Consumer Portfolio Services Inc (CPSS) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to the Consumer Portfolio Services third 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 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 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 thank you all for attending the conference call this morning. We're very happy with the results. As you can see, the products, they exceeded our expectations and probably in most cases exceeded what everybody else thought we might do. Overall the quarter was very strong, probably the only -- certainly not negative but the business certainly is a little bit slow in the industry and so that's had a little bit of an effect on our origination. So they're a little bit off compared to what we might have projected. But overall we thought it was good, the quality of originations remains strong, the overall market remains strong, so we're happy with that. We're happy with the results. We think our business model continues to perform, probably is now performing just a little bit better than we even expected. With that we'll walk through some of the numbers and talk about a few other things.

In terms of the numbers, the revenue for the quarter at $73.7 was up from $67.2 the previous quarter and year-over-year $49.4. Looking at the year-over-year, we're make some real strides in terms of seeing that revenue growth in the top line continue to grow. That's I guess half of the equation. Our business plan model in a sentence or less is to continue top line growth and keep expenses under control and then reap the benefit of that margin. Year-to-date revenue at $199, $199 million versus a year ago of $139 million. Expenses for the quarter were $69.4 compared to the consecutive quarter of $64.6 and the year ago quarter of $48. This compared with year-to-date of $190.3, year ago $137.3. We do certainly focus on keeping those expenses under control as the revenues continue to grow and that program is working very well. The loss provision for the quarter was $24 million versus $22.2 in the previous quarter and $15.8 in the year ago quarter. The year-to-date loss provision is now at $65.3 million compared to $43.4 the year ago period. The loss provision will certainly continue to rise as we put on more and more originations. That's to be expected. It is a large number in the overall numbers; however, it is exactly in line or right where we expect it to be. That all produced a net income from the quarter of $4.3 million. That compares to the previous quarter of $2.6 and the year ago period of $1.4. Year-to-date $8.7 million compared to year ago $1.7 million. Earnings per share for the quarter were $0.18 compares to $0.11 in the previous quarter and a whopping $0.06 in the year ago quarter. Year-to-date $0.36 versus $0.07 previous years nine months.

So for all those following along and staying on the conference call and is with the stock, you're now really starting to see some noticeable differences between year ago and today even quarter to quarter and year-to-date, all of those numbers. We've always said -- we used to get the -- not the funny question but the question of when are we going to see some earnings based on all the good numbers. Because we used to show lots of good revenue increases, lots of strong expense keeping in line, but not a lot of earnings, and we kept saying just wait, because it will catch up. It is nice to say today it is catching up.

In terms of the cash, the cash for the quarter stood at $212.4 million compares to $219.8 in the previous quarter and $164 million in the year ago quarter. So cash is basically flat. Again it's where we expect it to be quarter to quarter. Finance receivables, finance receivables on balance sheet were $1.384 billion compared to $1.266.5 billion the previous quarter and $872 million in the year ago quarter. The allowance now stands at $78.8 compared to $74.8 the previous quarter and $56.1 million a year ago. Overall net finance receivables now stand at $1.305 billion compared to $1.192 billion compared to $816 million a year ago. What's nice about the portfolio size is we're now getting to where we're just about going to pass and probably in the fourth quarter get to the largest portfolio we've ever had which is important in two respects. One, one of our initial goals and what we've been telling everybody for the last three years is that one of our financial goals was to get back the portfolio size we had in 1998. We are very close to doing that. From there the next goal is to get it to $2 billion. We've targeted some time next year. That target remains attainable and certainly looks like we can do that. But again, achieving one of our first goals was to get back to that portfolio size. It is nice to say we're just about there.

