EZCORP Inc (EZPW) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to EZCORP fiscal 2009 third 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, Monica. Good afternoon, everyone, and thank you for joining us today. With me is our Chief Financial Officer, Dan Tonissen.

I'm going to begin with an overview of the quarter's performance, quantify the contribution of our recent acquisitions, and include some commentary on each business segment. Dan will follow and provide detail on our consolidated results. We'll conclude with an update on the final quarter of the year before providing an opportunity for questions.

Quarter three was a good quarter for EZCORP. With a 16% percent improvement in diluted earnings per share over last year, it represents our 28th consecutive quarter of year-on-year earnings improvement. We grew our net income by 33% to $14.4 million. It's noteworthy that this is on top of an exceptional 60% growth in earnings during this same quarter last year when our customers had the benefit of stimulus checks. On a diluted earnings per share basis, we grew to $0.29 from last year's $0.25. This 16% increase in earnings per share is on top of last year's 56% increase.

Our results this year benefitted from the successful integration of two recent acquisitions, the 11 store Pawn Plus brand in the Las Vegas metro area completed in November and the 67 store Value Pawn brand, which closed on New Year's Eve. I believe these results clearly demonstrate the value of our strategy to build earning assets, including the pursuit of quality pawn acquisitions. These 78 acquired stores were immediately accretive by $0.02 in the March quarter and have continued to gain momentum as they've been assimilated into EZCORP. In the current quarter, they contributed approximately $0.04 of earnings per share. We're quite pleased with these results and we're looking forward to continued success with these stores.

Now let's take a look by segment and I'll begin with our domestic pawn operations, which are on page six of our release. On lines 15 and 35 under the column titled US Pawn Operations, you can see that we had a $6.4 million increase in our store level operating income. That's 34% growth over the same quarter last year. Included in these results is approximately $6 million in store level operating income contribution from the two acquisitions I just addressed.

With so many moving parts, I'm going to direct my comments to the key metrics of our US pawn operation on a same store basis, that is without the benefit of the acquisitions. Our pawn loan portfolio reflects high quality loans as demonstrated in the portfolio's yield, which grew to 147% this year. This is a 300 basis point improvement to last year and demonstrates continued improvement in our redemption rates. From a scale perspective, our pawn loan portfolio ended the quarter up 7% over last year, which was not quite as strong as we had anticipated. We did, however, realize much stronger loan growth in general merchandise loans, which increased by 15% over last year. The dampening effect was with jewelry loans, which trailed with only 4% growth in the quarter. In order to accelerate our portfolio growth in the jewelry category, we just recently stepped up our loan values on gold. Jewelry accounts for more than half of our pawn loan portfolio.

Same store merchandise sales for the quarter were down 2% to last year, and this sales performance reflects a merchandise category pattern that's similar to the pawn loans. General merchandise sales showed some strength with an increase of 4% in the quarter while jewelry sales decreased by 5% to last year. Our challenge has been to build our jewelry merchandise sales in what is arguably the most discretionary of any product category that we carry in our stores. What we've done is develop marketing programs to create urgency with the consumer with regard to our jewelry offering.

The first is a well-executed Christmas in July program which makes a jewelry purchase easy and affordable. The program provides a discount, low down payment, and an extended layaway period. That runs in the month of July. The months of August and September will follow with different promotions focused on the jewelry category.

Our same-store sales margins were 39% this year compared to 42% last year, and they reflect a more aggressive discounting approach in what I would term a rather difficult sales environment. Gold scrapping generated $6.6 million in gross profit, and that compares to last year's $7.1 million on a same-store basis. Our inventory turned 3.5 times, same as a year ago, and our same-store inventory levels have increased only 3%. This indicates that we've done a good job of selling through our inventory with no indication of a problematic buildup. Store level operating income is up 2% over last year and operating margins remain constant at a very respectable 43%.

