Consumer Portfolio Services Inc (CPSS) 2007 Q3 法說會逐字稿

Good day everyone, welcome to the Consumer Portfolio Services third quarter 2007 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 maybe deemed to be forward looking statements. Such forward-looking statements are subject to certain risks that could cause actual results to differ materially from those projected. I refer you to the company's SEC filings for further clarification. The company assumes no obligation to update publicly any forward looking statement whether as a result of new information, future events or otherwise.

With us here now is Mr. Charles E. Bradley, Chief Executive Officer and Mr. Jeff Fritz, Chief Financial Officer of Consumer Portfolio Services. I will now turn the call over to Mr. Bradley.

Thank you for joining us with the conference call.

In talking about the quarter, the results are in line with what we would have expected and looking at the overall situation, I think it is kind of almost sort of a two-sided story. On the one hand, the company is operating the way we would expect to. We are doing all the things we want to. We're continuing to expand a market net base. We are continuing to expand the dealership network. We are expanding our the collection facilities in line with the growth -- basically doing the things we would normally do. We, in fact, executed our third quarter securitization as planned. We renewed one of our credit lines, (inaudible) as planned.

The other side of the story, though, is that the rest of the market is very, very difficult. Everyone is still very much in the middle of the meltdown of the mortgage industry; and the subprime mortgage industry in particular. Everyone is tremendously gun shy about the capital markets. So it is kind of an interesting if not some what difficult situation. On the one hand, and going back to last quarter, the rumors were, we wouldn't be able to get a deal done, we wouldn't be able to get our securitization done; people were going to lose their credit lines and their (inaudible) lines and things of that nature. So the good news is none of that is true and certainly in the auto side and certainly not for CPS. We are dealing without any problems; we renewed one of our credit lines without any issues. So a lot of it was kind of overhype on doomsday scenario.

However, it is an interesting, you know, dynamic to be working in when everyone is dooming and glooming the industry in the world and we are still trying to run our company. So, having said that, the operational results were really good. It is in the overall market of a difficult market. The pricing was high on the securitization and you know, the pricing, we probably believe in the capital markets will continue to be unjustly inflated for the next quarter or two if not a little longer until the market realizes that subprime auto is not subject to any of the problems with subprime mortgage. So, it is kind of an interesting situation to be in, but like I said, from where we sit, now, we were very fortunate to get the capital raising deal done early in the third quarter and I don't know that that would be possible today. And as I said, it's nice to know the capital markets are strong enough and get all the deals done and for all intents and purposes operate normally. Unfortunately it is going to be a bit of a pricing increase and pricing factor given the market economics and all the noise going on in the industry. So I will comment more on that in a minute and for now we will go to the financials.

To go through the highlight of some of the financial results.

Revenues for the third quarter was $102.8 million. This is a 7% increase over the second quarter of '07 and 39% increase over the $73.7 million in the third quarter of 2006. Year-to-date revenues were $285 million. This is a 43% increase over the 9 months ended September 2006 last year. Revenues are, 95% of our revenues are interest income on the on balance sheet portfolio. One aspect of this quarter's revenues was a $1.2 million write up of other income on our residual interest and securitizations. This quarter marks the final clean up call of our off-balance sheet securitizations, which have led to other income in our incomes in the past several quarters, and so in the future quarters we expect nominal other income associated with less significant components.

Expenses were $96.4 million for the third quarter. That is up 8% from the second quarter of '07 and up 39% from the third quarter of 2006. Year-to-date expense were $267.1 million, a 40% increase over the nine month period of 2006. Our loss prevision, one of our most suggest components of expense was $36.3 million for the quarter. This compares to $32.7 million for the preceding June quarter approximately, a 11% increase. That is also a 51% increase over the third quarter of 2006. Year-to-date provision for loss is $98.5 million and 51% increase again over the 9 months ended September 2006. Our provisioning approach and methodology is largely unchanged; and we use the same mechanic and same estimates and largely based on past performances of similar portfolios.

Pretax income for the third quarter was $6.3 million. This is up about 2% from $6.2 million of the June quarter and for the nine month period, $18 million, compared to $8.7 million for the nine month period and ended September 2006. That's 107% increase.

Net income after tax income for this quarter, $3.7 million, compared to $3.5 million in the quarter previously. That is a 6% increase and it appears to be a decrease, it is a decrease, compared to the $4.3 million for the third quarter of 2006. You may recall we talked about this last quarter. The 2006 periods, the first three quarters of 2006 had no income tax provision and all of this year and presumably future periods will have a normal tax provision and when you compare the 2006 quarters to the 2007 quarters after tax results we need to keep that in mind. The year-to-date after tax income, $10.4 million compared to $8.7 million, a 20% increase for the previous year's nine month period.

