EZCORP Inc (EZPW) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first-quarter 2009 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, President and CEO. Mr. Rotunda, you may begin.

Good afternoon, everyone. Welcome and thank you for joining us today. With me on the call is Dan Tonissen, our Chief Financial Officer.

We had a little delay in getting the release out. PR Newswire has informed us that it has now hit and it should be available and we have distributed our copies here.

I'm going to begin with a high-level overview of the quarter's performance, make a few comments on the economy and how it relates to our business and then a brief commentary on each of our business segments. Dan will follow and he will provide more detail on our financial statements.

Overall, our first quarter was a good quarter for the Company. You will see when we get into the metrics of our business that each of our segments is sound. I am also pleased to point out that this is the 26th consecutive quarter of year-on-year earnings improvements.

We grew our net income to $14.8 million in the quarter, an improvement of $2.3 million or 18% over the same period a year ago. On a diluted earnings per share basis, we grew to $0.33 from last year's $0.29.

As you will see in the press release, included in the quarter is an unusual pretax charge of approximately $1.1 million which had a negative impact of $0.02 on earnings-per-share. Excluding this charge, the Company earned $0.35 per share, an increase of 21% to last year.

In the quarter, we also completed two significant acquisitions. The first during November was the asset purchase of 11 pawnshops in the Las Vegas/Henderson area for $34.4 million of stock and cash. The second and the largest was the acquisition of Value Pawn with 67 stores located primarily in Florida for $77.4 million of stock and cash plus the assumption of $30.4 million of Value Pawn's debt. The transaction was closed on December 31, New Year's Eve.

Before we look at the segments' results, I would like to make a few comments on the macroeconomic environment. Nearly every economic consumer group and business in our country has been affected by the most challenging economic environment in decades. In December, the unemployment rate jumped to 7.2% and consumer confidence declined an all-time low. All types of credit, from home mortgages to car loans to almost any type of consumer loan, has either become very restricted in its availability or the underwriting for the credit has tightened considerably. On a daily basis, the media continually reports and reinforces the economic uncertainty.

With all of this, the question is how these external conditions impact our business. My response is no different than it has been in the past. We are relatively well insulated from most macroeconomic conditions. Although there are periods of adjustment as economic changes occur, it is really all about consumer behavior in our operating model. The customers' behavior will soon adjust and the business model works such that a weakness in one component typically contrasts with a strengthening in another and vice versa.

When you look at our business globally in the U.S., this is what you see in this kind of an environment. Loan demand is strong. It is much more pronounced in pawn than in the payday loan segment in the quarter. However, the demand in both loan products has shown growth over the years, which also include the good times as well as these difficult times. It is noteworthy to mention here that a primary difference between our two loan products is that, to obtain a payday loan, the customer must be employed.

In pawn, we recorded same-store sales growth in the mid single digit range. We would normally consider this a modest increase, but if you compare it to traditional retail, it appears quite strong but it is not dramatically stronger than our trend has been over the years. Our redemption rates and our inventory turnover metrics have remained consistent and strong as well.

In payday loans, we have also seen a return to historical lower levels of bad debt. This is probably more a product of internal rather than any type of external factor.

I should point out there is another actually more quantifiable economic impact and it is associated with the recent strengthening of the U.S. dollar. The result has been the relative devaluation of the peso and pounded to the US dollar. As we convert foreign earnings from their currency in Mexico and the United Kingdom to US dollars, we have experienced an adverse earnings-per-share impact of about $0.005 in the quarter.

But there is also another more positive factor for our company that fits well into the discussion of the U.S. economy. In conjunction with our closing of the Value Pawn acquisition, we also closed on a new credit facility with a $40 million term loan and an $80 million revolving line of credit with very attractive terms. We chose to drive down the term loan but the $80 million line of credit remains untouched. Combined with our cash balance and our operating cash flows, this provides us with significant liquidity to pursue other acquisition opportunities that may arise.

Now for a look at the results by segment, and I'll begin with our largest, which is domestic pawn. Net revenues in our US pawn operations were robust and they grew by 14% over this quarter last year. The major drivers were same-store loan growth in pawn loans of 10%, coupled with our same-store sales increase of 6%. The result in net revenues reflected a 13% increase in pawn service charges and a 7% increase in retail sales gross profit.

