Q4 2014 Capmark Financial Group Inc Earnings Call
Apr 28, 2015 AM EDT
BGRP - Bluestem Group Inc
Q4 2014 Capmark Financial Group Inc Earnings Call
Apr 28, 2015 / 09:00PM GMT
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Corporate Participants
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* Andy Speicher
Capmark Financial Group Inc. - VP Corporate Development and IR
* Gene Davis
Capmark Financial Group Inc. - Executive Chairman
* Steve Nave
Capmark Financial Group Inc. - President and CEO
* Mark Wagner
Capmark Financial Group Inc. - CFO
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Conference Call Participants
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* Michael Cohen
Opportunistic Research LLC - Analyst
* Jonathan Lauer
Briar Capital Management - Analyst
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Presentation
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Operator [1]
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Greetings and welcome to the Capmark Financial Group's earnings call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded.
It is now my pleasure to introduce your host, Mr. Andy [Speicher], Vice President Corporate Development and Investor Relations at Capmark. Please go ahead.
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Andy Speicher, Capmark Financial Group Inc. - VP Corporate Development and IR [2]
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Good afternoon and thank you for joining us on our fourth-quarter earnings call. Before we get started, I'd remind you that during the course of today's call, various remarks we make about plans, strategies, and expectations for our Company and other statements that make use of forward-looking words, such as may, expect, believe, predict, or similar expressions constitute forward-looking statements. Actual results may vary materially from those contained in forward-looking statements based on a number of factors.
Also in today's presentation, we supplement the historical financial data derived from Capmark's and Bluestem's financial statements, which are compared in accordance with GAAP, by use of non-GAAP performance measures, including contribution margin, adjusted G&A expenses, and adjusted pro forma EBITDA. We refer you to the press release document available on our website at www.capmark.com for more information concerning these matters.
I will now turn the call over to Gene Davis, Executive Chairman of the Board at Capmark
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Gene Davis, Capmark Financial Group Inc. - Executive Chairman [3]
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Thank you, Andy, and good afternoon, everyone. Joining me on today's call are Steve Nave, our President and CEO, and Mark Wagner, our CFO. As a reminder, we have allotted approximately one hour for today's investor call.
Before I turn the call over to Steve and Mark to discuss our fourth-quarter results, I would like to mention how pleased I, on the half of our entire Board of Directors, am with the integration of Bluestem and Capmark following last fall's acquisition.
I will now turn the call over to Steve.
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Steve Nave, Capmark Financial Group Inc. - President and CEO [4]
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Thanks, Gene. Hello, everyone, and welcome to our fourth-quarter 2014 earnings call. Earlier today, we issued a press release that includes unaudited consolidated financial results for Capmark and stand-alone results for Bluestem.
We will provide some brief commentary on Capmark consolidated results. However, the focus of our earnings call will be on Bluestem's stand-alone results for the fourth quarter of 2014, which does not include Capmark legacy operations.
On a Capmark consolidated basis, we reported diluted earnings per share of $0.43 in the fourth quarter of 2014 versus $0.19 in the same period last year. Fiscal 2014 was a year of transition for Capmark, with the continued liquidation of legacy assets and of course the acquisition of Bluestem.
During the year, we received $178 million of cash from collection on commercial real estate-related assets and businesses. We ended fiscal 2014 with $254 million in cash and cash equivalents and have approximately $120 million in net commercial real estate-related assets.
On a Bluestem stand-alone basis, I am pleased to report that the fourth quarter net sales were a record $456.5 million, a 22% increase over the prior year's fourth quarter. Adjusted pro forma EBITDA was $56 million in the fourth quarter, an increase of 1% over $55.5 million in the prior year.
These results reflect strong growth across all three of our retail brands, as Fingerhut reported a 20% increase in net sales, while Gettington.com and PayCheck Direct combined reported a 43% increase in net sales over the fiscal fourth quarter of 2013.
Our brands benefited from a continued execution of a number of Bluestem strategies, including an increasingly relevant merchandise assortment, increasing market acceptance of PayCheck Direct, which experienced an 85% increase in eligible client employees to $2.3 million as of the end of the quarter, and a continued relentless focus on enhancing our customer experience.
In closing out 2014, we are very pleased with our full-year record net sales of just under $1.1 billion and pro forma adjusted EBITDA of $98.7 million, increases of 28% and 50%, respectively, over the prior year. As we begin 2015, we are focused on a number of initiatives that we expect to drive continued strong performance, brand-name recognition, and produce an overall better customer experience.
With that, I will turn the call over to Mark to share more details regarding the fourth-quarter results. Mark?
