EZCORP Inc (EZPW) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the EZCORP third quarter earnings call.

(OPERATOR INSTRUCTIONS)

I will now turn the call over to Mr. Joe Rotunda. Mr. Rotunda, you may begin.

Thank you, Kim. Good afternoon, everyone. Welcome and thank you all for joining us today.

With me on the call is Dan Tonissen, our Chief Financial Officer.

I'm going to begin with a high-level overview of the quarter's performance, including some commentary on each of the business segments. I'll also bring you up-to-date on our store development program thus far and for the balance of the year.

Dan will follow and provide more detail with our financial statements.

We'll conclude with an update on the final quarter of the year, before providing an opportunity for questions.

Overall, quarter three was a great quarter for EZCORP. It's also the 24th consecutive quarter of year-on-year earnings improvement for the company.

We grew our net income to $10.8 million, an improvement of $4 million or 60% over the same period a year ago. On a diluted earnings per share basis, we grew to $0.25 from last year's $0.16. That $0.25 compares favorably to the guidance we provided in April, which was $0.21, and it's dead on with our July 8th update.

It's noteworthy that these results are after a $0.02 per share impact of two nonrecurring charges, the closing of 11 EZMONEY stores in Florida, and the settlement of a lawsuit with the Texas attorney general.

Before we look at the segment results, I think it's appropriate to make a comment about the macroeconomic environment. A new element was introduced during this quarter when the government began issuing economic stimulus checks.

These began in May and they continued through the middle of this month. These stimulus checks have been both good and bad for our U.S. business. The adverse impact has been a slightly lower than expected seasonal demand in new loans in both of our domestic businesses, and the upside has been a favorable impact on retail sales demand and loan redemptions in pawn, as well as improvements in bad debt in payday lending.

As I walk through each segment, I think you'll see that the moving parts complement one another in such a manner that our businesses are favorably impacted in some manner when external factors move in either direction.

You also note that, once again, our growth in earnings reflected a solid contribution from all business segments.

I'm going to begin with our largest segment, U.S. pawn. From a net revenue perspective, our domestic pawn operations grew by 25% over this quarter last year. This is a healthy acceleration of the 19% growth through the first two quarters of the year.

The major difference is much stronger sales and the resultant gross profit it produced. This sales gross profit, without scrap, increased 12% over last year as compared to 5% for the first half of the year.

Our scrap gross profit grew by $2.7 million and that's pretty close to the average that we had for the prior two quarters. And our pawn service charges continued as a primary driver, with 26% growth over last year.

I should point out that even with the increased liquidity that the stimulus checks provided our customers, we still had 10% same store loan growth in the quarter. However, that's 6 percentage points less than the first half of the year.

From an expense perspective, U.S. pawn had a relatively modest increase, most of it in labor and performance-related bonuses. This drove outstanding operating income dollars, which grew by 47% over last year, and the resultant operating income margin grew to 44% from 38% a year ago.

All in all, it was an excellent quarter that was driven by the U.S. pawn operations team.

Now, for a look at our second segment, EZMONEY payday loans. From a net revenue perspective, defined as fees after bad debt, we grew by 33% over the same quarter last year.

Now, let me frame this against what happened back then. In this quarter last year, we relaxed underwriting coming out of the tax season. Our intent was to maximize our payday loan volume during that peak period of natural demand.

The result was extraordinary loan growth with fees up more than 50%. However, bad debt grew even faster. The net revenue result was growth of 40% during this quarter last year.

Now, back to this year. We grew those net revenues by 33% this year on top of that 40% last year, but with a key change in how we got there. This year, our fee growth was much less, only 17% compared to more than 50% a year ago.

This slower fee growth, I believe, is primarily reflective of two factors. The first is tighter underwriting criteria today than we had in place last year. The other is the impact of stimulus checks, which averaged between $850 and $900 per household during this quarter.

However, coupled with that lower fee growth this year is an excellent result in bad debt. Net bad debt dollars were under last year, even with fees increasing by more than $4 million this year over last year.

The resultant bad debt as a percent of fees was only 27% this year. That 27% bad debt number is the lowest level during the June quarter than we've had since we opened our first EZMONEY store six years ago.

