EZCORP Inc (EZPW) 2008 Q1 法說會逐字稿

Good afternoon, and welcome to the EZCORP quarter one fiscal year 2008 earnings conference call. At this time I would like to introduce your host, Mr. Joe Rotunda.

Thank you. Good afternoon. Today we'll be addressing our first quarter of fiscal year 2008. Here with me is Dan Tonissen, our Chief Financial Officer. I will begin with a brief overview of the quarter, and I will comment on the performance by segment, introduce Mexico's financials for the first time, provide disclosures on average payday loan balances by store age category, and then Dan will provide more depth and narrative on our financial performance. We will conclude with updated guidance for fiscal year 2008 before we open the call for questions.

Overall, our December-ending first quarter was a strong start to our new fiscal year. It's certainly a refreshing departure from the doom and gloom headlines associated with the mortgage industry, credit card debt, and general economic conditions that seem to command the headlines today. I think you'll find that the results demonstrate again our ability to continue to do what we say we're going to do.

For the first quarter our net income increased to $12.6 million, a 29% improvement over last year. On a diluted earnings per share basis, that translates into $0.29, compared to $0.23 a year ago. It's also $0.01 per share better than our public guidance. These results represent our 22nd consecutive quarter of year-on-year earnings improvement.

I'm also pleased to again report that all business channels contributed with strong year-on-year growth. The demand for our loan products continues to be strong, as customers seek alternatives to other more expensive and less satisfying options.

I'll begin with the US pawn segment, which had a very strong quarter. Although Santa appeared to be a little short of cash this holiday season, the overall pawn activity was robust. Store operating income in US pawn grew by 27%. That's $4.3 million over last year. Included in those numbers is Jumping Jack Cash, the Colorado pawn chain that we acquired in June. The comparisons I'm about to provide are for US pawn, excluding any benefit of that acquisition.

Our loan activity was excellent, with 19% growth in pawn loans on a same-store basis year-on-year. With improving redemption rates, [fee] revenue on the portfolio grew nicely. Sales, on the other hand, reflected lower demand, ending the quarter with a same-store decrease of 2%.

It was quite different by product category. We had a modest same-store sales increase in the general merchandise categories. However, we saw a weakness in jewelry sales that resulted in the overall sales decline to last year for the quarter. But there is some good news here. With the jewelry sales decline, we were then able to scrap the excess jewelry inventories. This resulted in a 6% improvement in the total gross profit dollars over last year, and that's on a same-store basis. Said another way, what jewelry we didn't sell, we scrapped, and it resulted in a comparable increase of 6% in total gross profit dollars over last year.

In addition to the same-store performance that I just described, last June's acquisition of Jumping Jack Cash pawn shops contributed, as we expected, about $0.01 in earnings per share for the quarter. These stores have now been rebranded and fully assimilated into EZPAWN.

All together, operating income margins for the US pawn segment increased to 47% this year from 43% a year ago. Our US pawn operations team delivered a very strong quarter, with a solid 27% increase in store operating income and continually improving operating margins.

Our pawn operations in Mexico also enjoyed a strong performance, with quite similar characteristics. You'll recall that we greenfielded four pawn shops in Mexico between November 2006 and September 2007. We also completed the acquisition of the 20 Mister Money Mexico pawn shops in late October. In addition, we opened another new pawn shop last month. With these 25 pawn shops now in Mexico, we'll begin reporting the performance as a separate segment from our US pawn operations.

Much of this quarter has been focused on converting the acquired stores to our store operating system, which requires a significant amount of training and integration. We've been quite pleased with the transition. Even with the distractions associated with this assimilation, our Mexican associates did an excellent job, working hard, and delivering a strong quarter financially. As in the States, sales were a little soft, but pawn service charges and margins were strong.

Our 25-store Mexican pawn segment produced $2.2 million of total revenues and $600,000 in operating income. This was in line with our expectations, and I'd remind you again that we didn't close on the Mister Money acquisition until October 22nd, so it wasn't there for the full quarter. Of particular note, the four stores we greenfielded last year collectively generated a positive operating income for the quarter. Their average age going into the quarter was six months.