Diluted earnings per share -- $0.16 compared to $0.15 in the previous quarter and $0.18 in the third quarter last year. Again, influenced by the lack of tax provision last year. Year-to-date diluted earnings per share for the nine month period, $0.45 compared to $0.36 in the 2006 nine month period.

Looking at the balance sheet, our total cash position including restricted cash is $275 million. That is the roughly the same as last quarter's and up from $212 million from September '06. That includes $258 million of restricted cash which in turn includes $97 million associated with the pre-fund of the third quarter securitization. That 97 million is essentially used during the month of October for the October originations funding.

Our finance receivables portfolio continues to grow. The before allowance balance of the finance receivables portfolio at September 30th and approaching $2 billion. That's compared to $1.8 billion in the last quarter and $1.4 billion in the one year ago period. After the allowance of $100 million, the on balance sheet portfolio is $1.9 billion compared to $1.7 billion last quarter and $1.3 billion a year ago.

On the debt side of the balance sheet, the warehouse line balance remains roughly flat from last quarter to this quarter to $80 million compared to $65 million last year. Our residual interest financing debt is $60 million. You may recall, I think we talked on the last conference call we completed a transaction early in the quarter, paid off our old residual financial and replaced it with the new transaction which currently has an outstanding balance of $60 million. Securitization debt is approaching $2 billion compared to $1.8 billion in the June quarter and $1.4 billion a year ago. The long-term debt which consists of primarily of our retail notes program after having paid off $15 million of the former outstanding long-term debt is $22 million compared to $35 million last quarter and $50 million a year ago.

So, just to summarize securitization of warehouse debt. About $2.1 billion compared to $1.4 billion a year ago; long term residual debt, $82 million compared to $74 million one year ago.

Our portfolio balance is the highest ever. Our managed portfolio is now $2.1 billion, this is up from $1.5 billion a year ago. We used to talk at some length about the various components of the managed portfolio being the on and off-balance sheet pieces and the third party securitization pieces; a lot of these pieces are essentially gone compared to a year ago, when they comprised $68 million. So going forward we expect to really focus on and talk about the on balance sheet portfolio as the managed portfolio and they will be the same thing.

Couple of the other metrics we typically talk about, the net interest margin for the quarter, $61million. This compares to $56 million in the previous quarter. That is a 10% increase and 34% increase over $45.5 million in the third quarter a year ago. Year-to-date, that same margin, the net interest margin is $168 million for the nine month period compared to $123 million or 37% increase from the year ago nine month period. The NIM, which is the net interest margin minus the loss provision, the risk-adjusted margin, which is the NIM less the loss provision -- $25 million for the quarter about a 7% increase over the June quarter and 15% increase over the third quarter last year. Year-to-date, the risk adjusted margin, $69 million compared to $58 million, or a 21% increase over the nine month year-to-date period last year.

We continue to get good leverage on our operating expenses. Our core operating expenses, which are expenses excluding the interest expense and the loss provision, those expenses were $23.7 million for the quarter, a slight increase compared to $23.2 million in the previous quarter and 17% increase over a year ago. For the nine month period, the same core operating expenses were $69 million or 16% increase over last year's nine month period. Our increase in those core operating expenses has primarily been employee expenses related to increase in employees throughout the company to accommodate the originations volume and the servicing platform. We had 700 employees in September of '06 compared to over 900 employees at the end of this quarter.

As I said, we continue to control those costs as the portfolio has grown and so our core operating expenses as a percent of the average managed portfolio were 4.7% a reduction compared to 5% for the June quarter and 5.6% for the third quarter of 2006. And for the year-to-date period, 5% of core operating expenses as a percent of the average portfolio compared to 6% for the same nine month period last year.

Our return on managed assets as a percentage of the average managed portfolio -- 1.3% for the September quarter compared to 1.2% for the third quarter of last year and the year-to-date period 1.3% compared to 0.9% or a 48% increase for the year-to-date 2006 and 2007 periods.

Brad?

Thanks, Jeff.

And looking at the some of the credit; let's look at the delinquency first. The delinquency for the quarter was 6%; that is up about a point year-over-year from 5%. And I think it is mostly a seasonal and if you look back a couple of years further, I think it is about 4.9% in '05, 5.2 in '04 and 6.2% in '03. So as much as 6% is higher than last year. And you go back a couple of years, you certainly can find times in the portfolio's performance where it has been at this level before. I think that it's -- from the way we are looking at that, we will talk about the losses first. The losses for the quarter were 5.57 which is up about a point from last year at 4.5. And again, if you go back, it was 4.8 a year before that in '05 and as high as 8.4 in '04.