It reflects not only a benefit from the stimulus checks, but also incredible execution by the field organization in driving initial defaults to the lowest level in years.

We're also seeing the benefit of improved processes, productivity, and talent in our central collections group.

Looking forward to the fourth quarter, we believe bad debt will be in line with last year's seasonal level.

Now, taking the fees after bad debt down to the operating income line, our EZMONEY segment grew by 36% over last year. It's also noteworthy that these results are after the Florida exit costs, $500,000 of which was recorded as period expense.

If you exclude that expense, EZMONEY's operating income grew by 44% over last year.

I'm going to turn now to an update on store openings and closings, as I segue between EZMONEY and Empeno Facil. We periodically evaluate our existing stores and selectively close or relocate units that don't meet our performance expectations.

During the quarter, we closed three EZMONEY stores, all in Colorado, and we merged those loans into nearby stores. That brings the total to eight EZMONEY stores closed this year, other than Florida, and we plan three more closings in the fourth quarter.

During this same nine-month period, we also opened 47 new EZMONEY stores and we expect to open 23 more in our fourth quarter. We should end the year with at least 70 new EZMONEY openings, which is in line with our revised guidance.

Shifting now to our third segment, Empeno Facil, and sticking with store development, we also opened four new pawnshops in Mexico during the quarter. We now have 30 stores operating in Mexico -- the four Greenfield pawnshops that was our initial entry into the country last year, our 20-store acquisition earlier in this fiscal year, and an additional six Greenfield locations that we've opened since December.

We also have six more new pawnshops scheduled and in process for our fourth quarter in Mexico.

Empeno Facil's gross revenues during the quarter were approximately $3.1 million. The resultant four-wall operating income is just over $900,000 and that's a healthy operating income margin of 47% of net revenues.

Our Mexico pawn team continues to do an excellent job in profitably growing the business and continuing to enhance our site selection and store opening process.

The overall results of this segment fueled our confidence in the potential that Mexico affords us in the pawn industry and we have high expectations for this segment as we move forward.

Now, we often refer to Albemarle & Bond as our fourth segment. During the quarter, our equity interest in A&B provided us with $1 million in pre-tax contribution, which is an improvement of 38% to last year.

Dan will discuss the current market valuation during his remarks. And with that, I'll now turn the call over to Dan for a deeper look at 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 the consolidated statement of operations for the quarter, which is on page 3 of our earnings announcement.

For the quarter, our pawn net revenues comprised of sales gross profit, lines 2 and 3, less line 11, pawn service charges, line 4, and other revenues, line 6, increased $10.8 million or 31% to $45.4 million.

Merchandise sales, line 2, increased $5.1 million or 17% to $35.7 million. Same store sales for the quarter increased 6%. With margins unchanged from the prior year period, merchandise gross profit, line 2, minus line 9, increased $2.2 million or 17% to $15 million.

Scrap gross profit, line 3, less line 10, increased $2.8 million to $7.2 million. Higher gold values net of higher cost and more volume delivered the increase in scrap gross profit.

During the quarter, we scrapped approximately 1.3 million grams of gold jewelry, an increase of roughly 13% from the prior year quarter. Proceeds per gram increased 35%, a little better than what happened in the gold market during the quarter, and the same increases to proceeds of $13.47 per gram.

Our cost per gram increased 24% to $8.23 due to increases in gold loan values and what we paid to purchase gold.

During the current quarter, we realized approximately $600,000 in proceeds on the sale of loose diamonds compared to $700,000 in the prior year quarter. These proceeds are included in jewelry scrapping sales, line 3.

We continue to forward contract our gold scrapping and currently have our estimated September quarter quantities locked at around $945 per ounce, which looks pretty good relative to the current gold market.

For the quarter, we turned our inventory 3.4 times, the same as the prior year quarter. Inventory levels per ending store increased to $122,000 at the end of June compared to $113,000 a year ago.

Pawn service charge revenues, line 4, increased approximately $5.7 million or 34% to $22.7 million. Included in the increase is approximately $1.1 million from the acquired Jumping Jack Cash stores and $1.3 million from our Mexico pawn operations.