We also opened a new store the week before Christmas in Carretero, which is in the [Bahillo] area. You can see my Spanish, as Dan often tells me and is now reinforcing with a facial expression, isn't very good. I'm really trying. Although it's early in our learning curve, here is an overview of our new store model in Mexico.

CapEx is between 80 and $120,000. Our expectation for the pawn loan portfolio at the end of year one is to be in the range of 90 to $100,000. Year two then increases by about 30%. We anticipate the redemption rate to approximate 80%. This all drives forfeitures that generates merchandise inventory for retail sales and scrapping. Our annualized four-wall operating expense is in the range of 90 to $110,000 per store. We expect a new store to turn profitable between months six and nine, and all this comes together with a run rate at the end of year two that produces a four-wall return on invested capital in the range of 50 to 60%.

We continue to be excited about our strategic positioning in Mexico, and what we believe to be excellent growth potential in an economy that is cash-based with a generally unbanked consumer.

Now moving on to our EZMONEY segment, this product continues to be driven by consistently strong mainstream consumer demand. Keep in mind, our customer is educated and they're employed. They're informed, and they have both a steady income and a banking relationship.

Our EZMONEY segment turned in a solid quarter. Our fee income grew by 39% over last year. If you exclude the 108 stores that we opened in the last 12 months, our same-store fee growth over last year was 27%. Bad debt for the December quarter was 28% of fees. That compares to 31% bad debt for the September ending quarter, and 24% a year ago for the December ending quarter. This fits seasonally within the guidance that I provided last quarter for bad debt, which we expect to be in the range of 26 to 29% for fiscal 2008. All in all, we grew net revenue after bad debt by 32%, $5.6 million over last year. Our EZMONEY operating income grew by 31%, $2.6 million over the same period a year ago.

To complete my comments on our EZMONEY segment, I'm going to update the growth curve of our EZMONEY stores that are not adjoined an EZPAWN shop. If you're interested in this data, again, label three columns on a blank piece of paper. The first column is labeled age, second column will be number of stores, and the third column is the average portfolio per store. Then the numbers go like this.

First line under age is a category less than six months. Under the number of stores, write in 56. And under average portfolio per store, write $20,000. That tells you that we have 56 stores with less than six months of operation that average $20,000 each in loan portfolio.

And the next group, on the second line, is seven to 12 months, then 47 stores, and then $36,000.

The third line, 13 to 18 months, 53 stores, $55,000. The fourth line is 19 to 24 months, 39 stores, $65,000. Then the last line is a category of over 24 months, we have 83 stores, $93,000.

Now, there are several points you should keep in mind as you review or use this data.

First of all, our portfolio expectation at the end of 24 months is $80,000, and we're pretty much on course to be there. The average age in that 19 to 24 months bucket for those 39 stores is front-loaded at 19.7 months.

Second, our mature stores, which we define as over 24 months of age; that group is growing their portfolios at the rate of 15% year-on-year. That's pretty healthy.

Third, just for your information, the composition of these stores this year includes a higher proportion in states that have limitations on the loan amount [to the] consumer. This year there are 63 stores less than 24 months old in states that limit the maximum loan to $500 or less. Last year, as a comparison, there were 26 stores with those limitations. Obviously, this has an impact on the rate of the portfolio ramp. If you're interested, those states that have loan limitations, the ones that we operate in, are Colorado, Nebraska, South Dakota, Kansas, and Alabama.

During this quarter we opened 17 new EZMONEY stores, and we closed two. For the balance of this fiscal year, we anticipate opening about 85 more EZMONEY stores. Approximately 25 of those will be in those states with some type of loan limitation. [With] new store openings, the ramp of immature stores, and the continuation of our same-store growth of mature stores, I believe we will continue to realize sustained portfolio growth in the future.

