EZCORP Inc (EZPW) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the EZCORP Fiscal 2008 Fourth Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Thank you, Kim. Good afternoon, everyone. Thank you for joining us today.

With me is Dan Tonissen, our Chief Financial Officer. We will be addressing our fourth quarter and fiscal year 2008 results.

I'll begin with the high level overview of the quarter and the year. Dan will follow with a more in-depth discussion of the financials and we'll conclude with guidance for 2009.

Before I address this period's performance, I'd like to comment on our results over a longer time horizon. I am pleased to point out that this quarter marks our 25th consecutive quarter of compounded growth and earnings. It's also the 8th consecutive fiscal year of earnings growth.

I believe this amplifies the strong dynamics within our business. When one component is adversely impacted by an external factor, primarily associated with economic conditions, another strengthens and vice versa. This is true both between and within the business segments.

It also reflects the strong management and confident associate team in our field operations at the point of customer contact that continues to strengthen.

I'd also like to note that we will shortly be discussing several unusual events that influenced our financial results in the quarter. Some of these were favorable and some not, some recurring and some not. But the good news is that we believe the beneficial elements will continue as we move forward.

For our fourth quarter, we are reporting net income of $16 million, that's an increase of 44% over last year. Diluted earnings per share were $0.37, compares favorably to $0.26 last year.

If you adjust for two unusual elements that you will be hearing about, the drag of Hurricane Ike and the advantage of a foreign tax benefit related to prior periods earnings, you will find that there is about $0.03 of cumulative net benefit in this quarter's $0.37.

So if you adjust for that, the resultant earnings per share without these would be approximately $0.34 for the quarter. That $0.34 per share is a 31% increase over last year.

Before I move on to the business segments, I'd like to take a moment and address the impact of Hurricane Ike. This is one of those unusual events. Ike's impact on our Texas stores began September 12, with evacuation in business closure orders in the Houston-Galveston area the day before the storm hit.

We had a total of 155 stores impacted, 63 stores were EZPAWN and 92 EZMONEY. This represents approximately 20% of the store locations in each of our two domestic businesses.

During the balance of September, these 155 stores accumulated a combined loss of more than 1000 business days. The majority of this can be directly attributed to power outages that Houston and its surrounding communities experienced after the hurricane.

We were fortunate to only sustain significant physical damage in 14 of those 155 locations. All have since returned to normal operations except for our four Galveston stores.

We estimate that the financial impact on our earnings in the quarter was approximately $2.5 million net of insurance recoveries on a pre-tax basis, that's about a $0.04 negative impact on earnings. Dan will segment these costs in just a few minutes.

In spite of Hurricane Ike, our EZPAWN segment had an excellent performance. We saw strong demand for pawn loans throughout the period. Our U.S. pawn loan portfolio ended the quarter up 18% over the same time last year and that's on a same-store basis. This is particularly positive given that the portfolio growth was accompanied with a 300 basis point improvement in both yield, which increased to 148% and redemption rate, which grew to 78%.

These metrics represent quality portfolio growth and they position us well for the upcoming holiday season. I anticipate that the demand for cash via pawn loans will continue given the current economic environment.

The overall net revenue growth for EZPAWN U.S. was 20% in the quarter. This was driven by the strong growth in pawn service charges coupled with increased jewelry scrapping activity at higher margin levels than a year ago. With operating expenses well contained, the flow through of the incremental revenues was strong. The resultant operating income in our U.S. pawn segment was $25 million and it represents growth of $5.8 million, which is 30% over last year.

The full fiscal year's performance was equally impressive. Net revenues grew by 21%, operating income for the segment increased by about $23 million over last year, that's an increase of 35%, and the resultant operating income margin exceeded 47%. All in all, our pawn operators did a terrific job and delivered an excellent quarter to cap an excellent year for our U.S. EZPAWN operation.

Moving on to EZMONEY, you'll see that the hurricane had a more dramatic impact on this segment than on U.S. pawn. What made this event more significant for EZMONEY is the fact that the 92 affected stores in the Houston area represent many of the most mature and profitable stores in EZMONEY.

35 of these stores were closed 8 days or more and we experienced a total loss of 609 business days. New loans, fee revenue, and default rates were all significantly impacted.

Yet for the quarter, our fee revenue in EZMONEY grew by 12% over last year. And if you exclude the impact of Hurricane Ike and you look at our fee growth on a same-store basis, we would have been up approximately 7% over last year.

From a bad debt perspective, we've done an excellent job of managing initial defaults through balanced underwriting and an intense focus on getting the customer into the store on the day their loan is due.

For this quarter and as for the year, our initial defaults show improvements to last year. However, our net bad debt still increased at a faster rate than fees and we ended the period at 36% of fees versus 31% last year.

Without Ike, bad debt would have been within 3 points of a year ago. The increase I believe reflects the difficulty in the current economic environment to collect debt once it's incurred. It shows with the consumer behavior once they default and it shows in the capital markets to buy bad debt as well. So regardless, we are committed to continue to address process to improve both.

For the entire year, EZMONEY operating income grew by $4.1 million, which reflects a 12% increase over last year. Bad debt was 28.7% of fees versus last year's 26.8%. This is in line with our guidance of 26% to 29% provided at the beginning of the year.

