EZCORP Inc (EZPW) 2007 Q2 法說會逐字稿

Good afternoon and welcome to the 2007 Second 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, Amanda. Good afternoon everyone. With me here in Austin is Dan Tonissen our CFO. Thank you all for joining us today.

It's been a busy quarter for us. We opened 30 new EZMONEY stores in the United States. We opened one new EZPAWN store in Mexico. We agreed to purchase 15 pawnshops in Colorado and we introduced a new loan product, (inaudible) in the EZMONEY stores. I'll talk a little bit more about these in a few minutes.

First, I want to address our earnings for the second quarter. This is the 19th consecutive quarter of year on year earnings improvement. Net income for the quarter is $10.2 million, which is an increase of 32% over last year.

Diluted earnings per share were $0.23 right on our forecast. And has been the case for some time now, all segments contributed.

Our pawn segment recorded growth of $2 million in store operating income over last year. This was driven by moderate revenue growth and a modest reduction in operating expense.

Our combined gross profit for merchandise and jewelry scrapping sales was up about $400,000. This was against the period last year where we generated an extraordinary sales increase of 17%. Dan will provide the detail in a few minutes as to how this compares by component.

Pawn service charges were strong in the quarter. These revenues grew by $1.1 million, 7% over last year. Our pawn loan portfolio had strong growth and we had solid performances and improvements in both redemption rates and yield.

Collectively, the pawn segment's net revenues grew $1.6 million and pawn operating expenses were reduced $400,000 from last year. The result in pawn segment operating income growth of $2 million represents a 14% increase.

Our second segment, the signature loan business, continued its trend of strong growth. Consumer demand for this product continues to be strong. We ended the quarter with the portfolio of active current loans 49% greater than a year ago.

Our net revenues, which are fees less bad debt, increased 48% for the quarter, up $6.4 million from the same period a year ago. Bad debt also continued to show improvement at just under 13% for the quarter compared to approximately 14% last year.

As I stated earlier, we opened 30 new EZMONEY signature loan stores during the period. Twelve of them were in the new entry states; six in Idaho, three in South Dakota and three in Nebraska. Wisconsin, which we entered less than a year ago, had the largest growth in the number of stores. We added nine new locations to Wisconsin to bring our total store count to 32.

We also closed one store, resulting in the total of 369 EZMONEY signature loan stores now operating in 10 states. We plan to add Kansas as the eleventh state during this next quarter.

Based on our real estate pipeline and current prospects, we believe we'll exceed our forecast of 100 new EZMONEY store openings this year. That will result in a total EZMONEY store count of over 430 locations by year end.

In addition to store expansion, we are excited about our first new product since July of 2005. During the quarter, we launched a new loan product in the EZMONEY segment. We did consumer research and focus groups to develop a name for this product. We considered names like Flex Loan, The Consolidator, Platinum Loan, Extended Term Loan and the like. But after extensive research, we settled on The Installment Loan. I wish I could tell if anyone chuckled at that.

This product has several calls to action. First of all, it's a larger loan. Principal amounts on this loan range from $1525 to $3,000. Second, it provides a longer period of time to repay; approximately five months. And at the end of the period, its principal is paid in full. This product provides the consumer with an option to consolidate their debt or to use this larger loan to make a bigger purchase.

Here's an example of how it works. Assume a customer obtains an installment loan of $2,000 for an EZMONEY credit services store. They would pay approximately $405 per pay period, let's say semi-monthly, for 10 payments. At the end of the five months, the principal is paid off because each payment has a portion of it that's applied to principal as well as to interest and fees.

The APR associated with this loan calculates at approximately 330%. The total dollars paid by the customer over the five month period would actually be less than if he had extended a payday loan for the same period. However, with that traditional payday loan, he'd still the original principal at the end of that period of time.

Just as an aside, I should point out that we never extend the CSO or payday loan 10 times. This is for comparative purposes only. Although it's early, we've only had the product out for about a month. We're pretty excited about the initial response. Our next steps to closely monitor the consumer's payment behavior over the extended terms of this loan. I'll provide more detail on results and installment loan with next quarter's release.

We're also excited about another event that occurred during the quarter. We're thrilled that we were able to craft an agreement with Jumping Jack cash for the acquisition of their Colorado stores. This deal will be the largest acquisition in EZCORP's history. With their 15 pawn stores in Colorado, this chain is the second largest pawn operator in the state and it will add nicely to our position as the largest pawn operator in Colorado. We expect to complete this transaction in early June.