This is probably a good place to respond to a request last quarter to disclose our levels of aged inventory. In general merchandise, which is the most at-risk category due to potential obsolescence, 7% of the gross inventory is more than a year old, which we classify as aged. In jewelry, which typically has a much slower inventory turnover and retains commodity value, we have 21% as aged. If you blend both GM and jewelry together, it results in total aged inventory of 15% of our total gross inventory, and that's before the inventory valuation reserve. Our total gross inventory of $63 million has a $6 million valuation allowance placed against it. I believe you'll find this provides adequate coverage for any risk associated with the aged portion of the inventory and is a realistic but conservative valuation.

Now for a look at our second segment, EZMONEY signature loans, and I'm still on page six of the schedule, our total revenues grew by 1% to $30.9 million in this quarter. The recent addition of the auto title loan product contributed $600,000 of additional revenues which more than offset the drop in the signature loan revenue. EZMONEY net revenues. defined as fees after bad debt, grew by 1% over the same quarter last year. While not what we would expect in a normal market, I think the fact that we grew revenues in this segment at all during this period of extraordinary unemployment is quite an accomplishment.

It also demonstrates the importance of new products which provide more loan options to a broader range of consumers. Interestingly, we found that the majority of both auto title and installment loan customers have never been an EZMONEY customer in the past. At quarter end, 246 of our EZMONEY stores offered auto title loans compared to 139 at the end of the March quarter. While it hasn't been long since the product's introduction, we're really excited about the early results. The auto title loan balance in EZMONEY has rapidly grown, reaching $1.5 million at June end. With bad debt at only 12% of fees, net revenues for the quarter were $526,000. I believe that this product line represents significant upside as the product ramps as these 246 stores mature. By the end of December, we plan to roll auto title loans to more than 100 additional stores.

Installment loans, a new product that was tested and deployed last year, are now offered in 89 EZMONEY stores in the State of Texas. Although this is up only three stores from this time last year, it remains a steady, profitable product. Installment loan net revenue grew 43% to $430,000 in the current quarter. We're nearing the completion now of system software development that will allow us to move the installment loan product beyond Texas. We expect to add installment loans to our EZMONEY stores in four to five additional states during the September quarter.

The EZMONEY segment signature loan bad debt for the quarter is 27% of fees. That's the same level as last year when we had the benefit of the stimulus checks. 27% is the lowest level of bad debt that we've had in this segment's June quarter since we've been in the payday loan business.

Collectively, our store operating income for the EZMONEY segment was $7.8 million, down $500,000 to last year, and largely reflective of the drag from the new stores opened this year. We plan to open only one additional EZMONEY store in the US, and that's later this month, and it is the last lease that we have in the pipeline for the United States. We have since redirected our expansion and development efforts to Canada. We're nearing the completion of several leases in Canada and plan to have stores open well before the holiday season. Canada is a very attractive market for us with a well-studied and pragmatically developed regulatory environment.

Now let's shift our attention to the Mexican pawn business, Empeno Facil. In US dollars, our net revenues grew 25% over the quarter last year, quite an accomplishment considering the headwinds of foreign exchange rates. Store operating expense grew by 35% for the same period and was related to 17 new stores that are still in their first year of operation and not yet contributing their full earnings potential.

Store operating income grew by 13% over last year in US currency. Now on a constant currency basis, the results reflect net revenue growth of 60% including the new stores and store operating income growth of 46%, also including the drag of those new stores.

At June ending, we had 47 Empeno Facil stores, nine of which opened in this fiscal year. We plan to open approximately 20 new stores in Mexico during the September quarter, of which two have already opened in July. These two new stores represent a modified concept which incorporates a jewelry-only store within a store that's adjoined to our general merchandise Empeno Facil pawn shop. We're excited about the concept, and we're anxious to see if the consumers' excitement is as strong as ours.

We often refer to Albemarle & Bond as our fourth segment. As a reminder, A&B is the largest pawn operator in the United Kingdom, a public company that trades on the AIM. Over the years, EZCORP has maintained ownership of just under 30% of their outstanding common stock.

A few weeks ago, we announced that Tom Roberts, EZCORP's lead independent director, and I have been appointed as non-executive directors of A&B. Tom's been a member of our EZCORP board since January of 2005 and has extensive experience, including positions, as a chief financial officer and as president of Worldwide Electronics for [Schlumberger]. We're both excited about joining their board and having the opportunity to represent all of their shareholders.