In terms of the debt, the overall debt stands at $1.494.6 billion for this quarter compared to $1.387 billion for the previous quarter and $950 million for the year ago. The vast majority of that is the securitization debt which today stands at this quarter at $1.355 billion compared to $804 million a year ago. The long-term and residual debt which probably, at least from our point of view, the more interesting number within the debt is $74.1 million for the quarter compares to $79.4 for the previous quarter and $76.8 for the year ago period. What's nice is as much as we've been growing and adding lots of paper and everything else, the long-term debt is managed to pay down a little bit more each quarter. It is down a little bit from the year ago period and down about $5 million or so from the previous quarter. Most of that is just the residual debt running off. One of the nice things about doing residual financings is they're self-paying. As much as we're beginning and have relied on them a little bit in the last year or two to provide our financing, the fact they get paid out through the cash flow makes it in some ways a very painless way to raise capital and an easy way to continue the growth of the Company.

In terms of looking at some of the portfolio performance, the delinquency for the period or for the quarter was 5%. That compares to the previous quarter of 3.8% and the year ago quarter of 4.9%. In terms of quarter to quarter, we would expect the delinquency to come up a little bit. This is seasonal, and we're very happy with that, and looking at the year ago, it's nearly the same, it's 5% versus 4.9%, probably almost all that difference between 5% and 4.9% would be because of the Katrina hurricane and us giving very generous extensions during that period. So the year ago period delinquency might have been a little bit low artificially, so again the delinquency year to year is flat and exactly where we expect it to be.

In terms of the losses year-to-date for the quarter, for the nine months September is 4%. That compares to June's six months at 3.7% and the year ago nine months to 4.9%. Again, if you look at that comparison, quarter to quarter it is up 3.7% going up to 4%, but year-over-year it is down from 4.9% to 4%, so again the numbers are exactly where we expect them to be. Actually we'll even go a little better than that. Lost performance is still trending better than we expected. All of the controls we put in place, all the things we worked on for the last few years have really continued to show strong results. We're not going to say we're amazed or anything with the performance on the paper but certainly we're surprised and happy with the results being better than we expected.

In terms of the consolidated portfolio, it now stands at $1.480 billion compared to last quarter of $1.375 billion and the year ago of $1.055 billion. As I said, we're just about at $1.5 billion. We debated internally. We think the previous best in the portfolio size was about $1.4 billion. So we've now passed that. Turning and looking at some other metrics that are important, the new metric or the net interest margin for the quarter was $45.4 million, that compares to $40.7 in the previous quarter. The year-over-year $31.8. Year-to-date is $122.8. Year-over-year $86.2. The risk adjusted margin which is the NIM less the loss provision for the quarter was $21.4. That's up from $18.6 in the previous quarter and $16 year-over-year. Year-to-date it is $57.5. That compares very favorably to $42.8 in the year ago. Core operating expense, something we always like to talk about and focus on for the quarter was $20.5 million versus $20.1 previous quarter and $18.6 in the year ago period. Year-to-date it stands at $59.6 which compares to $58.1 previous year.

The annualized quarterly expenses 5.7% versus 6.1% for the previous quarter and 7.4% for the year ago. Annualized year-to-date expenses 6.1% versus 7.9% on the previous year. We certainly like to point out this number. We've been trying very hard to keep those core operating expenses in line. That program continues to be very successful as we cross under 6%. Our goal and target is something in the 3% range. We think as we continue to grow and we continue to keep those expenses under control we can reach those numbers remembering as early as a couple years ago that number was 11%.

In terms of talking about the industry, overall we think the industry is very stable. Most of the players remain strong. You're always going to have a player or two have a little issue here and there but overall we think the general health of the industry is very good. This is in light of the overall market in terms of U.S. auto not being all that great, but overall we think the health of our industry still remains very strong. Interestingly enough, we've always -- we've talked recently about the fact that there aren't as many independents out there any more, that now they have been replaced by banks and by other companies buying up the independents. What we're now seeing which again is strangely enough a lot like before, so as much as things change, they remain the same, which is you now see banks as much as -- we used to see independents moving somewhat up and down the spectrum or in and out of the market. Now you see it with banks. Some banks bought somewhat aggressively for a time and now they, too, are retrenching and backing up, and that again offers more opportunities for us, and we probably said it before, but the name of this game is being consistent. You put your product out there. You stand still. You let people use it, and it performs the way you expect it to and in some cases like ours, even better. We still think the market is enormous.

