EZCORP Inc (EZPW) 2007 Q4 法說會逐字稿

Good afternoon and welcome to the quarter four and fiscal 2007 EZCORP conference call. At this time, I would like to introduce your host, Joe Rotunda. Thank you, and have a great conference.

Go ahead, Mr. Rotunda.

Thank you, Lisa. Good afternoon, everyone. Thank you for joining us today. With me is Dan Tonissen our Chief Financial Officer. We'll be addressing our fourth quarter and fiscal year 2007 results. I'm going to begin with a high-level overview of the quarter and the year. Dan will follow with a more in depth review of the financials. And we'll conclude with guidance for the new fiscal year.

2007 has been a busy and productive year for us. In June, we completed the largest acquisition in our history, the 15 store chain of Jumping Jack Cash Pawn Shops in Colorado. In August, we entered into an agreement to make the most strategic acquisition in our history, the 20 store Mister Money Pawn Operation in Mexico. We just closed this deal in October, a few weeks into the new fiscal year. By year end, we opened 100 new EZMONEY stores and we grew our chain to 731 stores, compared to 614 stores a year ago. And that doesn't include the Mexico acquisition.

We additionally surpassed for the first time in our company's history $1 billion in loans made or brokered in a fiscal year. And we maintained a strong balance sheet completing all these actions and still ending fiscal year 2007 debt free.

As a segue to our financial performance, we also recorded our twenty-first consecutive quarter and seventh consecutive fiscal year of earnings improvements. In fact, after more than doubling quarter four income last year, we're very pleased to report further, strong year on year improvement in the same quarter this year.

Our fourth quarter net income was $11.2 million, an increase of 22% on top of the 150% earnings growth achieved in this same quarter a year ago. Our diluted earnings per share were $0.26, and that compares to $0.21 last year. For the full 2007 fiscal year, net income grew by 29% to $37.9 million. And our diluted earnings per share grew by 28% to $0.88 a share.

All business segments continue to contribute to this earnings growth. Our EZPAWN segment recorded net revenue growth of 13% in the fourth quarter and there were three primary drivers.

The first was our pawn portfolio growth. It grew 13% on a same-store basis and additionally reflected an improving redemption rate. This provided significant growth in the result in pawn service charge revenue.

The second was the integration of Jumping Jack Cash into our operations for the full quarter. The revenue from these stores, which as all incremental to last year, provided approximately half of the pawn segment's growth in net revenues.

The third driver was our gross profit from the sale of forfeited collateral which was up 7%.

The gross profit generated by jewelry scrapping was, however, down about $300,000 to last year for the quarter. During the current year, we increased our lending on gold jewelry twice to keep pace with changes in gold market values and the competitive environment. This drove increases in our pawn service charges, but also decreased the margins on jewelry scrapping as the collateral from defaulted jewelry loans was scrapped. Our melt price for the period averaged $675 an ounce which we locked in at the beginning of the quarter before the gold market shot up in September.

With operating expenses well managed, the flow through of the incremental revenues was strong. The resultant store operating income in our pawn segment grew by 24% over last year for the quarter. For the entire year, pawn grew 9% net revenues and 19%, $10 million, in store operating income. All in all, it was a solid performance in EZPAWN.

Our EZMONEY signature loan segment recorded net revenue growth after bad debt of 31% in the fourth quarter. We ended quarter four with segment fee growth of 40%, compared to 38% in the same period a year ago. Our same store fee growth for all stores over one year of age reflected considerable strength and grew at 23% over the same quarter a year ago. Overall, this is strong growth in a quarter that is seasonally the weakest growth quarter of the year in pay day lending.

Our bad debt was 31% of fees. And this compares to 38% in the preceding quarter and 26% in this same quarter a year ago. Seasonally, the September quarter is one of the highest periods of bad debt. In fact, historically, it's been either the highest or second highest level of bad debt to fees for our entire time in payday lending. The resultant store operating income in our EZMONEY signature loan segment grew by 16% this quarter over last year.