Over the years, A&B has done a nice job of consistently growing the scale and profitability of their business. We believe, with our business experience and knowledge of the pawn and signature loan industry, that we can make significant contributions to enhance A&B's performances as engaged board members.

During this quarter, our equity interest in A&B provided us with $850,000 in pre-tax contribution versus $1 million last year. On a constant currency basis, our portion of A&B's earnings increased about 14% in the current quarter. Dan will discuss their current market valuation during his remarks and that's a pretty good segue to turning the call now over to Dan for a look at the consolidated numbers.

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. Keep in mind that I'm reviewing our consolidated results while Joe mainly discussed our segment results. Consequently, some of the segment metrics he discussed may be different than similar metrics for our consolidated results.

Starting on line 8, you see that our total revenues for the quarter increased 36.7% to $147.8 million. Total revenues include revenues from the Value Pawn and Pawn Plus stores of $35.1 million. Same-store revenues for the quarter were up approximately 2% overall, with our US pawn operation up 4%, Empeno Facil up 1%, and our EZMONEY operation down 1%. On a constant currency basis, Empeno Facil had 29% same-store revenue growth.

Merchandise sales, line two, increased 41.2% to $50.4 million. Same store merchandise sales were down 2%. After a four percentage point margin decrease from the prior year period, merchandise gross profit, line two minus line ten, increased 29% to $19.4 million. Scrap gross profit, which you see as line 3 less line 11, increased 53% to approximately $11 million. During the quarter, we scrapped about 2.3 million grams of gold jewelry compared to 1.3 million grams last year. Compared to the prior year quarter, proceeds per gram decreased 1% to $13.38 while our cost per gram increased 6% to $8.73.

Scrap proceeds include approximately $600,000 in liquidated diamonds in both the current quarter and last year's quarter. We continue to forward contract our gold scrapping, and we currently have approximately 70% of our estimated September quarter quantities locked at $938 per ounce. In our guidance, we have assumed a gold price of $920 per ounce for the uncovered portion of the September quarter.

You see that pawn service charge revenues, line four, increased approximately $10.2 million or 44.9% to $32.9 million. This is up roughly 7% on a same-store basis. Annualized yields on our pawn loan balance were 151% compared to 144% for the prior year quarter. The increase is largely due to the addition of the higher yielding pawn portfolio in the acquired Value Pawn stores.

For the quarter, our signature loan contribution, line 5 less line 14, declined 2% to $22.2 million driven mostly by lower fee revenues. Signature loan bad debt expense measured as a percent of signature loan fee revenues is 28% compared to 27% for the prior year quarter.

Looking at bad debt levels relative to loans originated in the quarter, our net defaulted principle came in at 5.2% compared to 5% a year ago. Loan originations for the quarter were down almost 5% to $152.3 million. In the quarter, auto title loans contributed $926,000 to net revenue, line 6 less line 15. Bad debt on title loans measured as a percent of fee revenues was approximately 10%.

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 $5.2 million to $21.5 million. Value Pawn and Pawn Plus incrementally contributed approximately $5.3 million to overall operating income.

Increases in operations expense and depreciation and amortization are primarily due to the acquisitions and new store openings, higher administrative expenses due to acquisitions, new store openings, higher levels of professional fees, and other inflationary increases. The gain on disposal of assets for the quarter is due primarily to property insurance recoveries on damaged properties.

Operating income margins as a percent of net revenues were unchanged at 24%. Our equity interest in the income of Albemarle & Bond decreased approximately 15% to $850,000. On a constant currency basis, our equity interest in their income increased 14%. After higher net interest expense and a 34.4% tax provision, net income increased 33% to $14.4 million or $0.29 per share. For the quarter -- excuse me, for the September quarter, we expect our effective tax rate to be 35.8%.

The Value Pawn and Pawn Plus acquisitions contributed incrementally approximately $3.2 million to net income. 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 approximately $0.04 per share for the quarter.