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Mark Wagner, Capmark Financial Group Inc. - CFO [5]
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Thanks, Steve. As Steve mentioned, we are very pleased with our fourth-quarter results and our business momentum as we head into the new fiscal year.
Capmark reported consolidated net income for the fourth quarter of $58.7 million compared to $12.9 million in the prior year. Impacting the year-over-year comparison during the fourth quarter of 2014 is an $84.3 million tax benefit associated with changes to our deferred tax valuation allowance, primarily due to the recognition of a portion of our NOL carryforward.
This benefit was partially offset by a $15.4 million loss on derivatives and our own equity related to the remaining unexercised Centerbridge warrants; stock-based compensation expense of $21.8 million, primarily due to the exercise of the Centerbridge warrants in November of 2014; $18.3 million in amortization expenses associated with intangible assets created by the acquisition of Bluestem; and $8.5 million in other associated costs resulting from the acquisition of Bluestem.
For Bluestem on a stand-alone basis, fourth-quarter 2014 adjusted pro forma EBITDA was $56 million compared to $55.5 million last year. Note that our EBITDA is reported on a pro forma basis, assuming the receivable sales transaction that we closed with SCUSA in April of 2013 was in effect and fully transitioned at the beginning of all periods presented.
Our fourth-quarter pro forma adjusted EBITDA was impacted by our conversion to the new receivables platform in March of 2014 and our decision in the fourth quarter of 2014 to temporarily move our collections platform to manual dialing to enhance our compliance with existing regulations regarding the calling of mobile phones.
As a result, we had higher credit operating costs of $3.7 million, a $3.1 million higher provision for loan losses on our FreshStart portfolio, and $4.7 million in lower profit sharing on the SCUSA-owned portfolio. We expect to have higher collection costs and slightly higher credit losses for the first half of 2015 as a result of our move to manual dialing and are on track to return to automated dialing in the early part of the second quarter of 2015 when we complete the implementation of new technology in our collections organization.
Our fourth-quarter 2014 Bluestem stand-alone contribution margin as a percent of net sales on a pro forma basis was 19.6% compared to 21.2% last year. The decrease in contribution margin rate over the prior year is due to the higher net credit expenses I spoke of -- just previously spoke about, partially offset by higher gross margins.
For the fourth quarter, gross margin improved 130 basis points over last year due to the elimination of our 2013 Gettington.com free shipping every day strategy as well as better markup driven by a mix shift to higher-margin merchandise. Our G&A expenses as a percent of net sales, adjusted for the impacts of the acquisition by Capmark and other nonrecurring items, increased 110 basis points to 7.7%, due primarily to higher incentive compensation expenses and Capmark integration costs.
Moving on to our key operating and credit portfolio metrics for the fourth quarter, active customer accounts were 1.5 million, an increase of 12% over the same quarter last year. The growth in active customers reflects their strong growth in new revolving credit customers, which are up 14% over last year, and improved rebuy rates.
We generated 288,000 new revolving credit customers in the fourth quarter, a 7% increase over the fourth quarter of last year. Average order size increased to $232, an increase of 3% over the fourth quarter of last year.
We are pleased with the performance of Bluestem's stand-alone credit portfolio for the year. I should first note that we report portfolio statistics on a service portfolio basis, which means our credit portfolio metrics include all SCUSA-owned and Bluestem-owned accounts receivable.
Our revolving credit portfolio, which represents over 96% of total serviced receivables, was $1.29 billion as of January 30, 2015, compared to [$1.044] billion the prior year. 30-plus days delinquent balances on the revolving credit portfolio were 14.7% at the end of the year, essentially flat to last year's 14.6%.
Our active account average balance increased to $686, an increase of 13.2% over the same period last year. The increase in the active balance reflects our ongoing strategy to grant credit line increases to our best customers after they have demonstrated strong payment performance. On average, a credit customer has 15 months of payment performance in order to build an outstanding balance with us of $686.
Our net principal charge -- our net principal credit losses on the revolving credit portfolio were 19.2%, an increase of 450 basis points over the fourth quarter of last year. 225 basis points of this increase is due to a change in payment allocation between principal versus fees and finance charges resulting from the receivables platform conversion earlier last year. 75 basis points is due to lower recoveries in the sale of charged-off receivables and the remainder is primarily due to other related conversion, change to mailing -- change to manual dialing impasse.
You can see the offsetting impacts of the payment allocation change in our finance charge and fee income yield, which increased 170 basis points during the fourth quarter of 2014 versus the same period last year. We expect our principal loss rate to normalize as we move in to the back half of 2015.
In summary, we are executing well against our strategic objectives and driving growth across all three of our retail brands: Fingerhut, Gettington.com, and PayCheck Direct. The integration of Bluestem and Capmark is going well, and we're looking forward to capitalizing on the strengths of the combined organization in 2015.