Also want to take a moment and touch on new products in the EZMONEY segment. As reported last quarter, we rolled out our installment loan product to 13 Texas stores and have been testing and fine tuning the product. Obviously, with a five month term, it takes some term to understand consumer payment behavior throughout the entire loan cycle. We expanded to a total of 37 stores last month. And we're now in the process of adding installment loans to an additional 16 locations next week.

We'll continue to roll out installment loans in a controlled manner in Texas with plans of offering this product in 125 Texas stores by the end of the fiscal year. Our rollout will be focused on stores located in markets with higher income demographics. In addition, we plan to move the installment loan product beyond the state of Texas sometime during 2008. Our biggest challenge with this product has been fine-tuning our underwriting. After several modifications, we've reached a comfort zone with the bad debt experience associated with this product.

I'm going to share some interesting data on the installment loan with you. The average loan is over $2000. The average income of an installment loan customer is between $60,000 and $70,000 a year. And the threshold to qualify for the installment loan is individual income of $46,000. Approximately one in six of the customers qualifying for this product is brand new having never received a loan from us in the past. Obviously, we feel installment loans provide a significant opportunity to expand our customer base and add incremental revenue.

We also introduced a second new product last quarter, our debit card with overdraft protection. This was introduced in 15 stores. And we've been modifying and reading this product since its introduction. For various reasons, including the less than expected initial demand for the product, we have yet to expand it to additional stores. One of the obstacles is the need for the customer to commit to direct deposit to the debit card account in order to qualify for the overdraft feature. We'll continue to read and chart our path forward with this product based on consumer acceptance.

For the entire year, our EZMONEY segment grew 42% in net revenues after bad debt and 31% in store operating income.

Our third segment is Albemarle and Bond. A&B is a UK based operator of jewelry-jewelry-only pawn and payday loans and check cashing stores. Last quarter, we announced A&B's acquisition of UK's third largest pawn operator, Herbert Brown & Son Limited. The addition of their 26 Northern England stores broadened A&B's geographical reach. And it brought their total store count to 112 locations, the largest by far in the United Kingdom. We maintained our position as their largest shareholder and have increased our ownership to just under 30% by investing an additional $13.4 million in A&B's recent offering.

During fiscal 2007, A&B contributed $2.9 million to our pretax earnings from our equity interest. In addition, we realized $1.3 million in cash flow from dividends. Since we report A&B's contribution on a quarter-lag basis, our current year's earnings do not reflect the impact of the Herbert Brown acquisition. However, you can see the public market impact on the appreciation of our investment in A&B. The public market value of our ownership at September end was approximately $90 million. At that same point in time, our balance sheet reflected the asset at approximately $36 million. That's approximately $54 million in unrecorded appreciation over our book value. I think you'll see over the years our share ownership in A&B has proven itself to be an excellent strategic investment.

Our fourth business segment is EZPAWN Mexico. Although the results of the four stores we opened are folded into the EZPAWN results, I thought I'd provide some color on the acquisition and our new store pro forma expectations. As I mentioned earlier, we closed on the Mister Money deal last month. For approximately $15 million we acquired 20 stores concentrated in Central Mexico, eight in and around Mexico City, seven in Veracruz Jalapa, and five in the Bajio area.

The total pawn loan balance is just over $3 million U.S. with an inventory of approximately $1 million. Store level operating income was approximately $2.7 million. The stores range in age from just under two years to one that opened in 1998 nine years ago. We're really excited about this acquisition because we believe these stores have additional growth potential with excellent locations and a solid management team in place. Additionally, these stores will generate inventory we can use to seed new store openings in Mexico.

Combining what we've learned from the four stores that we greenfielded ourselves, as well as the history of the Mister Money stores, we're confident in the potential for new store development. We believe a new store will ramp up to loan portfolio of approximately $90,000 at the end of the first 12 months of operation and develop a mature portfolio sometime during year two with modest growth in subsequent years. We anticipate a yield of approximately 135% and a margin on the sale of forfeited collateral of approximately 35%. Break even will occur on average between months six and eight. And we anticipate CapEx of between $75,000 and $100,000 to open a new store depending on the size and the facility characteristics.

