84 for the year ago or the year ending '03.

Now, in looking at those numbers the loss number is up a little bit, but actually if you look at the fact that the Company is growing, the portfolio is now beginning to get a little bit older. Since there was a period of time when the portfolio runoff was faster than we were growing, the average age of the loans in the portfolio is a little bit less than normally would be expected. It's moved down that curve about two months, and as the Company continues to grow that can happen some more, if we grow a little bit more it may actually come back the other way, but for the moment that loss number is mostly responsible for the portfolio, it's just a little older on average than it was a year ago, but overall we’re still very pleased with those results and overall looking at the collection results for the Company, we've been doing very well in terms of how we've been able to collect on the portfolio.

In looking at the consolidated portfolio, it stands at 620 million approximately, that compares to 315 million a year ago, and non-consolidated portfolio stands at 233 compared to 425 a year ago. And these are somewhat the operative numbers on how we go from off-balance sheet to on-balance sheet. The 619 versus 315 is, in fact, the on-balance sheet portfolio growing. The 233 coming down from 425 is, in fact, the non-consolidated or off-balance sheet shrinking. The overall total portfolio ended at 907 versus 898 for the third quarter and 741 for the year ago period. As time goes by, the consolidated portfolio will take up all of the balance sheet. The non-consolidated portfolio will run off to nothing and at that point we will have finished our conversion from off-balance sheet to on-balance sheet accounting.

In looking at some of the other numbers of interest the volume has actually been improving rather nicely if we look at the trend line there, we can actually go backwards the fourth quarter of '03 the volume was 83 million for the quarter. The third quarter of '04 was 119 and the fourth quarter was 127, and somewhat interesting the first quarter looks like it's going to finish at about 145. So we are finally after a fairly lengthy amount of time seeing the growth in the portfolio that we had hoped to.

In other things, we did mention in the press release that finally after a long and drawn out time, we were able to settle the Stanwich litigation and put that lawsuit behind us. It did take longer than we expected, but it worked out in a result we are very pleased with, and it's very nice to not have to answer any questions on that anymore and put it behind us.

In terms of looking at the industry overall, one of the things that’s appearing to come true finally after a significant period of being flat, are the recoveries at auction. The recovery values at auction for the last couple of years have been very low, and little by little, they have solidified and firmed up over the last year, but we are actually beginning to see some real results – real improvements in the recoveries at auction, and these are the numbers we don't figure into the results of how we liquidate loans, so having them be better would have a significant effect on the overall portfolio performance. So we are very pleased to see that the results at auction finally improving a little bit. We would hope that trend continues and if it does, it would have a significant impact on the portfolio performance.

In looking at the industry overall, really the industry situation hasn't changed so much. Lately in the last couple of quarters, people, some of the other competitors, a few of the competitors continue to pull back and stiffen up their buying, so that's actually beneficial to us. There are still other companies out there that are buying very aggressively. We think over time the aggressive companies will either have problems or have to pull back, and as interest rates continue to rise it will cause banks and other people in our industry continue to pull back as well.

There's two interesting notes in terms of acquisitions, first in terms of CPS we are not currently looking at any acquisitions, we are now at a point where the Company is starting to grow, we think it's more prudent to focus on the growth of the Company that we have, rather than look at other acquisitions. As always if a good acquisition comes along we would certainly look at it. We are not currently in the market to do that. People may have noticed in the last quarter or so, there were two acquisitions. KeyBanc sold its Auto division. Capital One bought that division, and we understand that KeyBanc is probably going to close. That would free up a lot more volume in the -- nationally, because we believe KeyBanc is not going to continue in that end in the auto area, so that would be somewhat beneficial to the Company.

The other acquisition that was announced recently was Triad was sold by Ford, and again, both of these things along with Onyx and a few others that have happened in the last few quarters, show that our industry is again becoming very popular in the acquisition arena, which we think will only add future value to the Company.

