EZCORP Inc (EZPW) 2006 Q2 法說會逐字稿

Good afternoon, and welcome to the EZCORP fiscal 2006 second quarter earnings release conference call. At this time, I would like to introduce your host, Mr. Joe Rotunda with EZCORP. Thank you. Have a great conference, and go ahead, Mr. Rotunda.

Thank you, Beth. Good afternoon, everyone. Thank you for joining us today. With me on the call here in Austin is Dan Tonissen, our Chief Financial Officer. I’m going to present a brief overview of our second quarter and first six months of the year. Dan will follow with a more in-depth look at our financials. Then I’ll provide our thoughts and an updated forecast for the balance of the year. And of course, an opportunity for questions.

Our second quarter was an excellent quarter. The results continued our five-year trend of strong year-over-year earnings growth. We improved earnings by more than $3.7 million, a 95% increase over last year for the quarter. Diluted earnings per share was $0.56, but this is the highest earnings per share of any quarter in the company’s history, and it compares quite favorably to last year’s $0.29 in EPS for the same period.

The $0.56 per share in earnings is substantially over the upper end of our initial guidance, which was $0.40 to $0.43, and it was at the upper end of our revised guidance of $0.54 to $0.56.

Operationally, all business segments contributed to these strong results. The pawn segment improved in contribution by $3.7 million for the quarter, and that represents double-digit growth over last year.

Sales gross profit without considering the impact of jewelry scrapping, increased by $1.9 million. This was driven by strong same-store sales increases of 17%.

The gross profit from gold scrapping increased by $1 million, primarily as the result of margin growth, with gold values soaring. The impact of gold is particularly amplified when you consider that we actually scrapped less in gram weight this year than we did a year ago. Dan will give you a rather thorough overview of the impact of gold values in just a few moments.

And then third in the pawn segment, our pawn service charges increased by almost $800,000. Although our pawn portfolio ended the quarter down $1 million to last year, our pawn portfolio yield grew by 5 percentage points to 149%. Now both of these outcomes were expected as we converted 148 of our pawn shops from a 90-day long-term to 60 days. We are quite pleased with the favorable impact of the term change on both pawn service charge revenues and sales.

And our other segment, the payday loan and credit services segment, continued to demonstrate strength. The contribution after bad debt and transaction fees increased by $6.9 million over the same quarter last year, and that’s an improvement of well over 100%. Fee revenues themselves almost doubled. They were up 99%. And bad debt, including transaction fees, decreased to 15% of revenues from 19% the same quarter last year.

The March ending quarter is seasonably the best quarter for bad debt due to the high cash flows our customers generated by tax refunds. But this quarter in 2006 was the best quarter we’ve ever had in bad debt since we’ve been in the business.

During this quarter, we also added a total of 22 new EZMONEY stores. We plan to open an additional 85 or so during our final two quarters of the year. As a result of the distribution of the new store openings by quarter, we did receive a benefit during the first half as a result of a lower level of drag, with only 30 stores opened during the first six months of the year.

Our annual drag was, and is still estimated to be, $0.10 to $0.15 in earnings per share. However, the portion incurred in quarters three and four will be disproportionately higher than the first half as a result of having almost three times as many new stores in the second half of the year.

The additional 115 or so new storefronts this year will bring our total EZMONEY store count to approximately 350 stores by year end. And all but four of those stores have been opened during the last three fiscal years.

Texas will be still the largest state in EZMONEY store count, with approximately 234 of the projected 350 locations. At year end, this year end, 2006, Texas will have 67% of our total EZMONEY storefronts, and you can compare that to just a year ago, when we had 93% of our storefronts in Texas.

Now we’re continuing to add stores in Texas, but at a much slower rate as we accelerate the expansion in other states. The resolve is that we’re becoming more geographically diverse.