The Jumping Jack team has done an excellent job of developing a strong professional organization and building the pawn business in those shops. Dan will provide more commentary and some of the metrics on Jumping Jack in just a moment.

One final topic, we opened our second store in Mexico during February. We're experimenting with various site characteristics to gain an understanding of how they affect consumer response. Our first store, which we opened in November in Matamoros, is on a vehicle thoroughfare.

The second site, the one we just opened in February, is located in Reynosa and it's in a busy street marketplace with a substantial density of foot traffic. Our third Mexico store will open in May and it will open in Matamoros as our second location in that city.

The site characteristics there will be a blend of the first two stores; vehicle traffic on a main thoroughfare but also with strong foot traffic on the fringe of a pedestrian marketplace. So there's more to come on Mexico as well in future calls. With that, I'll now turn it over to Dan for more detail on the quarter.

Thanks, Joe. Joe gave you an overview of some of the numbers. I'll give you a little more detail starting with our pawn operation. For the quarter our pawn net revenues increased $1.5 million or 4% to $36.6 million. Merchandise sales increased $471,000 or just over 1% to $39.5 million.

In this period we were matching up against a 17% merchandise sales increase in the prior year period. So we held and improved upon the strong sales from a year ago when we had a doubling of loan forfeitures from 148 stores converting from a 90-day to 60-day duration pawn loan.

After 140 basis point margin decrease, merchandise gross profit decreased $330,000 or 2% to $15.9 million. Scrap gross profit increased $720,000 or roughly 24% to $3.7 million. During the quarter we scrapped 1.1 million grams of gold jewelry, an increase of roughly 5% from the prior year quarter. Our proceeds per gram increased 17% to $9.74 while our cost per gram increased 16% to $6.18.

For the quarter, we turned our inventory 3.8 times compared to 3.5 times a year ago and inventory levels decreased year over year approximately 7% to $28.6 million.

Pawn service charge revenues increased approximately $1.1 million or 7% to $16.6 million. A less than 1% increase in the yield on our pawn portfolio which was 150% annualized for the quarter was compounded by a 6% increase in our average balance. As of the end of the quarter, our pawn loan balance was 10% above the prior year quarter ending. After a modest increase in our pawn store signature loan contribution and a reduction in store operating expenses, pawn store level operating income increased 14% or almost $2 million to $15.6 million.

Now a little more detail on our signature loan segment, both payday loans and credit services. For the quarter, our combined payday loan and credit services contribution including the contribution from our pawn store signature loan business improved 48% to $19.8 million. The benefit of a 46% increase in signature loan fee revenue is compounded by a lower relative level of bad debt expense.

As Joe mentioned, bad debt expense is a percent of related fee revenues improved to 12.8% compared to 13.9% for the prior year quarter. Keep in mind that the March quarter is a seasonally low period for bad debt. Over the last 12 months our bad debt as a percent of fees is just over 24%.

Looking at bad debt levels relative to loans originated in the quarter, our net defaulted principle as a percent of loans originated came in at approximately 2.9% compared to 3.3% in the prior year quarter. Loan originations for the quarter were up approximately 46% to $112.1 million.

Excluding the signature loan contribution in our pawn stores and after increases in operating expense primarily due to 106 additional locations, our EZMONEY operating income improved 43% to $9.6 million. These results include an approximate $1.2 million, or roughly $0.02 per share dragged from new stores compared to an approximate $700,000 or $0.01 per share in the prior year quarter. Our EZMONEY segment now makes up approximately 38% of our store level operating income.

Now a few comments on the balance sheet. You can see that we have approximately $61.6 million of cash on our balance sheet, roughly $57.5 million of that is non-operating. Our investment in Albemarle & Bond is carried on our balance sheet at just under $21 million. And using yesterday's closing price on Albemarle & Bond of around 2 pounds and 28 pence and an exchange rate of $2 per pound, our 13.3 million shares would have a market value of just over $60 million which is almost $1.00 per share in unrecognized book value.

We ended the quarter with 280 EZPAWN locations including our two Mexico stores and 369 EZMONEY locations. During the quarter we opened 30 EZMONEY stores and closed one for a net increase of 29.

Now a couple of comments about our Jumping Jack acquisition. Jumping Jack Cash has always been a strong competitor in the Denver market. Acquiring their 15 pawn stores in addition to our 24 stores will give us a dominant position in this trade area. As we announced on April 12th, we are acquiring their assets for $23 million to be paid in cash. We expect it to complete this transaction in early June after completing all required licensing and entering into new leases or obtaining lease assignments on the 15 locations.