Now a few comments on the balance sheet, which you'll find on page five of the earnings announcement. On line three, you can see that we have approximately $46.5 million of cash on our balance sheet, and $37.5 million of debt, and you'll find that on lines 24 and 30. Of the cash balance, approximately $41.2 million is non-operating cash. Our pawn loan balance, which you see on line four, increased 39% from the prior year to $94.6 million at the end of the June period.

Our pawn loan balance increased 4% on a same store basis. Keep in mind that our current balance is matching up against the prior year balance that was depressed due to the 2008 tax rebate checks. During the quarter, our pawn loan balance grew at a slower rate than we would typically expect. During normal years, we would expect our balance to grow approximately 25% between the end of March and the end of June. During the current period, it grew just over 19%.

You can see that our payday loan balance, line five, grew 16% in the last 12 months to $7.6 million. Not included in this balance is $20.3 million of short-term loans and $600,000 of installment loans that are brokered with unaffiliated lenders. These brokered loan balances are down 7% from the prior year.

On line seven, you see that our auto title loan balance has grown to $1.1 million. This amount excludes $1.2 million of auto title loans that are brokered with unaffiliated lenders so the total auto title loan balance including these brokered loans is $2.3 million. As of the end of June, as Joe mentioned, we offered our auto title loans in 246 EZMONEY stores and 35 EZPAWN locations.

On line ten, you see that our net inventory made up of largely (inaudible) collateral was $51.7 million. The actual inventory per [ending] store that you see for the current period on line 36 includes the inventories from our two acquisitions. Same store inventory levels per ending store increased to $126,000 at the end of June compared to $122,000 a year ago. For the quarter, we turned our inventory 3.6 times compared to 3.4 times in the prior year quarter.

Our investment in Albemarle & Bond is carried on our June balance sheet at $34.8 million, and you can see this on line 16. Assuming a 212 pence market price for A&B stock and an exchange rate of $1.63 per pound, our 16.3 million shares would have a market value of just over $56 million.

Finally, you see on lines 39 and 40 that we ended the quarter with 470 -- excuse me, 417 pawn shop locations, including 47 Mexico locations and 480 signature loan locations, six of which are managed by our EZPAWN operation.

Now let me turn the call back over to Joe.

Thank you, Dan. Before I address the guidance for the balance of the year, I'd like to take a minute and provide a few summary remarks. All in all, even in the difficult current economic environment, we feel these results continue to validate the business strategy we've outlined in the past. Our domestic pawn operations are exciting. The benefit of three acquisitions during the past two years have added substantially to our earnings performance. Each of these three was the largest acquisition that EZCORP ever made in its history at that point in time.

We will continue as we move forward to seek good quality pawn acquisitions as part of our strategic platform. Our US pawn operations have historically demonstrated solid organic growth, and we expect this to continue as we move forward. Jewelry has slowed down a bit in the current economy, but we know what we have to do, and we've taken appropriate action to stimulate this product line in both loans and in sales.

Next, I'd like to emphasize that EZMONEY is still alive and well. We're pursuing two strategic tracks. Number one, the addition of new loan products. This not only brings in more new customers and more business; it also diversifies beyond just payday loans. And number two is Canadian entry. With an underserved market in a well-defined regulatory environment, this offers us an opportunity to become a major Canadian payday loan provider in a relatively short period of time.

Further south, Empeno Facil is a huge growth opportunity in and of itself. We're just starting to pick up speed, have made some adjustments in rates, developed an alternative concept that provides us flexibility to move faster, and pursue the best of both jewelry and general merchandise pawn. The financials have been there, and we now need to accelerate our store builds.

Finally, as to Albemarle & Bond, I'd reiterate that they've done a very nice job over the years. The marketplace has responded well to their concept, but they still have, I believe, significant upside potential.

With all that being said, I'll now wrap up with our guidance for the fourth quarter. It remains unchanged from our pre-announcement several weeks ago at $0.41 to $0.43 per share compared to $0.37 last year. This will bring our full year guidance to $1.40 to $1.42 compared to $1.21 last year, approximately 16% to 17% over last year.

