EZCORP Inc (EZPW) 2007 Q1 法說會逐字稿

Good afternoon and welcome to the 2007 EZCORP first quarter earnings release conference call. At this time I would like to introduce your host, Mr. Joe Rotunda. Thank you, have a great conference and go ahead, Mr. Rotunda.

Thank you. Good afternoon. Welcome to our first quarter 2007 earnings call. Here with me today, as usual, is Dan Tonissen, our Chief Financial Officer. I will begin with a brief overview of the quarter and Dan will then provide his insights on our financial performance. We will conclude with an updated forecast for fiscal 2007 before we open the call for questions.

Overall, our December ending first quarter was an excellent start to the new fiscal year. Our net income increased to $9.8 million, a 44% earnings improvement over last year. Our diluted earnings per share increased to $0.23 from $0.17 a year ago. The $0.23 also compares favorably to our guidance of $0.19 to $0.20 for the quarter. All three of these EPS figures reflect December's 3-for-1 stock split.

A penny per share certainly means a lot more today in earnings than before the split. $0.01 plus or minus pre-split was about $225,000 in pretax earnings. Post-split, a penny represents approximately $680,000 in pretax earnings. Either way, this is now the 18th consecutive quarter of year-on-year earnings improvement.

We are also pleased to report that all business channels contributed with strong year-on-year growth. The consumer demand for our loan products continues to be strong as consumers seek alternatives to the more expensive fee-based products offered by traditional financial institutions. Consumers, well educated and informed, are exercising their choice and selecting short-term loan products that satisfy their needs and allow them to maintain control over their finances. Satisfying these needs and demonstrating that our loan products are the best solution for them has fueled our business.

Our pawn segment recorded $37.5 million in net revenues; that's growth of 12% over last year. As most of you know, we have three major generators of pawn net revenues -- pawn service charges, gross profit on merchandise sales, and gross profit on scrap sales. Pawn service charges are the fees collected on pawn loans that have been redeemed, renewed or extended. Pawn service charges grew by $1.4 million, 9% for this first quarter as our loan portfolio surpassed last year.

This is a significant accomplishment, given that we substantially shortened the loan term in the vast majority of our stores in fiscal 2006. Yields also improved by 14 percentage points to 146% for the quarter. The size and the yield of our loan portfolio is a key indicator of the strength and quality of our pawn segment.

Gross profit dollars generated from retail sales of forfeited collateral grew by $400,000, or 3% for the quarter. Net scraping revenues improved by nearly $2.1 million for the same period. We scrapped 278,000 more grams -- that's about 600 pounds of gold product this year. We sold roughly 12,000 carats of small, primarily less than 3 point diamonds.

During quarter three last year in 2006, we adjusted our diamond loan values so that it would allow us to more profitably scrap small diamonds as a normal part of our jewelry scraping process. This contributed approximately $500,000 to the profitability of the scraping activity in this first quarter. All in all, a strong quarter for pawn with a 12% improvement in net revenues for the period.

Now moving on to signature loans. This product continues to be driven by consistently strong, mainstream consumer demand. Our customer is educated, they are informed, and they have both a steady income and a banking relationship. Our research tells us they understand what the loan is for, how it works, and they appreciate having such a choice available to them.

The net revenue contribution from this segment after bad debt increased to $18.4 million, an improvement of 51% over last year. Net defaults were 4.4% of loans made. During the quarter, we opened seven new EZMONEY stores in Texas, Colorado, Wisconsin and Utah, and we closed one. We planned to open 10 stores during the quarter but had several construction and leasing delays. However, with approximately 30 stores slotted to open for the second quarter and our introduction into several new states, we're still confident in 100 new stores this year.

In addition to the states of Nebraska and Idaho, which we announced last quarter, we are intend to open EZMONEY stores in the states of South Dakota and Kansas during 2007. We feel these are attractive states from both a regulatory and competitive point of view.

To complete the new store perspective, I am going to share with you now the growth curve of our new monoline EZMONEY stores that are not adjoined to an EZPAWN shop. Now, if you're interested in this data you ought to get a blank piece of paper and something to write with and we're going to have three columns.

