Consumer Portfolio Services Inc (CPSS) 2005 Q2 法說會逐字稿

[OPERATOR INSTRUCTIONS]. Good day, everyone and welcome to the Consumer Portfolio Services Q2 2005 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 such 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 obligations 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 Consumer Portfolio Services. Sir, you may begin.

Thank you everyone for attending our second quarter conference call.

First, we're very pleased with the quarterly results. We did finally, after several years, return to profitability. Not an enormous profit, but certainly it's where we wanted to start and as we mentioned in the press release, we would expect further improvement as the quarters go by.

In terms of an overview of the company for the quarter, or actually overview of the Company currently, sort of going backwards, our collections remained dramatically strong, it's probably the best collections performance we've had in the first half of the year and it just keeps continuing so we're very pleased with the way our collections are going. Our originations, also, we've been concentrating on our dealer service. Our turnaround time, and we think that's had a noticeable effect in terms of the marketing and the application flow and the contract flow that we've seen.

Normally, certainly historically, for at least the last ten years, the summer months, June and July and August are not a time when the Company really grows and it really never has, yet this year we are showing some growth during those months. Normally we grow a lot in the first quarter and a little bit in the second quarter and then kind of hang on to those numbers for the rest of the year. This year we've seen somewhat significant growth in our production over the last few months, so that's a very strong sign for where we're going in terms of the originations and the marketing end of the company.

And as anyone who has listened to the last couple of conference call, this is obviously what we've been focusing on, in trying to get the originations performance better, and therefore getting the marketing performance better, and therefore getting more packages and it seems to really have -- be having a very good effect.

In terms of looking at the numbers, revenue for the quarter was 47.8 million, that's up from 41.8 million the previous quarter and 32.7 million a year ago. On the expenses on the quarter were 47.2 million. That's compared to the 42 million of a quarter ago and 32.9 million a year ago. It's really, as much as those numbers are good, we're quite pleased with the revenue growth. I think if we look at those numbers a little more closely, it really is far more indicative of how the Company's performing.

If you look at the loss provision, the loss provision is part of the new accounting, the loss provision in this quarter was 15.2 million versus 12.3 million last quarter and 6.3 million a year ago quarter. Obviously the loss provision is growing significantly as we grow and we've now gone over to fully on balanced -- on balance sheet accounting but something to look at, what we would like to sort of focus on, is if you exclude the interest expense, and the loss provision expense which are both almost solely associated with us buying loans, in other words, the more loans we buy, the more interest expense we're going to have because those loans are on balance sheet and the more loans we buy, the more loss provision we're going to have, again because every time you buy a loan you have a loss provision.

But if you separate those two line items out from the rest of the expenses, you can see the true operating expenses or the expenses of operating the platform that generates the loans. And if you look at those numbers, which would be the operating expenses excluding interest and loss provision for the quarter, they were 20.1 million, up slightly from 19.4 million last quarter and 19.1 million a year ago. And if you look at that number, the expense has only grown about 5% in the last year while revenue has grown 46%.

One of the things we've said for the last few conference calls or even as much as a year or so ago is that we were trying very hard to maintain the infrastructure of the Company, the operating platform so that as we were able to grow, we would be able to do it very efficiently. In other words, we were carrying a lot of extra expenses before and as the Company gets back to growing and building a bigger portfolio, those expenses will be more and more absorbed, so the result of course is you see that we have this large increase in top line growth, revenue growth and a very minimal growth in the expenses, almost all of the expense growth comes in marketing, and those are fees we pay for both application flow and to our marketing people in the field so there's going to be some increase.

But during the last year, we've probably actually reduced the employee count. We've reduced expenses across the board, other than the marketing expense, and so you have only a very slight increase in marketing expense and overall operating expense versus very significant revenue growth. So it's very worthwhile pointing that out today because we think that trend will continue.

We have the facilities and the infrastructure still set up to do at least a $1.5 billion portfolio. We're only just under $1 billion. And to originate in the neighborhood of $120 million a month, and we're still only originating 55 or 60 million, so we would think that as we continue to grow, and then continue to improve the top line revenue number, the expenses will continue to stay relatively flat other than the marketing expense, and therefore, as we grow, we should have more improvement in the bottom line.

Continuing on, the net income for the quarter was $0.05, net income was $0.05 -- or $0.03 -- or $0.02 fully diluted compared to a $0.02 loss last quarter and a 1.6 loss -- I'm sorry. I've got the earnings per share a little confused there.