During this year, we opened 66 new EZMONEY stores and we entered one new state, Missouri. We also closed 22 stores throughout the year, resulting in a net EZMONEY store gain of 44 locations. 11 of these closings were related to the discontinuation of CSO operations in Florida that we announced earlier. The other 11 were planned closings or consolidations of underperformed locations that arose from our normal business review process and primarily executed as we reached the end of a lease term.

Moving from new stores to new products, we've expanded our installment loan to 90 stores in Texas. We have been cautious with the product because of the size of the loans from $1,525 to $3,000 and the length of the term, which is at five months. We believe we have a pretty good handle now on the customer, bad debt management, and we plan to expand the installment loan to several additional states beyond Texas during the New Year.

We also recently began offering another new product, auto title loans. We introduced this product last month in all 11 stores in Missouri. We believe this product offers us an incredible opportunity to leverage our store base and drive incremental returns. It also affords us the opportunity to expand our customer base and diversify our product assortment beyond solely the payday loan product.

Our plans are to move judiciously and expand the auto title loan product to an additional 3 to 5 states and approximately 100 additional stores by the end of the year.

We also continue to be excited about our third business segment, Empeno Facil. Last year we shared our view of Mexico as a significant opportunity, expressed our desire to understand their culture, learn the country's business requirements, validate our model and then rapidly expand our presence.

We began the year with 4 pawnshops that we had green fielded in 2007 along the U.S. border. Then in October, barely a year ago, we acquired 20 pawnshops from Mister Money Mexico located from the Bajio area, south of Vera Cruz.

During the year, we subsequently opened an additional 14 stores. Of those 14 stores, new stores compare favorably to the initial guidance that we provided at the beginning of the year of 7 to 10 new locations.

Empeno Facil's total revenues of $3.6 million for the quarter are the highest recorded to-date as is the operating income for the quarter of $942,000. We are particularly pleased with the operating income margin of 42% even after the drag from the new stores.

For the year, Empeno Facil generated $11.6 million in revenues and contributed operating income of $3.3 million.

Moving from Mexico to the United Kingdom, there is also some excitement with Albemarle & Bond. As a reminder, A&B is the UK's largest pawn operator with 111 locations at June end.

As a public company traded on the London Stock Exchange's Alternative Investment Market, their fiscal year ended in June and they just recently released the results.

A&B's revenues increased 42% with net income growth of 37%. As their largest shareholder with 29.9% ownership, we report income from their operations based on our equity interest in their business. The resultant income that we reported was $1.2 million for the quarter. This represents growth of 55% over last year.

During this quarter, we identified an opportunity to claim a $3.4 million higher foreign tax credit related to A&B's current and prior year's earnings than what we have historically claimed.

Dan is going to provide the detail on this, but I want to make the point that the benefit arising from fiscal year 2008 alone was approximately $1 million and that this will be one of those positive recurring benefits as we move forward.

Before I turn it over to Dan, I would like to summarize how all this comes together for 2008. For the year, our total revenues grew to $457 million, that's a 23% increase over last year. Net income grew by 38% to $52.4 million.

Diluted earnings per share also grew by 38% to $1.21 and that compares favorably to our original guidance of $1.12, our revised guidance of $1.18 and last year's actual $0.88 a share.

If you exclude the impact of Hurricane Ike and a portion of the foreign tax credit associated with Albemarle & Bond's earnings in prior years, the company's diluted earnings per share for the 2008 fiscal year would have been $1.19, that's an increase of 35% over last year. All in all, it was an excellent year for EZCORP.

With that, I will turn it over to Dan for his comments.

Thanks, Joe. As a backdrop to my review of the financials, I am going to begin by discussing the two unusual items in the quarter; Hurricane Ike and the foreign tax credit.

As Joe mentioned, we closed 154 stores on September 13 with most of them closed on September 12 in advance of the hurricane.

During the month, we lost just over 1000 store days mainly due to power outages following the hurricane. We estimate the loss pre-tax income including uninsured losses was approximately $2.5 million or $0.04 per share.

Our EZPAWN operation accounted for $900,000 of the total comprised of sales gross profit of $200,000, pawn service charges of $500,000 and an additional $200,000 of operating expense net of any insurance coverage.

Our EZMONEY operation was more heavily impacted and accounted for $1.4 million. We estimate for EZMONEY we lost about $900,000 of fee revenue and realized higher bad debt levels of approximately $500,000.

The impact on fees and bad debt effectively raised our bad debt measured as a percent of fees for the quarter and year by 2.4 and six-tenths of a percentage point.

Included in the loss on disposal of assets, line 23 of our operating statement is $200,000 for the write-off of damaged assets net of the expected insurance recoveries.

Now let me elaborate on the foreign tax credit. During the quarter, we elected for tax purposes to change from the net method to the gross method for calculating the foreign tax credit on our portion of the income of Albemarle & Bond. This enables us to take advantage of a previously underutilized foreign tax credit.

As a result of this election, we realized a benefit included in our tax provision for the quarter, but not related to the quarter, of approximately $3.1 million or $0.07 per share.

And our 12 month tax provision is a benefit not related to the fiscal year of approximately $2.4 million or $0.06 per share. Prior to the change in this election, the earnings of Albemarle & Bond were recognized net of the effect of UK taxes on their income for both our book and tax records.

