Consumer Portfolio Services Inc (CPSS) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services second quarter 2006 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 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 statements whether as a result of new information, future events, or otherwise. I will now turn the call over to your host, Mr. Charles E Bradley, Chief Executive Officer of Consumer Portfolio Services.

Thank you, and welcome to today's call, everyone. Has everyone seen the numbers? We had what would certainly be considered an excellent quarter. I think really what we would attribute that to as a Company, we've been telling everyone now for probably on two years that our focus has been on the infrastructure, on automation, on redefining our system so we can better handle the production, keep our controls in place and over time with the new accounting change those results would come forward. Certainly this quarter would be very representative of all of those things finally coming to some fruition. There's a lot of different aspects and all are beginning to go the right way. The infrastructure is really paying off, we're really starting to grow into the infrastructure, so we are getting some real economies of scale. The accounting change is really starting to be just about finished. So you're really going to be able to see some numbers as we go forward.

In terms of the Company, marketing remains strong, that's really our focus now is to continue to grow, we're adding more reps all of the time. We're up to 85 marketing reps across the country, that's up from as few as 50 a year ago. That's a significant change in things that will help us grow in the future. Originations remain strong, our controls are probably working, probably better than we could have expected. We're buying real quality paper and maintaining our margins at the same time. Collections and asset recovery are both operating with excellent results, again with growth and the amount of things we're doing, we're having really tremendous performance on both the portfolio and the asset recovery. We'll go into a little of that in more detail later. But let's walk through the numbers first. In terms of the revenue for the quarter, the quarter was 67.2 million compared to the previous quarter of 58 million and the year ago quarter of 47.8. So again the trend continues of our gradual increase in revenue. Year-over-year, it's 125.3 million in revenue, year-to-date versus last year, 89.6.

Terms of expenses, expenses were 64.6 million for the quarter compared to 56.2 in the previous quarter and 47.2 in the year ago period. Year-to-date expenses are 120.8 million compared to 89.3 last year. Lost provision, 22.2 million for the quarter versus 19.9 in the subsequent quarter and 15.2 in the year ago quarter. Year-to-date lost provision was 41.3 versus 27.5 in the previous year. The income was 2.6 million for the quarter versus 1.8 for the previous quarter and 0.5 for the year ago quarter. Year-to-date income, 4.4 million versus 0.3 the previous year. Earnings per share, fully diluted, $0.11 for the quarter, $0.07 for the previous quarter, and $0.02 for the year ago quarter. Year-to-date $0.18 versus $0.01 year-to-date last year. What's nice about giving out all of those numbers is they're all good. The revenues up, the expenses we have been able to maintain the consistency, the loss provision is up a little bit as it should be.

And the income is up the most. What you'll see is we'll have a continuing rise in the interest revenue. We'll have an equal rise with the expenses and the interest expense and also the loss provision. What you won't see is the core cost will maintain their consistency, thus contributing much larger numbers to the bottom-line. Looking at some of the balance sheet numbers, the cash for the period was 219.8 million, versus 237.9 the previous quarter and 155.3 the year ago quarter. The timing on the cash, again, as I've said in the past, is somewhat determined by how much we've drawn down on the lines and things like that. Finance receivables on the quarter were 1,266.5 million. Previous quarter was 1,114.7. Year ago quarter was 747.1 million. The allowance for the quarter was 74.8, the previous quarter was 63.9 and the year ago quarter was 53.3. Giving us a net receivables balance for the quarter of 1,191.7 million versus 1,050.8 for the previous quarter and 693.8 for the year ago quarter. So we've had nice consistent growth in the portfolio.