So we talked about it before, so what we have had for awhile is tremendously good results and you sort have had for lack of a better term, the perfect storm: a good economy and competition was light and the paper performed really well last year and so did the year before. So probably what we are seeing is a little bit of the normalization of the performance. I think the fact that we are continuing growing and the portfolio is going to grow 30% this year, 50% last two years and collection force is probably a little less seasoned than before. I think they are picking that up quickly. But there is probably a bunch of little factors. Overall, we are happy with the performance. I think the bankruptcy law change probably has in fact pushed so many the losses and timing them forward a little bit; the fact that there is prepayment also changes the shape of the curve slightly.

So, I mean, it is not, you know, we would like the numbers to be a little bit better. We are not particularly concerned about the numbers. I think again, against the larger backdrop of the economy and the overall market place, I think we are doing things really more concerned and the pricing of our deals and such. We have probably tightened credit continually over the last quarter or two. We have instituted a slight price increase in the last quarter or so just to off set or maybe be a little conservative in terms of the overall market. In terms of the delinquency and loss numbers, yes they are up a little bit. It is part seasonal, it is part that long list of factors I have listed. We would expect over the next couple of quarters it would stay around here. Maybe trend a little bit up, little bit down, just depending on how the quarter performs. I don't think the performance is that much of an effect of the overall market. We are not you know, in any way connected to the mortgage issues, only less than 20% of our customers have homes. We have not seen any spillover effect from the mortgage problems into the auto problems at our level. Like I said, on the broader economic basis, on the capital market basis we have certainly seen a significant impact but the not the credit performance of our individual customers.

You know, so where does that leave us? On one hand, leaving us with a company doing what we are supposed to be doing. The earnings are pretty much on course and just we said what they would be. The pretax earnings are just about getting double year-over-year. Generally looking at it in and of itself would be a significant achievement, for us to double up earnings this year. And meanwhile, the stock price has actually come down a little in the last year. One would think if you did double pretax earnings, you would have effect on the stock. And apparently not in this market environment.

So where does that leave us? That leaves us to do what we have been doing what we have been doing all along. Run the company the way we are supposed to and weather the economic market storm until things get better.

I think we now have a $2 billion portfolio, with 30% annual growth in the portfolio. We have done pretty much we have set out to do everything we set out to do this year. And the results in the capital markets or with the stock price, they have not been there at all. We are disappointed in that and we continue to try to get people interested in the stock in the capital markets. One can imagine the reception we get when we push to get them interested in a subprime auto stock and they are running for the door from the subprime mortgage stocks. It is a difficult market in terms of get our story to out there and get noticed.

What is really annoying to the management team and certainly to myself is that we set out to do everything we wanted to do over the last three years. We built a big company. We grew it accordingly. And kept our credit performance in line. We have done the earnings model we expected to do. And yet just about the time when people should be noticing the story, noticing the size of the company, the growth in all areas and all aspects that we put forward, we go to have the subprime mortgage collapse on top of us and that has had an enormously negative effect on most of the things we want to happen such as on the stock price and such.

Where does it leave us today? A really good company doing just what we are supposed to be doing in a very difficult market and experiencing pricing pressure in terms of our securitization and the like. There is nothing we can do about that but ride out the market. Now the good news is, the company is very well set up to weather the storm to the extent there is one. I mentioned people thought the credit lines and the warehouse might be in danger and doing securitizations might be difficult. That has proven not to be true. One of the things to point out -- here is almost a funny aside in some sort. In our most recent securitization, we put it out to the market. We actually went to the rating agencies and we had our enhancement levels lowered meaning the quality of that securitization was better than the previous one. And the response of the marketplace was there is less enhancement level -- we want more pricing on the deal as opposed to response that it should have been "wow is better than before, you guys are doing really well." That unfortunately is going to be the story for the next couple of quarters.

But having said that, back again, as always, we will create some opportunities. Other people in the industry and other companies aren't doing as well. If you look at our credit performance versus others in the industry, it is substantially better. Whereas some of our credit performance may have shifted up slightly a quarter or so, many of our competitors have had them deteriorate markedly over the last couple of quarters. We are not sure what everyone else's capital situation is. But, again, it may create real opportunities and at the very least some people won't be buying nearly as aggressively as they were before, again creating opportunities for us.