Our scrap gross profit additionally grew 13%. The primary driver is a substantial increase in scrap volume over last year.

Store operating expenses grew at a slower rate than the growth of revenues. This provided a strong improvement in operating income in our US Pawn segment. Our operating income dollars grew by 16% over last year and the operating income margin grew to 47%, up 1 point from last year.

On November 13 of this quarter, we completed the acquisition of 11 Las Vegas/Henderson pawn shops. Our consolidated results reflect an additional four-wall operating contribution of about $500,000 from these stores for that period of time. Not reflected in the quarter's results is any earnings impact from the 67 pawn shops acquired from Value Pawn on December 31. The results of these stores will be included from January 1 forward.

Now, between these two acquisitions, we added a pawn loan portfolio of $24 million. We added inventory of $19 million and just over $1 million of auto title loans.

You frequently hear us talk about our focus on earning assets as part of our growth platform. The reason is that these are the drivers of our current and our future revenue streams. This additional $44 million of earning assets should serve well in enhancing our Pawn segment's future earnings potential. All in all, it was another strong quarter for our US EZPAWN operations team.

Now for a look at our second segment, EZMONEY payday loans, our net revenues or fees after bad debt grew by approximately $2.7 million over the same quarter a year ago. That is an 11% improvement. Our revenue component grew by 8%. Although this is positive to last year, it still reflects the lingering effects of Hurricane Ike which hit the Houston area in mid-September. That storm's impact resulted in reduced loan balances in our Houston stores and those balances have not yet grown back to pre-hurricane levels. Houston represents 92 of our most profitable, mature EZMONEY stores. Of these, the two Galveston stores still have not yet reopened.

The fees also reflect the closure of our 11 Florida EZMONEY stores last fiscal year, which will cycle as we go through our third quarter.

Now, our bad debt component in EZMONEY improved by a more than 2 percentage points to last year and it returned to historic seasonal levels of bad debt. In fact, our bad debt was actually lower in dollars this quarter than the quarter last year, even with $2.6 million more in fees this year than last year.

Two primary factors fueled these results. The first is continuing improvements in the store level execution of servicing the customer and the loan. The other is enhanced productivity measurement tools in our central collections group and continuing technology and system enhancements. After somewhat higher payroll investments, our operating income in the EZMONEY segment grew by 8% over last year, delivered a margin of 40%, which was about 1 point under a year ago.

Strategically in EZMONEY, we continue to focus on developing a multiproduct offering to leverage our investment in storefronts, generate new revenue streams and reduce our regulatory risk of any single product within the segment. Our installment loan product has been refined and we have comfort with the associated bad debt management. It has now been expanded into 91 stores and the loan balance itself has grown 64% over this period one year ago. We plan to roll this product to several additional states before the end of the year.

We announced last quarter the development of a second product, an auto title loan product which was introduced in Missouri. Since then, we have now expanded it to a total of 30 stores, including stores in Utah. Our plans are to continue to introduce it into several additional states and end the year with more than 100 EZMONEY stores offering the auto title loan product.

From a store expansion perspective, our plan is to open 30 to 35 EZMONEY stores during fiscal year 2009. We will continue to concentrate on filling in existing states and the majority of the new facilities will be our larger superstore concept with a focus on a multiproduct offerings.

During the quarter, we opened six new stores and we closed or consolidated six stores. This resulted in 477 stores in 11 states, including the 6 managed by the US Pawn segment. The six closures were related to routine site and lease reviews and we opted not to continue operations at these specific locations. We will continue to evaluate under-performing sites as lease expiration dates approach as we move forward.

I'm going to shift now to a topic that nobody can accurately predict, and the topic is legislative actions. I would like to take a moment and address obvious questions regarding the status and the outlook of the legislative environment we're facing in 2009.

While we have no crystal ball on a federal level, it is difficult to imagine adoption of rate caps either as a result of any type of Obama stimulus plan or really any other Congressional action. Consumers are already facing a significantly restricted credit environment and it is difficult to conceive that our federal government would further restrict consumers' access to credit and liquidity in a time of otherwise very tight credit.