We're now getting close to 1.2 billion. One of our near-term goals was to get to a $2 billion portfolio, we probably can see that certainly in the next 12-18 months. In looking at the debt, the warehouse debt was 59.3 versus 75.1 in the previous quarter and 45.3 a year ago. The residual financing continues to pay down as 30.7 this quarter versus 37.7 last quarter and 12 million the year ago period. The difference would be that we did redo the residual financing last December. Again, it pays down rather quickly. Securitization debt was 1,248.3 million for the quarter versus 1,100.6 million in the previous quarter and 692 million the previous year. Long-term debt for the quarter was 48.7 versus 46.3 in the previous quarter and 74.8 in the year ago quarter. And taking the relevant pieces of that, the securitization warehouse debt for the quarter was 1,307.6 million versus 1,175. 7 million versus 737.3 in the year ago period.

Long term and residual debt stood at 79.4 for the quarter, 84 for the previous quarter and 86.8 for the year ago quarter. So we've paid down a little bit of the debt as the quarter's gone by. Looking at some of the portfolio numbers again these numbers remain strong. The delinquency for the quarter was 3.76, that's comparative to 2.67 for the previous quarter and 3.87 for the year ago. Summer generally is a little bit higher delinquency time. So really if you look at the 3.76 versus last quarter 2.67. Last quarter tends to be -- the first quarter of the year tends to be the very best quarter for delinquency and losses, so it's up a little bit, but it is again down from last year, 3.76 this quarter versus 3.87 last. In terms of the losses. The quarterly annualized losses were 2.65% versus 4.6 for the previous quarter and 2.89 for the year ago quarter. Same story again, the losses at 2.65 are excellent, that compares very favorable to last year's quarter of 2.89 and down from 4.6 in the previous quarter.

The portfolio today stands at 1.375 billion compared to 1.24, compared to 966 for the year ago period. Again our percentage of that portfolio that is CPS consolidated under the new accounting is 94%, that's up from 92 and 80% a year ago. So we're almost to the point where the entire portfolio is going to be made up of CPS on balance sheet paper versus the off balance sheet pools or the acquisition pools. Looking at some of the other important metrics, the net to interest margin for the quarter was 40.7 million compared to 36.5 for the previous quarter and 28.6 for the year ago quarter. Year-to-date, the net interest margin is 77.2 million compared to 54.4 for the year ago quarter. The risk adjusted margin, which is the new minus the loss provision, was 18.5 for the quarter versus 17.4 for the previous quarter, 13.4 for the previous year's quarter. Year-to-date is 35.9 versus 26.9 in the previous year and the last 12 months it's 70.3 versus 48.2. Again, what that shows is that the operating profit margin is increasing versus the core origination expense which is maintaining a very static number.

Those core operating expenses, excluding interest, loss provision, and impairments for the quarter was 20.1 million versus 19.1 million in the previous quarter and 20.1 in the year ago quarter. The year-to-date is 39.2 versus 39.4 on the year ago. The operating expense as a percentage in the managed portfolio has dropped to 6.1% for the quarter versus 6.5 in the previous quarter and 8.5 in the year ago quarter. Annualized year-to-date it's 6.3 versus 8.4 last year. And really that's one way, an easy way to look at how the Company is growing and becoming more profitable is that the core operating expense as a percentage continues to drop, remembering if you've been along for the ride here, several years ago that number was above 10, as high as 11 or 12, now it's 6.1. Our targeted number's in the threes, if not a little bit lower. As we continue to grow, we maintain the infrastructure, maintain the core expense levels, that percentage will continue to fall and thus more profit drops to the bottom-line.

Really what we're experiencing and looking at the Company and the results we've put out recently is a couple of things. As I've said now a couple of times, the infrastructure is really kicking in and performing all the automation and the score cards we've built have really performed very well. And really one easy way to look at the overall performance is we had some expectations in the portfolio performance, and that performance is far exceeding what we expected. And you can imagine the portfolio now the size it is with continued performance that you could have some very nice results coming through. If the annualized losses continue to perform better than expected that has a very far-reaching effect, both in terms of net interest income that comes in because the portfolio remains outstanding and lower chargeoffs which also contribute to the bottom-line too. And looking at the industry. There isn't really too much to talk about. The industry competition remains very stable, there hasn't been any real new entrants.

