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Edited Transcript of CCFI earnings conference call or presentation 21-Nov-19 7:00pm GMT

Q3 2019 Community Choice Financial Inc Earnings Call

Dublin Jan 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Community Choice Financial Inc earnings conference call or presentation Thursday, November 21, 2019 at 7:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Michael J. Durbin

CCF Holdings LLC - Executive VP, Chief Administrative Officer, CFO & Treasurer

* William E. Saunders

CCF Holdings LLC - Chairman of the Board of Managers & CEO




Operator [1]


Ladies and gentlemen, thank you for standing by, and welcome to the CCF Holdings Third Quarter 2019 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Michael Durbin. Thank you. Please go ahead.


Michael J. Durbin, CCF Holdings LLC - Executive VP, Chief Administrative Officer, CFO & Treasurer [2]


Thank you very much. Good afternoon. As we said, this is Michael Durbin, Chief Financial Officer of CCF Holdings LLC. Thank you for participating in today's call and for your continued support of Community Choice Financial.

I'd like to remind you that the following discussion contains certain statements that are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Because forward-looking statements involve risks and uncertainties, they are not guarantees of future performance and actual results may differ materially from those expressed or implied by these forward-looking statements, due to a variety of factors.

We assume no duty or responsibility to publicly update or revise any forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. As required by our registration rights agreement, we have submitted a resale shelf registration statement with the SEC, which is now available publicly. More information about our business and our results of operations can be found in the registration statement, subsequent amendments to that registration statement and the quarterly report on Form 10-Q filed on November 14, 2019.

And now I'd like to turn the call over to Ted Saunders, our Chairman and Chief Executive Officer.


William E. Saunders, CCF Holdings LLC - Chairman of the Board of Managers & CEO [3]


Thanks, Michael. Thank you all, and good afternoon. I appreciate you all joining us this afternoon, as we discuss the progress we made during the third quarter.

Over and all, I'd like to say that I'm very pleased with where the company is and our progress to date. Unfortunately, the operational progress we're making is masked by the cost inherent in transitioning away from the credit service organization structure we formerly operated on in the state of Ohio. Ohio was one of our largest markets, and as a result of a legislative change in the state, which became effective in April of this year, we have had a major disruption. Credit service fee revenue in the quarter is down 35% versus the prior year's third quarter.

I'm pleased that the negative revenue comparison related to the Ohio transition is largely being offset by strength elsewhere in the enterprise. Revenue, excluding credit service fees, was up over 5% this past quarter. Our reaction to the legislative change in Ohio was a heightened focus on the marketplace model as a strategic priority. In deploying this model, we leverage our retail competencies to foster a marketplace within our brands and our physical locations where third parties can offer their credit solutions to our customers. This insulates us from the direct risks of an ever-changing legislative environment and continues to position our brands as one-stop shops for all of our customers' financial services needs.

This positioning also allows us to build on our existing customer traffic and brand loyalty. It presumably and hopefully will continue to increase the sales of our related products and our money service business products. Benefiting from the model, we are seeing growth in these other revenue categories, which include check cashing, bill payment, money transmittal, prepaid cards, of over 20% as compared to the third quarter of last year.

I indicated on our last call we're working to expand this model to include other lenders in other markets across the country. We now have another lender offering a secured installment product through our branches in 5 different states. We have identified a lender who has reported to us that they've received licenses to offer a line of credit solution in 7 states where we have retail operations. And finally, we have a lender we're actively working with who intends to offer an unsecured installment solution, both through our retail and Internet channels.

The marketplace concept is being well received by both customers and credit providers and will be a major strategic focus of the enterprise, as we head into 2020. I think our operators are doing an extraordinary job of keeping our focus on the customer. Our store count actually expanded during the quarter as with the adversity accounted in the Ohio market, we had the opportunity to take over one of our competitor's operations. Over time, we'll look to explore rationalizing that store count, but during the quarter, we were opportunistic and really viewed the takeover as a path towards further customer acquisition.

Our markets outside of Ohio, both retail and Internet, are performing well. Internet revenue was down slightly as compared to last year's Q3. However, the Internet segment reported growth of nearly 10% as compared to Q2, demonstrating solid quarter-over-quarter momentum.

I'll ask Michael to share with you the details from the quarter, and when I rejoin, we'll talk a little bit about our priorities and what we're working to in 2020.


Michael J. Durbin, CCF Holdings LLC - Executive VP, Chief Administrative Officer, CFO & Treasurer [4]


Thank you, Ted. As Ted indicated, while we experienced strength across the enterprise, the contraction in credit service fees associated with the Ohio legislative change resulted in an unfavorable variance versus Q3 of the prior year.

Credit service fees represented a negative variance of 35% as compared to the third quarter of 2018. On a linked quarter basis, credit service fees reduced 25% versus Q2 of this year. Looking into Footnote 2 in the financial statements, we reported that the Ohio CSO portfolio was $13.8 million as of the end of the third quarter, which compares to a portfolio value of $33.3 million as of the end of the second quarter of 2019. While the portfolio declined throughout the quarter, maturities were more concentrated in the month of September, resulting in revenue contraction, which is lagging the linked quarter portfolio contraction, which was nearly 60%. As a result of the contraction in credit service fees, aggregate retail revenue reported a negative variance of 3.6% as compared to Q3 2018.

