U.S. Markets open in 7 hrs 54 mins

Edited Transcript of CCFI earnings conference call or presentation 22-Aug-19 6:00pm GMT

Q2 2019 Community Choice Financial Inc Earnings Call

Dublin Sep 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Community Choice Financial Inc earnings conference call or presentation Thursday, August 22, 2019 at 6:00:00pm 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]


Good afternoon. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the CCF Holdings Q2 2019 Earnings Conference Call. (Operator Instructions) Thank you. Michael Durbin, you may begin your conference.


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


Thank you. Good afternoon. 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 statement 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 result 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 August 13, 2019.

And now I would 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]


Thank you, Michael. Good afternoon, everyone. On our last call, I highlighted for you our focus on building out and creating our marketplace model and also promised we'd give you an update on initiative on this call.

If you recall from our prior comments, when we referenced the marketplace model, our objective is to leverage our retail competencies and footprint, our digital and brick-and-mortar channels and continue to offer our core products but augment those core offerings through allowing other third parties to deliver various loan products to our customers.

Community Choice Financial's had a proud legacy of providing financial service solutions to the underbanked consumer. These solutions include check cashing, bill pay, money orders, wire transfer, prepaid cards and various consumer loans. Our value as an enterprise is really predicated on our ability to continue to add value and convenience to our customer base and to nurture that long-standing relationship that we have with the consumer.

So marketplace concept is a recognition that not each one of these solutions individually needs to be a solution for the customer or always a CCFI proprietary product. What is important is that we continue to meet the needs of our customer base, and we provide them the very best and the most convenient options in order to conduct their financial affairs. So as we expand this marketplace and consequently a number of offerings made by various third parties through our channels to our customers, we may grow gross margin, but we expect to increase our customer loyalty and retention. However, if, at the end of the day, that provider, our new third-party provider, is offering the best option for our customer, we would rather our customer continue to come to one of our valued brands, retail online and obtain that product or service versus having to go find that needed financial solution somewhere else in the marketplace.

We value the consumer traffic and the loyalty, which comes from a commitment to ensuring our customers are optimally served. On the consumer lending front, the marketplace model allows our consumers access to the critical credit solutions through our various brands, while at the same time mitigating for CCFI some of the risk associated with the ongoing changes in our various state lending statutes.

On our last call, we reported that we had one state-licensed lender offering a sub-36% APR loan to our Ohio retail customers. We're actively working to develop 2 other lending relationships to the Ohio marketplace, which I hope will be online by the time of our next quarterly call.

We're also in discussions with potential lenders regarding similar opportunities in a number of our retail markets and other jurisdictions around the country. Under the current Ohio marketplace model, the third-party lender accepts applications submitted to our retail operations. We collect no fee from either the consumer or the lender in this program. However, we remain optimistic that both foot traffic and customer loyalty will be increased and that we will benefit from those 2 items by virtue of being able to serve money service products as well as other related services from our same bricks-and-mortar locations.

In our second quarter report, you can begin to see the benefit of the marketplace model through an expansion in our revenue categories not associated with lending. Check cashing is a category subject to shifting payment streams, grew over 10% as compared to Q2 of the prior year. In addition, both prepaid card revenue and our other revenue category, which includes bill payment, also expanded during the quarter. The marketplace model is being embraced by our associates. It seems to be gaining traction with our customers.

Michael will now share the financial results of this and other initiatives conducted during the second quarter.


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


Thank you, Ted. Overall, revenue reported a favorable variance versus Q2 of last year despite entering the quarter with a reduced portfolio. We entered Q2 of 2019 with a portfolio inclusive of CSO receivables as if on balance sheet, down 3.8% compared to the beginning of Q2 2018. While portfolios were down at the start of the quarter, they grew 16.8% during the quarter compared to 8.2% growth between Q1 and Q2 of last year.

Portfolio expansion during the quarter resulted in an ending portfolio that was 3.8% higher than Q2 2018 ending portfolio balance. Stronger quarter-to-quarter portfolio growth versus the prior year, coupled with the benefits associated with the marketplace model highlighted by Ted, resulted in the favorable revenue comparison.

Normal seasonality results in Q2 revenue typically reducing from the revenue reported in the first quarter. This year's linked quarter seasonal reduction was 4.6%, again, comparing favorably to the comparable linked quarter reduction of 7.2% of 2018.

For the second quarter period, total revenue was up 1.4% or $1.2 million compared to the prior year period. Short-term loan revenue continues to experience an unfavorable variance compared to last year as a result of a product shift to a medium-term line of credit in our Tennessee stores. However, the negative variance created by that market is being offset by strength elsewhere. In Q1, we experienced a negative 4% year-over-year short-term loan revenue decline. We were able to narrow that variance in Q2 and only reported a 0.8% decline in year-over-year short-term loan revenue.

Medium-term loan revenue also reported a positive trajectory. In Q1, this revenue category reported an unfavorable year-over-year variance of 4.4%. In Q2, this shifted to a favorable variance of 4% as compared to Q2 2018. As mentioned previously, the growth in the medium-term revenue did benefit from a product shift in Tennessee.