Electing the gross method is a more advantageous method for both book and tax purposes, which essentially grosses up the earnings of Albemarle & Bond for their UK taxes and applies the U.S. statutory rate to our portion of their pre-tax income.

Assuming no material changes to other variables such as A&B's income, exchange rates or tax rates, this change should reduce our tax provision by approximately $1 million a year going forward.

There are a couple of less material adjustments in our quarter's tax provision related to the Texas margin tax and realization of a capital loss carry forward and we will lay these out and the foreign tax credit changes in excruciating detail I am sure in our 10-K.

The bottom line is that our effective tax rate has been reduced in the current period and in 2009 we estimate it will be around 35.2% of pre-tax income.

Excluding these two unusual items, our earnings per share for the quarter and fiscal year would have been $0.34 for the quarter and $1.19 for the year.

Now I'll give you a little more detail on our financials starting with the consolidated statement of operations for the quarter on page 3 of our earnings announcement.

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 $10.9 million or 26% to $52.2 million.

As I already mentioned, we estimate we lost approximately $700,000 of pawn net revenue due to Hurricane Ike.

Merchandise sales, line 2, increased $1.8 million or 6% to $34.9 million. Same-store sales growth for the quarter was up 1%. With margins up slightly from the prior year period, merchandise gross profit, line 2, minus line 9, increased $900,000 or 7% to $14.4 million.

Scrap gross profit, lines 3, less line 10, increased $4.6 million to just under $10 million. Higher gold values net of higher cost and more volume generated the increase of scrap gross profit.

During the quarter, we scrapped slightly less than 2 million grams of gold jewelry, an increase of roughly 12% from the prior year quarter. Proceeds per gram increased 35% to $13.63.

Our cost per gram increased 21% to $8.64 that's primarily due to increases in gold loan values and what we paid to purchase gold.

During the quarter, we realized $400,000 in proceeds on the sale of loose diamonds compared to $450,000 in the prior year quarter. These proceeds were included in the jewelry scrapping sales line, which is line 3.

We continue to forward contract our gold scrapping and we currently have our estimated December quarter quantities locked at around $867 per ounce. In our guidance for the balance of the year, which Joe will cover in a few minutes, we have assumed a gold price of $775 per ounce.

For the quarter, we turned our inventory 3.5 times, and that's the same as the prior year quarter. Inventory levels per ending store increased to $130,000 at the end of September versus $127,000 a year ago.

Pawn service charge revenues increased approximately $4.8 million and you see this on line 4 or 22% to $26.9 million. The increase is a result of additional pawn service charges from the 34 Mexico locations acquired or developed in the last 12-months, higher loan values on gold jewelry and same-store loan growth.

Annualized yields on our pawn loan portfolio were 148% for the quarter and that compares to 145% for the prior year. Our ending pawn loan balance was up 25% from the prior year, 18% on a same-store basis.

For the quarter, our signature loan contribution, line 5, less line 15, improved 2% to $21.3 million. The benefit of an 11% increase in signature loan fee revenue, line 5, was eroded by a 30% increase in signature loan bad debt, line 15. Ike adversely impacted our signature loan contributions by approximately $1.4 million as I mentioned earlier.

Consolidated signature loan bad debt expense, line 15, measured as a percent of signature loan fee revenues, line 5, increased to 37% from 31% for the prior year. Excluding the impact of Ike, we estimate our bad debt as a percent of fees would have been approximately 34%, about 3 percentage points above the prior year's level.

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 6.3% compared to 6% for the prior year quarter.

Loan originations for the quarter were up 9% to $170.2 million. After higher levels of operations expense, line 14, administrative expense, line 16, and depreciation and amortization, line 17, operating income increased 13% to just under $19 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 higher levels of performance-based incentive compensation, 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 declined 1 percentage point to 22%. Excluding the impact of Ike, operating income margins would have improved 1 percentage point to just over 24%. Strong margin improvement in our U.S. pawn operation and the addition of high margin operating income in our Mexico pawn operation more than offset the decrease in margins in our EZMONEY segment excluding Ike's impact.

After higher levels of equity interest and the income of Albemarle & Bond, higher net interest expense, greater losses on the disposal of assets and an adjusted 18% tax provision, net income increased 44% to $16 million or $0.37 per share.

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

Store level operating income, which you see on line 15, increased 30% to approximately $25 million. This strong performance is the net result of a 21% increase in net revenues, line 9, and a 12% increase in EZPAWN operations expense, line 12.

Store level operating income margins for our U.S. EZPAWN operations improved 4 percentage points to roughly 49% of net revenues.

Moving over to the next column to the right, our Mexico pawn operation generated store level operating income of $942,000, you see this on line 15. Store level operating income margins in our Mexico stores were a strong 42% of net revenues, an excellent result for an immature store base.

Moving over to the third column, our EZMONEY store level operating income, line 15, decreased $1.2 million to $7.3 million. Hurricane Ike adversely impacted this result as I mentioned by approximately $1.4 million.

For the quarter, our U.S. and Mexico pawn segments made up approximately 78% with about 75% and 3% mix between the U.S. and Mexico and that's of our total consolidated store level operating income. And then with our EZMONEY segment making up the balance of 22%, the total revenue split between pawn and payday would be roughly 73% and 27%.