Finally, I want to touch on Albemarle & Bond, which we consider our fourth business segment. Keep in mind that A&B reports earnings only twice annually, June and December. We consequently report our equity interest on a quarter lag with interim estimates. This quarter is one that requires us to estimate their earnings. Last fall we announced A&B's acquisition of UK-based pawn operator Herbert Brown & Son. Herbert Brown was the third-largest pawn operator in the UK, with 26 Northern England stores. The transaction expanded A&B's geography and, along with 11 other store additions during the year, brought their total store count up to 112 pawn shops. We're estimating a quarter-one pre-tax contribution of $1 million, $400,000 more than a year ago. In addition, we have substantial unrealized appreciation on this asset, which Dan will address shortly. With an excellent management team in place in the UK, we continue to be pleased with our position in this company.

With that, I'll turn it over to Dan for a more detailed review of the financials.

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

For the quarter, our pawn net revenues, which is comprised of sales gross profit -- you see that on lines 2 and 3, [less] line 11. On service charges on line 4, and other revenues, line 6, increased $7.8 million, or 21%, to $45.2 million. Merchandise sales, line 2, increased $2.6 million, or 10%, to $40.5 million. Same-store sales for the quarter declined 2%. As Joe mentioned, we had same-store sales growth in our general merchandise categories and a same-store sales decline in our jewelry categories.

After a 0.3% margin decrease, merchandise gross profit, line 2 minus line 9, increased $1.7 million, or 6%, to $16.2 million. Scrap gross profit, which you see -- which is made up of line 3 less line 10, increased $1.9 million, or roughly 48%, to $5.7 million. Higher gold values, net of higher costs, made up most of the increase in scrap gross profit. During the quarter we scrapped approximately 1.3 million grams of gold jewelry, an increase of roughly 6% from the prior-year quarter. Proceeds per gram increased 31% to $11.68, while our cost per gram increased 21% to $7.25. That is primarily as a result of increases in gold loan values and what we pay to purchase gold.

Included in jewelry scraping sales is approximately $320,000 from the sale of loose diamonds. In the prior-year period we sold 510,000. We continue to forward contract our gold scrapping 30 to 60, maybe 90 days out. Unlike last quarter, we pretty well matched the market this quarter. Currently we have about half of the March quarter's quantities locked at $834 per ounce, and we have a stop loss of $900 per ounce on the balance.

For the quarter, we turned our inventory 3.2 times, the same as the prior-year quarter. Inventory levels per ending store increased to $131,000 versus $125,000 a year ago. This gives us good inventory levels going into the seasonally strong sales quarter that we're in today.

Service charge revenues, which you see on line 4, increased approximately $4.9 million, or 28%, to $22.9 million. Included in the increase is an approximate $1.8 million benefit from higher loan values in gold jewelry. It also includes $1.4 million in pawn service charge revenue from the acquired Jumping Jack Cash stores, and $900,000 from our Mexico pawn operations.

Annualized yields on our pawn loan balance were unchanged for the quarter at 146%. Our ending pawn loan balance was up 23% from the prior year, and that's 19% on a same-store basis.

For the quarter, our signature loan contribution, line 5 less line 15, improved 30% to $23.9 million. The benefit of a 37% increase in signature loan fee revenue, line 5, was partially reduced by higher levels of signature loan bad debt relative to those fees. Consolidated signature loan bad debt expense, which you see on line 15, [and measured] as a percent of signature loan fee revenues, line 5, increased to 29% compared to 25% for the prior-year quarter. However, this is down 2 percentage points from the September quarter.

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 5.3%, compared to 4.4% for the prior-year quarter. Loan originations for the quarter were up 38% to $170.9 million.

After higher levels of operations expense, which you see on line 14, administrative expense on line 16, and depreciation and amortization on line 17, operating income increased 32% to $19.3 million. Increases in operations expense and depreciation and amortization are primarily due to acquisitions and new store openings. The increase in administrative expense is primarily due to staffing increases to support our growth both in the US and Mexico, higher professional fees, and inflationary increases.

Operating income margins as a percent of net revenues improved 0.9% to 23.4%, due to the significant margin improvement in our US pawn operation, which Joe mentioned, and I will discuss in a little bit more detail in a moment. This margin improvement is after giving up about 2.5 points of margin at the signature loan bad debt line.