Now for the six month fiscal year-to-date period, we’ve achieved earnings of $14.5 million, which is up 62% from the same period last year. On an earnings per share basis, we’ve improved to $1.06 for the first half, versus $0.66 last year. And this is after absorbing the impact of new rules on stock option expensing in the current year.

The after-tax expense was $745,000, which equates to $0.055 per share in the current year-to-date period.

Incidentally, one balance sheet comment or particular note before I turn the call over to Dan. Instead of debt, we now have $26 million of cash on our balance sheet. This is approximately a $100 million turnaround from five years ago.

Now for a little more detailed look at the financials, I’ll turn the call over to Dan.

Thanks, Joe. For those of you who have the earnings release in front of you, if you’d turn to the statement of operations for the March quarter. Starting with line 8, you see that total revenues increased approximately 25%, or $15.8 million for the quarter, to $78.9 million. The 25% total revenue growth is largely comprised of a 99% increase in combined payday loan service charges and credit service fees, an 18% increase in combined merchandise and jewelry scrapping sales, and a 5% increase in pawn service charge revenues.

On line 12, you see the cost of goods sold increased approximately 19% to $28.3 million. Margins on total sales fell slightly to 40%. After the slight relative increase in cost of goods sold, sales gross profit increased 18% to approximately $19.3 million.

Net revenues for the quarter, line 13, increased 29% to $50.6 million. For the quarter, our pawn contribution, sales gross profit, pawn service charges, and other revenues increased 12%.

After an approximate 17% increase in operating expenses, lines 15 through 19, operating income, line 20, increased 97% to $11.5 million. Excluding payday loan and credit service bad debt, operating expenses increased approximately 15%, largely due to expenses associated with 72 locations added during the last 12 months.

Payday loan and credit service bad debt and direct transaction expenses, lines 16 and 17, measured as a percent of combined payday loan service charges and credit service fees, lines 5 and 6, improved to 15% from 19% for the same period last year. Looking at bad debt levels relative to loans originated in the quarter, our net defaulted principal as a percent of loans originated came in at 3.3%, compared to 2.9% for the prior year quarter.

Operating income margins measured as a percent of net revenues improved 8 percentage points to 23%. After lower levels of interest expense, greater equity interest in the income of [Albamoral] and Bond, and a 36.4% tax revision, net income for the quarter, line 27, improved 97% to $7.7 million, or $0.56 per share, versus roughly $4 million or $0.29 per share for the second fiscal 2005 quarter.

Current period earnings per share includes an approximate $0.02 impact from the expensing of stock options, which is not included in the prior year results.

Now let me address the current most popular question I’m asked. What impact do rising gold prices have on your business? In last year’s March quarter, gold traded in the range of $410 to $440 per ounce. This March quarter, gold traded in the range of $525 to $585 per ounce, a roughly 30% above the prior year quarter. This obviously has had a favorable impact on several elements of our business.

As gold has risen, we have increased the amount we lend on gold product. As a result of these increases in loan values, we have realized approximately $500,000 greater pawn service charges in the March 2006 quarter, compared to the March 2005 quarter.

As gold has risen, we have raised our selling prices for gold jewelry. Increases in loan values and increases in the amount we pay for purchased gold and jewelry increases our cost of goods. The net effect of higher selling prices and higher cost of sales has resulted in an approximate $200,000 increase in merchandise sales gross profit for the March 2006 quarter, compared to the March 2005 quarter.

The proceeds or revenues we realize on jewelry scrapping tends to follow the gold market directly. In fact, our revenue per gram of gold jewelry sold increased 29% this March quarter over last year’s March quarter.

Our cost of jewelry scrapping sales increases as a result of our higher loan values on jewelry loans and purchase prices on jewelry and scrap gold purchased over the counter. The net effect for the March 2006 quarter was approximately $1.4 million more gross profit on jewelry scrapping, attributable to higher gold prices.

The combined gold impact for the quarter is approximately $2.1 million before taxes, or just under $0.10 per share.