Lastly, in talking about the two writedowns we took, the first one was a residual writedown. We think that portfolio is still very volatile. It is getting older and it is running off very significantly, and we thought it was a prudent thing to do, looking at the volatility and the way things can change in that portfolio, to take the write down today, so we don't have to worry about it too much in the future. If, in fact, that residual portfolio performs better, some of that write-down would come back through the earnings stream, so we just thought it was a conservative thing to do, and this is certainly the right time to do it.

As for the other writedown, that was a writedown on the CUS portfolio, the CUS purchase of the portfolio probably hasn't worked out quite as well as we had imagined, we thought the portfolio would be a little stronger. It's turned out to be somewhat of a challenge in terms of collecting. Having said that, we think that the overall results of the portfolio will be just fine. We certainly won't lose any money in that acquisition. We may not make quite as much as we had hoped, but it's still early in the game in terms of how that portfolio will perform, but we again thought it was prudent and the conservative thing to do to take that writedown now, rather than wait and see how it would do in the future.

That's why we took those in the fourth quarter. With any kind of luck those things will work out well for us in the future. Other than that, as I said, probably if I were going to pick the highlights for the quarter and the year I think the CPS business plan of rebuilding to a larger company with new and improved controls and abilities to grow and finally getting the growth we've been looking for, is really the highlights for the year.

We have been able to start growing in what would be the fourth quarter and now the first quarter of '05, and we have been able to maintain a very strong infrastructure in terms of collections and originations, particularly collections as they have been able to shine during the year in the way we've been able to collect the portfolio. The results in terms of collections have been far better than we could have anticipated, and we think that bodes very well as we continue to add more portfolio having the collection unit doing so well.

With that, we think the future looks very good, and we'll open it up for questions.

The floor is now open for questions. [OPERATOR INSTRUCTIONS] Thank you. Your first question is coming from [Laurie] Miller with Ragen Mackenzie.

Hello?

Hi, Larry.

Hi there. I guess I was on mute. Hi there. One -- it would look to me like what you've essentially done here with your write downs is cleared the decks for the future, and whatever might you (ph) be questioning are now behind us and maybe that will get better, as you point out hopefully, so having observed that, that's indeed, that's what has transpired. When does this transformation finally get completed, the changeover from to balance sheet accounting from off-balance sheet accounting?

Generally we said when we started the whole process of doing it in June of '03 it usually takes 18 months to 2 years. We are now at the 18-month mark. As much as we would like to get it done a little quicker than other people, we will probably be more in line for two years, so we think in the next quarter or so we would have it completed.

Going forward then, again having addressed whatever questions you had about the portfolio, I get what you're saying is we're ready.

We would certainly hope to be ready. I think it's a combination of as you said, clearing the decks somewhat, also the fact that just the mathematical changes and the accounting takes some time to work through the balance sheet, and also in fact we are getting the growth we've finally been expecting, and those combinations over the next couple of quarters can be very good.

Any observations about the situation with General Motors and Ford? You know, the difficulties that they are experiencing? Both of those companies essentially are being carried by their financial arms.

You know, we certainly pay attention to what they do. It's a little bit of a different -- certainly ballpark than the one we are playing in. However, I think it’s more the way to look at it -- certainly the way we look at it, is the effect on the overall economy. As much as everyone says the economy is coming around, it probably hasn't improved enough in the auto sector or, in fact, if it's improving in other sectors, and not as much in the auto sector, that does have a impact, certainly has a much larger impact on them, because they are trying to sell new cars, whereas we are just trying to finance cars, and everybody needs a car to drive.

So on the one hand, there's a fundamental difference between us -- forgetting size and everything else, there’s a fundamental difference between us and those companies because we are strictly a finance company. We are not in the business of selling cars and I think, in fact, they have lots more competition, and they are having trouble selling cars at the moment, and that isn't relevant to us, but I think if the overall economy improved and they could sell more cars the trickle-down effect would help us, because we finance new cars as well.