In late May, we will issue audited consolidated financial statements of Capmark and audited consolidated financial statements of Bluestem on a stand-alone basis for the years ended January 30, 2015, and January 31, 2014. We will post these audited financial statements to our website at that time.
That concludes our financial highlights for Capmark and Bluestem fourth-quarter 2014 results. We will now open the call to your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Michael Cohen, Opportunistic Research.
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Michael Cohen, Opportunistic Research LLC - Analyst [2]
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I had a few quick questions. Could you just kind of walk through some of the one-time items again, just a little bit more slowly? As well as the effects related to the migration to manual dialing? That will be helpful in terms of just the numbers and how they were affected.
I think I caught $3.1 million of higher collection costs, $3.1 million of higher charge-offs, and $4.7 million of lower profit sharing, if that's correct. And then maybe take a step back and just address the overall issue and just explain what happened.
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Mark Wagner, Capmark Financial Group Inc. - CFO [3]
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This is Mark. I'll take the first. So in terms of -- we had $3.7 million in credit operating costs. And that's a combination of both collection costs as well as the impact of the migration to the new receivables platform.
There was a $3.1 million higher provision for loan losses under Fingerhut FreshStart credit portfolio. And that's obviously an allowance for loan loss as we booked at the end of the year. And $4.7 million in lower profit sharing on the SCUSA-owned portfolio.
And primarily what it reflects is early in the fourth quarter of 2014 to ensure and frankly enhance our compliance with regulations or on dialing of mobile phones. We moved from an automated process to manual process to ensure that we were not autodialing mobile phones. And so that will change and we will go back to -- once we enhance some of our technology in the back half -- or actually in the second quarter here of 2015, we will move back to autodialing.
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Michael Cohen, Opportunistic Research LLC - Analyst [4]
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Okay, great. And can you explain to me -- I guess some of the line items on the retail side of the P&L -- seemed like the G&A -- I think you called out that there were certain things that were inflating that. Could you just sort of explain -- help us understand what the run rate G&A might have been, absent those extraordinary items?
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Mark Wagner, Capmark Financial Group Inc. - CFO [5]
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Yes, I think if you -- this is Mark again. I think if you look back on the earnings release schedules, we have a reconciliation of net income to EBITDA that calls out a number of the one-time items.
As I think about it, the 7.7%, which I mentioned in the call notes, does draw -- I think is somewhat close to what I will call a fourth-quarter run rate. We do have some incentive comp expenses in there, which drove the year-over-year increase from 6.6%. And we also have some Capmark integration costs.
So that's driving the increase. In terms of what we see as a run rate for 2015, we're not giving any guidance to 2015.
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Michael Cohen, Opportunistic Research LLC - Analyst [6]
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Okay. Can you talk about -- I know as you guys finish the process of pulling together financial -- audited financial statements, you're having a public earnings conference call. Your results are sort of displayed as such. Have you guys given any thought to a public listing of the shares?
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Steve Nave, Capmark Financial Group Inc. - President and CEO [7]
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This is Steve. We're not seriously thinking about that right now. We've got a lot of things going on with the integration to get behind us. We've got a lot of strategic initiatives that we are excited about and focusing on for this year. And we're not setting any sort of guidance or timeline with respect to a full SEC registration at this time.
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Operator [8]
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(Operator Instructions) Jonathan Lauer, Briar Capital.
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Jonathan Lauer, Briar Capital Management - Analyst [9]
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Just following up on the G&A and the marketing, which were noticeably higher, which I think was touched on in the earlier question. Starting with G&A in the quarter, it was $63 million context, up from $42 million.
What in there is noise and things that go away versus just regular run-of-the-mill for the quarter? Because we're just trying to understand how the gross margin is up and 20%-plus sales, while EBITDA is pretty much flat?
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Mark Wagner, Capmark Financial Group Inc. - CFO [10]
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Yes. So included in G&A for the fourth quarter would be costs coming out of the acquisition of Bluestem. So you do have a dividend equivalent expense of about $19.6 million. You'll see that on the reconciliation of adjusted EBITDA, which is on page 19 of the earnings release. And so that's a big item in there. You've also got higher stock-based compensation expense. And when you --
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Jonathan Lauer, Briar Capital Management - Analyst [11]
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Right. Just on that, the $19 million, does that go away?
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Mark Wagner, Capmark Financial Group Inc. - CFO [12]
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Yes, it goes away.
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Jonathan Lauer, Briar Capital Management - Analyst [13]
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And that's non-cash?
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Mark Wagner, Capmark Financial Group Inc. - CFO [14]
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It was cash in closing, but it was part of the acquisition. So it is -- and it goes away.