The first column is going to be labeled age; the second column, number of stores; and the third column would be average portfolio per store. Then the entries under those columns are going to go like this -- on that first line under age, write Under Six Months. And then under that caption number of stores, write 53. And then under the average portfolio per store, write $23,000. So now if you read that across what you have is 53 stores that have been in operation less than six months, that have an average loan portfolio of $23,000 each.

Now the next line would be six to 12 months, 39 stores, $42,000. So that we have 39 stores that are six to 12 months old, and their average portfolio each is $42,000.

The next line, group, segment is 12 to 18 months; 25 stores; $53,000.

The next line is 18 to 24 months; 23 stores; $75,000. On the last line would be over 24 months; we have 35 stores; and their average portfolio each is $94,000. Now in addition to the actual ramp up for each of these stores, or the collective group of stores, the key point here is that the new stores are on target with our objective that we stated several times of reaching a loan portfolio of $80,000 at the end of 24 months. The other factor is that once you get beyond the 24 months, the stores continue to grow.

Now if you couple this information, these 175 freestanding monoline EZMONEY stores, with our other EZMONEY stores, the 165 that are adjoined to an EZPAWN store, you get an aging segmentation of the total, 340 stores that we have. Now keep in mind that these numbers that I just gave you do not include any data from the adjoined stores -- stores that are adjoined to an EZPAWN shop.

The adjoined EZMONEY monoline stores ramp up faster than these stores -- these freestanding monoline stores -- because of the transfer of signature loan balances from existing pawn shops into that adjoined store when it opens. The data that I just provided, again, which is only for the freestanding monolines, is a more conservative and a more realistic growth curve to use for any projections that you may do of our new stores as they begin to mature.

Now on to the aging of the 340 stores we have. At the end of December, we had 53 stores that were opened less than six months. We had 46 stores that were six to 12 months of age; 39 stores that were 12 to 18; another 39 that were 18 to 24 months old; and we had 163 that were over 24 months old.

Now the point of this as you look at it and you analyze it is that we have considerable growth potential in our existing stores with 30% of our entire group of EZMONEY stores opened less than 12 months. We have 40% that were opened less than 18 months. Keep in mind that this is in addition to more than 90 stores that are yet to open this fiscal year.

So moving on to another new store, you will recall that we opened our first pawn shop in Mexico in November. It is still much too early to talk about numbers. However, we do plan to open two more Mexico stores shortly; one in February and the other in the March/April timeframe. The earlier store will be our first location in Reynosa and the other will be our second store in Matamoros. We continue to be confident that Mexico will be an attractive new business segment for us as we move forward.

The results of our fourth business segment, Albemarle & Bond, will be included in Dan's remarks and we'll segueway to him right now.

Thanks, Joe. Joe gave you an overview of some of the numbers. Now I'll give you a little more detail, starting with our pawn operation.

For the quarter, our pawn contribution increased $3.9 million or 12% to $37.5 million, which Joe touched on. Merchandise gross profit included in that pawn contribution increased $434,000 or 3% to $15.6 million, largely as a result of a 6% merchandise sales increase that was slightly offset by roughly a 1.25% percentage point margin decrease, which occurred primarily in electronics. 6% sales growth was supported by 8% more inventory available for sale in the quarter, where inventory available for sale is beginning inventory plus our purchases and pawn loan forfeitures.

For the quarter, we turned our inventory 3.2 times and this compares to last year's turn during the December quarter of 3.1 times. At the end of the quarter, our inventory levels were approximately 3% above the prior year period, giving us good inventory levels to support the seasonally strong March quarter sales.

Pawn service charge revenues also included in the pawn contribution increased approximately $1.4 million or 9% to just under $18 million. An 11% increase in the yield on our average pawn portfolio, a yield of 146% annualized for the quarter, was offset by roughly a 2% decrease in our average balance. As of the end of the quarter, our pawn loan balance was 1% above the prior year quarter ending.