Benefiting from the marketplace model, which Ted has discussed, we reported positive variances in our money service business categories. Check cashing expanded 12.4% versus the prior year quarter. Prepaid card grew 21.2%. And other, which includes money transmittal business and bill pay, expanded 51%. In Q3 2019, check cashing saw its fifth consecutive linked quarter revenue increase. You'll also note that our check cashing revenue expanded, while our return check expense declined as compared with the prior year quarter.

Internet revenue was down slightly as compared to Q3 2018, however, as mentioned in Ted's comments, we achieved positive linked quarter expansion of 9.6%. The linked quarter expansion is a result of growth in our new customer accounts. On a comparative basis, last year, moving from Q2 to Q3, revenue in the Internet segment was flat. The heightened growth realized this year corresponds with the increase in provision for loan loss in the Internet segment. Total consolidated short-term loan revenue reported an unfavorable variance when compared to last year as a result of the product shift to a medium-term line of credit in Tennessee. Excluding this product shift, we would have reported a favorable variance in short-term loan revenue.

Medium-term loan revenue continued the positive trajectory we saw in Q2 by reporting a favorable increase of 8.4% versus the prior quarter and an increase of 5.3% versus the prior year. Again, the growth in medium-term loan revenue did benefit from the product shift in Tennessee. This was partially offset by a contraction in our California installment business ahead of that upcoming statutory change.

The product transition in Ohio resulted in an unfavorable variance in net revenue or total revenue less provision for loan losses of $5.7 million or 9.6%. Operating depreciation and amortization increased $3.5 million as compared to Q3 2018, as a result of the revaluing of the company's balance sheet due to the 2018 restructuring transaction. The combination of net revenue reduction associated with Ohio and the increase in depreciation and amortization account for the year-over-year reduction in income from operations of $9.3 million. We reported corporate expenses of $17.9 million for the quarter as compared to $16.3 million in Q3 of 2018. During the third quarter, we experienced heightened health care-related costs and professional service fees also increased, in part due to the rollout of the marketplace model. On a year-to-date basis, corporate expenses have increased 1.4% as compared to year-to-date 2018.

For the quarter, we reported net interest expense of $12.3 million. Of this amount, $9.2 million represents the accrual of PIK interest during the quarter. Finally, the fair valuing of the PIK indenture resulted in a $6.6 million other comprehensive income during the quarter.

Turning to our balance sheet. The senior PIK notes were valued at $74.5 million as of the end of the quarter. As indicated in the other comprehensive income, this represents a reduction in value of $6.6 million as compared to Q2. There is a comment in the quarterly report regarding the April 2020 maturity of our $73 million subsidiary note payable. I should note, this facility is provided by a long-term capital provider of the company, and we have begun discussions regarding the modification and potential extension of this facility. Lastly, from a liquidity standpoint, we ended the quarter with $61.7 million in cash on our balance sheet. This represents an increase of $6.5 million as compared to the end of Q3 2018 and a $2.2 million reduction as compared to the end of Q2.

And now I'll turn the call back to Ted Saunders.


William E. Saunders, CCF Holdings LLC - Chairman of the Board of Managers & CEO [5]


Thanks, Michael. We believe responding to regulatory adversity is a proven competency of our enterprise. If you review our history, we can point to numerous occasions, where our ability to creatively adapt to change while remaining focused on our consumer has allowed our brands to be sustained in markets where others have failed.

The next change we'll need to prepare for is in California. The recent passage of AB-539 taking effect this January will prevent us from originating a type of installment loan, which was a very nice product for us in California. That product was well appreciated and well received by customers, and it made a very nice contribution to our operations in that state. Order of magnitude, before we rationalized our balance sheet ahead of the restructuring transaction, we had over $35 million in receivables originated under that statute. We have proactively reduced our exposure. We've been working the portfolio down. We're well positioned to weather the change. However, we have to look at AB-539 as one more data point that reinforces our commitment to transitioning more of our future towards a marketplace model of matching consumers and third-party lenders.

While responding to regulatory adversity is a competency, the changes that we must undergo in the process create dramatic fluctuations in our business practices. These changes impact our customers, our store associates, and as you can see, our financial results. The recent changes in Ohio and the changes anticipated in California will necessitate the implementation of the marketplace model, which clearly has not been a small undertaking. However, we believe strategically advancing that model more broadly will help mitigate the risk of regulatory change on the go forward in all of our markets.

We're endeavoring to provide more consistent offerings to our customers, certainty to our associates and stability in our financial results. We appreciate your support as we work towards that goal, and we believe it's in the best interest of all of our stakeholders.

Thank you very much, and we look forward to sharing more with you on our progress on next quarter's call.


Operator [6]


Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.