All right. Well, it would look like perhaps we're on the cusp, as you Americans say.

We are getting closer, yes.

Excellent. Thank you very much.

Thank you. Your next question is coming from [Clair Baum] with Wachovia.

Yes, hello. I've got a question. I'm looking at that 69.6 million of allowance for credit losses. You referred to concerning the purchase of -- let's see, I don't know what the purchase is for sure. It shows 69.6 million of allowances of -- it says before 69.6 million of allowances for credit losses and deferred acquisition fees, under owned by consolidated subsidiaries. You show 619.8 million of debt or securitizations here, is that correct?

Yes. That, in fact, counts the securitization debt as well.

Now, where does the 69.6, where does that show up on your balance sheet?

It's netted against the receivables.

It's netted against receivables.

Correct.

Okay. Because I'm kind of trying to find the numbers that --

Interestingly enough, one of the strange things about making the change from off-balance sheet to on-balance sheet, is a few more numbers tend to net out on-balance sheet. For instance, you don't -- we used to break out a servicing fee for off-balance sheet. That fee is now thrown in with the interest calculation. You see both the interest and the interest expense coming through the P&L, so it is a little harder to follow. Plus you have the provision in there as well. So I guess the important thing is that the provisions netted, it may dampen the effect of how large the portfolio is getting, but in fact, we broke the numbers out so you could see it, but that's where it is. It's buried in there.

Why would you bury it?

It's just buried for the way you present it for GAAP.

Okay. All right. Thanks a lot.

You're welcome.

Thank you. Your next question is coming from [Russ Salzbury] with Woodcliff Company.

Good morning, Brad.

Hi, Russ. How are you?

Very well. The 9.1 impairment, does that relate to specific pools, or do you break it out by specific pools or do you just kind of took a -- ?

Theoretically it's by specific pools, but in fact you just take it against the entire asset. If we were looking at it, we would probably pick one or two of the pools and say those pools had done poorly relative to what we expected, and in fact, those would be pools from 2001 and early 2002. The more recent pools have done just fine. In the way you take the loss or write down, you take it against entire asset.

And those are CPS originated pools, or acquired pools?

No. Well, there's a Mercury pool included in that, but it's predominantly CPS pools.

Another quick question, is the Sea West acquisitions, are they structured as gain on sale, or as a balance sheet? Securitizations?

Balance sheet. We service three pools for them that were securitized and the purchase we did is on balance sheet.

On balance sheet. Okay great. Thanks, Brad.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question is coming from John DePaulo with Prudential Financial. It appears Mr. DePaulo has dropped out of queue. [OPERATOR INSTRUCTIONS] There appear to be no further questions at this time. I would now like to turn the floor back to Mr. Charles Bradley for any further comments.

So in wrapping this up, the way to look at it as I think I tried to point out during the call, we have done what we wanted to in terms of the Company, in terms of the infrastructure and building the controls, to grow back to being the kind of company we were before.

We are now, in fact, experiencing the growth we have been hoping for. If that growth continues, it will have a really good effect on how the Company performs, and last but not least as much as everyone cares about the earnings in terms of the stock, and certainly the Company does, too, in the process it's probably going to be the last thing that follows, and in the end, though, when it does, it will be very good.

So it's going to take a little time and we appreciate everyone bearing with us and working with us. The Company is doing very well in all other areas, so we think that area will catch up over time, and the results will be very good. So thank you all for attending the call, and we look forward to talking to you next quarter.

Thank you. This does conclude today's teleconference. A replay will be available beginning an hour from now until Thursday March 31st, by dialing 877-519-4471 or 973-409-9261 with PIN number 5859610. A broadcast of the conference call will also be available live and for 30 days after the call via the Company's website at www.consumerportfolio.com and at www.StreetEvents.com. Please disconnect your lines at this time, and have a wonderful day.