The conversion from 90 to 60-day duration loans in most of our pawn stores during our first and second fiscal 2006 quarters continues to drive the yield improvement that we're seeing. As of the end of December, our loan balances have surpassed last year's balances.

The last component of the pawn contribution, scrap gross profit, increased $2.1 million or 113% to $3.9 million. During the quarter we scrapped approximately 1.2 million grams of gold jewelry, and that's an increase of roughly 30% from the prior year quarter. Our proceeds per gram increased 21% to $8.89. As Joe pointed out, that we included in the scrapping gross profit, the sale of a batch of small diamonds that amounted to approximately $500,000.

Now a little more detail on the signature loan side of our business. For the quarter, our combined payday loan and credit services contribution improved 51% to $18.4 million. The benefit of a 47% increase in signature loan fee revenue is compounded by a lower relative level of bad debt expense. Bad debt expense as a percent of related fee revenues improved to 24.7% compared to 26.4% for the prior year quarter.

Looking at the bad debt levels relative to loans originated in the quarter, our net defaulted principle as a percent of loans originated came in at approximately 4.4%, and this compares to 4.7% for the prior year quarter. Loan originations for the quarter were up approximately 47% to $123.4 million.

Now a few comments about our operating expense and operating income. For the quarter, operations expense increased approximately $4.9 million or 19% and roughly 80% of the increase is related to the 98 EZMONEY locations opened during the last 12 months.

Administrative expense for the quarter increased $705,000 or 10%. The reasons for the increase are our greater stock compensation expense, and that was approximately $200,000 and then higher salaries and wages and other inflationary increases. After an 8% increase in depreciation and amortization due to our new store additions, our operating income improved 42% to $14.6 million. Operating income margins improved approximately three percentage points to 24% of net revenues. The margin improvement came largely from pawn operations and administrative expense.

Also included in our operating income for the quarter is the earnings drag from new stores. In the current quarter, the drag reduced operating income by approximately $1.3 million or roughly $0.02 per share compared to approximately $600,000 or $0.01 per share in the prior year quarter.

Now a couple of comments on the balance sheet. You can see that we have just under $40 million of cash on our balance sheet, and roughly $34 million of that would be non-operating. Our investment in Albemarle & Bond is carried on our balance sheet at $20.3 million. If you use yesterday's closing price on Albemarle & Bond of GPB2.30, at an exchange rate of $1.98 per pound, our 13.3 million shares would have a market value of just over $60 million, almost three times our book value for Albemarle & Bond.

Then, finally, you see that we ended the quarter with 281 EZPAWN locations and that includes our first Mexico store, which Joe talked about, that opened in November, and 340 EZMONEY locations. During the quarter we opened seven EZMONEY stores and we closed one. Now let me turn the call back over to Joe.

Thank you. We continue to be optimistic and confident about the business. We're also confident in our team's ability to continue growing the Company while improving earnings and continuing to strengthen our balance sheet. Looking forward, I believe we are well positioned for a solid second quarter. The March quarter is traditionally a strong revenue, earnings and cash flow period, fueled with income tax refunds that drive both loan redemptions and merchandise sales.

For our second quarter this year, we expect earnings to be approximately $0.23 per share compared to $0.19 for the same quarter last year. For the full year, we are increasing our guidance to approximately $0.85 a share compared to last year's actual $0.69.

Dan, if you would do Safe Harbor, please.

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 risk and uncertainties such as changing market conditions and the overall economy in 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.

(OPERATOR INSTRUCTIONS). Dennis Telzrow, Stephens, Inc.

Great quarter, to say the least. A couple quick questions. The sale of the diamonds and the scrap -- is that just sort of a one time thing or is that something we can anticipate every quarter?

In the past it used to be an annual event and it has been growing over the years. I think two or three years ago we were at about $50,000 a year. Last year we got up to about $500,000 for the year. This year we already have $500,000 in -- we now have a process, Dennis, where because of the loan values that we have established on this particular product, we should be able to continue to pull, harvest and sell for scrap, at a reasonable margin, the product as it ages and we see the opportunity to pull it out of our stores. We expect this is an ongoing part of the process, but not necessarily that the $500,000 is representative. It's certainly not, I don't believe, of what a typical quarter is going to be for us.