That concludes our prepared remarks, and I'll pause now for Dan to cover the Safe Harbor. Then we'll open the call up to questions.

This conference call and earnings announcement contains certain forward-looking statements regarding EZCORP's expected operating and financial performance for future periods, including, but not limited to, new store expansion, anticipated benefits of acquisitions, and expected future earnings. These statements are based on current expectations. Actual results for future periods may materially differ from these expressed or implied by these forward-looking statements due to a number of certainties and other factors, including change in market conditions and the overall economy of the industry, consumer demand for the Company's services and merchandise, actions of third parties who offer services and products in the Company's locations, and changes in the regulatory environment. For a discussion of these and other factors affecting the Company's business and prospects, see the Company's annual, quarterly, and other reports filed with the Securities & Exchange Commission.

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

Thank you. (Operator instructions.) Our first question comes from David Burtzloff of Stephens, Incorporated.

Good afternoon, Joe and Dan. A few questions. In relation to your original expectations and your original guidance for the third quarter, can you kind of break out where the shortfalls were on the revenue lines -- for the three revenue lines for your revised guidance?

Yes, primarily in the signature loan fees, the pawn service charges, and merchandise sales.

You don't have like a -- I mean, what was more impor- -- what contributed more to that?

The two largest would be the fees on the two loan products.

Okay.

And, David, the issue was the ramp up of our portfolios. As we came out of the March season, the income tax refund season, the season when the customer is really flush with cash, the rate of increase in our portfolios in the quarter we expected to be sharper because of the impact of the stimulus checks last year that we felt slowed it down somewhat during that period. This year we anticipated a sharper ramp up to a more historic level than last year's, and it didn't come on that strong.

Okay. Okay, and then the merchandise margins we're seeing, a little weak. Is that mainly due to value?

The operating -- on the merchandise margin?

Yes, the gross margin.

There's a point to two points -- there's about two points difference in cost of goods there that affects it. But the other factor was just on a same store basis if you look at EZPAWN, we were down about three points in margin to last year. Last year was a higher margin than normal. We were 42% during this quarter a year ago in EZPAWN. And I think the stimulus checks at that point helped us because sales were very strong during the quarter and they seemed to come a little bit easier, allowed us to not have to negotiate at the point of sale to the same degree that we do this year when the market's much more difficult.

Okay.

But even at 39%, it's within about a point of our traditional margin level, which is right at 40%.

Okay. And did loan balances pick up any relative to your expectations after you pre-announced at all? I mean, did you see any pickup late in June?

Nothing that we would really -- that would be material.

Wasn't out of the ordinary. It typically picks up as we move forward.

Okay. And then the last question, on the two test stores in Mexico --

Yes?

-- is that mainly because you don't do a big jewelry business in those stores and this is a way to -- since the predominant model down there is jewelry only?

That's correct. In the United States in our pawn shops, our full-line pawn shops, we typically have over 60% of our portfolio in jewelry, and in Mexico it's much less represented in that portfolio in the full line GM stores. And as you know, throughout Mexico, the stand-alone jewelry stores are the most dominant pawn model that's available to the consumer. So basically what we're doing is the same thing we did with payday lending when we put them to an adjoined pawn shop, and that's give them their own front position and their own entrance and the ability for the customer to go in and out very quickly.

Okay. Thank you very much.

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

Hey, guys.

Hi, John.

Quick question. Dan, did you -- did I hear you right? Do you have $41.2 million of non-operating cash on your balance sheet?

I believe that's correct, 41.2.

Okay. What -- I'm just curious. Is there a -- why are you guys holding so much cash? I mean, it's obviously more than debt that you have. I mean, are you comfortable that your revolving credit is available at this point?

We are. The outstanding debt that we have, the $37.5 million, is term debt.

Okay.

We could retire that, but it just leaves additional dry powder.

Okay, but if I'm not mistaken, I think I've asked the question before, there's no kind of prepayment penalty if you prepay that term debt, right?

There is not.

Okay. And then just to go over the store openings, did you say 20 store op- -- 20 pawn in Mexico just in the September quarter?