Now if you turn to the statement of operations for the six months ended March. You know, as Joe mentioned, and you can see on lines 27 and 29, we are reporting net income of $14.5 million for the 2006 six-month period, or $1.06 per share, compared to approximately $8.9 million, or $0.66 per share, for the prior year six-month period.

A 94% increase in payday loan and credit service contribution and a 9% increase on our pawn contribution produced the earnings growth.

Operating income margins for the six months measured as a percent of net revenues improved 5 percentage points to approximately 22%.

Now if you turn to the balance sheet. On line 4, you see that we ended the period with a pawn loan balance of approximately $39 million, roughly 3% below the prior year. We announced two quarters ago that we were in the process of converting most of our stores to pawn loans of a 60-day duration. At the end of March, 259 of our 281 pawn stores had completed this conversion. We expected to lose approximately 15% of our portfolio from this conversion, those loans between 60 and 90 days old, with little impact on our pawn service charge revenue.

For the quarter, the yield on our pawn portfolio improved 5 percentage points to 149%. This change also creates a one-time doubling of forfeitures as loans made 60 and 90 days ago forfeit simultaneously for a 30-day period. We realized this doubling of forfeitures in 148 stores during the quarter.

Inventory available for sale during the quarter was approximately 16% above the prior year quarter, fueling strong sales in the period.

On line 9, you see that our net inventories are up roughly 14% to the prior year. Even with higher levels of inventory, we turned our inventory 3.5 times, compared to 3.2 times for the prior year quarter.

On line 5, our payday loan balance decreased to $1.5 million as a result of our conversion to being a provider of credit services in many of our payday loan locations. The lenders for these credit service locations had approximately $13.2 million outstanding at the end of March. Our combined payday loan and credit service business, including loans made by the lenders and not on our balance sheet, increased 90% to approximately $14.7 million.

On line 13, you see the book value of our investment in [Albamoral] and Bond of $17.6 million, or $1.34 per share. With [Albamoral] and Bond stock trading just above 2 pounds, and an exchange rate of $1.79 per pound, the market value of our $13.3 million shares is approximately $47.8 million, or $3.62 per share.

Looking at line 25, you can see that we have no debt at the end of the quarter. On line 3, you see that we have approximately $26 million of cash on hand, $23 million to $24 million of which would be non-operating.

Finally, you can see on lines 35 and 36 that we ended the quarter with 281 EZPAWN and 263 EZMONEY locations, 165 of which adjoin an EZPAWN location. Thirty-two of our EZPAWN locations offer payday loans, and 51 provide credit services. Two hundred twenty-five of our 263 EZMONEY locations, including ten Florida locations, offer credit services.

Now let me turn the call back over to Joe.

Okay. Thank you, Dan. In looking forward, we continue to be optimistic about our ability to generate growth and strong earnings improvements as well as strengthen our balance sheet. For our 2006 fiscal year, we’re raising our guidance to the range of $1.60 to $1.65 in earnings per share, compared to fiscal 2005’s $1.09. Our third quarter should be in the range of $0.20 to $0.23 per share, versus $0.16 last year.

At $1.60 to $1.65, our full year would then end with earnings per share growth in the range of 47% to 51% over fiscal year 2005.

The drag from the high concentration in new stores in the second half of the year is the primary factor affecting the earnings growth rate during the second half compared to the first two quarters. We expect to open approximately 30 new stores in quarter three, and approximately 55 new stores in quarter four.

That concludes our prepared remarks. I’d like to pause now for Dan to cover the safe harbor, and then we’ll open it up to questions.

This conference call and earnings announcement contains certain forward-looking statements regarding EZCORP’s expected performance for future periods, including but not limited to new store expansion and expected future earnings. Actual results for these periods may materially differ from these statements. Such forward-looking statements involve risks and uncertainties, such as changing market conditions in the overall economy and the industry, consumer demand for the company’s products and services, actions of third parties who offer services and products in the company’s locations, changes in the regulatory environment, and other factors periodically discussed in the company’s annual, quarterly, and other reports filed with the Securities and Exchange Commission.