Included in the assets we are buying will be a pawn portfolio of approximately $4.2 million or roughly $280,000 per location. Inventory of $2.1 million and a payday loan portfolio of approximately $100,000. Those are the primary earning assets that we are acquiring. Jumping Jacks trailing 12 month store level EBITDA is approximately $4.1 million. This includes approximately $200,000 of drag from two immature stores. We would expect these stores to turn profitable in the next 12 months. The $4.1 million is purely store level EBITDA and does not include any operational support at all.

While still being finalized, we expect to add approximately $400,000 to $500,000 of operational support to ensure the proper integration of these stores. There's several profit enhancement opportunities with this acquisition. Over the next two to three years we will be able to consolidate three to four stores with an estimated operating income benefit of $200,000 to $300,000 per location.

Our scale will give us leverage with certain operating expenses such as telephone, insurance and bank fees. This benefit is estimated to be $300,000 to $500,000 per year when fully effective. Seven to eight of the locations are potential adjoined EZMONEY locations.

At an incremental payday loan balance of $50,000 per store, a conservative expectation in two years, seven adjoined stores would be expected to generate approximately $300,000 of store level EBITDA. For the first 12 months following the acquisition, we expect to generate an incremental EBITDA of $4 to $5 million for these stores. This would represent about $0.04 to $0.05 per share. Now let me turn the call back over to Joe.

Thanks, Dan. Now to wrap up the call, here's our revised forecast for the year. We're raising our guidance for the fiscal year to $0.86 a share. That's approximately a 25% increase over last year. Our guidance for quarter three is $0.15 and a quick math calculation will develop for you at $0.25 forecast then for quarter four. That concludes our prepared remarks and I'd like to pause now for Dan to cover the Safe Harbor and then we'll open it up for 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, completion of an acquisition and expected future earnings. Actual results for these periods may maturely 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. Amanda will now open the call to questions.

Certainly. (Operator instructions). Our first question comes from the line of Daniel O'Sullivan from Utendahl Capital. Please proceed.

Good afternoon, guys. Thanks for taking my call. Just a quick question on the new installment loan products. From a modeling standpoint, can you guys give us a sense of when you started offering that?

It's been about 30 days now, Dan, that we've had it in place. We have it only in 12 stores. Once we get a good feel for the customer's payment behavior, we'll then look at expanding the complete market and moving on from there.

Okay. Did you say what states you rolled that out into?

The test itself is in Texas. That would be the initial rollout. There are two to four other states that have potential for this product as well that we operate in today.

Okay. It sounds like as far as making a substantial impact on the top or bottom line it's going to be a couple quarters that you're just testing right now then?

That's correct. You also have to understand how much of this is incremental, if any of its substitutional, or if there's any cannibalization of our current base. It's important probably I should have mentioned that the consumer income to qualify for this loan begins at about $45,000 in individual income a year to qualify for that entry amount of $1,525.

Okay.

It's a different segment we're attempting to attract with this.

Right. That's very helpful. Actually that was leading into my next question. Do you think the customer profile is a little bit different than the current cash advance loan segment or would there be a little overlap there?

When you say profile I think the (inaudible) graphics are going to be basically the same. What's going to differ are the demographics. It's primarily going to be related to their individual income. We actually do our loans based on individual, not household income. Our norm, and we've released this once before, median individual income is about $29,000 for our payday loan customer. That probably translates into something that's close to $40,000 in household income. This consumer is going to be at the upper end of that income scale.

Okay. Great. As far as other products have you been testing any prepaid debit cards or any other types of services in your footprint?

We've been looking at a number of new products for some time. We're pleased that we're now able to bring installment loan to fruition. I think over the near term you'll see another product that we should be moving forward with hopefully before the end of this fiscal year.

Okay. Great. Real quick, Dan, I'm looking at the provision for loan losses this quarter. If we take a look at sales, can you give us a comparative apples to apples if we take out sales for the quarter?

If you take out sales? I'm not quite sure I'm following

As far as recoveries through debt sales?

No. We have not broken that out for some time because it's been our practice to do that on an ongoing basis as part of our normal debt collection process. The real answer to your question there are no lumps in that bad debt number.

That's what I was trying to get to. Are you guys still expecting I think before on gold you were looking between $600 and $625? Does that still stand?

We'd be a bit higher than that probably in the $650 to $675 range in the forecast.

Okay. Just a quick question. Congratulations on the acquisition. It looks like that was a nice buy for you guys. It looks like there's a lot of upside there as far as in the cash advance loan product. Is it only just initially starting and those stores? What are your thoughts there?