So, with that, I'll turn it over to Dan for a little more detail on the numbers in the quarter and the year.

Thanks, Joe. Joe gave you an overview of some of the numbers, and I'll give you a little more detail, starting with our statement of operations, on page 3 of the earnings announcement.

And I'll start with a few comments on pawn net revenue. For the quarter, our pawn net revenue comprised of sales gross profit, which is lines 2 plus 3, less line 11. Pawn services charges which you see on line 4 and other revenues on line 6, increased $5 million or 14% to $41.3 million. Merchandise sales, line 2, increased $3.1 million or just over 10% to $33.1 million. Same-store sales growth for the quarter was approximately 3%. After a one percentage point margin improvement, merchandise gross profit, line 2 minus line 9, increased $1.5 million or just under 13% to $13.5 million.

Scrap gross profit, line 3 less line 10, decreased $264,000 or roughly 5% to $5.4 million. During the quarter we scrapped approximately 1.7 million grams of gold jewelry, a decrease of roughly 2% from the prior year quarter. Our proceeds per gram increased 7% to $10.08, while our cost per gram increased 13% to $7.16. Included in jewelry scrapping sales is approximately $460,000 from the sale of loose diamonds. This is comparable to the proceeds from the sale of loose diamonds in the prior year quarter.

We typically forward contract our gold scrapping 30 to 90 days in advance. As a result, we only realized a modest benefit from the run up in the gold market that we experienced starting in September.

For the quarter, we turned our inventory 3.5 times, and that compares to 3.3 times a year ago. Inventory levels per ending store at the end of the quarter were flat with the prior year quarter at $127,000.

Pawn service charge revenues, line 4, increased approximately $3.7 million or 20% to just under $22.1 million. Same-store pawn service charge revenues increased 9%. Our annualized yield on our pawn loan balance improved one percentage point to 145%. And our ending pawn loan balance was up 21% from the prior year, 13% on a same-store basis.

Now, let me just talk about the signature loan side of our business. For the quarter, our signature loan contribution, which is line 5 less line 15, improved 30% to $20.8 million. The benefit of a 38% increase in our signature loan fee revenue, line 5, was partially reduced by higher levels of signature loan bad debt relative to fees. Signature loan bad debt expense, which you see on line 15, measures a percent of signature loan fee revenues, line 5, increased to 31%, compared to 27% for the prior year quarter. However, this is seven percentage points lower than the June quarter.

Looking at bad debt levels relative to the loans originated in the quarter, our net defaulted principal as a percent of loans originated came in at approximately 6% and this compares to 5.2% for the prior year quarter. Loan originations for the quarter were up approximately 40% to $155.7 million.

After higher levels of operation expense, line 14, administrative expense, line 16, and depreciation and amortization, line 17, operating income increased 28% to $16.7 million. Increases in operations expense and depreciation and amortization are primarily due to new stores. The increase in administrative expense is primarily due to stock compensation, additional administrative staffing to support our growth, and inflationary increases.

Included in operating expense is an out-of-period charge, the store rent expense of $349,000 due to an error we discovered during the quarter in our lease accounting. Most of this out-of-period rent expense is in our EZMONEY segment. And $284,000 of that should have been applied to an earlier fiscal year. These amounts were not material in the current quarter or any of the prior periods that would have been impacted.

Operating income margins as a percent of net revenues improved one percentage point to 23.4% due to our pawn operation performance and lower levels of administrative expense relative to our net revenues.

Now, if you'd turn to page 6 of our earnings announcement for a couple of comments on our segment reporting, the EZPAWN operation segment and the EZMONEY operation segment. Starting with the EZPAWN, after a 13% increase in our EZPAWN net revenues, and a 6% increase in EZPAWN operations expense, our EZPAWN store level operating income, which you see on line 15, increased 24% to $19.1 million. Our operating income margins for our EZPAWN operations improved almost four percentage points to just over 45% of net revenues.