Credit service fee revenue reported a negative variance of 4.6% as compared to Q2 of the prior year. As discussed on our prior call, this is the result of the April 28 implementation of House Bill 123 in the state of Ohio, which eliminated our ability to offer CSO-supported loans in that state. As you might expect, the logical consequence of this law is that retail credit service fee revenue has and will continue to decline through the year due to the attrition of the existing Ohio portfolio.

As Ted indicated, partly in response to the implementation of House Bill 123, the company is seeking to expand its marketplace model and focus on revenue generated through its Money Service Businesses such as check cashing, bill payment, money transfer and prepaid cards.

Check cashing revenue saw a significant year-over-year growth in Q2 and is the primary driver of the $1.2 million increase in revenue. Check cashing revenue reported a favorable variance of 10.5% over the prior year period. And other Money Service Business revenue, categorized as other income, reported a favorable variance of 7.3% compared to Q2 of 2018.

Reviewing footnote 11, segment reporting. The retail segment reported a favorable year-over-year variance of 3.8% or $2.6 million. Provision for loan losses in the retail segment increased from 24.9% or $17.2 million in Q2 of 2018 to 27.3% or $19.5 million in Q2 2019, a year-over-year variance of 2.4% or $2.3 million.

Community Choice Financial has a debt buying agreement in place associated with third-party lender programs. The expansion of these programs along with linked-quarter portfolio growth mentioned previously necessitated an increase in provision for loan losses.

Reported operating gross profit in the retail segment was a negative variance as compared to the prior year. This negative variance was a result of increased provision associated with portfolio expansion along with the year-over-year increase in depreciation resulting from the revaluing of the balance sheet at the time of the delevering transaction and transition from predecessor to successor reporting entity in December 2018. From a store count standpoint, we ended the quarter with 475 stores compared to 478 stores at the end of Q2 2018.

Turning to the Internet segment. Recall through 2018, we contracted our Internet portfolio as we worked towards the December 2018 deleveraging transaction. While the Internet portfolio expanded in Q2 2019 as compared to Q1, our average portfolio level during the quarter was reduced as compared to Q2 2018. As a result of the lower average managed portfolio during the quarter, we reported an unfavorable revenue variance of 11.7%.

The portfolio trajectory also impacted provision for loan losses. Last year, on a linked quarter basis, the portfolio was contracting as compared to the expansion achieved this year. Provision for loan losses as a percentage of revenue increased from 45.6% in Q2 2018 to 53.2% in Q2 2019. The year-over-year increase in provision is directly related to the portfolio expansion and a higher proportion of new customers in the portfolio.

Turning back to consolidated performance. The year-over-year increase in consolidated revenue, driven by the growth of check cashing revenue, was offset by the increase in provision expense resulting from portfolio expansion.

Looking next to total consolidated operating expenses. Recall that year-over-year depreciation is elevated due to the deleveraging transaction executed upon in December of 2018. Excluding provision for loan losses and depreciation and amortization, consolidated operating expenses decreased from $36.5 million in Q2 2018 to $34 million in Q2 2019. The decrease can be attributed to the closure of underperforming locations combined with several successful cost containment initiatives.

Excluding the impact of depreciation and amortization, Q2 2019 operating income exceeded the prior year's operating income by 5.8%. Again, excluding depreciation and amortization, corporate expenses as a percentage of revenue decreased from 21.1% in Q2 of 2018 to 20.9% in Q2 of 2019.

And finally, from a liquidity standpoint, we ended the quarter with 69 -- $63.9 million in cash on our balance sheet, in line with the balance sheet reported as of Q2 2018. And now I will turn the call back to Ted Saunders.


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


Thanks, Michael, appreciate that. Overall, we're pleased with the performance in the quarter. The company achieved a positive trajectory in its portfolio balances, while also making important advancements in the marketplace model. We don't provide forward-looking guidance. The pathway to this marketplace model will not be without challenges and financial impact, and we're forging a new path. And as we do so, it is possible and perhaps even probable that the product shifts coupled with portfolio expansion will result in a near-term increase in associated cost. We may also see this negative impact as early as the third quarter. However, once the path is cleared, we believe the company will be firmly rooted and in a better position for the future.

As I discussed in the last call, we'll continue to monitor a number of potential changes in state statutes on the go forward, including California specifically and other markets critical to our retail footprint. Changes in lending statutes often result in customer disruption and confusion. While we're experiencing this in Ohio, where we witnessed a number of the companies, which we previously served in this market segment, even closing their stores.

This dislocation can create opportunity, which we're cautiously exploring. We believe continued movement towards the marketplace model will best position the company for the success in light of these financial changes. I look forward to continuing to report on our progress as the year unfolds. And as always, thank you. We appreciate your ongoing support of the company.


Operator [6]


This concludes today's conference call. You may now disconnect.