The quarterly was $500,000 of profit versus $200,000 lost last quarter and 200,000 loss a year ago quarter, and the earnings per share were $0.02 this quarter versus a $0.01 loss last quarter and $0.01 cent loss a year ago quarter. Looking at the balance sheet, the cash on hand today is $155 million, that compares to $159 million last quarter, and $85 million a quarter a year ago. So cash continues to build up. A lot of that, again, is a result of the cash coming out of of the residual deals we did -- excuse me -- the gain on sale deals we did or the old securitizations versus the new securitizations, and most of that cash has then just transferred over to be put into the new securitizations. But either way the cash continues to build.

Looking at the finance receivables, the finance receivables for the quarter stand at $747 million gross, $693 net, versus 666 for the previous quarter and 620 net, and that compares to a year ago quarter at $460 million gross and $421 million net. So again, we have continued growth in the portfolio as I mentioned a moment ago, our goal is to get to that billion and a half level because that's what we were servicing before and we think the company and the infrastructure can easily service that today.

In terms of the debt, the overall debt stands at $824 million. That's for $673 million a quarter ago. And $502 million a year ago. Something to point out there, the same kind of idea as the expense items we broke out, and in that way, if you take the securitization debt out because the securitization debt is all on balance sheet now, the securitization and warehouse debt this quarter was $737 million versus $577 million last quarter and $394 million a year ago quarter.

That leaves your long-term debt at $86.8 million this quarter versus $96 million last quarter and 108 or 109 million a year ago quarter, so while we are building our securitization portfolio and thereby building our securitization debt, we are in fact reducing our long term debt a little bit from the last quarter by $9 million. But from 109 million down to 86 or 87 for the year. So whereas we've continued to grow, we've kept expenses down and we've actually lowered our long-term debt. So all those are obviously very positive numbers for the health of the Company.

And now we get to the performance numbers, which are also good. In terms of the delinquency, the delinquency for the quarter was 3.87% versus 2.91% the quarter -- preceding quarter and 5.24% a year ago. The analyzed net losses are 2.89 for the quarter, which might be one of the lowest numbers the Company has ever done, versus 5.65 the previous quarter and 4.61 a year ago. So the delinquency and the loss numbers are significantly better, the delinquency's up slightly from a quarter ago but significantly better than a year ago and the losses either comparison, previous quarter, or a year ago are significantly better.

It's probably a little early to say but it would certainly appear that the quality of the paper originating today is significantly better than either we expected or than what we had planned, and with that, as both the combination of the really good collections, the tremendous job our collection folks are doing, along with the health of the economy, the recoveries at auctions are significantly better, just across the board, everything's going much better than we might have either expected or planned. So the portfolio is performing very well. We're really trying to figure out, is it that we're doing such a great job collecting the the portfolio or is the credit quality that much better than we expected? Either one is a very good problem to have we know we'll continue to look at.

Again, the consolidated portfolio, the total portfolio today stands at 966 million, that's versus 926 previous quarter, and 900 million a year ago quarter. In terms of the consolidated versus nonconsolidated which is the difference between what's on balance sheet and the old gain on sale deals, today 80% of the portfolio is on balance sheet versus 17% being the old deals or the off balance sheet deals.

That compared a year ago to 55% on balance sheet, 36% off and two years ago when we started the transition, when it was 32% consolidated and 62% off, so obviously the difference is fairly significant. We've gone from 68%, that was gain on sale portfolio down to 17% until the last two years and at the rate we're going in another quarter or two, we'll be fully on balance sheet. And as that continues, we would expect to see more and more of our interest income growing. You would see less and less of base servicing fees and less and less of the residual gain on sale revenue.

So again, overall, it's hard to find a number we're not very happy with. The results of the portfolio performance are tremendous. The growth originations at this time of year is much better than we expected. We're being very conservative in how we grow, and how we project earnings so we're very happy to have a profitable quarter. We think we should have continued success in the profitability. We'll kind of see how that goes over time.

In looking at the industry, other nice things that are happening, we've talked about the pressure from banks and credit unions in previous conference calls as much as a year or so ago. Recently, the credit union regulators have come out and put a lot of pressure on credit unions not to be in the sub prime business.