The new Payday stores -- and I know they're largely very immature, but the ones in the two states, I think it's Nebraska and actually Wisconsin, I think -- are those performing up to expectations?

The two new states that we have the highest penetration in now is Utah and Wisconsin that we just added during the latter part of 2006. And we have, I'd say, I would characterize Wisconsin as exceeding our expectations. I would say that in Utah we have some excellent stores and we have some opportunities. It's a little less consistent across all of the stores there, but a state that we're very satisfied with and we're going to continue to expand in.

Daniel O'Sullivan, Utendahl Capital Partners.

Just a quick question, I think you guys said you were hoping to open 10 Payday stores during the quarter and you ended up opening seven. Did that come down to just finding good locations? Or what was kind of going on there?

Actually, there were several issues. One was construction delays, because a number of these are up North and dealing with the harsher weather. Secondly, we had some issues and we're learning about, particularly the new states we're going into -- licensing and special use permits and those types of issues. That's primarily -- in fact, that more than makes up for the delays that we had in the stores that we missed.

I think you said you're hoping to open 30 during the second quarter?

We plan to open 30 or more stores this quarter, that is correct.

And the new states, Nebraska, Idaho, South Dakota and Kansas -- will the 30 new stores -- will some of those fall into previous states? Or more skewed towards newer states?

Several of them will be in a couple of those new states. I don't believe we will have anything in Kansas, in all four of them this quarter. But we will continue with our expansion in Utah, Wisconsin -- we'll still have a couple of stores through the year in Texas and Colorado.

Just on the surface, just starting out there, how are you guys feeling about site location and licensing and everything in those states?

In the new states?

Yes.

We've just been out -- we're just getting started in them now. It becomes a learning process in each of them, particularly as you get into local municipalities and you see some differences across the state, and this ends up with a little longer process than we like in being able to get the stores open. But we're starting to understand that a little bit better now as we forecast our openings.

And moving onto the reoccurring question -- regulatory environment -- can you give us an update on what's going on in Texas and any other states that you have Payday in that we should be looking at?

In Texas -- there's two different avenues in Texas. The ideal scenario in the state would be that we are able to maintain the CSO Regulation just as it is that would allow us to do business to satisfy that demand for short-term loans, utilizing those regulations. And in addition, have a payday loan regulation enacted that would also be favorable to the industry. I understand that there are discussions underway and that there may be regulatory support for payday loan regulations in the state of Texas that has been absent in prior years.

I understand also that there has been a challenge to the CSO with a proposal of a piece of legislation. But it's early on in the legislative session. Committee chairs haven't been even appointed yet in Texas, nor the committees themselves, and it's really early to gauge the direction in the state.

And the opposition, is that the Flores Bill?

The Flores Bill is the one that has been filed, that is correct.

Now are you guys -- what's the maximum loan you are doing in Texas? Is that still $1,500? Have you guys considered moving that up at all?

We are at $1,500 and that is the maximum that we would do for a payday loan. I'd point out to you with the underwriting that we utilize for payday lending, the consumer that qualifies for a $1,500 loan is probably individually, not household, individually earning $60,000 to $70,000 a year in personal income, which I think demonstrates the segment that is utilizing that size of a payday loans in the state of Texas.

I think you had mentioned, Joe, in the last call that you guys are looking to expand some of your adjoining stores. Can you kind of give us an update where you stand there so far?

We have started on it. We have identified the stores that we want to do and we have laid out construction plans for the first dozen or so. One of the stores that is actually our largest volume adjoined store, we've actually ended up leasing additional space because now we're going to expand both the pawn shop and the EZMONEY store. In fact, set the EZMONEY store adjacent to it a little further down the strip, because it's been so successful with us and for us and we need to get more of the teller stations in it.