Now a few comments on the balance sheet, which you will see on page 5 of our announcement. You can see that we have approximately $27.4 million of cash on the balance sheet, and you see this on line 3, roughly $4.9 million of this amount is operating and the balance would be non-operating cash.

Included in the cash usage in the quarter is $5.1 million of capital expenditures about half of it would be growth related and the balance would be maintenance CapEx.

For the 12 months, we generated approximately $36 million of free cash flow before $18.1 million in capital expenditures and $15.5 million for the acquisition of the Mister Money Mexico operation. Approximately half of the $18.1 million of capital expenditures would be maintenance CapEx.

You can see that our payday loan balance, line 5, grew 48% in the last 12 months to $7.1 million. Not included in our payday loan balance is $23.1 million of short-term loans and $500,000 of installment loans, both of which are brokered with unaffiliated lenders. These brokered loans increased 1% in the last 12 months.

Our investment in Albemarle & Bond is carried on our September balance sheet at $38.4 million, and you see this on line 13. Assuming a market price of their stock of 190 pence at an exchange rate of $1.60 per pound, our 16.3 million shares would have a market value of just under $50 million.

Finally, you see on lines 34 and 35 that we ended the quarter with 332 EZPAWN locations, including 38 Empeno Facil locations in Mexico, and 477 EZMONEY locations, six of which are managed by our EZPAWN operation.

During the quarter, we opened eight Empeno Facil locations, adding 34 during the year including our 20 store acquisition. During the quarter, we opened 19 EZMONEY locations and closed three stores in Colorado.

For the year, we opened 66 EZMONEY locations and we closed 22, including the 11 in Florida that Joe mentioned.

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

Thank you, Dan. 2008 was a busy year for us. During the period we made, brokered, extended and renewed approximately $1.4 billion in loans, that's 30% more than in 2007. It was also a busy year from an acquisition perspective, which will help fuel that loan growth even more in 2009.

As I commented earlier, we completed a strategic acquisition of 20 pawn shops in Mexico during our first quarter. This was followed in our fourth quarter with two additional announcements. The first was Pawn Plus, the Las Vegas acquisition of 11 pawn shops with the loan portfolio of approximately $8 million and $5.5 million in EBITDA. We are on track and in final license transfers to close this transaction next Thursday.

Pawn Plus was followed in mid-September by our announcement of a new agreement to acquire Value Financial Services with 67 pawn shops located primarily in Florida and several stores also in Georgia and Tennessee. At June end, Value Pawn's loan portfolio was $18 million and their trailing 12 months EBITDA was $15.8 million. We are on track we believe to close this deal sometime in December. We expect both of these pawn transactions to be immediately accretive and to make a significant contribution to our ongoing performance.

Looking forward, here is our guidance for fiscal year 2009. In our US EZPAWN operation, our guidance incorporates same-store growth in net revenues in the mid to high single-digit range. Dan has already addressed our perspective on the impact of the gold markets which are incorporated into the forecast. I'll address the impact of Pawn Plus and Value Pawn in just a moment.

In our EZMONEY Loan segment, we are evolving the focus of our growth strategy to a two-pronged approach. A primary driver will be new product expansion within our existing store base. This will allow us to more fully leverage the capital investment we made in our existing store fronts. Secondly, we will continue with new store expansion that's focused on strategic in-fill opportunities in key states in which we currently operate.

We still have a substantial amount for new store development in our plans. We'll open 30 to 35 new EZMONEY stores all again in existing states. We will also selectively incorporate a larger footprint in both the new store openings and existing store models. This is to accommodate larger volumes associated with multiple products.

Within the US, we've attempted to choose the states for our EZMONEY business with significant attention to the regulatory environment and the financial opportunity within each individual state. We are cautiously optimistic regarding the current regulatory environment in all the states in which we operate.

We also plan to enter Canada in 2009. We'll continue to monitor the regulatory process by province and we will pursue entry into those provinces that pass favorable regulatory and licensing provisions. Given the passage of favorable legislation, we expect to open our initial stores in Canada during the second half of the fiscal year. These will be in addition to the store plan of 30 to 35 in the US. From a bad debt perspective, we expect to be in the range of 27% to 29% as a percentage of fees for the year, fluctuating seasonally by quarter.

In Empeno Facil, we will focus on fine-tuning our model and continuing with our new store expansion strategy. We plan to open 30 to 35 new stores during 2009. Even with the drag associated with these new stores, we expect significant double-digit growth in operating income. We also continue to be interested in any potential Pawn acquisitions in Mexico that make good economic sense to both us and the sellers.

All in all, considering what I've just covered, we expect fiscal year 2009 earnings per share of approximately $1.45 before the benefit of either of the pending acquisitions. That's an improvement of approximately 20% over this year's $1.21 in earnings per share or approximately 22% on the adjusted earnings per share of $1.19 that both Dan and I described earlier. We expect our first quarter earnings per share of $0.35 as compared to last year's $0.29, an improvement of just over 20%. The benefit of Pawn Plus and Value Pawn will need to be layered on to this forecast for the final three quarters of the year, quarters 2, 3, 4.