They currently offer the payday loans in most of the locations; a relatively low balance. They'd get about $100,000 in portfolio outstanding. There are seven to eight locations, as I mentioned, where we can do our adjoined stores which have been very successful for us. The only reason we can do it at seven or eight is we pretty well penetrated the Denver market with our EZMONEY stores. These seven or eight stores would represent trade areas where we still have an opportunity to do a store within a store.

Okay. Great.

A lot of upside there. As you model that, keep in mind in Colorado the maximum loan is $500. The fee schedule is 20% up to $300. Anything above $300 is 7.5%. There's only one renewal in the state.

Okay. Thanks. That helps out quite a bit. Just one last one on the acquisition. Can you give us a sense of what the age of the stores and what the average revenue is per store over the last trailing 12 months?

We didn't break out average revenue. At least at this time we're not going to provide it. I think we gave you enough metrics with the loan balance inventory you can back into it. There some tweaking, obviously, that we're going to do that we think there may be some upside in some of the revenue accounts, but that remains to be seen.

The average age of the stores there are two stores that are less than two years old, and one of them is just getting into its second year, the start of its second year. They have a drag on earnings as I mentioned of about $200,000. We would hope that in the next 12 months that turns up profitable.

Okay.

The thing that I would say, and anybody that has seen these stores in the Denver market, they're good locations.

Okay. Great. Very helpful. I appreciate it guys. Take care.

Our next question comes from the line of Jeff Schollaert from Wachovia. Please proceed.

Great. Thanks. I was hoping you could give us a little color on the pawn merchandise business. It looks like with inventory down almost 7% year over year and merchandise margins were down 140 basis point. Did you make a conscious decision to aggressively mark down merchandise to clear that inventory?

There are couple factors there that I think impacted the margin. Number one, we knew that we had a challenge with sales in the quarter because of the extraordinarily strong performance a year ago with the 17% increase and the double drops of inventory that really fueled it. In the pawn business the majority of the transactions with the customer end up as some type of negotiation or haggling that takes place. You would be a little more aggressive, had been a little more aggressive in the quarter as we did that on one end.

The other element is that that influx of merchandise a year ago as it goes through the pipeline and ages into this period, we then have a greater amount of aged product that we have to address to liquidate, but also then restrains a portion of the margin. I think those are the two factors that have the greatest impact on the margin itself.

Jeff, your question about the inventory levels being down 7%, you probably gathered from what Joe said that inventory levels in March a year ago were very high given the double ended forfeitures that we had during that quarter converting those stores to a 60 day pawn loan.

Okay. Great. That's helpful. Then just on the gold side. It looks like you might have changed the amount of money that you're loaning against gold. If I just do some quick math it looked like your last guidance said the gold price assume was $610 to $620 and now the gold price assumed is a little bit higher than that. I'm assuming you're passing that LTV on to the customer?

No. With that largely impacts is the scrap revenue that we would use in our projections. The projections that we looked at the end of last quarter, we were in the $620 gold value range and we've upped that to $650 to $675.

Okay. I guess I'm just trying to reconcile that in this quarter gold was up 17.5% year over year, but the gold scrap margin was only up 30 basis points.

During the last 12 months and that's the reason I gave the one data point on the cost per gram increased roughly 16%. That would indicate during the last 12 months we've increased our cost through lending or what we would pay for gold over the counter by the 16%.

Okay. Great. One other question.

By the way I should say there's other factors in there. In fact, we have not increased the amount of our loans by 16%. It's been less than that, but as we have pulled excess jewelry, we're getting into more product that has stones and it and adds additional cost to that. I wouldn't infer from that 16% that we've increased the amount that we're lending on gold jewelry by 16%.

Okay. Thanks. Are you actively shopping your A&B stake? Are you planning to hold on to that? If you do sell it, what would you do with that cash?

We have no intention at all of disposing of that in the near term. We're quite pleased with the performance that they've had, the returns that we've been able to generate, the contribution and cash flow, the contribution and earnings, as well as the appreciation in the value of the asset, both short term and long term.

And what we see as the prospects.

Okay. Great. The last question, everyone's favorite topic, can you give us some color on the Texas regulatory situation?

There's two dynamics going on simultaneously here in Texas. One is activity around a payday loan bill and the other is around the CSO statute. I'd say that from the payday loan perspective there initially seemed to be momentum for the bill, but it seems to have waned. It hasn't gotten out of it hasn't even reached committee it. I'd say that is apparently just basically treading water right now in a hold position.