So where do we go from here? I think overall, the current situation of the company is caution. We are not sure where the capital markets are doing. I think they should hopefully strengthen over the next couple of quarters. We certainly can't count on that. I think we will continue and do what we are doing. We had said last year, when we did 50% annual growth, that something in the 30% range was the target for this year, and we are in fact on that target. Next year I think the target was on the 20s; we will probably stick with that target. But, again, maybe looking at getting the pricing passed on to the loan portfolio so that we can, we haven't raised prices much like ever in the last five years or so. So the fact that the market has priced, has passed on a little pricing in the capital markets. We probably will pass it on in the next quarter or and get us right back to the economics we would expect. As I've said, we've tightened credit a little bit. That also will have a positive effect over the next few quarters as well.

So I think, you know, on the one hand we are going to do what we have been doing. It has been a model that has worked for us, and a business plan that has also been successful and worked for us. At the moment, we have to not worry with a the capital markets are doing. Like I said, maybe some of the benefits will come out over time. But in the end, when the smoke clears and everybody realizes they are fine. We could have a real nice run at that point.

So, that's the quarter. We will open up for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question is coming from Dan Fannon of Jefferies.

Good morning. Thanks for taking my questions. The other income line, you might have walked through what the components of that are, but if you could please refresh me on that and give some sense of where you think that line item is going to grow or go to in the next couple of quarters or into '08?

Well, in this quarter and for the last quarter as well, $1.2 million of the other income was associated with the write up of the residual interest and securitizations and that's the component you won't be seeing in the future because we cleaned up the last of the off-balance sheet portfolios. And so, now, we expect that that will taper down to kind of the low threes for this quarter and future quarters in 2008.

Okay. That's helpful.

Then, in terms of you mentioned tightening credit recently and you mentioned the theme of caution. How shall we look at that? What kind of changes have you made in terms of tightening credit in terms of underwriting? And as you look forward, can you be a little bit more specific in terms of opportunities for growth on the portfolio? Is it something that you are going to be in terms of the capital markets and looking at a slower growth here from the levels in the fourth quarter, and what you think the trajectory is posted during the nine months which has been very strong and should continue through the end of the year?

Well, I think, in terms of the credit tightening, we have had the ability -- at various times we continue on how the risk based models work and I think we have gotten to the point where we have confidence in them. And we have been able to go in some of the markets and look at the individual states and how those programs perform within the states. And so as much as I mention and have said we are going to tighten them, it is going to be very difficult for the average dealer for instance, to see. But in fact, what we are doing is rather than just buying what comes through, we are being a little pickier than normal. And so what we will probably get is -- you won't notice as much but it will be better. At least that is the plan.

In terms of how it is going to effect growth, I didn't mention particularly. It is kind of an old horse, but the auto market is just terrible right now. Business is way off. Car sales are way off and so, that probably is beginning to temper the growth some what. Not so much us. But it really is kind of slow. As a result, I think we might have had sort of a mid-30s growth this and we are going to have a low 30s kind of growth. And I think the fourth quarter, at least the way it's looking at the moment, might be less than expected.

But having said all that, when you get into the first quarter of next year, the opportunity is there to grow substantially. And it always is. So one of the questions this year is how much do we want to tap the market? The interesting part is we told everybody we want to grow 20% to 25% next year. Remember, we are saying it in a market where you usually have the potential to grow 30% to 40%. And the real question is what are we going to do not to grow 40%. Because I think, given the capital markets, having a big boom of a year at 40% growth probably isn't particularly prudent. Again, as much as we have tightened a little and done this and that, it really will just end up putting us where we are supposed to be. And now there are more erosion in the capital markets and if the economy starts to tip over, that would have a significant effect on the plan but we are not thinking of that at the moment.

That is helpful. Lastly, in terms of credit -- on the early-stage delinquency buckets, either we've seen that rise year-over-year and as you highlighted in the scripted comments. Obviously, that reflects more normalization of credit. Bur you are not seeing any change in terms of the overall profile, as the early stage buckets are picking up or not getting any concern with the overall portfolio that things have changed even in the last three months or subsequent to the close of the quarter that anything has, the overall consumer has shifted at all.

Well, another highlight of being able to look at what we look at, we certainly see things and are able to jump on it much faster than you might have five years ago. And you know, we have been looking at the numbers for three months rather than few weeks that they have been done and so, you know, we are having trouble finding anything to point out. That is the interesting part.

In terms of of the credit profile of the customer, almost nothing has changed. To be quite honest, when you look at the numbers in any given level, you immediately say "are we buying deeper or are our originations controls slipping a little?" And the good news is that they are not. The origination control is perfect. In terms of the customer profile, it appears to be exactly the customer who is supposed to be buying. And so, there might be, other than the normalization of credit, maybe there is a little economy effect in there possibly. But in terms of what we look at and we see, we can't find anything. And I guess the good news for anyone who cares or is listening is that we have the ability to look very deeply at what the numbers are and at the moment, we can't find something to point out. Because if we did, we would do something about it. Given that, you have to fall back a little bit on the normalization of the credit performance and the seasonality of the times.