We anticipate little to no benefit in the first quarter. With Pawn Plus, we expect a benefit of approximately $0.04 per share during the final three quarters and with Value Pawn to receive a benefit in the range of $0.04 to $0.05 per share for that same period. With these acquisitions included, we expect our earnings per share for the year to be between $1.53 and $1.54 a share.

And while we're pleased with what we've accomplished over the past several years and this year in particular, our excitement continues to grow as we contemplate the potential that we have in front of us. I know I've said that before probably several times, but it just keeps getting better.

So that concludes our prepared remarks for today. Dan, if you will read the Safe Harbor, we will go into Q&A.

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 up 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 morning, I mean, afternoon, Joe and Dan, great quarter and year.

Thank you.

Joe, any comment, I know you mentioned that the stores you open in the payday area would be in existing states or would I assume most of those are outside of Texas or will Texas still see some fill-ins?

There will be a couple of them in Texas, but there are four or five other states who will also have the additional development. And these will back-fill our existing stores, but they will also include a new store model that has a larger square footage and were to accommodate what we believe to be greater volume potential with the expansion of the product assortment.

And you mentioned title loans in Missouri, what other states would be eligible based, I guess, on obviously the laws in those states?

I don't want to reveal the actual states from a competitive perspective at this point. We've done enough research that we have five states that we believe have favorable regulatory environments for the title loans. And I know -- we've looked at title loans in the past. I can go back to a previous career before I joined this company and even earlier after I came onboard where title loans were very risky and the regulatory environment was very unfriendly. But there have been a number of changes that have really been enhanced with consumer protection as it relates to the transaction and excess funds that are collected when the collateral is forfeited and sold. And we feel much more comfortable in moving forward with it now than we would have in the past.

Last question, obviously your asset mix looks great, growth is very strong and inventories look under control so I assume you feel pretty good going into the -- whatever challenging environment we got here at fourth quarter retail?

Yeah, we feel great. Our inventory -- our portfolio is up on a same-store basis by 18% gives us potential to generate some additional inventories going into the holiday season. And you heard our turnover number 3.5 times for the quarter and our inventory is about flat with last year. So we feel we are well positioned going into the season.

Okay, thanks a lot. I appreciate it.

Sure.

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

Good afternoon.

Hi John.

Hi, John, how are you doing?

Dan, can you just talk about how the financing is coming along for the acquisitions?

Yeah, really no changes there since our last update. We have the credit facility in place and it will be in place up to December 31 and its contingent on the close of the value transaction. Just to refresh everybody's memory it's basically $120 million facility split between a $40 million term and an $80 million revolver. And again, as I said, it would be contingent on the closing and obviously without closing on the value we would not need the credit facility.

Okay. Can you remind me what the covenants are on those -- on this debt?

Yeah, probably the key thing that you are asking about is the pricing. The first two quarters out of the gate and we conceded this as part of the extension of the credit facility, we agreed to 150 basis -- 250 basis points over LIBOR for the first two quarters. And then, it would drop down based on our funded debt to EBITDA to 175 basis points over LIBOR. I think in this market, its good pricing.

Okay. But is there a limit as to your trailing 12 month EBITDA as far as how high you could take the debt?

Yeah, there is a limitation there, but we are so far below that, it would not be an issue.

Okay. And just the tax rate for the quarter, I know you said the number of what was in there in terms of the non-recurring items, can you just tell me what the tax rate was for the quarter?

For the quarter, it works out to -- just take our tax provision as a percent of pre-tax income, it's about 18%. I think for the year it works out to be just over 34%. And as I mentioned going forward in 2009 at least at this point in time we could expect it to be about 35.2%.

You said there was a $3.1 million benefit in this quarter alone though from the change in tax accounting?

That is correct. That's what pulls it down to the 18% effective tax rate.

Okay. And then, on the installment loan product, can you just -- I guess kind of talk about the pricing on the installment product, how much do you currently have, and if that falls under kind of the small loan laws that are a little different than the payday loan laws?

We are doing installment loans today in Texas. We are doing them under the CSO statutes. We developed the loan, so it is a five month period which is far out as we want to go. And the pricing to the customer is approximately 10% of the principal of the loan paid every twice a month as they go through the period. The rate if you calculate an APR on it, the APR is somewhat lower for an installment loan than it is for a typical or traditional payday loan.

Okay, but this will then fall under most of the payday loan laws, right?

It depends on the state. In Texas it will. As we move this through some additional states it will fall under different financial regulations in those states.

Did this put you in with any regulations or any banking regulators?

I don't believe so.

Okay. Alright. Thank you very much.

Our next question comes from Chuck Ruff from Insight Investments.

Hi, very good quarter and year and the outlook is certainly bright also. I had a few questions for you. You I think have -- can you talk a little bit about the regulatory outlook for payday loans. I'm surprised you are still expanding that as much as you are here in the US.

In -- we are in 11 states with payday loans and one of the benefits of being relatively late to market as we were is that you are able to get a better view of the landscape. We didn't open our first payday loan store until 2003 and when we in Texas, and we didn't expand beyond Texas until like a year after that. So, we've -- it gave us a pretty good view and we were very careful with the states we went into, and we look for what we felt were favorable and more stable environments.