The 15 former Jumping Jack stores generated operating income of just over $800,000. After some incremental administrative expense and depreciation and amortization, we realized an approximate $0.01 per share benefit from this acquisition in the quarter.

After a 31% increase in our EZMONEY signature loan contribution, which is line 4 less line 13, increases in our EZMONEY operating expense, line 12, our EZMONEY store level operating income, line 35, improved 29% to $8.5 million. The primary reason for the increase in EZMONEY's operations expense is the 99 net new locations. These EZMONEY results include an approximate $1.4 million of drag for new stores, which is flat with the prior year quarter's new store drag.

Operating income margins for our EZMONEY operations decreased six percentage points to just under 29% of EZMONEY net revenues, line 9. That's primarily due to the higher levels of bad debt compared to the prior year period and the out-of-period rent charge that I mentioned. For the quarter our EZPAWN segment made up approximately 69% of our store level operating income.

Now, a few comments on the balance sheet on page 5 of the earnings announcement. You can see that we have approximately $22.5 million of cash, which you see on line 3 on our balance sheet. Roughly $17.2 million of this amount is non-operating. You can see that our payday loan balance on line 5 almost doubled in the last 12 months to $4.8 million. Not included on our balance sheet is $23.3 million of loans brokered with an unaffiliated lender. These brokered loans increased 28% in the last 12 months.

Our investment in Albemarle and Bond, or A&B, is carried on our September 30 balance sheet at just under $35.7 million, and you see this on line 14. This includes our additional investment of $13.4 million which we announced on July 11. Using September's ending closing price on Albemarle and Bond's stock of GBP2.68, and an exchange rate of $2.05 per pound, our 16.3 million shares, including the shares acquired in July, would have a market value of just under $89.6 million. This represents approximately $1.31 in under recorded book value per share.

You'll see on lines 35 and 36 that we ended the quarter with 298 pawn locations and 433 signature loan locations.

Now, let me give you a little bit more, couple more data points on the Mexico acquisition. As Joe mentioned, we closed on the acquisition on Monday, October 22. We acquired 20 operating locations which are located in Central Mexico, as well as, a headquarters which is in Queretaro.

The transaction was an asset purchase. And we acquired $3.2 million pawn loans, roughly $160,000 per store, and about $1.2 million in inventory, including the inventory which is in layaways. The total consideration and closing costs are expected to be approximately $15.4 million, including just over $1 million in non-recoverable [EVA] or back tax on a portion of the transaction. In the next 12 months, we expect these stores to generate approximately $3.5 million of store-level operating income before depreciation and amortization and approximately $2.2 after administrative expense. This would represent approximately $0.03 per share.

As Joe mentioned, we view this as a strategic investment which will give us the infrastructure and scale to accelerate our growth in Mexico.

Now, let me turn the call back over to Joe.

Thank you, Dan. Looking forward, we will maintain the same intensity on growing the business, improving profitability, and strengthening our balance sheet as we have over the past seven years. And we continue to expect all business segments to contribute with year on year growth and improvements in earnings contribution.

In our EZPAWN operations, our guidance incorporates same-store mid to high single digit growth in net revenues. Included in this is an average market price of gold at $750 an ounce for the year. In addition, the Jumping Jack Cash acquisitions layered in incrementally for the first three quarters of the year. For our EZMONEY signature loan segment, we're planning to continue our strong growth trend. Organically, we expect significant double-digit same-store loan growth. We expect our bad debt to be in the range of 26% to 29% for the New Year, fluctuating seasonally by quarter. Our guidance on store growth is to add approximately 100 new EZMONEY stores. The new store builds will be in our existing 11 states, plus the addition of Missouri during 2008.

In our Mexico pawn segment, we're going to focus on assimilating the 20 acquired stores into our infrastructure during first quarter. We'll follow this immediately with the integration of our four existing Mexico stores into their operations. During the New Year, we plan to add between seven and ten new pawn shops in Mexico ending 2008 with a store count in the range of 31 to 34 locations.