The balance of the increase is due to the benefit of higher loan values on gold jewelry and same store loan growth.

Annualized yields on our pawn loan balance were 144% in the quarter compared to 136% for the prior year. Our ending pawn loan balance was up 17% from the prior year, 10% on a same store basis.

For the quarter, our signature loan contribution, line 5, less line 15, improved 34% to $22.7 million. The benefit of a 16% increase in signature loan fee revenue was compounded by a 16% decrease in signature loan bad debt, line 15.

Included in our bad debt expense is a charge of approximately $300,000 related to exiting the credit services business in Florida.

Consolidated signature loan bad debt expense, line 15, measured as a percent of signature loan fee revenues, line 5, decreased to 27% from 38% for the prior year 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% compared to 6.2% from the prior year quarter.

Loan originations for the quarter were up 13% to $159.8 million. After higher levels of operations expense, line 14, administrative expense, line 16, and depreciation and amortization, line 17, operating income increased 78% to $16.6 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 the $600,000 settlement with the Texas attorney general, staffing increases to support our growth both in the U.S. and Mexico, higher professional fees, and other inflationary increases.

Operating income margins as a percent of net revenues improved 6.5 percentage points to 22% due to lower levels of bad debt, margin improvement in our U.S. pawn operation, and the addition of high margin operating income in our Mexico pawn operation.

After higher levels of equity interest in the income of Albemarle & Bond, lower net interest income and a 37.7% tax provision, net income increased 60% to $10.8 million or $0.25 per share.

Now, if you turn to page 6 of our earnings announcement, I'll make a couple of comments on our segment results for the quarter, starting with our U.S. EZPAWN operation, in the left column.

U.S. EZPAWN store level operating income, line 15, increased 47% to $19.5 million. This strong performance is the net result of a 25% increase in net revenues, line 9, and a 13% increase in EZPAWN operations expense, line 12.

Store level operating income margins for our U.S. EZPAWN operations improved six percentage points to roughly 44% of net revenues.

The 15 former Jumping Jack Cash stores generated store level operating income of approximately $800,000 in the quarter. This is included in our U.S. EZPAWN operations. For the couple of weeks these stores were included in the 2007 period, they contributed approximately $100,000 of store level operating income.

Moving over to the next column to the right, our Mexico pawn operation generated store level operating income of just over $900,000. You see this on line 15. Store level operating income margins in our Mexico stores were a strong 47% of net revenues, with one-third of these stores less than two years old.

Moving over to the third column, our EZMONEY store level operating income, line 15, improved 36% to $9.1 million. The benefit of a 17% increase in signature loan fees, line 4, was amplified by a 13% increase in signature loan bad debt, line 13.

The primary reason for the increase in EZMONEY operations expense is the 71 net new locations opened in the last 12 months. Operating income margins for our EZMONEY operation improved five percentage points to 30% of EZMONEY net revenues, line 9, due to the lower levels of bad debt.

For the quarter, our U.S. and Mexico pawn segments made up approximately 69% of our consolidated store level operating income, line 15, with our EZMONEY segment making up the balance of 31%.

Now, a few comments on the balance sheet, if you'll turn to page 5 of the earnings announcement.

You can see that we have approximately $29.8 million of cash, line 3 on our balance sheet, and roughly $5.3 million of this is operating cash. Included in the cash usage in the quarter is $1.2 million of growth CapEx for new EZMONEY and Mexico locations and $2.2 million of maintenance CapEx.

You can see that our payday loan balance, line 5, grew 46% in the last 12 months to $6.6 million. Not included in our balance sheet is $21.9 million of short-term loans and $500,000 of installment loans, both brokered with unaffiliated lenders. These brokered loans increased 4% in the last 12 months.

Our investment in Albemarle & Bond, or A&B, is carried on our balance sheet at $37.2 million, and you can see this on line 14. Using today's closing price on A&B of 180 pence at an exchange rate of $1.98 per pound, our 16.3 million shares would have a market value of just under $58.1 million.