The states that we are in today, the 11 states we are relatively comfortable with. The only one of the 11 that we've had an issue with has been Colorado, and that was during the last session where there was legislation adverse to the industry that was introduced, passed through the house by one vote, went to the Senate. It was sponsored by -- and the Bill was co-sponsored by the President of the Senate and the Bill never reached its third reading. It was sent back with modifications to the House and withdrawn, and the industry was caught relatively off guard at that time, and I think with the opportunity -- what we learned in Colorado was with the appropriate opportunity to explain the transaction and the benefit and the alternatives, and the contribution to the economic environment, that the legislators were very receptive to not doing something that would in effect put the industry out of business in the state.

But, you get beyond Colorado, and again the states that we are in today are relatively stable. We are relatively comfortable with, let's say cautiously optimistic. In Texas is where we have a lot of stores. And Texas is a CSO model. The legislature only meets every other year and they meet -- they convene in January of 2009 and they go through May of the year, and just had the election results posted yesterday in Texas. And the Republican Party lost three of the seats in the House. It still has a majority of two in the House and it's a very business friendly state, and I don't think that you find this state going purely along party lines. So, we are relatively comfortable here as well where we have our largest presence.

You worry at all about Federal regulation now with Democratic control of the White House and Congress?

Well, I think anything that would be done from a Federal perspective would be inconsistent with their responsibilities and practices. If you look at insurance, usury rates, rent-to-own, bank fees and a lot of other things, utilities, even pawn, they're all regulated at the state level. And I think if at a Federal level if they were to enter that arena, it'd be a whole new frontier. And I would certainly hope that good judgment prevails. Particularly in the economic time that we're in today, I think the need for the -- by the consumer for access to credit should be expanding and I just can't imagine they'd take any actions that would shrink that.

Okay, I'm with you. What is the number of shares that you are assuming for fully diluted in your earnings guidance for fiscal '09?

It's right around 43.6 million for the guidance excluding the two acquisitions.

Well, that's kind of the more interesting number that I was trying to get to. When you talk about the earnings accretion, what kind of -- we are all believing these acquisitions are going to get done, so we're trying to figure out what the number of shares would be?

Yeah, I don't have that number exactly for you. The -- Chuck, let me -- maybe we can take another question. Let me see if I can get you the actual number, I've got it here.

Okay. I've got one more and then I'll let other people get in. I've heard from different industry sources that Value Financial has some very healthy pay scales and I don't know if that's true or not, but maybe you could talk about that and how that would integrate with the rest of your business if that's any sort of issue or not?

Value Financial has a philosophy of really focusing on the human resource aspect of the business, developing talent, and they've developed in conjunction with that quite a bunch. Their pay scales are somewhat higher than the norm, they are higher than the norm in the industry. And we anticipate that the pay scales with value pawn brand won't change. We will most likely run this as a sperate division and maintain the Value brand, because it's so well recognized in the markets that they operate in and pretty much keep it isolated or managed separately from the balance of the organization.

Okay.

So we can better understand it and understand its implications.

Okay. I'll...

Chuck?

Yes.

Let me give you the shares.

Great.

I was understating the base basically the EZCORP, it would average out to be about 43.9 million.

Okay.

Excluding the two acquisitions. Including the two acquisitions, and again these are partial years, so this is a weighted average number of shares.

Right.

On assuming those partial years. Assuming that 100% of the Value shareholders took EZCORP stock and we've used a $17 share price, we would be at about 48.6 million. And assuming that 20% of the Value shareholders took cash, it would bring that down to about 47.8 million.

Okay, great. I'll get back in line, thanks.

Thank you. Our next question comes from Alan Brochstein from AB Analytical Services. Please go ahead.

First of all, congratulations as I know it's a tough environment and there's not too many companies that are giving guidance that's showing growth, so I'm appreciative of that. I had a question regarding, if one were to break apart your two businesses, let's say -- I know somebody earlier asked about the regulatory environment, but for whatever reason you guys decided to exit the lending business and focus strictly on pawn, what would the cost be approximately to do that, have you all given that thought, is that something that can be quantified?

Yeah, was it Alan?

Yes.

We haven't looked at the cost of doing that, but if you're trying to, basically to split out the two incomes, and again this is a bit unusual this quarter with Ike, but pawn represented about 78% of operating income versus 22% for the EZMONEY operation. And I think a fairly safe assumption is that as you drop that on down, the split is probably going to be about two-thirds pawn and about one-third payday and that's very general.

I guess I'm also getting at just in terms of trying to figure out what the closing costs would be, those are all C-type properties, I imagine it would be very inexpensive to exit those businesses should you ever need to, right?

Well, generally -- I mean we're talking about stores that have 1,000 to 1,500 square feet, so the rent typically is going to be $2,000 to $3,000 a month. The lease term is going to be three to five years, say our average term I would guess in the portfolio today would be probably less than two years. And the other thing to keep in mind is that about a 165 of our 477 EZMONEY stores actually adjoin a pawn shop, so there is no incremental rent associated with that.

Right. I drive by those all the time actually here in Houston.

We also have clauses in many -- in the majority of our leases for change of law that would allow us then to exit the lease responsibility.