We are beginning to see that ripple through the industry in terms of how it affects lenders in our industry who are using credit union money. We think that would be very significant in generating more business for us and other competitors that are not dependent on the credit unions for their funding. We've talked about that happening for a long time. It certainly appears that it is finally starting to have an enormous effect on the ability of lenders to use credit union funded money.

Certainly the improved economy is helpful; as I mentioned earlier, the improved recoveries at auctions is very helpful. All of these things are having a very good effect on how the Company performs, and the overall health of the Company, which we're very pleased with. With that, we'll open it up for questions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS]. Thank you. Our first question is coming from [Ken Liddy] of Wachovia Securities.

Hi, guys, congratulations.

Thank you, Ken. How are you?

Great. I was really shocked to see the revenue growth this past quarter. Is that sustainable?

We think so. We're a little surprised ourselves, but if you take June and July as indicators, June generally slows down and it didn't and July has been better than June so not being able to forecast in the future, I think an overall comment would be that normally this time of year we would think revenue growth would flatten out -- it doesn't seem to be and we would expect our collection performance to start to get a little weaker and it also doesn't seem to be. So it's a nice time of year.

Whether it's totally sustainable, normally you get a little bit of a growth spurt in September/October, so we're only talking about literally another month before you get into the point where it might grow a little bit anyway, so if I were going to guess, sure, it's probably sustainable for another month where you're getting to the point where it might grow a little bit anyway. So if I were going to guess, sure, it's probably sustainable for another month, when it should grow anyway.

Now, how are you doing so much more revenue on approximately the same amount of loan portfolios year over year?

Well, in terms of the size of the portfolio, what you're doing is you're seeing a transition from the old portfolio to the new portfolio and since we had all the gain on the old portfolio, we had a lot of accounts that are running off, but they're replaced by for more productive accounts in the new originations

Okay, that's what I thought, I just wanted to do clarify that. As far as profitability --

We bought those three companies, but predominantly Mercury and TFC we bought fairly significant portfolios with both of those acquisitions, Mercury is all but gone and TFC has runoff somewhat significantly as much as we're replacing some of the TFC with new originations, so we've got a lot of push in our earnings from those two categories but those two categories have very depleted at this point but they've been replaced with a high yielding CTS paper or the new originations so it's been a nice transition that has worked out rather well. Which is really what we thought we would do all along. The portfolios we bought were there to bridge the gap between where we were and where we thought we could get to and it's kind of worked out the right way.

Yeah, I couldn't be any happier. My clients couldn't be any happier. Now as far as profitability, I would think that that should be pretty much sustainable at this point unless you grow too, too much.

We certainly would think the profitability is sustainable, and it's just a matter of not getting too ahead of ourselves. I agree.

And would you expect that earnings slowly to build from here and kind of snowball? Over the next, you know, 24 months?

Yes, we think that the earnings are sustainable. We think that the earnings should continue to grow. We do not want to have some big spike in our earnings by growing too fast. We would like a nice orderly conservative growth phase, whatever you want to call it, but certainly our goal is to grow at that kind of pace or at some kind of pace over the next two years if not for the next ten.

Now, I mention this every time. Are you ready now to get Wall Street interested? I mean, you have a great, great story here.

Certainly that is one of our main goals now that we're profitable. Everything looks -- I mean, again, from the call, you can tell if you look at our revenue lines, the expense lines, the balance sheet lines, everything is where it should be. This is a perfect time to go get somebody interested in the company.

Do you have any contacts with the former firms that cover the company? Sure, we're certainly going through a list of not only people that we know from before, but people that cover our competitors in the industry and we would expect to contact certainly most if not all of them in the next quarter or so.

And one last question. As far as the interest rate environment, how is that impacted your business or have you seen a major impact at this point yet? Interestingly, we've been forecasting interest rates going up, so we're certainly not surprised nor anyone else should be that the interest rates have gone up over the last 18 months, but the pricing on the securitizations or the curves that the securitizations are based on, those interest rates have not gone up as significantly as we might have expected, so certainly there's a little bit of a benefit there .

We will continue to forecast interest rates to go up the way the Fed says they're going to go up. To the extent the long-term rates or the securitization guidelines or pricing guidelines stay lower, it's going to be a bigger benefit to us or to everyone else for that matter.

So we'd see long term rates go up and we'll have a flattening out of the yield rate with that, concern you?

It wouldn't certain us because we've already got that built in, the fact that it's not doing that is just benefiting us more.