Additionally, if rate caps were established, the federal government would be entering a new frontier by regulating what has traditionally been the responsibility and the purview of the individual states. This applies to rate and terms for virtually any products, including usury caps, insurance rate and terms, rent and the like.

Looking at the state level, we are cautiously optimistic about the regulatory stability of the states in which we offer payday loans. We have been fortunate thus far in not having to deal with some of the aggressive legislative action that others in our industry have faced in several states.

We do, however, expect bills to be filed in several states. We feel that the legislators are pro-business and have been receptive to learning about the industry. We will continue to work with both the industry and trade associations to lobby and educate legislators.

I'm going to now move onto our third segment, Mexico, which is Empeno Facil. During the first quarter, this segment generated was revenues of approximately $3.9 million and net revenues of $2.4 million. The results in four-wall operating income is just over $1.1 million. That is an 87% increase over the prior year. If you take this and you exclude the impact of the fluctuation in the exchange rates between the two periods, the operating income growth would have been well in excess of 120%. We are particularly pleased that, even with the drag from new stores, Empeno Facil produced an operating income margin of 47% of net revenues, which compares favorably to 42% a year ago.

We continue to evaluate a Mexico pawn operating model and we've begun to test several enhancements to further improve the overall performance. Our plan is to add between 30 and 35 new pawn shops in Mexico during this year. We opened two during the first quarter and we acquired one with the Value Pawn acquisition. We now have 41 stores in operation in Mexico. We continue to be pleased with the results being produced by our Mexico pawn team in being able to grow and manage this business segment.

Now before I turn it over to Dan, just a brief comment on Albemarle & Bond -- our equity interest in A&B provided us with more than $900,000 in pretax contribution during the quarter. However, this is down about $100,000 from the prior-year contribution, primarily due to changes in currency exchange rates. If you exclude the negative impact of exchange rates between last year and this year, the current-year pretax contribution from A&B increased just over 5% from last year.

So with that, I will turn the call over to Dan for a look at the financial statements in some depth.

Thanks, Joe. Now, I will give you a little bit more detail on our financials and I'll start with the consolidated statement of operation, which is the fourth page in our earnings announcement.

Starting on line 8, you see that total revenues for the quarter increased 14.5% to $128.6 million. Same-store revenues in the quarter were up 10%. Merchandise sales, line 2, increased $4.3 million or 10.6% to $44.8 million. Same-store merchandise sales were up 6% for the quarter.

With margins down 1 percentage point from the prior-year period, merchandise gross profit, line 2 minus line 10, increased $1.4 million or 8.5% to $17.6 million. Scrap gross profit, line 3 less line 11, increased $800,000 to just over $6.5 million. Higher gold values net of higher costs and more volume generated the increased in scrap gross profit.

During the quarter, we scrapped about 1.6 million grams of gold jewelry, an increase of roughly 29% from the prior-year quarter. Proceeds per gram increased 3% to $12.07. Our cost per gram increased 11% to $8.02.

During the quarter, we realized approximately $150,000 in proceeds on the sale of loose diamonds compared to $300,000 in the prior-year quarter. These proceeds are included in the jewelry scrapping sales, line 3.

We continue our forward contracting for our gold scrapping and currently have about 75% of our estimated March order quantities locked at around $840 per ounce. In our guidance for the balance of the year, we continue to assume a gold price of $775 per ounce.

For the quarter, we turned our inventory 3.3 times, up 0.1 of a turn from the prior-year quarter. Same-store inventory levels per ending store increased to $143,000 at the end of December compared to $131,000 a year ago. The actual ending inventory per ending store that you will see on line 35 of Page 5, which is our balance sheet for the December 2008 period, includes the inventories from our two acquisitions.

Returning back to Page 4, you see that pawn service charge revenues, line 4, increased approximately $3.5 million or 15% to $26.4 million. This is up roughly 10% on a same-store basis.

Annualized yields on our pawn loan balance were 141% compared to 146%. Our ending pawn loan balance was up 20% from the prior year, and that is 9% on a same-store basis.

For the quarter, our signature loan contribution, line 5 less line 14, improved 11% to $26.5 million. The benefit of a 7% increase in signature loan fee revenue, which you see on line 5, was compounded by a 2% decrease in signature loan bad debt, line 14.

