EZCORP Inc (EZPW) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the EZCORP Second Quarter Earnings Release Conference Call. (Operator Instructions). Please note that the conference is being recorded.

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

Thank you, John. Good afternoon, everyone. I'd like to thank you all for joining us today for our second quarter fiscal year 2009 earnings call. With me is Dan Tonissen, our Chief Financial Officer.

I'm going to begin with a high-level overview of the quarter's performance, provide an update on our two recent acquisitions and how they contributed to the quarter's results, and I'll conclude with a brief commentary on each of our business segments, with a few remarks on how the economic environment's impacting our business. Dan will follow, and he's going to focus his time on the consolidated results.

Overall, the March quarter was an excellent quarter for the Company. We grew our net income to $18.3 million from $13 million for the same quarter last year. That's an increase of $5.3 million, or 41%, over last year.

On a diluted earnings per share basis, we grew to $0.37 from $0.30 last year, and we additionally exceeded our guidance of $0.36 for the quarter. The percentage growth in earnings per share was 23%, less than the percentage growth in net income dollars due to the additional shares issued in conjunction with our two recent acquisitions. But, still, a very healthy growth rate, particularly in today's economic climate. I'm also pleased to point out that this quarter represents now 27 consecutive quarters of year-on-year earnings improvements.

During this quarter we also had the benefit of two recent acquisitions - the 11 Pawn Plus stores located in the Las Vegas metro area, which closed in November, and the Value Pawn acquisition, with 67 stores primarily located in Florida, which closed on New Year's Eve.

In the Pawn Plus stores, we made a substantial investment in CapEx and just completed the rebranding of the stores to EZPAWN with new signage and other identification. We also invested in expansion and fixturing of the showrooms to allow more merchandise to be displayed with better presentation of our retail inventory in these stores. Although pawn portfolios are large, we feel there are substantial sales enhancement opportunities in the Pawn Plus stores. In conjunction with the build-outs, we added, on average, three additional fulltime associates per store to better serve our customers.

During the quarter we also relocated one of the acquired stores - a 3,000-square-foot facility with over $700,000 in pawn loans in the downtown area of Las Vegas to a 10,000-square-foot store in the same neighborhood but right on Las Vegas Boulevard with plenty of parking.

In May we're going to run a grand reopening event for the entire market supported with a strong promotional campaign.

During the quarter these acquisition stores contributed approximately $900,000 in store-level operating income.

Value Pawn represents a business of much greater scale. Our biggest challenge was converting all the stores to our proprietary operating system and transferring all the loan, inventory, human resource, and accounting information into our servers and database. This was completed in conjunction with the assimilation of full backroom functions into the EZCORP support center, which will be completed at the end of this month. We will continue to operate under the Value Pawn brand. I believe that Value is the most recognized pawn brand in Florida, and it's developed excellent customer loyalty. These stores have been led for the past eight years by a veteran pawn operator who's been instrumental in building the business and the Value organization. This operations team continues to be supported with an experienced group of human resource professionals that are responsible for recruitment and training.

During this quarter Value Pawn generated approximately $5.3 million in store-level operating income. This is particularly strong considering the current economic environment, as well as the distractions that are caused when you install a whole new POS system that changes the way every single store transaction is handled, as well as going through the transition of their administrative support functions from Orlando to Austin, Texas.

I couldn't be more pleased with the attitude, commitment, dedication, and professionalism of both the Value Pawn and the Pawn Plus teams, and I'd be remiss if I didn't acknowledge the additional effort of over 100 EZPAWN and EZCORP associates who took on additional responsibility to assist with this integration in a very short period of time.

Together, Pawn Plus and Value Pawn contributed approximately $0.02 per share net accretion in this quarter. We expect this will increase in future quarters as we complete the consolidation of administrative functions and realize other synergies and economies of scale.

With these acquisitions, we added approximately 78 additional store managers and more than 20 multiunit managers to the EZCORP team. I think it's noteworthy to point out that during this three- to four-month assimilation process that we've been through, we've lost only three management associates. And if you explode this to run rate of turnover, that's barely 10% annually for the management team.

Now for a look at the results by segment. I'll begin with US pawn. In our domestic pawn operations, including the contributions from the acquisitioned stores, the store-level operating income improved to $28.1 million, reflecting growth of $6.6 million, or 31%, over last year. If you adjust the growth by the $6.2 million contributed by the acquisitioned businesses within the quarter, our net same-store improvement in US pawn over last year was $400,000, or 2%.

Loan activity continued strong in the quarter on a same-store basis. It drove $2.7 million, or a 13% increase, and that's in same-store increase-- in same-store, pawn service charge revenues for the quarter. Our same-store portfolio of pawn loans averaged an 8% increase for the quarter, and that's significant. And that was coupled with continued improvement in our loan redemption rate, which signifies a healthy loan portfolio growth.

Retail in-store sales, the second of the three major pawn components, were negatively impacted during this quarter, resulting in a 2% same-store sales decrease for the period. Our general merchandise sales remained relatively brisk. In fact, they were up 5% for the quarter over last year. But our jewelry sales were down approximately 9% to last year. I think you'll find that the jewelry parallels most mainstream retailers, even the discounters, because of the discretionary nature of jewelry purchases in today's environment. Our margins on retail sales were 38% compared to 39% for the prior-period quarter.