None of the big players have done anything particularly different. So it's really pretty much status quo for within the last quarter, even the last several quarters. No real changes there. No irrational competition, nobody's made any big changes or pushes. The environment's very good for us, we've been able to grow rather easily and we'll continue along that path. In terms of looking at the auctions and at our asset recovery results, this last quarter was a little bit softer, probably as a result of the summer season. But, again, only just a little bit and even the auctions still remain very strong. We did some analysis in looking at the gas prices and how that would affect our portfolio. In terms of the larger vehicles, the SUVs, that auction price dropped about 10% from down to about 31 from 41%. However, that percentage or that group of our portfolio is less than 3% of the overall portfolio. So certain the mitigates any effect that will have dramatically.

In looking at the economy, the economy seems fine again as much as we follow the economy and even how the big three performed, our basic stable way to look at things is that our customers have to have those cars to drive to work. And they're going to be able to maintain those cars. The economy will not affect them as much as one might think. And the last thing I'd like to touch on is the secondary we announced that we are going to be doing in the next week or so. That secondary is almost predominantly our senior lenders selling off their equity position in the Company. This isn't because they think that there's anything going on with the Company or anything else. Their fund closes next year and this is the time for them to get out of their positions. We will eventually refinance out their debt, as well. They're going to have both their debt paid off and their equity liquidated by early next year. So this is just a process and the time that works for them.

From the Company's point of view, we think it's a very good thing. It will add a lot of liquidity to the float. One of the big negatives or one of the things people comment on on our Company is the lack of liquidity in the stock. By putting out 4 million or so shares, we will do wonders for increasing that liquidity. So the Company views this secondary as a very positive thing. We put all of that stock out there at once. It really should do wonderful things for the liquidity. The Company has registered to sell 500,000 shares, which we may or may not sell depending on market conditions. Really the secondary is revolving around liquidating that position for our senior lender. That timing is going to work out just fine. Other than that, I think overall the Company is performing very well, we've had a second quarter that is terrific. We think we could have a really good year underway. And the prospects are good. So with that, we'll open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is coming from Jed Gore.

Hey, how you doing? Thanks for taking me question. I was just -- your credit was remarkable in the quarter. And I was just wondering how you're able to get a loss rate where it is given what you mentioned, Brad, with respect to recovery rates maybe drifting down a little bit? And wondering if you could just comment just generally on credit. And what you see for credit for the second half of this year because, I think, it's a bit of an issue out there in terms of your customer base and what's going on in credit.

Sure. Probably two factors we would look to in discussing that question. One would be, we spent a lot of time and effort in getting our collections people and our branches really to where they function very well. And in fact that is just what they are doing. So on the one hand, we are really ahead of the curve in terms of collections. We're fully staffed and we're using lots of automation and sort of new techniques that are having tremendously good results. We are getting to our customers sooner. We're getting to what we could call potential delinquencies sooner, and that's probably the major reason. That's probably half the reason we're producing the results we are. And the second one is something that is really hard to put a finger on and quantify. When we started originating this paper and put out this model in 2002, we had a certain expectation for the loss portfolio. The loss profile of those customers. Probably given the performance and now it's been several years, after the first year or so you still say well, it's early, we'll have to wait and see.

It's now been almost 4 years since we started that profile. And it's probably about the time where as a Company we would say that we were very conservative in projecting those losses. So we thought we were buying a certain level of loss per customer, that loss has not materialized and those customers are actually performing better than we projected. So what you're really going to have is, I guess the use of numbers. If we had forecast a 13 or 14% cumulative loss curve for our profile of customers and maybe we even used 14 or 15, those numbers are coming in certainly more than in the 12, maybe even significantly better than that level. The real answer is, even if collections weren't doing a great job, that portfolio performance would do wonders for the numbers. The combination of both have made our performance exceptional. But really, and in going forward, we would think that we're going to continue to buy that kind of customer because that's what the model says and that's all that it will let us do. And we obviously would think that the collections would continue, as well.

Typically in the second half of any year credit worsens, what's your expectation for the second half of this year?