From the CFO perspective, there has been quite a bit of activity with a little bit of movement. The first piece was on a military bill that's quite similar in the state of Texas to the talent amendment that we've done on a federal level. I believe that that is just to show the state's endorsement of that federal bill. It's already passed the Senate and I believe it's gone to the House at this point, it hasn't made it through the House yet.

There have been a couple other bills that have been considered at committee level related to CSO, but the only one that seems to have any type of momentum is geared towards aggregate reporting of data on the CSO business by those in the industry. It's still at, I believe, committee level and from there it would have to go through calendars in to the House and then companion into the Senate as well. That's the only one that seems to have any type of momentum that I see.

Okay. Great. Thanks.

Our next question comes from the line of Dennis Telzrow from Stephens, Inc. Please proceed.

Good afternoon, Joe and Dan. Joe or Dan, could you elaborate on the installment loan, whether you're using a bank partner or are you doing this on your own under I guess in Texas you can do it with the CSO, but if you went to other states fill me in on how the legality behind this is?

In Texas where we're doing it today, we're doing a CSO so you could have application. We believe in other states that allow a CSO transaction as well. However, there is several other states that just by their regulations would allow them as well. I'm sure you can identify most of those, but South Dakota would be an example where we believe you can go in and possibly do something like this, or Idaho. There's several, but we're still flushing them out. We haven't finalized anything beyond the state of Texas.

Are you doing any additional underwriting of the customer at the front end given the size of the loan?

No. We're using the same parameters with adjustments on them. We're not doing anything extraordinary out of the norm beyond the usage of [Teletrack] externally that assessing the customer.

Right. With regard to the third quarter guidance, my assumption is that clearly you don't have the benefit or maybe even a drag from Jumping Jack, so most of that discussion with regard to the benefits of Jumping Jack would be more next year, maybe a little bit in the fourth quarter?

I would hope there would be a bit of it in the fourth quarter but most of it's going to be next year as we get into the strong December and March quarters.

I guess this is all relative because last year you were sort of bulging with inventory, but inventory just on an absolute basis is about 40% of assets in the stores if I take loans plus inventory. Is that about where you want it? Do you have any feel for where you like to see inventory go as I guess a percent of assets in the store?

You know we don't track it as a percent of assets, but I think the key is what level of turnover we're getting, what sort of yield we're generating from that inventory. If we can turn it effectively in an acceptable margin, we'd like to have more inventory.

One of the things that we saw last quarter, or this quarter year ago, was that we had significant sales growth by having the inventory there. One of the challenges with the pawn business is balancing your lending activities so you create the inventory that's available there for sale to generate the gross profit.

And Dan, refresh my memory, when did we finish cycling on this sort of doubling up of the loans?

The doubling of forfeitures actually occurred in the March quarter of last year. We had 148 stores. We're [lapping] that now.

We won't see as much in the Jan quarter?

That's correct.

Okay. Thank you very much.

Our next question comes from the line of Richard Eckert from Roth Capital partners. Please proceed.

Thank you. First of all, Dan, I want to thank you for the segment reporting. I think I am going to hold that up as a model of transparency. I have two questions and forgive me if you've already answered them. I've been jumping on and off. The first is do you expect any kind of a creation from the Jumping Jack acquisition in the fourth quarter of this year?

I think it will be nominal. Just given the fourth quarter is not a strong earnings quarter. I think it will be some benefit, but most of the benefit will come in fiscal 2008.

Okay. Do you disclose what kind of drag the new stores, not just the stores you opened in the quarter; you opened a large number toward the very end of last fiscal year. By my calculation another 37 this year, so I imagine that had some not insignificant effect on earnings in the quarter?

That was the $1.2 million that I mentioned which would be roughly just under $0.02 per share.

Okay. Thanks a lot.

(Operator instructions). We do have a question from the line of Daniel O'Sullivan from Utendahl Capital. Please proceed.

Thanks guys. Joe, I forgot to ask earlier was there any updates on developments in Florida the case that was going on there?

No. In fact, it's been stagnant this entire period. I don't think we've had any activity there for two quarters now.

Okay. Great. Thanks a lot guys.

Our next question comes from the line of Isabel Sterk from Roth Capital Partners. Please proceed.

Hi Joe, Dan. Just one question. Assuming Bill C26 passes in Canada, would you consider opening any stores in that market?

Yes. We would very seriously consider, depending on how the providence established the rate and terms.

Is this something you've looked into ready?

We've been watching it from a distance.

Okay. Thank you.

You're welcome.

At this time gentleman, there are no questions on the phone.

Terrific. We appreciate everyone's participation and interest and we'll talk to you again next quarter. Thank you.