Consolidated signature loan bad debt expense, line 14, measured as a percent of the signature loan fee revenues, line 5, decreased to 26% from 29% for the prior-year quarter.

Looking at bad debt levels relative to loans originated in the quarter, our net default to principal as percent of loans originated came in at a 5.2% compared to 5.3% for the prior-year quarter. Loan originations for the quarter were up 4% to $178.4 million. Auto title loans contributed $214,000 to net revenue. That is line 6 less line 15. This is primarily from our 11 stores acquired in Las Vegas.

After higher levels of operations expense, line 19, administrative expense, line 20, and depreciation and amortization, line 21, offset by a gain on disposal of assets versus a loss in the prior-year, line 22, operating income increased 15% to just over $22 million.

Increases in operating expense and depreciation and amortization are primarily due to the acquisitions and new store openings. Included in the administrative expense increase of just under $2 million, which you see on line 20, is the $1.1 million charge related to the bonus due to two executives upon the exercise of their 1998 stock options. As Joe pointed out, this unusual charge adversely impacted our earnings per share for the quarter by approximately $0.02, although it is cash neutral.

The gain on disposal of assets for the quarter is due to property and insurance recoveries on properties damaged during Hurricane Ike in our September quarter.

Operating income margins as a percentage of net revenues were up slightly to 28%. The modest margin improvement in our U.S. pawn operation and the addition of high margin operating income in our Mexican pawn operation were partially offset by 1 percentage point margin decrease in our EZMONEY segment and higher relative levels of administrative expense. After lower levels of equity interest and the income of Albemarle & Bond due to the stronger dollar, slightly higher net interest expense and a 35.2% tax provision, net income increased 18% to $14.8 million or $0.33 per share.

The 44.7 million weighted average shares for the quarter seen on line 35 includes the 1.1 million shares issued in the Las Vegas acquisition for approximately half of the quarter. The 4.1 million shares issued in the Value Financial acquisition have a negligible impact since they are only included for one day of the quarter. Both of these additional share amounts will be included in our weighted average account for the full March quarter when we report those results.

Now, if you turn to Page 6 of our earnings announcement, I'll make a couple of comments on our segment results, starting with our US EZPAWN operation in the left column. Our US EZPAWN operation's total revenues, line 7, increased 16%. That is 12% on a same-store basis to $89.4 million.

Store level operating income, line 15, increased 16% to approximately $23.5 million. This includes approximately $500,000 from our 11 stores acquired in Las Vegas. Store level operating income margins for our U.S. EZPAWN operation improved just over 1 percentage point to 47% of net revenues.

Moving over to the next column to the right, our Empeno Facil operation's total revenues, line 7, increased 76%. That is 21% on a same-store basis to $3.9 million. Empeno Facil generated store-level operating income of $1.1 million, and you see that on line 15. Store-level operating income margins in these stores were a strong 47% of net revenues and they were approximately 1/10 above our US pawn operation.

Moving over to the third column, our EZMONEY operation's total revenues increased 8%. That is 3% on a same-store basis to $35.3 million. Store-level operating income, line 15, increased 8% to $10.5 million. Operating income margins decreased 1 percentage point to 40% of net revenues.

For the quarter, our US and Mexico Pawn segments made up approximately 73% of our consolidated total revenues and 70% of our consolidated store level operating income. You see that online 15.

Now, a few comments on the balance sheet on page 5 of the earnings announcement -- you can see that we have approximately $41.6 million of cash and you see that on line 3. We have $40.3 million of debt, and that is lines 23 and 29. With our new credit facility and the closing of the Value Financial transaction, we drew down the $40 million term loan portion of this facility. Of the $41.6 million cash balance, approximately $33.3 million is nonoperating. This nonoperating cash and our strong operating cash flow, which we expect in the March quarter, should be sufficient to meet our operating cash needs and fund any contingency payments due under the merger agreement with the Value Financial shareholders.

You can see that our (technical difficulty) payday loan balance on line 5 through 34 (technical difficulty) a couple of months to $8.2 million. Not included in our payday loan balance is $24.7 million of short-term loans and $600,000 of installment loans, both of which are brokered with unaffiliated lenders.