The gross profit generated from gold scrapping activities, the third component of pawn net revenues. Although we scrapped more gram weight than a year ago, we didn't have the benefit of a rising gold market as we did last year. Our same-store scrap gross profit was down $1.7 million, or 24%, for the quarter, and scrapping margins decreased to 31% from 43% in the prior-year quarter. Dan will provide more information and in-depth commentary, including our forward gold locks in a few moments.

All in all, it was another strong quarter in pawn lending activities and a solid contribution from our two recent acquisitions but less than robust results in the sales and movement of the scrapped, forfeited collateral.

Now for a look at our EZMONEY signature loan segment. In our EZMONEY operations, store-level operating income improved $11.2 million for the quarter, reflecting strong growth of $2.2 million, or 24%, over last year. This improvement was driven by the combination of two factors. The first is growth in fees of 5% over last year. The second is an excellent improvement in bad debt, ending the quarter at 16% of fees compared to 22% last year. These two factors together resulted in additional fee income of $1.5 million and $1.5 million less in bad debt expense for the period, a really nice combination.

Now, there were several obstacles that precluded even stronger revenue growth. First of all, our portfolio of loans in the Houston market, one of our most mature and largest groups of stores, still reflect the lingering impact of Hurricane Ike, which occurred in September. Second, is the closing of 11 Florida EZMONEY stores [that are] in last year, which will anniversary in June. And third is the macroeconomic impact of rising unemployment, which shrinks our overall potential customer base in payday lending.

With these economic challenges, we've continued to place significant emphasis on managing our bad debt. However, we've made no alterations to our underwriting requirements; nor have we reduced the amount of cash we loan to new or existing customers. What we have done is put greater emphasis on process and execution.

And intense focus on getting our customers on their due date into the stores has led to improved initial default rates. For those accounts that do slip into default, store-driven execution, coupled with process enhancements and our central collections center have delivered improved collection results. We're cautiously optimistic that we can continue to deliver satisfactory results in the management of bad debt even in these economically demanding environments.

I'm going to shift to new products in the EZMONEY segment. We continue to focus on leveraging our investment and brick and mortar with multiproduct offerings to drive growth and also expand our customer base. Auto title loans and installment loans have been recently introduced. At quarter end, we offered title loans in 139 EZMONEY stores in three states - Utah, Missouri, and Texas. This month, that's April, we began adding stores adding stores in Wisconsin. Although early, we've been pleased with the initial introduction of the product and will expand auto title loans to additional states during the second half of the year. Incidentally, an important factor to note is that over 80% of the customers who take out this product are new to our stores.

The installment loan product is the second product, and we introduced this over a year ago in Texas. And it continues to deliver incremental contributions as it continues to evolve. Revenues were up 56% this year, with 88 EZMONEY stores versus 72 last year. The contribution, which is fees less bad debt, increased by 53%, and bad debt, which is absolutely critical to this five-month term product, was 19% of related fees compared to 17% last year. We plan to introduce variations of this product in additional states throughout the remainder of this year.

From a store expansion perspective, we scaled back our EZMONEY plans for this fiscal year, taking a wait-and-see position as our legislative process works itself out, both at a state and a federal level. We opened eight stores during the quarter, and we closed three underperforming stores during the lease review process. We plan to open only two more EZMONEY stores this year in the United States.

Our store expansion focus will now move northerly to Canada. We've been monitoring the positive legislative developments, providence by providence. It's refreshing to see through studies of the payday loan product and very thoughtful standards being established. We plan to enter the Canadian market when final licensing and regulations permit, which we anticipate will allow our first store opening as early as September but, more likely, sometime during the December quarter.

To wrap up this segment, I'm going to move on to a topic that nobody can accurately predict, and that's legislative actions.

From a state perspective, there's been activity in the states in which we operate but no movement of anything of significance. We're cautiously optimistic here that there will be no changes in this year's state sessions that will impact our economic models.

Activity on the federal level, on the other hand, has picked up. In the House, both Representative Baca and Representative Gutierrez have introduced bills which include rate caps and renewal limitations on payday loans. Neither of these bills is supported by the industry. Yet neither of them is a prohibition bill, and they allow rates of at least $15 per $100. Both bills demonstrate a movement towards overall acceptance of the payday loan product as a legitimate, buyable, financial alternative for consumers. I believe this was clearly reflected during the recent hearings of the House financial services subcommittee chaired by Representative Gutierrez.

In the Senate, the Durbin bill, with a 36% APR cap on all forms of consumer credit would eliminate approximately $42 billion in consumer credit provided by the payday loan industry alone. This is a prohibition bill. This doesn't include the credit access provided by many other industries that I believe will be impacted by this bill as well - industries such as pawn and banking, among others. However, this piece of legislation does not appear to be gaining any type of support in the Senate.