The overall industry, we keep adding reps. We still see different areas. We talk to dealers in different areas and they say that subprime is still something they're trying to get their arms around and beginning to look at as a necessary tool they want it get involved with yet the market has been here for 12 or 15 years, so it is very nice to see that as much as we've expanded and as much as we continue to expand, there is still lots of room for growth, there doesn't seem to be a lot of unwieldy pressure from other competitors. There is a very large market, plenty of room for everybody. It is just a matter of doing it right, doing it controlled and consistently and not making any mistakes. So the overall industry remains very good.

In terms of what CPS's plan in the future is; our plan again is to continue on what we've been doing which is revenue growth and managed expenses, results being the net margin improving time over time. We kept those core operating expenses in line. We kept our infrastructure in line. We're now taking advantage of that previous infrastructure being overly expensive. Now it is providing all the benefits as we continue to grow into it. We're going to -- we're in the process of raising some new capital for growth. We are going to refinance our senior lender, probably by the end of the year. That's all going very smoothly. We have lots of different capital sources. That market continues to be strong. I think we pointed out in our last securitization, we got some of the best execution in that securitization that we've had in a long time. Also, the credit agencies are giving us more credit for the performance and that's resulting in less reserves posted up front, less cash requirement. So, again, that continues to go exactly the right way, and the way we would have expected. We would look for continued improvement in those areas.

Overall in the market, as I mentioned, we think the U.S. car market remains soft, sales are down. That had a little bit of effect on our overall production for the third quarter. It will probably a little effect on the fourth quarter as well. We probably will have soft originations for the fourth quarter which is what we expect. They may come out to be just a little bit softer than we expected. The used car market remains strong in terms of our liquidating of vehicles. The third quarter we got 45.5% which is down a little from the previous quarter of 46.6%, but again that's up year-over-year from 44%, and really the highest that market has really gone is about 48%. That market remains strong. It has softened up a little bit which is probably more seasonal than anything else if you compare it to a year ago when it was 44%. We're still doing -- that market remains stronger today than it was a year ago even though it is down a little bit from the previous quarter. So we don't see any real results there. We're not exposed to the large truck or the SUV market. I think our exposure for full-size truck is about 6% and to the SUV market only 3%. So as much as those two areas have declined slightly or some -- or a little more in the case of SUV's, it really isn't big enough in terms of our overall portfolio to have much of an effect. So net-net we think things are very good, the results were very good and things are working exactly the way we would expect. With that we'll open it up for questions.

The floor is now open for questions. [OPERATOR INSTRUCTIONS] Thank you. Our first question is coming from John Hecht of JMP Securities. Please go ahead.

Good morning, guys. Congratulations on a good quarter. With respect to -- that you touched on the competitive environment, some of the banks retrenching, can you comment on maybe where you've seen pricing go, has there been any relief in contract pricing or are you seeing anything change in that environment yet?

We really haven't. The pricing -- the pricing overall remind very consistent. I think it is almost we could make a multi-year -- an industry generalization saying people tend to -- their aggression or whatever -- their aggressiveness comes in how deep they buy. It's the credit quality they sacrifice, not the price and as much as that may seem an interesting way to go, it is certainly is proven over time never to be successful. So occasionally you'll see a little bit of price competition. We haven't seen much of anything. We haven't seen really any easing on the prices. To be fair, we haven't tried to raise our prices and push it through. We like where our pricing model sits. We think the interest rates have now slowed down. We have absorbed all of that without any problem. I guess certainly the overall throughout is interest rates won't rise for a little bit anyway and since we've baked in some increase in interest rates, the fact they might not would only improve our margins. So to answer the question, no, we haven't really seen any pricing relief but we don't really expect to. What you really see in changes in the market is retrenching in terms of the credit quality people are willing to buy.