Our investment and Albemarle & Bond is carried (technical difficulty) December balance sheet at $37.9 million. You see this on line 15. (technical difficulty). Assuming a GBP0.211 market price on their stock and an exchange rate of $1.39 [per pound] (technical difficulty) our $16.3 million shares would have a market value of just (technical difficulty) dollars.

Finally, you see on lines 38 and 39, that we ended the quarter with 412 pawnshop locations, including 41 Mexico locations and 477 EZMONEY locations. The 412 pawnshop locations include the acquired 11 Las Vegas locations and the 67 Value Financial locations.

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

Thanks, Dan. I will conclude my prepared remarks with an update to our earnings guidance for 2009. In quarter two, we expect earnings-per-share of $0.36 compared to $0.30 last year. For the full year, we are adjusting our earnings guidance as a result primarily of the 1988 option impact to $1.52 per share for the year. This guidance represents diluted earnings per share growth of 20% in quarter two and 26% for the year. Both the quarter and the year incorporate the benefit of the two acquisitions.

Now back to Dan to pick up a couple of issues.

During this conference call, we've used a non-GAAP financial measure when referring to earnings-per-share, excluding the unusual charge related to the 1998 stock option grant. For clarity, we would refer listeners and readers to the non-GAAP to GAAP reconciliation on the second page of our earnings announcement and our 8-K filed today with the Securities and Exchange Commission. These can be accessed on the EZCORP Web site.

This conference call and earnings announcement contain 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 and 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.

Jaime will now open the conference call to questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). John Rowan, Sidoti & Co.

Good afternoon. Joe, just to be clear, the $1.52 guidance includes the $0.02 impact from the bonus accrual, right?

That is correct.

Dan, the rate on your debt with the new credit agreement, it changes with your leverage. Can you just give me a rough estimate as what you're paying right now on that debt?

The first two quarters, it is going to be at 250 over LIBOR and that was something that we negotiated with the extensions. That will be for the March and June quarters. Then it will be repriced at probably 175 over LIBOR.

Do you know yet if you're going to face any -- or not face but have any expenses related to the deficiency agreement with the merger for Value Financial?

I would suspect we will but we do not know the amount at this point.

Do you know when you're going to start getting that information back?

I would expect over the next several weeks for any shareholders that had sold but that period is open for 125 days after the acquisition.

Okay. One last question -- you did say that your inventory per store was up on a year-over-year basis but I assume that also includes the Nevada stores, which should have a dramatic new higher inventory level per store. Can you kind of give me an idea of what the inventory per store looks like, excluding the Nevada acquisitions?

I actually gave that to you. On a same-store basis, it is 143,000 at the end of December of '08 and in the prior-year period, it was 131. I think that is very much in-line with the loan growth that we have generated.

Okay, thank you.

I would also point out that, John, our turnover was up to last year, 3.4 in the pawn segment, U.S. pawn segment, versus 3.2 a year ago.

David Burtzloff, Stephens Inc.

Good afternoon guys. I just have a couple of questions really real quick. Related really to merchandise sales, how did sales trends react throughout the quarter?

We had a modest increase through October and November. We got into that last week, 10 days before Christmas, we had some very intense sales activity in our stores.

(multiple speakers)

Okay. How did the -- did the Houston market -- I mean I assume sales were good down there as people replaced merchandise.

I had some FEMA checks earlier back -- I think it was in the October timeframe, but I did not see anything extraordinary through the holiday season in Houston with sales.

Okay. Then the last question related to the sales. Did you start have to discount more heavily at Christmas to try to keep inventories in line or is there --?

No, we didn't do really anything out of the ordinary. We did have a couple of promotional efforts during the period basically in-house and some flyers around the stores and our reader boards out front and we had a focus on game systems and jewelry during that period of time.

If you note, our margin, our retail margin, was 39% versus 40% a year ago, so it was down about 1 point. But I think that 1 point was probably more associated with clearance activity that we had with a good flow-through of older merchandise during this period of time and of course a higher cost of goods.

Okay, all right. Thank you very much.

Sure.

(Operator Instructions). Chuck Ruff, Insight Investments.

Good afternoon, guys, and good quarter. I know a lot of industries have been talking with the Obama people since well before even the election. I'm wondering if your industry lobbyists or whoever have been speaking with them and if you've gotten many feedback at all regarding the likelihood of some sort of federal action on payday loan?