We would love to be more specific with reasoning on all the things and there isn't any good number for that. And we can't find one and we will continue to look. And to the extent we find it, we would certainly talk about it. But at the moment, from the originations profile in how we do business. Everything looks to be the same.

Maybe it's a normalization, maybe it's a historical normalization and maybe it is a bankruptcy law or maybe it's the general economy or small mix of all of that. That's where we sit today.

All right. That's helpful. Thank you.

Thank you.

Our next question is coming from John Hecht of JMP securities.

Morning guys. Actually Dan asked most of my questions.

In addition to that, one question I have is -- did you guys during the quarter see any changes in terms of values at the auction level and seeing the Mannheim index look pretty strong here, but I've heard there's bits and pieces of that that aren't so strong. Were you seeing anything change in the quarter in terms of the ability to go to the auctions and sell your repo'd collateral?

Not really in terms of overall, there isn't any real difference at all. In terms of what we have got quarter to quarter, it is off 2% in terms of what we recovered at auction from this quarter versus last quarter. But if you look at the trend, and I am looking at almost three years of trend, for the last two and a half years, that trend is between 44% and 48%; and today it is right around 45. So it hasn't moved much and that would be eight or nine quarters. So, I don't think we are seeing anything that would be more than maybe -- that could change just as easily up the next quarter and go back up to 46. Tree quarters ago it is 44 and this quarter; the last couple quarters it was 46; this quarter it's 40. And we are right in the same band. We don't. And in terms of what we see from the collection side and auctions, we haven't seen any real push back in terms of the pricing and what the dealer are buying at the auction. That factor seems to be remaining relatively constant.

Okay. Then on the price hike you refer to during your comments. Can you give us a sense for the magnitude of it? You are doing it across all products. Are you doing it at different degrees? Have you seen any response at all, any elasticity at the customer level on the price differential?

I think the price adjustment at the moment is going to be slight enough that almost no one is going to notice. If anything, one, it isn't across all programs/all products; it is very, it is smaller than that. And it is really more. What it really is -- some individual states and individual programs, we really thought we weren't getting paid as much as we might want on some of the programs. So we adjusted them. And in the overall blend, it is not going to be enough, at least at the moment. It's really hard to quantify. At the moment, we think slight is a good way of looking at it.

In terms of response from the dealership, I think the dealership is more -- they have having trouble selling cars. And you are seeing a lot of cars you probably wouldn't want to buy rather than people pushing back on the prices.

But at the dealer level, from what we understand, they are selling fewer cars, but the mix shift toward used cars is increasing. Is that a) Are you seeing that as an accurate statement? and b) Is that commentary about the consumer stepping down big ticket purchases to smaller ticket purchases?

I agree to the consumer stepping down to smaller ticket purchases. We haven't really seen any mix -- we had mentioned that mix change a few quarters ago; it hasn't changed substantially since then. I would probably agree with a statement that customers are pulling back a little bit in terms of how they are spending money.

Thanks very much for the color, guys.

Sure.

Thank you. Once again, if you do have a question, you may press star 1 on your touch-tone phone at this time. There appear to be no further questions, I would turn the floor back to Mr. Charles E. Bradley for any closing remarks.

Well, I think in summary, it is like I said, it's a two-sided story. One hand the company is doing what we said it would do. We are building and growing at the rate we want to grow. We are maintaining the credit performance and maintaining the expansion the way we would like to, and I think results have been very positive across the board.

Unfortunately the macro of the economy and the capital markets has shifted slightly and I think that has certainly had an effect on the stock price and the appreciation of the story today.

It is a long road. It is not a sprint. So, I think when the market turns, you know, the good news is, we will be well positioned once again to take advantage of a nice growing company and a good market.

Today we are a nice growing company in a bad market. There is nothing the company can do about that particularly except to hunker down and do what we are doing, and maybe find some way to take advantage of it, which we're going to try and do, and wait for the smoke to clear and take off again. That's not the perfect story. But it is what we're, the hands we are dealt and the ones we are going to work with.

With that, we will look for a good fourth quarter and look for everybody then. Thank you for attending the call.

This does conclude today's teleconference.

A replay will be available beginning an hour from now until Thursday October 25th by dialing (877)519-4471 or (973)341-3080 with pin number 9337877.

A broadcast the conference call will be available live and for 30 days 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.