Beth will now open the conference call to questions.

Yes, sir. [Operator Instructions] And our first question comes from the line of Dennis Telzrow with Stephens Inc. Go ahead, please.

Good afternoon, Joe and Dan. Obviously a great quarter.

Thank you, Dennis.

Joe, last year it looked like your payday loan store opening was sort of first half loaded, and this year it’s sort of second half loaded. Is that just the way you ended up getting stores rolled out, or is there any psychology to all that?

Well, it’s not psychology. It’s more circumstance. There are really two issues that impacted this. The first was back during our fiscal third quarter last year, as we were coming through the FDIC announcement, we greatly curtailed our store openings because we were continuing to expand in Texas. As a result of that, it did take -- in our focus on the CSO, we were distracted for a period of time. And we didn’t get as many stores into the queue, into the pipeline, as we would have had we not had the disruption.

At the same time, we made a conscious decision to begin to accelerate more in other states besides Texas, and in a number of those states, including Wisconsin, Colorado, and Utah, we had some issues as we began to explore the possibility of sites and develop the leases and so forth.

We just opened our first store this past quarter in Utah, and we have in the queue right now approximately nine or ten for Wisconsin and then more stores in Utah this next quarter. And what we’re finding is that we have them ganging, particularly in through our fourth quarter of this year.

We have 50 approved sites now scheduled to go, and leases on them, during this time frame. As we look to achieving that 115 or more stores this year, with the four real estate managers we have, we need approximately eight sites to be identified by each of them. But it’s been a matter of ramp up now since that period of time in the -- towards the end of last year.

All right. Two questions for Dan, I think. You mentioned that the gold price and merchandise margin was $1.4 million. I guess that’s a combination of the scrap and the retail sales?

Actually, the scrap was about $1.4 million. Merchandise sales, the impact was about $200,000.

Okay. I guess I looked at the margin off the income statement. It looked more like $1 million. Am I missing something there?

The gold scrapping gross profit was about $1 million. And what I think Joe commented on, we actually scrapped fewer grams of gold during the quarter than we did in the prior year quarter. So the benefit that we actually realized from the higher gold values was the $1.4 million.

Okay. I got you. And lastly, did you sell any bad debt in the quarter in the payday sector?

We did. We continue to do that, Dennis. We batch our bad debt every single week. And we have a contract and agreement with a third party who buys the debts. Once it goes beyond a certain threshold, typically 60 days. And we continued that throughout the entire year. We don’t accumulate the debt and sell it large quantities. We did that for the first time in our fourth quarter a year ago. And that’s -- and since then, it’s just a routine part of the flow. We do this instead of giving it to a third party and just doing it on a consignment basis. We find this to be much more efficient.

Okay. Thank you very much.

You’re welcome.

Our next question comes from the line of [Dan Sullivan]. Go ahead, please.

Yes. Good afternoon. Thanks for taking my question.

Hi, Dan.

Hi. Did you guys give out a number of how much the face value in bad debt sold during the quarter was?

We did not. And it’s -- just say it’s an ongoing piece of our business and our bad debt collection, just like any other activities in the store and our centralized collection.

Okay. So that -- I mean, that shows up in the [Q] as part of recoveries, I guess? Or --

It does.

Okay. And it looks like the net charge operate -- I think you said that was 3.3% for this quarter?

As a percent of loans originated during the quarter. That’s correct.

Okay. And the 2.3%, was that the previous quarter or year over year?

2.9% was the same quarter last year.

2.9%. Okay. Great. And one last question. Your guidance for the next quarter. Can you give us a sense of what you’re factoring in for gold prices into that?

We were not building in a substantial increase over the current market in it.

Okay.

So I [inaudible] a little bit -- not bearish, but we see gold in that $500, $550 to $650 range.

Okay. Now do you guys tend to sell a little bit more? I mean, in the second quarter, after Mother’s Day?