Our CFSA, which is the industry for payday lending, has been very active in lobbying efforts at a federal level not just this year but over the years and has developed I think a very strong presence with many members of Congress although there has certainly been some shift in the membership recently.

But as to Obama specifically, his stimulus plan is out and there is absolutely, to my knowledge, no reference at all to payday loans, rate caps or anything of the like. Now, at the federal level there have been bills filed virtually every year that have something to do with payday lending but they gained no momentum to this point in time. I have no knowledge of anything that is different this year.

But I would go back to my earlier statement and I believe there are two primary reasons that it would be inappropriate to expect any type of federal legislation that has anything to do with rates and terms with payday lending. The first one is it's just totally unchartered ground for the federal government. There are implications with all of these other products that really are the responsibility at the state level. The other is this is a time where access to credit is very difficult and I cannot imagine that any line of credit would be taken away. I can refer you to any number of academic studies that have been done, as well as several studies by the Federal Reserve Bank of New York, that point out the economic benefit of payday lending and the adverse impact if it is not available.

I'm in complete agreement with you, but as we have all seen, stranger things have happened in the past few months. If somehow the payday loan industry does get regulated out of existence, how much of that administrative expense, the kind of corporate overhead line, would you be able to adjust? I'm trying to get some sort of downside. I'm trying to think about what is the worst-case downside and I'm just wondering if that number is adjustable at all.

I think what I do, Chuck, is look at the segment reporting and the split that I went through at the (inaudible) operating income line. It's about a 70/30 split. I think, if you push that on down to the consolidated operating income line, the assumption that you might make is it would follow a similar split.

Okay, great. You mentioned the potential liability or payments on the Value Financial deal. Is there a maximum there?

Yes, there is. There is a maximum deficiency reserve as well as premium fund.

Yes. Given the number of shares that were issued, it would work out to be just over $16 million would be the maximum, yes.

Okay, great. How many shares are you assuming in your fiscal '09 guidance?

It would be the 4.1 million shares that were issued to the Value shareholders and the 1.1 million that were issued in the Las Vegas acquisition. Obviously, as I tried to explain, that is going to be a weighted average. You won't see the full impact of that over the full 12 months in our 2009 fiscal year, but each quarter, you will see that ratchet up in the year-to-date number. In the quarterly numbers, you see the full impact of those additional shares.

Okay. Thanks.

(Operator Instructions). Ted Hillenmeyer, Northstar Partners.

Do you actually have the fully diluted share count at the end of the year?

We don't because there will be some adjustments to it over the balance of the year. But if you take the 44 -- take the diluted shares for the quarter and that includes half a quarter of 1.1 (multiple speakers) roughly 500,000 to 600,000 on top of that would be the full quarter's impact in the March quarter of the Value acquisition. On top of that would be an additional 4.1 million shares. Now it will not be that precise because there are fluctuations in the fully diluted shares depending on what happens to the stock price and options and other things. That would give you a rough way to look at it.

Okay. Then when you guys pointed out the 70/30 split, will that be what the split will be throughout the year as seasonality plays out?

That would be for the December quarter and that is obviously going to shift I suspect more to a 78 to 80 split.

That is without any impact at all Value Financial -- the 67 stores. It is only for half a quarter of the larger 11 stores in Nevada. The [federal] approach will be much closer to 80/20 than it is 70/30.

Thanks.

(Operator Instructions). Chuck Ruff, Insight Investments.

Can you talk a little bit more about the auto title business and how large you expect that to get? You talked about I think you said 100 stores by the end of the year. Can you give us some idea of what sort of revenues we should expect to see on that going forward? I'm trying to get bigger than a bread box feel for how large a business you think that can be.

We have not sized it at all, or at least we're not ready to publicly disclose any of the sizing of it but I will give you an idea of what the loans look like. We model it with an average loan of about $600 to $700 and our fee rate is 25%. Our bad debt, we anticipate bad debt on this product to probably be approximately -half of the bad debt that we incur on payday loans because this is a collateralized loan and our loan values are going to be such that we're going to be at 50% of black book. You can model in a ramp-up to get to 100 stores by month end with an assumption of volume in the neighborhood of one or two loans per week as the business develops. That could bring it to a portfolio and a fee.