I'll now move further south to our third segment, Empeno Facil. After conversion to US dollars, the store-level operating income from our 45-store, Empeno Facil, Mexico pawn operation was relatively unchanged from the prior year at $800,000. Now, if you exclude the effect of the exchange rate fluctuation, Empeno Facil posted a 34% improvement in store-level operating income. Although the Mexican economy has slowed, we continue to grow as planned, and we continue to improve our results versus last year.

In local currency, all revenue components exceeded plan and reflected collective growth of 64% at the net revenue line over last year, with 19 more stores than last year's 26 at this particular point in time. With the proportion of new stores and additional drag, the result in operating income still grew by 34% over last year.

During the prior two quarters we tested a pawn service charge rate change in Mexico City, and we've subsequently raised our monthly rate on general merchandise throughout Mexico, except for Guadalajara and the border stores, which are already higher. Moving forward, we'll be testing several concepts to explore methods and process to build a greater scale of jewelry in our loan portfolios.

In Mexico, we began with a small foothold and conducted a lot of consumer research. We've now modified and tweaked the concept, and we're now much better prepared to accelerate growth. We continue to be pleased with our pawn operation in Mexico, and we believe we'll be able to open a total of 30 to 35 new locations by yearend, including the 7 which have already been added thus far.

Mexico has clearly demonstrated that our market segment, one that's frequently in need of cash, exists throughout the world. It's been amplified by Albemarle & Bond, and it gives us confidence in pursuing the Canadian opportunity I pointed out with EZMONEY.

And, before I turn it over to Dan, I have a brief comment on Albemarle & Bond. A&B contributed approximately $1.4 million to the quarter's pretax income. This compares to $1.1 million in the prior-year quarter. Similar to our Mexican results, exchange rate fluctuations somewhat muted the improvements in our earnings from A&B. But we expect a continued, strong contribution from them as we move forward.

With that, I'll now turn the call over to Dan for a more in-depth look at financials.

Thanks, Joe. Now I'll give you a little more detail, focusing on our consolidated results, starting with the consolidated statement of operations for the quarter, which you'll find on page 3 of our earnings announcement.

On line , you see that our total revenues for the quarter increased 37.5% to $156.3 million. With this quarter, EZCORP's trailing 12-month total revenues passed $0.5 billion for the first time. Total revenues include revenues from the Value Pawn and Pawn Plus stores of $31.7 million and $5 million. Same-store revenues for the quarter were up approximately 3.5% overall, with our US pawn operation up 4% and our Empeno Facil and EZMONEY operations up 2%. On a constant currency basis, Empeno Facil had 34% same-store revenue growth.

Merchandise sales, line 2, increased 36.7% to $61.1 million. Same-store merchandise sales were down 2% for the quarter. With margins down 1 percentage point from the prior-year period, merchandise gross profit, line 2 minus line 10, increased 31% to $22.9 million.

Scrap gross profit, line 3 less line 11, increased 36% to approximately $9.7 million. The impact of significantly greater volume was partially offset by lower gold values and higher costs. During the quarter, we scrapped about 2.2 million grams of gold jewelry compared to 1.3 million grams in the prior-year quarter. Proceeds per gram decreased 2% to $12.79. The 2% decrease in proceeds per gram is in line with what happened in the gold market this quarter compared to the same quarter a year ago. Our cost per gram increased 13% to $8.29, primarily due to increases in gold loan values and what we paid to purchase gold. We did not liquidate any diamonds in either the current quarter or last year's quarter. And these are typically included in the scrap proceeds.

We continue to forward contract our gold scrapping and currently have approximately 60% of our estimated June quarter quantities and 50% of our September quarter quantities locked at $890 an ounce and $923 per ounce. In our guidance, we have assumed a gold price of $875 per ounce for the uncovered portion of the June and September quarters.

For the quarter, we turned our inventory 3.8 times, a slight improvement over the prior-year quarter. Same-store inventory levels per ending store increased to $122,000 at the end of March versus $112,000 a year ago. The actual ending inventory per store that you'll see on line 36 on page 5 for the March 2009 period includes the inventories from our two acquisitions.

Returning to page 3, you see that pawn service charge revenue, line 4, increased approximately $11.7 million, or 53.8%, to $33.5 million. This is up roughly 12% on a same-store basis.

Annualized yields on our pawn loan balance were 160% in the quarter compared to 149% for the prior-year quarter. The improvement in this yield is largely due to the addition of higher-yielding pawn portfolio in the acquired Value Pawn stores. Our ending pawn loan balance was up 40% from the prior year, 4% on a same-store basis.

For the quarter, our signature loan contribution, line 5 less line 14, improved 13% to $26.5 million. The benefit of a 5% increase in signature loan fee revenue was compounded by a 23% decrease in signature loan bad debt. Signature loan bad debt expense measured as a percent of signature loan fee revenues decreased to 16% from 22% for the prior-year quarter.

Now looking at bad debt levels relative to loans originated in the quarter, our net default in principal as a percent of loans originated came in at 3.8% compared to 4.2% for the prior-year quarter. Loan originations for the quarter were down 2% to $150.9 million. In the quarter, auto title loans contributed $373,000 to net revenue, and that's line 6 less line 15.