This represents approximately $0.50 in per share in unrecognized book value.

Finally, you see on lines 35 and 36 that we ended the quarter with 324 EZPAWN locations, including 30 in Mexico, and 461 EZMONEY locations, six of which are managed by our EZPAWN operation.

During the quarter, we opened four Mexico pawnshop locations and 13 EZMONEY locations. Also, during the quarter, we closed 14 EZMONEY locations, 11 in Florida and three in Colorado.

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

Thank you, Dan.

First, let me take a moment to update you on the Value Pawn acquisition. We now have an expanded $120 million credit agreement in place pending the closing of the acquisition and we plan to close the transaction in early August here in Austin, pending a favorable outcome of the Value shareholder meeting.

In our fourth quarter, we anticipate a benefit of approximately $0.01 in diluted earnings per share and will discuss the anticipated earnings benefit for fiscal year 2009 during our quarter four earnings call that will be in early November.

Guidance for our fourth quarter and the year remains unchanged from our pre-announcement two weeks ago. We expect $0.35 earnings per share in the fourth quarter and $1.19 for the year.

This represents a 35% increase in earnings for both the fourth quarter and for fiscal year 2008.

That concludes our prepared remarks and I'd pause now for Dan to cover the safe harbor. Then we'll open up the call to questions.

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

Actual results for these periods may materially differ from these statements. Such forward-looking statements involve risks and uncertainties, such as changing market conditions in the overall economy and the industry, consumer demand for the company's products and services, actions of third parties who offer services and products in the company's locations, changes in the regulatory environment, and other factors periodically discussed in the company's annual, quarterly, and other reports filed with the Securities and Exchange Commission.

Kim will now open the conference call to questions.

Thank you. We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS)

Our first question comes from Dennis Telzrow from Stephens Inc. Please go ahead.

Good afternoon, Joe and Dan.

Hi, Dennis.

Hi, Dennis.

Joe, I know you may not want to put numbers on this, but, obviously, next year's store growth, I can assume that you're looking to sort of uptick the Mexico number and probably moderate the payday number.

Is that a fair sort of trend expectation?

I would say that is appropriate, yes. We see tremendous potential in Mexico, as we've spoken about it for the last several quarters, and we're going to continue to gear up.

The greater the base of stores, the easier it is for us to be able to open new stores, because we're able to generate inventory to seed the new stores, and that's extremely important in a pawn operation.

At the same time, we're going to look at filling in and enhancing the presence in the states that we're in today in the U.S. in EZMONEY.

And I know you've talked about Canada, but the pace of regulatory change up there is about at a glacier pace. So assuming you're just going to bide your time until those things evolve?

We're going to continue to watch it and we're going to hope that Manitoba isn't indicative of what's going to happen in the other provinces.

Okay. Thank you.

Our next question comes from John Rowan from Sidoti & Company. Please go ahead.

Good afternoon. Can you guys just go over the credit agreement that you have in place for the acquisition? I know you said it was $120 million.

But can you give us more detail? Is it a revolver and what's the rate that you're going to pay on it?

Yes. There's a layer that would be term debt, and I believe the term of debt is four years, and the balance of it would be a revolver.

And, John, just off the top of my head, I think it's a 30/90 split. And then the rate that we would pay on it would be, at the leverage ratio we're anticipating post-acquisition, would be about 175 over LIBOR.

Over the 30-day LIBOR, right?

Yes.

Okay. And the 30/90 split, 30 is the term or is 30 the revolver?

Of the term.

And that's a four-year term. Okay.

Let's see. After the acquisition, with the debt, I think you guys said you were going to have about $72 million of debt post-acquisition. Would you look to pay that off next year or pay part of it off?

Yes, barring any other transactions that we may do--

Of course.

We could put a pretty good dent in that $70 million.

Okay. And just to make sure I have it right, you had $300,000 one-time charge on the bad debt expense and the $600,000 settlement was in the administrative expense line, right?

Yes. Actually, exiting the stores in Florida, the total is about $700,000. $300,000 of that would hit the bad debt line, $200,000 is hitting the loss and disposal of assets, and then we backed out the accrued fee receivables on the loans in Florida and that's about 150, roughly, up in revenues, in the fee revenues.