Okay. I'm just trying -- I mean just to -- where I'm coming from is it seems like -- I know a lot of people are afraid of the payday lending and now obviously you're expanding some of the products and I agree this is a time where credit is so constrained, it makes no sense at all for you guys not to be able to be in this business, you and your competitors, but one never knows. I guess I just wanted to see what the total cost, if you decided to just be a pawn shop, because it seems to me that your stock price pretty much assumes you're just a pawn shop. That's just my perspective.

And another question, I don't know if it was last quarter, I believe it was a negative quarter before. You guys were talking about some of the changes in your customers on the payday lending side and in terms of -- you hadn't really changed your credit requirements or your requirements, but if things got worse you could. Can you update us as far as any changes you're seeing in your customers in that business?

I think probably the comment on the customer related to the demographics that we were seeing with the installment loan, because the installment loan because of the threshold principal of over $1,500 has a requirement that the consumer's personal income, not household income, is well beyond $40,000 a year. And we've seen customers apply for the installment loan actually not just the installment loan that make over $100,000 a year. It may have been those demographics that related to the installment loan customer that you're referring to.

Secondly, on the underwriting requirements, we have the ability to adjust, modify the underwriting as it relates to any particular time. So we've done that over the years where in some cases we've relaxed the underwriting requirements in order to attempt to increase our market share vis-à-vis our competition, our competitors and we try to do that at the opportune times, peak periods of natural demand and the like. And we did it last year and I think it was the third quarter. And as I recall, remember we had a 52% increase in fees during that period. Our bad debt went up, but our net revenues had a substantial increase over the prior year. We can do those types of things. We can also pull it back. As I've commented earlier during my remarks, the thing we have attempted to do is focus on that initial default and work with the customer on that and we've done that. Our operations group has done an excellent job of getting the focus there and bringing down those initial defaults. In this kind of economic environment, our challenge is to deal with the customer who does default and we're continuing to focus on that.

Okay. My last question, and I appreciate you taking these questions, is now with another quarter behind us, can you comment any on the stimulus checks, is -- was your initial analysis, do you stand by that or are there any updates to how you viewed that, especially since it seems we may go through that again potentially?

I'd paraphrase it. I think the stimulus checks had a net positive benefit in our pawn operation and in our payday loan business. Our bad debt benefited significantly. But I believe there was a more significant drag on new loans in payday lending than there was in pawn. Both of them had an adverse impact of the checks in loan demand.

Okay. Well, thanks a lot guys and keep up the good work.

Thank you.

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

Thanks and nice quarter. Joe, curious on Mexico, are the potential acquisitions, are there -- I mean you've surveyed the landscape so to speak, are there a lot and are these sizable acquisitions, are they more 5 to 10, 10 to 20, and what would you be willing to share with us about that?

I think there is a lot of interest on individual owners' parts that have anywhere from two stores to as many as 100 stores to look at the marketplace and see what their business operation may be valued at. And I think the public announcement that CashAmerica recently made has stirred a lot of interest in the market in Mexico to shop their pawn operations. There are many different kinds as you know having been down there, Liz, from the jewelry-only concept to a very heavy general merchandise.

Right.

It's a very active environment. There aren't a lot of chains that really are much bigger than 100 or so stores.

What do you think optimally will -- before you would put too much pressure on your own infrastructure, like how many could you handle in a year? How many could you digest?

On acquisition? Well, it's very dependent on the quality of the operators in the business. A strong group of operators would be relatively easy to assimilate, because we have global PeopleSoft. It's a tremendous benefit. We have a store operating system that's in Spanish that when we were able to complete the interfaces with Mister Money Mexico provided significant benefit on the administration of the pawn operation through loan values and the like.

You've really -- the right operations could almost be a seamless, and I don't mean seamless, but you can kind of drop it in and go from there?

That's right, it took us about three months I think, approximately three months from October to January to really get Mister Money Mexico integrated.

Okay.

And with what we learned from that and the integrations we've made to our system it will be easier in the future.

All right. And then in terms of the product that you are going to be adding to some of the EZMONEY stores, any clarification on what kind of a product that would be?

Well, at this point it's basically the auto title loan.

Okay.

Installment loan. There's one other product that we have in test and we're still learning about it and we've consistently had products that we've been exploring and tinkering with to see if it fits good and demand is there and we're able to manage the bad debt in the application on a loan product and will continue to do that. But at this point it would be installment loan, payday loan and the auto title.

Okay, all right. And Dan, 35.2% is the tax rate that we should be using for the year?

2009 that would be correct.

And then what about 2010?

I would still use a 35%, 35.5%.

Okay.

Somewhere in the same range.

Somewhere in the same range. So this thing that from the unused -- not going to say it right, tax credits in Albemarle & Bond kind of goes forward or is there like an expiration on this, it wasn't quite clear?

It will have essentially about a $1 million benefit each year. It will reduce our tax provision by roughly $1 million each year. And that assumes that there's no change in Albemarle & Bond's income which we certainly hope that continues to grow at the rate it has and that would be -- would reduce that tax provision proportionately.

And that's just because of the way you've been reporting it net versus gross?

That's correct.

Okay, got it. I think that's it, thanks.

Our next question comes from Ted Hillenmeyer from Northstar Partners. Please go ahead.

Hey, guys. Dan, did you give what you expected the percentage of pawn to be after the two acquisitions?