All in all, we're providing guidance for fiscal 2008 of $1.12 in diluted earnings per share, versus 2007's $0.88, an improvement of 27%. We expect first quarter EPS of $0.28, as compared to last year's $0.23, an improvement of 22%.

While we are pleased with what we've accomplished over the past several years and this past year in particular, our excitement grows as we contemplate the potential we still have in front of us.

That concludes our prepared comments for today. Dan, if you'll read the Safe Harbor, we'll go on to the questions.

This conference call and earnings announcement contains certain forward-looking statements regarding EZCORP's expected performance for future periods and including, but not limited to, new store expansion, expected future benefits of acquisitions and investments, 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 & Exchange Commission.

Lisa will now open up the call to questions.

Ladies and gentlemen on the phone, we will now have a question and answer session. (OPERATOR INSTRUCTIONS.)

Our first question comes from the line of Daniel O'Sullivan of Utendahl Capital Management. Please proceed.

Yes. Hi, Joe and Dan, thanks for taking my questions. Great quarter, guys. Quick question, out of the entire group, I have to say you guys actually came right in line with my loss expectations, most other companies a little bit higher. Maybe you can -- (technical difficulty). I was asking about loan losses. I had made the comment that you guys came in right in line with what I was looking for in the quarter, as opposed to some others in the space which were higher. I was wondering if you guys maybe have tweaked the underwriting or your collections. What are your thoughts on loan losses for the quarter?

We did basically what we talked about last quarter. I don't know if you recall, in quarter three we saw that as an opportunity to expand market share. And we reduced -- we adjusted some of our underwriting. We were very aggressive at the beginning of the quarter. And as we saw our losses, our bad debt, begin to increase all we did was adjust our underwriting. We thought we brought it back in line as we moved through the end of the June quarter. And it was pretty much on projection within a point or so of where we thought it would be this quarter. Basically, we just followed through with what we said we were doing.

Great. Do you guys feel like you picked up some market share in Texas?

Our Texas performance has been good. What was really encouraging to us in the quarter was the growth that we had in fees was actually higher than the same growth we had in this quarter a year ago. We were a couple points higher. And when you consider the fact that we added about the same number of stores through the quarter and through the year, 100 stores on a base today of 400 stores doesn't give you same look that 100 stores does on a base of 300 a year ago or 200 the year before that. So we were pleased with performance we had in the growth business.

As far as taking away from our competitors or peers, I'm not sure about that. I believe, as I've stated so many times before, this is probably $100 billion marketplace and our industry has only scratched the surface. We still have tremendous potential.

Okay. Well, I mean if we take a look at the Texas market in particular, there's a lot of folks out there that, as of (indiscernible) mentioning more competition and saturation of that market, what are your thoughts there?

Basically, as I've said in the past, I don't believe we're anywhere near saturation. I think I said on the last earnings call or the one before that, we could probably add another couple hundred stores in Texas and continue to grow the marketplace.

And, Joe, I'm sorry if this is redundant because I actually missed a couple minutes of the conference call in the beginning. Did you talk about your consumer loan product at all, how that is ramping up?

I talked about the installment loan. We're quite pleased with that. We believe we have our arms around the underwriting and managing the bad debt. And we're continuing to expand it. We will throughout Texas and wind up with 125 stores by the end of fiscal year '08 in Texas. And we'll take it outside of that state as well.

And the debit card with overdraft protection, the customer take-up hasn't been near what we thought it would be. I believe that the primary obstacle or issue we have there is that it requires the customer to commit to direct deposit of their income into the debit card account. That seems to be somewhat of a hindrance on growing it as we thought we would. But we're continuing to watch it.

And one last question, just given where we've seen gold prices over the last few weeks, have you guys been opportunistic in maybe scrapping a little bit more than you normally would?

It's not scrapping more. We've started locking in some of the prices that we would get out in November, December.

And how has that impacted the loan to value ratio? Have you had to move that up? There's been competition in that area?