We certainly agree with you that considering the fourth quarter is the weakest quarter of the year. Given our collection strength and the way we can go about it, we would still like to think that our numbers are going to hang in there just fine.

So you think you may still be down year on year? If you compare it in this year to last year.

If you go by what we've done so far, that's certainly one way we would probably go. To be safe, we should be able to match last year. The goal for all of our collection people is to be what they've done before. And they've done a wonderful job of doing that. It's easy enough to say we're very confident that we should be able to maintain the performance for the rest of the year.

Thank you.

Thank you.

Thank you. Your next question is coming from KC Ambrecht with Millennium.

Hi, Bradley, good afternoon, thanks for taking my question. Great quarter. Just one comment and one question. Just continue to be impressed at the ROA build here, 71 basis points in the quarter versus 53 last quarter and 24 bps a year-over-year. I don't think you are going to comment on it. I still think the Company can grind to 2%, which I think means a lot for earnings. My question though is on volumes for the quarter, you guys did 268 million versus 150 million last year. What continues to kind of drive that volume?

The driver on the volume is mostly just the adding of new reps. New marketing reps and new markets. As the summer goes on, we'll have a slight decrease in originations. Let's do it another way, we may not have so much of a decrease as we won't show the growth. What you really do is you grow a lot in the first two quarters and you kind of hang on for the last two. But the fact that we've added a lot of marketing reps in the last six months, we may fight that trend a little bit this year and manage a little bit of growth, which would be certainly nice. The reason we've been able to grow, and there isn't any irrational competition, the market's wide open. If anything our market is growing and there aren't any real new competitors to come into that market. So it almost makes it even easier for all competitors in the industry to get the paper they want without any irrational competition. At the end of the day, the year-over-year is going to be very significant growth. We've grown something in excess of 50% two years running, we would probably expect to do that again this year.

Okay. At your peak, years ago when the Company was still on gain on sale, the Company was doing close to in the threes, right per quarter? $300 millionish?

Yes.

It was in the high 3s? And you haven't really added any infrastructure. So it's just kind -- you're just kind of thinking in the back of your mind like 80 to 100 million a month and just kind of cranking out the model?

Pretty much. Right now we're doing just about that. We're doing anywhere between 85 and 95 million a month today. To go back, our all-time high was about 115 or 118 million per month. We only did that for a short period of time, but just like you said the infrastructure is sitting there to do at least 120, a 140 million a month. So with the brand structure we have, you have very little increase in getting to those numbers. If you look at our year-over-year growth in originations, you might be able to pencil out getting to 120 -130 million a month next year. And again, if you follow that kind of a trend in originations and you keep the infrastructure in place, lots of good numbers happen.

Super. Great quarter, thank you.

Thank you, our next question is a follow-up question coming from Jed Gore.

It's easy to get questions on this conference call. Thank you. I was just going to ask you, Brad, what do spreads look like right now?

What kind of spreads.

Well, your coupons over your funding?

the spread, as I said, based on the overall portfolio performance are probably -- it's kind of like we think they're one thing because we keep assuming that the losses might be there, and since the losses aren't the spreads in our minds keep improving. What we do have is a slight negative impact by the interest rates going up, all of which at this point you might think as much as we have built in further increases in interest rates, it may flatten out somewhat substantially after maybe the next raise. And if that's the case, then we'd actually pick up a little interest margin as we went forward. You know, which would be nice. But really, what we're picking up in the spread is a decrease in our loss expectation, and that's obviously very significant.

And lastly, when do you expect the residuals will be off your balance sheet?

Probably over the next year, a little bit longer.

Okay.

The residual just for the fun of it is performing wonderfully. That piece of the portfolio, we were very consecutive, we took a write down on that a year or so ago, and we were very consecutive in how we applied that residual. And we're seeing some very nice benefits from that conservatism now.

Thank you, we look forward to seeing you when you come through New York.

Thank you, our next question is coming from Alex Powell with SunTrust Robinson.

Hi, guys, congratulations on the quarter.

Thank you.