Bad debt on title loans measured as a percent of fee revenue was approximately 10%. After higher levels of operations expense, which you see on line 19, administrative expense, on line 20, and depreciation and amortization, line 21, and these being offset by a gain on disposal of assets versus a loss in the prior-year period, and you see that on line 22, operating income increased 40% to $27.7 million. Value Pawn and Pawn Plus contributed $4 million and $900,000 to overall operating income.

Increases in operations and administrate expense and depreciation and amortization are primarily due to the acquisitions and new store openings. The gain on disposal of assets for the quarter is due to the property insurance recoveries that we realized on properties damaged by Hurricane Ike.

Operating income margins as a percent of net revenues were up 1 percent point to 29%. Lower operating margins in the acquired Value Pawn stores adversely impacted the overall operating margins by approximately 2 percentage points, but we were still 1 percentage point above the prior-year quarter.

After higher levels of equity interest in the income of Albemarle & Bond, higher net interest expense and a 36.1% tax provision, net income increased 41% to $18.3, or $0.37 per share. The Value Pawn and Pawn Plus acquisitions contributed approximately $2.3 million and $500,000 to net income in the quarter.

The 49.3 million weighted average shares for the quarter seen on line 35 includes the 1.1 million shares issued in the Pawn Plus acquisition and the 4.1 million shares issued in the Value Pawn acquisition. The two acquisitions, after considering the impact of the additional shares issued, were accretive to earnings by just over $0.02 per share for the quarter.

Now a few comments on the balance sheet, which you can see on page 5 of the earnings announcement. You see that we have approximately $55.2 million of cash, line 3 on our balance sheet, and $40 million of debt, the sum of lines 24 and 30. Of the cash balance, approximately $49.3 million would be non-operating cash. You can see that our payday loan balance, line 5, grew 21% in the last 12 months to $6.4 million.

Not included in our payday loan balance is $17.4 million of short-term loans, $500,000 of installment loans, and $78,000 of auto title loans, brokered with unaffiliated lenders. The brokered loan balance at the end of the quarter decreased 11% from the prior year due to our withdrawal from the Florida market, where we brokered loans, and lower levels of demand at our Texas stores, the only remaining market where we broker loans.

Our investment in Albemarle & Bond is carried on our March balance sheet at $34.7 million, and you can see this on line 16. Assuming a GBP1.83 market price on their stock and an exchange rate of $1.47 per pound, our 16.3 million shares-- we have a market value of just under $44 million.

During the quarter, Albemarle & Bond reported strong results for their six-month period ended December. They reported a 25% increase in net income to GBP4.4 million, or GBP0.08 per share, on total revenues of GBP26.5 million. As of the end of December, they operated 114 branches and were the largest operator of pawn shops in the UK.

Finally, you see on lines 39 and 40 that we ended the quarter with 416 pawn locations, including 45 Mexico locations and 482 signature loan locations, 6 of which are managed by our EZPAWN operation.

Now let me turn the call back over to Joe.

Thanks, Dan. We've had a number of questions concerning the status of the EZCORP shares which were issued in conjunction with the Value acquisition. As most of you are aware, we agreed to pay contingent consideration to former Value Pawn shareholders, depending on the price at which they sold their EZCORP stock that they received in conjunction with that acquisition. We issued approximately 4.1 million shares. Through this morning, we've received and processed claims for contingency payments of 3.3 million shares for a total of just under $9.7 million. Approximately 750,000 shares remain eligible for these payments. However, those shares must be sold by May 5-- That's in less than two weeks for today-- in order to qualify for any payment.

I'll conclude our prepared remarks with an update to earnings guidance for 2009. This year we're in an economic environment that's created a lot of uncertainties and has changed the behavior of virtually all consumers with regard to how they set their priorities and how they spend their money. We also have a lot of noise in last year's numbers, with stimulus checks, a significant benefit that we received with foreign tax credit adjustments, and Hurricane Ike, which hit us in Houston. All this makes our forecasting a little more difficult.

With that said, we're still bullish on the business. Although the macroeconomic environment has had an impact, we are well insulated, I believe, from it. We plan to continue our strong growth and our track record of compounded earnings improvements while maintaining a strong balance sheet.

Here's our guidance, and this incorporates the benefit of both the Value and Pawn Plus acquisitions. For the full year, we expect to be in the range of $1.50 to $1.52 compared to last year's actual $1.21. That represents an increase in the range of 24% to 26% for the full year. We expect our June quarter to be approximately $0.34. That represents an increase of 36% to last year.

Quick math will provide, then, the September quarter guidance, which will be in the range of $0.46 to $0.48, and that's an increase of 24% to 30% over last year.

So, with that, I'll give it back to Dan for the safe harbor, and then we'll conclude with questions.

This conference call and earnings announcement contain certain forward-looking statements regarding EZCORP's expected performance for future periods, including but not limited to the new store expansion, anticipated benefits of acquisition, and expected future earnings. These statements are based on our current expectations. Actual results for future periods may materially differ from our current expectations due to a number of 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.