Can I ask a couple of quick additional ones here?

Sure.

The tax rate for the quarter, should we assume that is a reasonable estimate for the year?

At this point, yes.

Okay. Can you tell us what sort of net interest income or expense you are assuming in your fiscal '09 guidance?

We have not disclosed that but it is going to be very modest. The reason (technical difficulty) as you can see on our December ending balance sheet, we actually had about $40 million in cash. And so we have got interest income. Actually, it will depend on a number of things. Conceivably after the March quarter, we would have sufficient cash to retire the term loans, should we choose to do that.

Thanks. That is all I had.

Ted Hillenmeyer, Northstar Partners.

Are acquisitions still on the table or do you need to absorb the two that you have made for some period of time?

We're still quite interested in any acquisitions that make good economic sense in pawn, either domestically or in Mexico. We feel we have the capacity with our infrastructure to continue to pursue them.

Where are you planning on opening -- I think you said 35 to 40 payday stores?

We're currently in 11 states in payday lending and there a couple of them that we're not interested in expanding at all. So, the concentration is going to be in the states that we are comfortable with the financial model and the regulatory environment.

I really believe that, in the payday lending, it is going to be much like pawn was. If you go back as pawn was being developed and it was in the same regulatory stage of its business lifecycle, there were states that adopted regulations and maintained them that were very positive for the industry and other ones that were not very attractive at all where you really wouldn't want to do the pawn business. Over a period of time, it stabilized. If you look at virtually every change in pawn regulations that has occurred in the last eight years as I have been associated with this business, they have all been favorable to the industry. States like Colorado have gone from 10% to 20%; in fee-based Florida has gone from 20% to 25%. In Texas, it is a tiered rate, has adjusted the tiers frequently that reflect a more positive impact on the industry.

I think the same thing is going to happen with payday lending. It is going to shake out where there are some states that are very attractive for payday lending and other states that are not going to be able to do payday lending in or want to. I think it is that is still early and we're still in that portion of the lifecycle of the industry. So, the states that we're doing business in and the states that we're looking to enhance and fill in and put in this little larger footprint are the states that we believe will be conducive to payday lending and these types of products as we move forward.

Does the 35 to 40 include any stores in Mexico or potentially any in Canada?

No, not in that number. As you know, as I said today, we opened six of those stores in the first quarter and we also then will close six stores in other states as we did that. But we still have a high level of interest in Canada and we are watching from the sidelines as they finalize the rates and terms by individual providence. Although the first province, Manitoba, was at 17%, it was not particularly attractive and it has now moved onto another province and we look forward to British Columbia. We believe that we are seeing higher rates and we believe the rates are going to be much more attractive as these become finalized (multiple speakers) in Canada but they are not in those numbers.

Can you just give us an update on Texas? I'm guessing there is nothing happening much activity-wise, but --.

The legislature just convened about I guess ten days ago and the Speaker of the House, new Speaker of the House was elected, a pro-business legislator. I don't believe committee assignments have been yet finalized, but we feel good about the very pro-business nature of the legislator in Texas. But there is no new news. There is one senator who every year files a bill or bills about the industry. But to my knowledge, none of these bills of ever come through committee.

Lastly, do you know when the Q will be out?

I'm sorry?

Do you know when the 10-Q will be out?

It should be around the middle of February.

Okay, great. Thanks guys.

John Rowan, Sidoti & Co.

Just two quick follow-up questions -- Dan, you said that you could potentially pay off all of the term debt by the end of the March quarter. Did I hear that right?

We could do that if we chose to. I suspect. I mean, the March quarter has very strong operating cash flow.

Okay, and so there is no prepayment penalty on either of the two loans that you have right now?

No.

Then just one last question -- the one senator in Texas who, like you said, every year submits something on the industry. Can you just remind me? Is it generally a challenge of the CSO model? it is a challenge to payday lending or pawn or both?

My experience over the last two sessions, which is four years as I recall, it has all been CSO.

Okay, thank you.

I'm showing no further questions.

Okay, Jaime, thank you very much. I appreciate everyone's time and interest today on the call. Thank you.

Thank you, ladies and gentlemen. This concludes the first-quarter 2009 earnings conference. Thank you for participating. You may all disconnect.