Okay. With that in terms of your origination mix, I guess you have your alpha product and some others around that. Has there been any change in terms of the composition of your origination mix or should we think of that as being relative to historical averages?

The lower tier programs have gone up a little bit. I think part of that is a result that one of our largest segments was alpha and that consisted of a lot of discharged bankruptcies, and obviously given the bankruptcy law change, the filings have really dropped off in that market. Our lower tier programs have grown a little bit over time. That would probably be all we have seen so far.

And what about any fluctuations in the new versus used mix of your originations or is that pretty consistent with historical levels?

So far it has been very consistent with historical levels. If we had to lean any way, it is probably slightly more used because new car sales are so off on the U.S. providers.

Okay. And last question so you can open the mic for others is that you mentioned you're continuously hiring marketing reps. Where were you at the beginning of the quarter and how many did you hire during the quarter?

I don't have that number right off the top of my head. If I was going to guess what it is, I think we're probably up a net 10 and currently sitting right around in the low 80's. We probably went from 70 to 80 would be my guess.

Thanks very much, guys.

Thank you.

[OPERATOR INSTRUCTIONS] Thank you. Our next question is coming from K.C. Ambrecht of Millenium Partners. Please go ahead.

Hey, guys. Thank you very much for taking my question. It looks like it's a really solid quarter. There is turbulence right now in the market by one of your peers, specifically regarding credit, and I was just wondering if you can get into that a little bit more, why we haven't really seen it come through in your portfolio and what kind of your outlook is on that going forward?

We're certainly aware of other folks having a little problem here or there. I guess the way we would probably frame it, we're very happy with the way the economy has proven. We haven't seen any problems with the economy in terms of job retention as new jobs are being created all the time. Unemployment is about the lowest it has been in a long, long time. We haven't seen anything in terms of the economy that would have any effect on our portfolio. We have a lot of controls in terms of what we buy. I think our general take on the economy affecting portfolio performance is it would have to be a relatively severe swing in the economy before it would affect us. The fact that many as much as there is some doom and gloom about the future economy, the fact of the matter is and certainly in our opinion is the economy still remains very strong in terms of jobs and things that we care about and have not seen any effect on that though we certainly monitor it closely, and in the end of the day we rely on the controls we have in place in terms of what we buy, so we would even assume that assuming there is an economy that changes, we would see it in the way the controls perform and keep us from buying deeper or that paper. We certainly monitor delinquency and losses. We've been very conservative in our provisioning so that we don't consider -- we think we and our auditors would say our provisioning is very conservative today, so again we would even have a hedge in the event that the economy changed somewhat. But in terms of looking at other things, it is the same old thing. Like I said before, what you see is sometimes it is not about the pricing, it is about how deep you buy. It is about how you can control your growth. It is about how you can collect your paper. So that's on the one hand those are the real aspects to look at. On the other, a severe swing in the economy would exacerbate any problems in the first area.

Alright. That was great. And then just one more question. How should we think about the private equity stock that was originally filed then pulled? Presumably it was pulled because the private equity firm thought the stock was just too cheap. Is there any update on that situation?

That's pretty exactly what happened. One of the sellers in that group has now sold all their stock. So they're out. The large shareholder, our senior lender, I think seeing the results and seeing the pricing, they feel it is too cheap, but they can do what they want. I think at the moment, though, they're going to wait and see and we're looking at some other alternatives. Potentially we wouldn't mind acquiring that stock to the extent we could but they're pretty smart. They want the best value they can for their stock and they think the stock is very cheap today.

Okay. Great. Great quarter.

Thank you.

Thank you. Our next question is coming from Jason Stewart of Barrier Investments. Please go ahead.

Great quarter. Thanks for taking the question. To the extent that you guys can measure it, are there any collateral characteristics in your portfolio that are performing differently such as -- is it by FICO or first time car buyers, et cetera?