Just one quick question. What do you guys see as far as new car incentives, this year, I guess to clean up lots after summer, and how will that affect your volumes? What are you guys seeing in the marketplace and what do you expect this year?

We're really only seeing very little so far this year and we probably wouldn't expect to see that much more, predominantly because the new car incentives really aren't very good for the captives. There is two ways to look at it. They did a tremendous amount of new car incentives a year or so ago, and as much as it helped their sales then, they paid for it dramatically later. And this year you're seeing a little bit of it, but you almost can kind of tell they're doing it a little bit out of desperation and they probably won't lean into it nearly as hard as they did last time. So as a result of that, I guess from our point of view, it probably won't ever be as severe as it was the last time, and this time we haven't really seen much of it, and by now, during the summer period, we would expect to assume whatever you're going to see.

Okay. Great. Thank you, congratulations again.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question is coming from Michael Cohen.

Hi, I was wondering if -- let me start by saying great quarter. But was wondering if in the future maybe you could put some of those metrics that show up, obviously, a lot of them show up in the Q and a lot of them show up in your commentary regarding credit and maybe even some of the loan metrics. Maybe you could start to put that in the release. And I think that's going to become increasingly important as our shareholder base expands with the upcoming offering.

I agree with you 100%. Having said that, we'll do it, I'm not sure quite when we'll do it. But it's certainly something we'll getting ready to do and over time we are going to have to do. And we certainly given the numbers, would love to do it.

So -- I mean not an FD, but is it a Sarbanes Oxley kind of thing or a compliance? Is that sort of the issue?

Well, it comes right down to giving guidance. You know, we've shy away from giving guidance, at some point we're not going to be able to get away from that either. But it's the same idea. You can expect to see those numbers in the next quarter or so.

So we'll start to see your delinquency and your net credit loss numbers published with the earnings release?

More than likely.

Right. Thank you very much.

Thank you.

Thank you, our next question is coming from Clare Baum with Wachovia Securities.

Hello, a couple of items. Number one is more of a comment. You mentioned you might want to put 500,000 shares into the secondary. Why would you do that at these low prices, I guess? I would think you would have to, and I'm hoping you don't as a shareholder. I'd rather not see any more new shares come on. I'm very glad to get rid of the other holders. But secondarily, on loans, my understanding is you're pretty much in the used car side of the equation, is that correct? And your average loan isn't that high. Am I correct on that?

Yes, we're 80% in used cars, so we're very much predominantly in used car and the average loan isn't that much. The average loan is about $17,000. So we're nothing compared to new cars and things like that as much as 20% of the portfolio is new cars. And to answer your question on the shares, we put in 500,000 shares cause to put the book together and the legal aspects of it, it was better to put it in so we'd have the option to do it. Given the stock price and other things, you never know what the stock will do and whether it may come to a number where we would be interested in maybe selling a few shares. We're probably a little up in the air as to what we'd do. We think the stock has a huge future, so we'll keep that in mind as we go forward. And your other point that you did mention about us being able to sell those other shares is really a very big positive.

Thank you.

That's really the fundamental of the secondary. The secondary is we're going to add a minimum of 4 million shares of liquidity and take away any overhang that could have been pressing down the stock price in the future.

Good.

Thank you, and at this time, I'd like to turn the floor back over to Mr. Charles Bradley for any additional or closing remarks.

So anyway, in wrapping up the quarter, certainly was a nice quarter for us. We were very pleased with the results. The results were probably even better than we expected. We think, again, it's all based on the strong infrastructure we have in place, the very consecutive approach we've taken to originating the portfolio, and really just a great job all employees at CPSS are doing and doing their jobs really well. We'll take some credit for it too. But the results are really good, the plan we've laid out for the last two years, the last three or four years is really starting to come together. So thank you all for attending, we'll 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 Tuesday, July 25th, by dialing 1-877-519-4471 or 973-341-3080 with the pin number of 7617180. A broadcast of the conference call will also be available live and for 30 days after the call via Company's website at www.consumerportfolios.com and www.streetevents.com. Please disconnect your lines at this time and have a wonderful day.