We haven't -- we're still watching it. We haven't made any changes in the last 30 days. We made several changes, as you know, during the latter half of this past fiscal year. And with that, we've been quite pleased because we've built our portfolio nicely and our redemptions have been good and the yield has been very good. We haven't had, though, the forfeitures that we've had in the past. And we haven't been scrapping with the kind of growth that we've had in scrapping in the past. We're continuing to watch it. We haven't been much more aggressive with pricing yet -- loan values yet.

And one last quick one, given where the stock has been, you guys are sitting on almost $23 million in cash at the end of September. Have you guys given any consideration to a buyback? Has the board discussed that at all?

We've discussed a lot of different alternatives, Dan. And we still believe that the long-term benefit to our shareholders is best served by continuing to invest in earning assets. And that is what we're continuing to look for.

So that wouldn't preclude acquisitions in '08 then?

Oh no, we're very interested in acquisitions that make good economic sense.

Okay, great. Again, nice performance this quarter, guys. Thanks.

Thank you, Mr. O'Sullivan. Our next question comes from the line of Dennis Telzrow of Stephens Inc. Please proceed.

Good afternoon, Joe and Dan.

Hi, Dennis.

Joe, on the installment loan product, refresh my memory on what rate we're charging there or how is that structured.

It's a five month product. If you use an [APR] to calculate the type of rate that's associated with it, it's about 70% or 75% of the rate on a traditional payday loan.

And the loss rates there is it too soon to tell where they sort of go out? I guess you haven't had it out there long enough.

Well, we have quite a few loans that are out there, but they're layered with the different levels of underwriting that we've had, because again, it's a five month loan. And as we measured the customers behavior -- and last quarter, I actually covered with you all two things that we did to adjust the underwriting, one of which was going to a different type of evaluation, a more thorough evaluation of the customer with even quasi-scoring model and then moving into direct ACH debits as a convenience to the customer on their payday for the installment payments. And those are two of the major tweaks that we made in that.

So we have with those, three layers of different types of underwriting that we're watching. And that's what's given us the confidence as we've seen the evolution of the customer's behavior as those changes have been made to move forward with the product now.

It would probably be slightly higher than a typical payday loan loss rate would be as a percent of fees.

Dennis Telzrow; And you mentioned possibly going to other states. Obviously those would have to be states that have an appropriate law, or I guess or it has the CSO. Is that correct?

That is correct. We would certainly do it under the auspices of the appropriate regulations that would allow us to do it.

And, Dan, from a cash flow standpoint, how much free cash flow do you think you'd throw off in '08 excluding any acquisitions obviously.

Well, if you look at the trailing EBITDA, probably about $65 million of maintenance CapEx is going to be in the probably around $5 million to $6 million. And then the growth, 100 stores, that's roughly $50,000 to $60,000 each. And then limited expansion, limited capital used in Mexico. It will be substantial. I would say in excess of $40 million.

$40 million in free cash flow?

Yes.

And Joe, obviously, the challenge in Mexico is building inventories. It just takes maturity of stores for that to happen, I guess.

It does. And I think that we could probably expand a little faster the first year, except we're going to go through the pain of assimilation of the business. We're going to change the operating system in the stores that are in Mexico to our EZ system here. There are a lot of features that Jose Manuel Fernandez, who runs the business there has found very attractive that will enhance the performance of the stores there. When you change the operating system and you have to go through the entire organization and teach them how to use it, and a little different approach to loan values and so forth, it's going to command a lot of attention for the first three or four months. And we're going to begin slowly then after that to expand.

We think there'll probably be enough inventory to do what we need to do. Because most of those stores most of the inventory there is general merchandise. And jewelry is the one category of goods that we can move in as long as it is NAFTA identified product we can move into Mexico. We think that the first year will start a little slow and then we'll accelerate it after there. And we think the inventory issue will be taken care of.

Okay. Thank you very much.

Thank you, Mr. Telzrow. And there are currently no questions waiting from the phones.

Okay. Well, thank you, all. We really appreciate your time and your continued interest in EZCORP.