Trying to think of any part of our portfolio that's either under performing or out performing. If we were going to pick one as much as I hate to even admit to it since I am certainly not a happy camper in that area, our extended term is performing way better than we expected. We've certainly been hawks or -- not hawks but we've been very conservative in looking at extended term, very cautious in how we pursued extended term, and yet that segment of the portfolio has performed wonderfully well. So if we were going to say is there a segment of the portfolio that's been surprising to us, it has been that. First time buyers to pick an example, your example, we've always -- first time buyers are a very dangerous kind of buyer . But we have built a very strong model in terms of our first time buyer and so that characteristic has always performed very well. But we've always expected it to because we've been very cautious in how we bought that piece of credit all along. The extended term, though, everyone's said that all you're going to end up doing is having customers more under water in their loans for a longer period of time and therefore you're going to see bigger losses. We bought into that and agreed with that 100% and as much as a lot of the market has participated very heavily in extended term, we went in slowly and cautiously and our results have been great, So that piece of the portfolio certainly has surprised us, and in terms of the FICO scores, as much as our overall average FICO is down around 520, we probably wouldn't even try and relate portfolio performance by FICO score. We would look at the different segments, and as I said, all of our segments have performed very well. The extended term has certainly performed better than we expected, but that's about it.

Okay. That works. And then if you could remind me, the growth in the originations given flat expenses is tremendously impressive. If you could just remind me of your strategy, whether it is increased penetration in dealers or products or -- it doesn't sound like it is price. What's driving that growth and allowing you to grow and keep expenses flat? That would be great. Thank you.

It is certainly not price. Our rationale and growth -- we built -- we were a rather large company back in '97 and '98 and we made somewhat a tough decision back then to keep the entire infrastructure in place, both collections and originations, and so we had a rather heavy overhead. As I said as much as 11% or 12% back then. But by having that we now have a tremendous group of experienced people, experienced staff that do their jobs very well. And as we have grown we haven't had to add any infrastructure whatsoever and so we have been able to really leverage that environment tremendously well. Our overall growth strategy is in fact to put more people out there to get more reps in the field, you know, increase our market penetration and we're doing it in two ways, and maybe this is a little different this year. We sort of always said we're going to put as many reps out there as we can and get more business by having more reps. What we've done this year is we've continued that strategy and increased the strategy to say let's get the reps we have and get them even more productive each time. In terms of what we're trying to do in the dealer base, we've also expanded both -- not only do we want our reps -- more reps out there, more production from our reps, but we want more penetration in each of the dealerships, and that strategy has worked rather well. One of the things dealers have always said and an easy way to get a good relationship with a dealer is to have a consistent funding program, and as much as I mentioned earlier that some of the banks have pulled back and forth, we really have stayed the course and because of that dealers hang onto our program even though they may add or lose some others. And so we have been even able to increase our penetration through better dealer penetration in and of itself.

Great. Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] As there are no further questions, I will now turn the floor back over to Mr. Charles E. Bradley for any additional or closing remarks.

Again, thank you all for participating. We think the quarter went very well. The bottom line numbers probably exceeded what we expected, and we would probably attribute that mostly to both the loan portfolio performing better than we anticipated, the leverage on the expenses continues the way we would expect it and the result is just better than -- overall better numbers than we might have thought at this time, but, again, we've been waiting for three years, so we're not unhappy to finally be starting to see all of these things come together in a good way. As I said, I think the industry remains very strong. I think there is large opportunity for us to expand and grow. The Capital Markets remain very favorable. Our story is beginning to get out. We're trying to spend more time on the road, attend more conferences, get the name out there -- get the CPS name out there, both in the Capital Markets and the story of what we've done. I think that's beginning to pay off somewhat as well. We're going to continue doing that. We think the fourth quarter, you know, is fourth quarter is inherently going to be a soft quarter. We think overall the year has done very well and we'll continue right through and have another strong quarter. With that, we will talk to everyone next quarter and thank you all for attending our call.

Thank you. This does conclude today's teleconference. A replay will be available beginning an hour from now until Friday October 27th by dialing 877-519-4471 or 973-341-3080 with pin number 7996460. Broadcast of this 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.