John, we'll now open the conference call to questions.

Thank you. (Operator Instructions). David Burtzloff.

Great quarter here. I've got a few questions. First, on the loss rate, are you seeing any change in fewer new customers that would-- may bring that loss rate down?

I don't believe there's been any impact from that. In fact, when you think about it, David, our initial defaults are down significantly the last year. And, typically, that isn't something you see with new customers. As I said in my remarks earlier, much of that is from the focus that we have in the store of working with the customer courtesy calls and really working to get them in on their due dates.

Okay. And, then, with respect to the pawn loan balances, are you--? Did you see those decline later in the quarter than when they normally would and, as a result, kind of the bottom happens later in the quarter and hasn't recovered all the way at quarter end?

Typically, the loan balances do decline faster as you near the end of the quarter because of the tax refunds.

Yes. But, if you looked at the seasonal pattern during the quarter, David, and I think that's your question, I wouldn't say there was a significant change from what we've seen in past years.

Okay. And, then, did you say you have title loans in 138 stores now?

136.

So you ramped that up a lot faster than what you had indicated before, because I thought on the last call you said you'd have it in about 100 stores by yearend.

That's correct. We were pleased with the rollout. We have it fairly well systemized, as well, so that there's very little for the associate to do. The system is able then, with limited information being put in, to be able to obtain a loan value based on the value of the car, as well as the income of the customer.

Okay. And then a last question. On the guidance of the $1.50 to $1.52, does that include the $0.02 charge in the first quarter for the stock option grant?

It's net of that.

Okay. So, if you ex that, it's still $1.52 to $1.54?

You would be correct.

If you ex it, yes.

Okay. Thank you very much.

Jordan Hymowitz.

Just two quick questions. The title business has obviously ramped up during the quarter. Could you say approximately how much of the title loan fees were in the month of March or, even better, give kind of guidance as to, in your third quarter or fourth quarter this year, what type of title loan fees you were hoping to achieve? Basically, any sort of guidance you could give on the title business I'm trying to get at.

We had very little, actually, in the March quarter, Jordan, but here's-- This will give you an idea. We anticipate-- What we anticipate and what we're seeing is about a $600 or $700 average loan value. And we're looking for a ramp-up to about three loans a store over a period of three, four, or five months.

Three loans per week, per store.

-- per week, per store over that period.

And when will it be rolled out at all the stores?

We're going to continue to roll it out through the balance of the year. We've just moved on to Wisconsin, and we're looking to add some additional states as well. We'll give you some additional information on the next call, after we've built it out a little bit more. Even though we've had it in Utah and Missouri for a few months now, we've really seen quite a difference in the take-up in Texas. I think much of it relates to the type of competitive environment in those states and the different level of demand.

A second question is - The payday business is obviously slowing and may have regulatory issues, but everything else seems to be moving along quite well. If you were sitting here two or three years from now, what percent of business do you think could be from non-payday; in other words, Pawn Plus, Mexico, plus Canada, plus-- anything but US payday, basically, which is about 75% of total income now. What do you think that number would trend towards?

Well, it depends on our rate of growth outside of the United States, including pawn in the United States. I think it would be fair to say that you're going to see that proportion to the total decline-- continue to decline. The faster we move in Canada and the faster we move in Mexico and as we're able to do more pawn acquisitions in the United States, all that's going to contribute to a rapid decline in penetration to the total. But payday lending-- I'm confident that as we're able to continue to do business in the states that we're in that we will be able to grow significantly, organically and with new products, the payday loan business in the United States. Even in this past quarter as we looked at our business in payday lending, we had same-store, albeit small-- about a 2% same-store growth rate in payday lending, even with the challenges that exist today.

And a final question. Would you care to disclose the (inaudible) inventory aged a year and over, the same thing that Cash America disclosed this morning?

We haven't done that in the past. It's something that we've talked about doing, and we will consider it. We have been considering it. We will for the future.

Thank you.

Chuck Ruff.

Could you talk more about the outlook for the two House bills, with the understanding that it's very difficult to know exactly where they're going? Can you give us your kind of best guess on how you think those are going to progress?

The bills have to go through a process, and I think they're still early on in that process. The only bill that's held hearings has been the Gutierrez bill, and I thought that the hearings were very positive with the testimony and the comments from the legislators during those sessions. Typically, what I believe will--

And there's two bills. There are some similarities, but there are a number of differences between the two of them. And I would think that as this goes forward it will be an iterative process where they'll go along parallel paths. And, at some point, the two bills are going to have to come together before they-- I would think before they were put onto the floor for any type of debate and vote. When I say the floor, the floor of the House.

Once it goes through that process, it then has to go to the Senate. Any other similar bills that are there will have to be considered, I would think, in conjunction with them. I believe that as this moves forward there will be some modifications and some compromises that would be done before it ever reaches the House floor, but it's impossible to predict.

In talking with your industry lobbyists, et cetera, do you have any feel for how much support there is out there for either of those bills?

On the House bills?

Yes.

Just the House?

Yes.

The industry does not support--

I know that. I'm asking support within Congress. I wasn't clear there.