After higher levels of equity interest and the income of Albemarle & Bond, and lower net interest income, and a 37.7% tax provision, net income increased 29% to $12.6 million for the quarter, or $0.29 per share.

Now if you turn to page 5 of our earnings announcement, I'll make a couple of comments on our segment results, starting with our US EZPAWN operations in the left column.

US EZPAWN store-level operating income, line 15, increased 27% to $20.7 million. This strong performance is the result -- is the net result of the 16% increase in net revenues, which you see on line 9, and an 8% increase in EZPAWN operations expense, which you see on line 12. Store-level operating income margins for our US EZPAWN operations improved 3 percentage points to just over 46% of net revenues.

The 15 former Jumping Jack Cash stores generated store-level operating income of just under $900,000, and this is included in our US EZPAWN operations numbers.

Moving over to the next column to the right, our Mexico pawn operations generated store-level operating income of 620,000, which you see on line 15. The four stores that we greenfielded this past year contributed approximately $30,000, while the 20 stores that we acquired in late October contributed the balance, net of a small drag from one store opened late in the quarter.

Moving over to the third column, our EZMONEY store-level operating income (inaudible) you see on our EZMONEY store-level operating income, on line 15, it improved 32% to $10.7 million. This strong growth is the net result of a 32% increase in EZMONEY signature loan contribution, which is line 4 minus line 13, and increases in EZMONEY operations expense, line 12. The primary reason for the increase in EZMONEY operations expense is the 108 net new locations opened in the last 12 months. These EZMONEY results include an approximate $1.3 million drag from new stores, and that is comparable to the drag that we had in this quarter a year ago.

Operating income margins for our EZMONEY operations decreased 2 percentage points to 33% of EZMONEY net revenues, line 9. The margin decrease is due to the 4 percentage points loss at the bad debt line. For the quarter our US EZPAWN, EZMONEY and Mexico pawn segments made up 65%, 33% and 2% of our consolidated store-level operating income, which you see on line 15.

Now a few comments on the balance sheet, on page 4 of the earnings announcement. You can see that we have approximately $13.7 million of cash, line 3 on our balance sheet. Roughly $6.2 million of this amount is non-operating. Included in the cash usage in the quarter is $15.3 million for the acquisition of the Mister Money locations in Mexico, and $1.9 million, roughly, in growth CapEx for our new store development, and approximately $3.6 million of maintenance CapEx. You can see that our payday loan balance, on line 5, grew 88% in the last 12 months to 6.2 million. Not included on our balance sheet is $27.2 million of short-term loans and $400,000 of installment loans, both brokered by unaffiliated lenders. These brokered loans increased 39% in the last 12 months.

Our investment in Albemarle & Bond, or A&B, is carried on our December balance sheet at 37.3 million. You see this on line 13. Using today's closing price on Albemarle & Bond of GBP2.13 at an exchange rate of $1.97 per pound, our 16.3 million shares would have a market value of just over $68 million. This represents approximately $0.74 in unreported book value per share.

Finally, you see on lines 34 and 35 that we ended the quarter with 319 pawn locations. This includes the -- our 25 pawn locations in Mexico and 448 signature loan locations, six of which are managed by our EZPAWN operation.

Now let me turn the call back over to Joe.

Thank you, Dan. We continue to be optimistic and confident about the business and our team's ability to continue growing the Company while improving earnings and maintaining a strong balance sheet. Looking forward, I believe we're 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 in the United States. This drives loan redemptions, merchandise sales, and seasonally, the lowest level of bad debt of the year. For our second quarter this year, we expect earnings to be approximately $0.29 per share, compared to $0.23 for the same quarter last year. For the full year, we're increasing our guidance to $1.13 per share, compared to last year's $0.88.

That concludes our prepared remarks for today. Dan, if you would?

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, anticipated benefits of acquisitions, 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 location, 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.

Now we'll open the conference call to questions.

(OPERATOR INSTRUCTIONS).

It sounds like no questions.

There are no questions waiting from the phone lines.

Hopefully we provided an adequate narrative and sufficient detail to preclude the need for many questions, and hopefully, a performance that speaks for itself. Thank you all for joining us today, and we certainly appreciate your continued support.