We started on the other ones and I'm not sure exactly how many we have done. But I know in Houston we have completed several of them already and we've done work in the Dallas/Fort Worth market as well.

What's your hope, I mean as far as loan volume or impact on operating income once you expand those? What are you guys hoping to hit as far as a target in expanding those stores?

Well, they are each a little bit different. You have to understand the adjoining stores are generally 300, maybe 400 square feet. They are very tight. And if they get up to that $80,000, $90,000 or larger portfolio of loans, the activity in there, in those stores on a Friday, they don't have sufficient lobby for the customers to be able to comfortably wait, nor do we have sufficient teller stations.

So what we're doing is, we're just adjusting the brick and mortar so we can accommodate the higher level of volume. The investment in doing this is really minimal on a per-site basis. We're talking somewhere in the neighborhood of $5,000 to $10,000 a store in order to make these adjustments and expand it. In most of the cases what we are doing is just going deeper into the pawn shop warehouse area. So it's our own real estate. There's no additional occupancy cost except for the capital investment in the remodel.

How many of those -- what's the number on that, Joe? You guys are hoping to do that?

We'll probably end up this year doing probably 40 or more of those.

Jordan Hymowitz, Philadelphia Financial.

A couple of questions. You said you scrapped 30% more but the prices were up 20%, so in volume you scrapped 10% more -- is that right, then?

Yes, the total number of grams scrapped were up the 30% and then the proceeds per gram were up 21%. And then what you don't see but you can back into it is the cost per gram also increased. Over the last 12 months we've increased the amount that we would lend on gold jewelry.

So what was the actual ounces sold in the quarter?

About 1.2 million.

Second, I'm a little less familiar with the other gentlemen's question on the Flores Bill in Texas -- that would eliminate the CSO model? Is that what he was implying?

The Bill that was filed in effect would preclude the ability to do short-term loans of this nature under the CSO statutes -- Credit Services Organization statute.

A large percentage of your stores are in Texas. There's no legislation now in Texas, right, that permits payday lending outside of that statute?

Well, there is a statute but it is not an economically feasible statute that is in place. It would need modification, I believe, to allow an enterprise to engage in payday lending profitably.

Well, let me ask the question another way -- I know the CSFA is endorsing a $16 Bill per hundred in Texas -- have you thought of what type of economic profit you would make or guidance would be under that assumption?

We haven't recast our numbers, but I would point out that it's $16 per $100. It would roughly be the same net as when we acted as a servicer and marketer for an FDIC chartered bank in the state when the total fee was $18 per $100.

Richard Eckert, Roth Capital Partners.

I have a quick question. The pawn loan yield is up pretty substantially. Was that all attributable to shortening the grace period?

Yes, I think it's largely that. I would attribute most of it to that. It's changed sort of the dynamics within the portfolio, but we are generating more pawn service charge per dollar that we have invested in that portfolio. It's something that we talked about a year ago. I expected then that our yield would get up to the 140% to 150%.

One of the factors, we are also doing daily extensions in our stores that allow a customer to rather than extend the loan for an entire 30 day period, to be able to extend it for five days or seven days. We've seen a very favorable impact with that as well.

One more question of Dan. You don't have any planes buried there in other assets, do you?

No.

You know, Dan's been trying to get one, now that he's been traveling so much, but we just can't quite get there.

(OPERATOR INSTRUCTIONS). Daniel O'Sullivan, Utendahl Capital Partners.

Thanks for the follow-up. Just curious, Dan, in your forecast, can you give us a sense of what you think gold prices are going to be for the next year? What number you're factoring into that?

In the $0.85, we are looking at [$610] to [$620] range on gold.

And has your expectations for the drag from the new store builds, has that changed? Or is that still pretty much on par with what you guys were talking about six months ago?

This quarter it was $0.02. Going forward, obviously, it depends on the timing of the openings, I would expect $0.01 to $0.02 a quarter.

At this time, there no further questions waiting from the phone.

Okay, Beth, thank you, and I thank everybody for joining us today.