To my knowledge, there's been no polling that's taken place to determine that.

And your lobbyists, et cetera, are not giving you any feel for that?

No.

Okay. And, on a different subject, can you talk a little bit about the potential for share buybacks? Obviously, you've got a wonderful balance sheet but yet a very high cost of capital right now. To me it would make sense to buy back a little stock, but you're not doing it. So can you talk about that?

We've talked about this a number of times over the past years. And the thing that we've really focused on is being able to build our earning assets and invest in earning assets - assets that will provide a revenue stream and a stream of revenue that allows us to substantially grow our earnings as we move forward.

If you look to where we were two years ago-- less than two years ago, we've increased our earning assets probably by 25%. And each of these earning assets is able to generate some type of substantial yield for us. It's our intention that, as long as we have the opportunity to be able to look at expanding and growing earning assets, we'd rather invest in that than share buybacks, although we do talk about it. It's a subject of discussion with the board. And I'm not saying it's not going to happen.

You guys have made a lot of acquisitions over the years. Obviously any acquisition you make is-- By definition, you're not going to know that company as well as you know EZ. On a risk-adjusted basis, can you imagine making an acquisition that's cheaper than the Company you run?

I think what you have to look at is what you can do with the assets that you purchase. If you're able to enhance those and add any kind of value to them-- If you're confident you can, I think, over time, they're going to provide us a much greater return.

Yes. Okay. Do you feel like you've gotten credit for the growth we've seen, which-- We're shareholders, and we've been happy with the earnings record. But I feel like we don't get any credit for it. I don't know if you feel the same way.

I think there's been some overhang from several different issues. I'm not sure it's share buyback that's caused any of the problems. We've demonstrated our ability to continue to grow our earnings. We've done it year after year. We've maintained a sound balance sheet. And I believe that, as long as we're able to continue to do that, that our share price will eventually catch up to it. Every time-- And we've had good momentum in building our share price. And, frequently, there's been some type of interruption to it, whether it's an analyst report that may be somewhat off base that's happened a couple times or concerns for the regulatory environment and how that might impact us and how it's pointed towards us or something of that nature. We've always bounced back, and I believe over time we will continue to grow significantly our share price.

Okay. I'll give someone else a chance. Thanks.

Henry Coffey.

Could you go over those cash balance numbers for me? They caught my attention. You said you had how much in-- When you called it non-operating cash, I'm assuming you mean by accessible cash?

Just over $49 million of non-operating cash.

That means it's cash sitting there that you could deploy else-wise?

That's correct.

What are the restrictions to just paying off your debt? Or are you sort of waiting for the whole Value deal to sort itself out?

The $40 million of debt that we have on the balance sheet is part of a term facility. We could repay that if we chose to. It's our choice at this point in time to, essentially, keep the cash as additional capital to grow the business.

And what is the borrowing cost on the term debt right now?

It's going to be about [250] over LIBOR, so you're probably talking, what, 3.5% or 4%?

Yes. So relatively cheap, considering. And that's not a line of credit; it's a term debt facility. So, if you pay it it's gone.

That's correct.

And, as you kind of look forward for the rest of the year, what's your outlook on US retail sales? You said, what, down 2% on a same-store sales basis?

We were for the quarter. Our general merchandise sales were up. Our sales decline was in jewelry. As we move forward, if that continues-- If we loan appropriately on the jewelry, we should be able to convert the forfeit of collateral into more revenues from scrapping.

Are you adjusting for that?

Well, we're not optimistic about sales growth. Yes, we are adjusting. We're not optimistic about sales growth the balance of this year. Considering the fact we had stimulus checks out there in the third quarter last year that gave our sales performance a year ago a pretty strong, pretty nice lift, that will be somewhat difficult to replicate this year. So we've factored that into consideration.

Well, I agree with the previous caller. The market doesn't get it, but congratulations on a great quarter.

[Liz Pierce].

Nice quarter. I'm going to ask the inventory question just a bit differently. How comfortable do you feel with the aged inventory and the quality of the inventory?

Liz, I'm glad you asked that because, I think to Jordan's question about the aging-- I think if you look at our inventory turnover at 3.8 times in the quarter, I think that's one of the better inventory turnovers in the industry. The margin that we're getting is at least comparable or better than some of our peers. If you look at the valuation allowance that we have on the inventory, I believe as a percent of the gross inventory it is well above our peers. So we haven't disclosed the inventory aging in the past, but I think from an inventory valuation standpoint evidenced by that valuation allowance as a percent of the gross inventory, we tend to be very conservative.

I'd point out, also, if you look at our inventory on a per-store basis-- same-store basis a year ago, the change in our inventory is not dissimilar to the change in our portfolio on loans as well. It would indicate a pretty healthy relationship.

So that was the other thing I was just going to ask. You said your retail was up 2%?

We were down 2% in retail sales.

Obviously, one of the metrics we look at at retail is comp inventory per store. So are you saying comp inventory is down 2%?

No. I'm not comparing the inventory to sales. I'm comparing the inventory to the growth in the pawn portfolio.