Yeah, we do. And during both the third quarter, which is the June quarter, and the September quarter, is when we typically will scrap the largest portion of our scrap during the fiscal year.

Okay. Now are you factoring into the guidance that you’re maybe selling a little bit more to take advantage of higher gold prices? Or how are you approaching that or taking a look at that, as far as your guidance?

We’re factoring in what we think we will scrap given jewelry inventory levels today and what would be sourced through forfeitures and over-the-counter purchases.

Okay. All right. Great. Nice quarter. Thanks, guys.

Thanks.

Thank you.

[Operator Instructions] We now have another question from the line of Dan Sullivan. Go ahead, please.

Yeah. I’m sorry. One other quick question I had. Can you give us an update -- I know you talked a little bit payday expansion. I know you’ve been moving into Colorado and Utah. Can you maybe give us a sense of other states, and maybe some store counts in those states year-to-date?

Sure. Texas, as I said before, has the greatest number of our EZMONEY stores, and I’m addressing specifically the EZMONEY because they’re the new store builds.

Right.

In Texas, we have about 216 locations as we come through the second quarter. The next state to that is Colorado, where we have 30 stores now. We have ten in Florida. And we have onesies and twosies, Alabama, Utah. And Wisconsin, although we have a number of leases, we haven’t opened any stores there yet. But that’s the way they fall today.

As we go through the balance of the year, we had anticipated in Colorado and Florida, Texas, Utah, Wisconsin, each of those five states, to add between 20 and 30 stores for the year. And as you can see, Utah and Wisconsin, virtually all of those are in quarter three and quarter four.

Okay. Have you looked at Michigan at all? I mean, [possibilities] in [inaudible]?

We have looked at Michigan from several perspectives, and we’re somewhat uncomfortable with the regulatory environment there today.

Okay. And I think you mentioned you’re doing a CSO model in Florida?

That’s correct.

Okay. Any updates on -- I think you have two CSO lenders in place right now. Are you continuing to pursue others? Any update there?

We have two lenders today, and we’re quite pleased with both of them. I think either one of them alone could handle the volume that we have. We believe with the two of them in place that we’re quite capable of continuing to support our anticipated growth in CSO as we go forward.

Okay. Can you -- just one last question. In Texas, can you give us some thoughts on -- obviously we’re going to have the legislature meeting in January ’07. Thoughts on the status of a possible payday law in place there? And obviously defending the current CSO. And in Pennsylvania, any thoughts on where that state is moving along? I know there’s a bill in committee right now, and it seems to just be sitting there.

In Texas, we’re very fortunate, I think, to have the CSO regulations that we do. I believe that we’ll be able to operate under those regulations for some period to come. The legislative assembly in Texas in 2007 I think will afford us and afford the industry an opportunity to again attempt to have favorable payday loan regulations enacted. I think there was a lot of progress last year, although there were several obstacles at the end, some of which were technical. But clearly, the ability to enable legislation in Texas.

This year I think we’ll find -- I know we’ll find the industry itself through the CFSA as well as the primary providers in the state working diligently to attempt to get legislation passed. Hopefully, some of the other reforms and other matters that have caused the legislature to focus on issues that need to be addressed that have languished for years will be behind us or addressed by the time the legislature assembles again.

Okay. And I know you guys don’t have any stores, or I believe, in Pennsylvania. But --

Oh, no.

Did you -- any updates there as far as where things stand in that state at all?

Dan, I couldn’t really comment on Pennsylvania. We’ve looked at the state. It’s been quite dynamic with what’s been going on there.

Right.

But we’re not close enough to have good intelligence on it.

Okay. All right. Thanks a lot, Joe. Have a great night.

You too, Dan. Thanks.

Thanks.

[Operator Instructions]

Beth, that sounds like that’s it.

Yes, sir. We have no further questions waiting.

All right. I’d like to thank you all again for your continued interest and support in EZCORP. Thank you.