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Jonathan Lauer, Briar Capital Management - Analyst [15]
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Okay. So if we had the -- just to make it abundantly explicit, if we had the exact same quarter next year, but no transactions, I could add roughly $20 million to your adjusted EBITDA or remove $20 million --.
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Mark Wagner, Capmark Financial Group Inc. - CFO [16]
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We had a similar expense in the fourth quarter of the prior year, so it's about a $7 million --
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Jonathan Lauer, Briar Capital Management - Analyst [17]
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First [well plan]. Okay.
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Mark Wagner, Capmark Financial Group Inc. - CFO [18]
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$7 million increase year-over-year. So the next quarter, G&A would be a $7 million benefit.
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Jonathan Lauer, Briar Capital Management - Analyst [19]
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Okay, so that's part of it. So then what explains the extra $13 million? So $7 million of it relates --.
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Mark Wagner, Capmark Financial Group Inc. - CFO [20]
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Okay. So on page 19, if you go right above the dividend equivalent expense, there's stock-based compensation, which is $6 million -- $7.6 million. Most of that is related to the cashing out of stock options upon the acquisition of Bluestem. Again, most of that will go away in 2015.
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Jonathan Lauer, Briar Capital Management - Analyst [21]
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So is it fair to say, at least on a quarterly basis, stock-based comp should be $1 million or less?
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Mark Wagner, Capmark Financial Group Inc. - CFO [22]
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I have not given any projections for 2015, but it's going to be substantially less than the $7 million.
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Jonathan Lauer, Briar Capital Management - Analyst [23]
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Okay. So then we got -- just to break it down, we got $7 million coming from stock-based comp and then a delta of $7 million from the dividend expense. So we'll call it $14 million that goes away, which then leads to only a $6 million increase year over year, excluding these things on a G&A side. That's really helpful. Is that correct?
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Mark Wagner, Capmark Financial Group Inc. - CFO [24]
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Yes, that's correct. There is also -- I don't know the number off the top of my head, but there's also the impact of our overall business performance was so much better this last fourth quarter than the prior, even though the prior was good, was the management short-term incentive plan accruals with higher in the fourth quarter of this last year than they were before.
And I don't know if that impacted that number, but it's not going to be order of magnitude that we just talked about on those other two, but it will be a reasonably sized number.
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Jonathan Lauer, Briar Capital Management - Analyst [25]
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Okay. So -- and before we get to the next thing. So then, $56 million, if that's our starting point, we probably can add, call it $14 million: $7 million from each of those lines, give or take, to get to a more normal adjusted EBITDA -- a more normal EBITDA. So we start getting to $70 million?
Now can you help us on marketing, which is the other glaring line item?
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Mark Wagner, Capmark Financial Group Inc. - CFO [26]
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Okay. So first of all, the two items that I just mentioned, the dividend equivalent expense and the stock expense compensation, were addbacks to adjusted EBITDA and pro forma adjusted EBITDA. And though -- you can't take those numbers and add them to the $56 million to come up with some (multiple speakers).
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Jonathan Lauer, Briar Capital Management - Analyst [27]
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Oh, it's really big. Okay. Okay. Okay, so then that's not -- apologies then; that's not answering the question. Can you help us understand what led to G&A being up $20 million?
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Mark Wagner, Capmark Financial Group Inc. - CFO [28]
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Maybe this would be better if we want to take this off-line. We can try to walk through a reconciliation, but it's probably easier to do that off-line than it is trying to do it over the phone.
But going back to the previous question I had answered with the previous gentlemen, when you're looking at year-over-year performance, from the $55 million to the $56 million of pro forma adjusted EBITDA, the things you need to take into consideration is the impacts from the conversion to the new receivables platform and the cutover to manual dialing and collections in the fourth quarter, which had impacts as to our credit operating cost of $3.7 million, the FreshStart provision of $3.1 million, and the lower profit sharing of $4.7 million. That I think is how you think about the bridge between $55.5 million last year and $56 million this year.
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Jonathan Lauer, Briar Capital Management - Analyst [29]
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Okay. Thank you.
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Operator [30]
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It appears there are no further questions in the queue. At this time, I would like to turn the call over to Mr. Gene Davis for any additional or closing remarks.
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Gene Davis, Capmark Financial Group Inc. - Executive Chairman [31]
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Thank you, operator. And thanks to all of our investors for joining us on this call. I thank you all for your past and future support. We will be speaking to you again shortly next -- I guess in June.
Thank you, everybody. We will adjourn. Operator, you can disconnect the others.
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Operator [32]
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That does conclude today's conference. Thank you for your participation.
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