And that's where we went from $112,000 in inventory per store last year to $122,000 this year. That's pretty much in line with the growth that we're seeing in our pawn portfolio.

I'd point out also, as I said earlier, our strength in sales was in general merchandise.

Right, with the weakest being in jewelry.

That's correct. Typically, when you have any type of inventory problem with aging, it doesn't exist in jewelry; it exists in general merchandise. And we're flushing that.

Right. So I presume you're scrapping it.

No. General merchandise. I said we're flushing that through sales.

Right, but you're scrapping-- I presume maybe you're scrapping the jewelry.

That's correct. Our scrap weight was up this year over last year.

Right. Okay. And, then, I presume, Joe, when you said you have-- What was it? You received in process-- That means you've paid that money out?

I'm not sure what you--

You're talking about the Value-- the contingency--?

I'm sorry.

I should have clarified. Yes, on the Value financial contingency payment.

That has been paid out. That's correct.

Okay. And, then, just, if I remember correctly, for anybody that does it now, it's not that much, right? $0.30, is it?

No. that would be if they were in a premium payment.

Oh, yeah, the deficiency guarantees still exist under 1467?

That's correct.

The difference between 1467 and the market price they sell it at.

Right. Okay. So you could still have a bit of a payment to be made.

On about 750,000 shares that remain. That's correct.

Right. And, Joe, when you think about your growth strategy-- and maybe just, since you talked about Canada-- Maybe, can you rank how you feel you're going to deploy the capital between--? You mentioned domestic acquisitions on pawn. You've mentioned Canada - that you're going to go in by, I think you said, the fourth quarter or second half of calendar '09. And then, obviously, you're already in Mexico. I'm just looking at, with the cash that you have on your balance sheet, with $49 million of that being non-operating, what do you think you get your most bang for your buck for.

We believe we get it in all three of these segments. And our intention and the way we run the business is that each of the three are growth segments in and of themselves. And we don't restrict the capital we deploy to any of them, other than the return that we're able to get on it. We're quite pleased with Mexico. We'll move as fast as we can in Mexico. The challenge there is being able to find appropriate real estate. And we're also interested in any (technical difficulty) that we're able to find that make good economic sense for us in Mexico. We will accelerate as quickly as we can, being able to overcome those hurdles, the growth in Mexico. And each year as we move forward-- And the broader our base gets, the faster we'll be able to accelerate that growth.

In EZMONEY stateside, the new products, we believe, provide us additional leverage on the investments we've already made in the facilities that we have. And the flow-through on these new products is phenomenal because relatively little additional investment, the CapEx is already sunk cost. The labor is there and the occupancy and so forth. So we're able to flow through considerably those types of products. That's why we've accelerated our expansion, because we've seen the consumer response to it.

Canada is phenomenal. The way that the various provincial legislators or regulators have looked at the product and the thoughtfulness of it, the research that they've done, the rates they've applied-- We want to move there as quickly as we can. And what I'd like to see there is-- We'll need to get a foothold established, but, once we do, it's to be able over the next several years to get the kind of growth there that we did in the United States.

And, in Canada, are you looking--? Do you think--? Because some of the operators are operating at levels-- how much higher than the rates that have been set? Do you think you'll have an opportunity to pick up some locations? There's going to be some vacancies, if you will, in the space.

We surveyed the real estate market, and it appears that, first of all, there's good siting available, number one. Number two, I'm not sure that anyone who had a site that didn't do very well in it would be the type of site that we'd want to pick up as they vacated.

Okay. And then, just circling back to Mexico, you said the challenge is location. And just-- Has it become too crowded all of a sudden with Cash's move into the space in terms of finding good locations and good acquisitions for the right price?

No. The thing you have to understand-- And, Liz, we did travel down there together.

Right.

Think of the stores that you saw. They're typically 4,000 or 5,000 square feet because their model is general merchandise in Mexico. And there's quite a high demand for that. There aren't a lot of general merchandise pawn brokers in Mexico. So when we're looking for a 4,000-,or 5,000-square-foot facility, we're not competing with other pawn brokers, generally. It's typically retailers and others that would use something of that size. Most of the competitors-- You mentioned Cash-- down there are probably 400 or 500 square feet.

Right. No. I realize that. That does make sense. So it's just a matter of-- I guess I wouldn't think there's such demand for 4,000 to 5,000 square feet by a general merchandisers.

The difficulty is finding that size of facility because most of the shops in the commercial or retail areas--

-- are smaller. Yes.

So the difficulty is sometimes build to suits or finding a couple that are adjacent to one another or even a good store front that has apartments near it. In fact, you may have seen some of the stores there, where we have a 1,500-square-foot showroom, and the backroom storage areas used to be apartments.

Yes. And then my last question-- That makes total sense, and thanks for that kind of reminder. You said you rebranded the Value financial stores.

No. We rebranded the Pawn Plus in Las Vegas stores.

Okay. Sorry. I was--

(Inaudible) because the Value brand is very well known and very well regarded in Florida. We're going to take advantage of the name that we bought.

That's why I thought. I guess I just misunderstood and had a sudden kind of-- What? You did what? That clarifies it. Okay. That's great. Thanks, and good luck.