Okay, great. Congratulations.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question comes from George Bun, a private investor.

Hi, Brad. Congratulations on a good quarter.

Thank you. I was surprised to learn the other day that there's only one market maker and I assume that your new overture to the Wall Street community will affect that and expand the number of market makers and people that are interested in the stock.

We certainly, along with -- I mean, our goal for the next six months and certainly by year end would be to have one or two, if not more, equity analysts following the stock. We'd like to get some institutional backing along with those analysts and we would expect to have more market makers as a result of those first two things.

Thanks very much.

Thank you.

Thank you. There are no further questions at this time. I will return the floor to Charles Bradley for any additional closing remarks.

Once again, I think as you can tell from the tone of the call and all the numbers we went through, we're very pleased and we're not just pleased with the fact that we finally had a profitable quarter. We told everyone all along it would take some time to get the Company repositioned to get the accounting changes put through so the profitability is certainly nice and I know everyone's been waiting for several quarters to see that thing happen.

To be quite honest with everyone, I mean, that's not -- I mean, as much as we enjoy it, too, the profitability was going to come when it came and the goal of what we're trying to do is get the Company set up to where it can grow and become a very large company again with the great big portfolio and increased monthly originations.

Along those lines, we are more than exceeding our expectations. The portfolio is performing much better than expected. The originations are doing great. The collections are doing great. The business is coming in when we wouldn't expect it to. We're being able to pay down our debts. Across the board, from beginning to end, every aspect of the company is doing very well. One can only think that the profitability will follow along the way it should.

But again, we're not running the company for profitability. We want the profitability to come naturally and, you know, be long term and enduring. So having said all that, we think the quarter was real good. We like the earnings. We expect good things to happen in the quarters to come. And thank you all for being on the call.

Excuse me, Charles, we do have more questions at this time.

Okay.

Sorry about that.

That's all right.

Flint Horner, he's independent management

Brad?

Yes.

Congratulations. I haven't talked to you for a couple years but I haven't seen you since '94 when I was the director of research at Dickinson and you and your dad came up to Wall Street. You know, I've been a long-time fan and I'm very pleased that you went to online instead of gain on sale. Is there any way you could make yourself more accessible to people like me that do the number crunching and are a special situation guys? Because it's hard to get through to you on the telephone.

Certainly if you call in and ask to speak to me specifically and say you've known me for ten years, you'll get to talk to me.

Well, I've gotten to your assistant. Her name starts with a J. or something. And no response.

Well, if you call me this afternoon, Clint, I will you absolutely take your call.

Actually, it's Flint, like Flint Michigan. Unfortunately, it's not like that guy from Piper that torpedoed us a couple years ago. Well actually it's almost ten years ago, but, yes, I would be pleased to do that and I'd like to ask you a couple questions on -- so I can build a new model using some new metrics.

That would be fine. No problem at all.

Super. Thanks.

Thank you.

Good luck.

Thank you. Our next question comes from Mel Barnes of UBS.

Yes, hi. Very pleased to hear the report and you all are to be congratulated and everyone paying attention should be pleasantly involved right now. One thing I noticed that confused me was the share number and I see a big dilution in the number of shares. I had thought that the plan had been to have the company in the buying back or possibly retiring some shares by buying them back. Could you address that?

Sure. When the company is losing the money, the loss has become antidiluted to the shares. So now that the company is making money, more of the shares are outstanding. We have bought in a significant amount of shares and continue to try to carefully buy in more shares as they become available.

You may know that the formula for buying shares makes it very difficult for us to buy a lot of shares on the open market that we consistently try and buy every chance we get. So what you'll probably see -- that's the easy answer for the dilution or the dilution you see. It's not like there's a lot, but we're adding shares outstanding but you probably had an antidilution effect because of the losses.

I've got you. So the existing options had been out of the money and they were not considered diluted?

Correct.

Do you have reports that come in of the dilution amounts at various price levels?

Well, it's in the Q If you look in the Q, you'd be able to see the explanation of the options and how they're diluted

Okay, I'll deal with it that way. Thank you.

If you have any questions, feel free to give us a call .

Thank you.

Thank you. This does conclude today's teleconference. A replay will be available beginning an hour from now until Wednesday, August 3rd by dialing 877-519-4471 or 973-341-3080 with PIN number 6295911. A broadcast of the conference 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.