We didn't, but I just -- top line it's probably going be around -- it's going to approach 80%, yeah.

And would that be similar at the gross profit line or EBITDA line?

Very similar.

Okay. And then in your '09 guidance, what are you assuming for growth in payday? I think you said pawn was mid to high-single-digit or lack of growth?

Yeah, I don't think we said it in the comments. I think that for existing stores probably mid-single-digit growth.

Without new products.

Without new products, yes. Still a lot of moving parts with the EZMONEY stores. We saw the maturation of the store portfolio and the introduction of new products.

Okay. And you mentioned an assumption of $775 gold price, is that also the case for -- was that for all of 2009?

Except for the December quarter where we already have locked in $867.

Okay, all right. And then what are the returns for opening a new either I guess Mexican pawn store versus a US payday store?

Yeah, if you're -- I mean the way we look at it is typically a four-wall return on invested capital where you are looking at basically the operating income within the four walls untaxed and over the total investments including any start-up losses that you would experience. That's just kind of a good benchmark way to look at multi-unit businesses. And both should be in that 50% to 60% return on invested capital.

Going to year three.

At the -- yeah excuse me, Joe pointed that would be going into year three. So you have, you have an operating loss for the first six to nine months, turning profitable in that fourth quarter of operation and then the run rate as you end year two going into year three would be in that 50% to 60% range.

And have you seen new stores ramp at the same rate as old stores?

We've been very pleased with the ramp of the new stores we have opened. I commented some time ago about the border stores were meeting the pro forma bottom line. The ramp was we had some good, some bad and I commented one was -- one store, the first one we opened really didn't give us the kind of portfolio ramp we wanted. I would say the interior stores that we've opened this last year have just been extraordinary with the ramp of portfolio they have been able to develop and our operators in Mexico have just done a terrific job of being able to gather forfeited collateral in good balance by categories and the day the stores open they have a full representation of merchandise on the show room floor that I think assisted greatly in attracting the customer to come in and understand that this is a place to get a good loan for their merchandise. They have been very good.

And have you seen any impact today on the merchandise side effects on the economy, looks like your inventory levels were good?

We had -- our same-store sales in the quarter was up, I think it was 1% on a same-store basis, about 5% or 6% in total. We haven't seen a strong demand of customers dropping down into pawn retail if that's what you mean, Ted.

You have or have not?

Have not. We've seen much greater demand for the loan product and this is where typically you have very strong demand for one element, it's weaker in the other. And as one begins to weaken, the other one tends to strengthen substantially and they tend to complement each other.

You haven't seen your existing customer pawn merchandise buyers drop off?

Drop off, no. No, we are not incurring decrease. Those results were even after the impact of Hurricane Ike in September on quite a few of our pawn shops where we have a high concentration in Houston as you know.

Yeah, okay. That's all for me. Great job, thanks.

Thank you.

Our next question comes from [Dave Brosnahan] from WestPark Capital. Please go ahead.

Hi, great quarter guys and wonderful guidance for next year. My questions have been asked and answered; it was on the split of business. Thanks.

Thank you Dave.

Thank you. Our next question comes from Chuck Ruff from Insight Investments. Please go ahead.

Hello again. Can you talk about why with your wonderful balance sheet you would issue shares to make the acquisitions?

I think it's primarily to maintain a more conservative capital structure and just to have the credit facility that would be in place for any other opportunities.

These economic times too it gives us continued flexibility to be able to continue to pursue opportunities to grow our business.

Okay. So, basically you just want to have a really strong balance sheet going forward period that's the basic approach?

Yes.

Okay. Do you have measure share buybacks against acquisitions or is that not really enter into the equation?

Generally does not. We still believe that the best long-term return to the shareholders is to make good quality acquisitions as we have and like the two that are in the pipeline. And just as I said, we will maintain a very conservative capital structure. We will use debt, but we will try and maintain a very conservative capital structure.

Okay. And can you talk -- Albemarle & Bond has obviously been a good investment for you. You bought it for a lot less than it's worth today. Can you talk at all about what you foresee there, do you just plan on owning 29% forever or do you ever hope to buy the rest of it or trying to get an idea of longer term how you view that?

We view it more as -- we have a number of different options as we move forward without committing ourselves by maintaining this ownership level. To go beyond this would require in effect a tender offer and we are not prepared at this time to do that. However, the UK market I believe -- we believe -- has tremendous potential in the segment of business that we engaged in and this allows us the opportunity to share in the benefit of that marketplace and still have the potential to expand our portion of that and through them or in conjunction with them as we go forward.

Okay. When you say you've got a number of options, can you mention on what you view as the options?

Obviously, we have the potential or the option of making tender offer for the entire company, participating with them in a joint venture and in the expansion of potentially a modified business model in the United Kingdom. It's even using them as a, or working with them as a base of operations to expand beyond the United Kingdom potentially into Eastern Europe and so forth.

Okay. Thanks.

Or to realize the investment that we've made in them in the past.

Okay. Thanks again and again congratulations.

Sure, thank you.

At this time I show no further questions.

Okay. Kim, I think we are finished then and I would just like to thank all the participants for their time and attention and particularly for everyone's continued interest in and support of EZCORP. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thanks.