John Rowan.

I missed the beginning of the call, so I just have a couple of questions. I'm sorry if you're repeating anything. But did you guys put any gold scrap hedge for the quarter?

Yes. Let me describe that, John. We locked in 60% of our June quarter quantities and 50% of our September quarter quantities. And that is at $890 an ounce and $923, for the June quarter and the September quarter.

June was what?

June was 60% at $890, and the September quarter is 50% at $923.

Okay. And just one more question. Did you have a supplemental acquisition payment in the quarter?

The contingency payment?

Yes, for the deficiency agreement.

We did, and that's $9.3 million, I believe.

Okay. Thank you.

Ted Hillenmeyer.

Can you discuss--? I agree with some of the other callers in terms that you don't seem to be getting credit for the growth. Can I just go straight to the worst-case scenario of, if payday goes away, what would that require you guys to do in terms of getting out of leases? I listened to the Gutierrez hearing, and that doesn't sound like it's likely in any way, but you don't seem to be getting credit for it. I'm just trying to figure out what the floor might be on the stock.

I'd say most of our leases, Ted, have a change-of-law clause that, if there is a change in the regulatory requirements in the states that we're operating the store, it allows us an option to opt out. We've looked at one particular state at one time in the past. Of 45 leases that we looked at, 44 of them had the change-of-law, opt-out clause.

But I point out also that the majority of our leases in EZMONEY are three-year leases. There are a few five. But most of them are three to five years, which is a pretty short cycle as well.

And that three to five would be the full term. And, on average, it might be a year and a half to two and a half years.

So, under the opt-out provision, how quickly, if the law changed--?

It would be lease-by-lease, but, generally, 30 to 90 days.

Which is how long you'd be in it anyway to continue collecting. Correct?

If the change of law occurs, typically, there is some period of advance notice--

Yes.

-- before it becomes effective.

Okay. And then, if I look at kind of the other items, G&A, depreciation, and amortization, how much would have to be absorbed by the pawn side that currently is being allocated to payday?

I'm not sure we could quantify that. But I would point out that what you're describing, Ted, although you said, having listened to the hearings, you don't believe that it is a probability-- But what you're describing is a doom's day-type scenario for the payday loan industry. If that were to occur, we would look at redeploying the resources that we have committed to payday lending. We would look at other product lines. We would look at other uses of those resources.

But, effectively, utilize them, obviously, to generate profits and--

That's correct, obviously.

But I just second the thought of the previous caller in terms of considering a buyback. As I calculate it, it looks like you're kind of getting credit for six times EBITDA for pawn and zero for payday. Or people are just-- at less than five times EBITDA, they're not giving you any credit for growth. And you guys keep putting up 20%-plus-type growth. So, as you kind of weigh your capital allocation decisions, I wouldn't think you'd be able to find too many companies that get you 20% growth that you know as well as your own-- not that I would suggest taking away what you've achieved on the other side, but, just a portion, since you guys currently have more cash than debt, just seems like a logical use as you kind of go through your capital allocation checklist.

We hear you.

Okay. Appreciate it.

(Operator Instructions). Dan Mazur.

Just a quick follow-up on-- Did you say the deficiency payment was $9.3 million in the quarter?

It was $9.7 million.

$9.7 million? And that was in the quarter, or is that year to date?

That's year to date--

Okay. So, are you still seeing--?

-- which is basically, Dan, in the quarter, because we closed on New Year's Eve.

Okay. Yes. Are you still seeing claims come in, or are they still trickling in?

Yes. The remaining shares that Joe talked about-- I think it's about 700,000-- they have until May 5. They could actually make the claim after that, but the shares would have to have been sold before May 5.

Okay. And I know you're probably happy to have Value on board. But it seems like this has created quite an overhang. Is this a structure you look to in future acquisitions?

I would say this was very unique. And I couldn't rule it out in the future. But, being unique, you wouldn't see it very often.

Okay. And I might have missed this in the call, but, just given the strength in your balance sheet and lack of the buyback, it sounds like there are some pretty opportunities probably for you on the acquisition side. Can you just--? If you haven't addressed it already-- If you have, I apologize. -- but just what you're looking at from an acquisition standpoint.

Our interest is in any pawn acquisitions in the United States that would make good economic sense to us as well as the seller. And we're also interested in Mexico as it relates to pawn. And we're also interested in other types of short-term financial instruments in Mexico as we explore that market that we may be able to come across as we're looking for pawn. Those are our primary interests at this point.

Okay. And, then, so Canada would be a de novo growth with--? Is that pawn or payday?

It's payday lending. And the model works out so well for a very healthy return on invested capital with the rates that allowed in Canada, and we're able-- We've found that we can open 100 stores a year in the United States. And, from what we've learned in Canada, we think we can, over time, replicate that rate as well. It makes more sense to greenfield the stores than to do an acquisition.

Okay. Great. Thanks for the time.

We have no further questions at this time.

Okay. I thank everybody, all of you, for your time and your interest today. And we're going to continue to be bullish on the business, and we're going to continue to do the things that we do. So thank you all very much.

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