And then there's a modest charge in operating expense related to other closing costs.

Okay.

A total of about $700,000 related to closing the 11 stores in Florida.

Okay. Do you know about how much cash in those stores in Florida?

How much cash?

Yes.

I'm not sure I understand the question.

Well, I'm just trying to understand. Obviously, your cash balance is going to have to come up when you make the acquisition. I'm just trying to understand if it's a significant amount.

The 11 stores would not be material, if that's--

No. I meant the Value acquisition.

Yes. I mean, broadly, with, let's just say, $110 million purchase price or total consideration including expenses, we anticipate, let's just say, that $20 million of that would be stock, $20 million would be cash off our balance sheet. We would use our cash. And then what does that leave -- $70 million, that would draw down the credit facility.

Okay. And just one last question. Can you just give me the CapEx numbers again?

Yes. I think it was a total of about 3.5. Hang on a second, John -- 1.2 was growth and 2.2 was maintenance.

Great. Thanks a lot.

Thank you. Our next question comes from [Andrew Moore] from [E. Reilly]. Please go ahead.

Hey, guys, thanks for taking my call. I don't think you guys have FY '09 guidance out there, but just at a high level, could you talk a little bit about what you see the split of pawn versus payday revenues is next year, as well as kind of on the operating income line?

Yes. With the Value acquisition, I just mentioned a minute ago, there was roughly a 69/31 split at the operating income line and I would suspect that that's going to shift--

About seven or eight points.

Yes, into the high 70s.

Okay. Good enough. Thank you.

Our next question comes Liz Pierce from Roth Capital Partners. Please go ahead.

Thank you. Congratulations, guys, nice quarter. I just have a couple housekeeping things. I couldn't write fast enough.

Could you, Joe, I think you or maybe it was Dan, just go over the closings again? It was three in this quarter, eight year to date, and then three more; is that right?

That's correct.

Minus the 11 in Florida.

Okay. All right. Great. And then I know you don't want to talk about next year, but should we think that this could be a natural kind of cadence of store closings over the next few years?

Without Florida, it's a possibility. What we would prefer to do is relocate the site to one that is more beneficial to the business.

Our intention is not to reduce the number of sites we have out there, but just to ensure or maximize the productivity of the locations that we do have.

Okay. So this is not an effort to reduce the fleet size. This is just to improve productivity.

That's right. We opened our first store in July of 2003 and over that time, we've closed one or two here and there and we're getting to the point now where we have a convergence of leases expiring that allow us the opportunity then to evaluate each of the locations whether we want to move forward with them or not.

In some cases, we also have the ability then to plan, as we're nearing the end of a lease, an opening somewhere near that store. But frequently -- or occasionally, what we've found with these is that we're able to merge the agreements and maintain, we hope, a high level.

Okay. And then for next year, in openings, you'll go into more detail on the call.

Yes. Our next call is when we'll release the information and our plans for fiscal year 2009, the next year, and we'll go through in detail with store openings by individual segment, our plans for the year, and we'll give you some indication then of growth by segment, as well, and, of course, we'll give you earnings guidance for the year at that time.

Right. And then the loose diamonds proceeds, how much was that?

It was about $600,000 this year versus $700,000 last year.

Okay. And then on the merchandise sales, between merchandise and scrap, the $17.9 million, should I just assume a comparable amount for Mexico? I think in the second quarter, it was about $200,000 - to kind of split that out.

I know you release it in the Q.

Mexico, you're going to see that our scrapping is at a lower level than in the States and part of the reason is that we're building inventories. We want to build inventories to be able to seed new stores.

Right. But I think in the second quarter, it was about a couple hundred thousand. I'm just trying to look at the split on that $17.9 million just for modeling purposes.

About $100,000 in net proceeds, as I recall.

$100,000. Okay. And I think that's it, at least for the next five minutes.

Okay, Liz. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

At this time, I show no further questions.

Okay. Well, once again, we want to express our appreciation for your continued interest and support of EZCORP and we're looking forward to talking to you then next quarter.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.