That's approximately 20. That's what we expect to do, yes.

Okay, and is there anything else slated for the fourth quarter or is it just 20 off of the current balance to get to where you should be at the end of the year?

Are you referring to Mexico specifically?

The entire pawn footprint.

Yes, that's it for pawn. We have one additional store that we'll open in EZMONEY, and that's because it's a lease that we're obligated to for some period of time and we're just to the point that the property is available now. We do hope that we're able to get a store or two opened in Canada, but much of that's going to be dependent on how quickly the regulatory environment is finalized and allows that to happen. But if they don't fall into this fiscal year, which ends in September, it'll be shortly thereafter.

And when you say in Canada, can you remind me, are you doing any kind of pawn store in Canada, or is it just a payday store?

No, just payday.

Any thoughts of doing anything on the Internet in Canada?

Not to this point, no. There have been thoughts, but no actions or plans.

Okay. Thank you.

Our next question comes from Chuck Ruff of Insight Investments.

Hello. Can you talk about your view of how your US pawn business did versus the competition? Do you feel like you fell short a little bit or what's your view?

I haven't really had adequate time to thoroughly review it. I would point out that on a same-store basis our operating earnings in US pawn without acquisitions improved over last year.

And when you talk about increased gold lending guidelines, does that mean you're just willing to lend a higher percentage of the estimated value or what exactly does that mean?

It means that we are going to -- we have risen -- raised our loan values on gold. That's been done basically as a result of several factors, where the spot market is and has been and where we believe it's moving and [the locks] that we've made. It relates also to an increase in some purchasing of gold this year to last year as a result of a concentrated effort that allows us to acquire some portion of that product at a lower cost because typically as we buy it from the consumer, we buy it at a lower value than we lend on it. And as we look at where we were and have been and what we are able to sell it for, we believe that there is a little bit of room there to allow us to increase these loan values.

Okay, and can you give us --

There is one other factor that's very important, and that's the redemption rate that we currently have indicates at the levels that we're loaning today, the customer elects to continue to redeem or extend those loans at a higher rate than they have in the past, which also gives us confidence in raising those loan values.

Okay. Can you give us an order of magnitude there? When you talk about raising the loan values, are you talking about 10% or some idea of how big a move that is?

If I was going to -- I would say it would be net single digit improvement as you blend it through the different carat compositions.

Okay. And in the payday loan business, is -- are the Internet operators taking share from the bricks and mortar stores in that industry?

I don't know. If you look at our same store growth, you have to take into account, I think, many of the economic factors that exist. And the loss of jobs, which is a basic requirement to get a payday loan, is difficult to separate from any type of competitive element, and you almost have to do it by state. And I would think any time there's an additional option for the customer there is some dilution of your ability to grow, but I can't quantify it nor can I even tell if it's a significant impact.

Okay, and still in payday loan, some people believe that at least the Texas market has been saturated. Do you have a view on that?

I believe that there has been additional competition that's come into Texas. I believe there's still opportunity in Texas for us to open stores if we chose to continue to expand in the US beyond where we are today. There are markets that we haven't yet penetrated in Texas.

Okay. I've got some more questions, but I'll give someone else a chance. I'll get back in line.

Okay, Chuck.

Thanks.

Thank you.

(Operator instructions.) Our next question comes from Liz Pierce of Roth Capital Partners.

Thanks, and good afternoon, Joe and Dan.

Hi, Liz.

I wonder if we could circle back to the new prototype or new concept you were talking about in Mexico because I thought that the stores had jewelry in them already. I was a little bit confused.

They do have jewelry in them today, but if you reflect on it, most of the stores it's -- you go through the general merchandise showroom floor to the very back, and in the back you would typically find one to two, in most stores, showcases of jewelry. And the penetration of jewelry in those stores is very low. Now the customer places great value, however, on the general merchandise, as well. So the general merchandise volume we're, I think, quite pleased with, but there's an opportunity there, we believe a significant opportunity we believe, to substantially grow our scale of jewelry loans.

More or less kind of making it a boutique kind of front and center when they first walk in?

Yes, and I'd point out also in those stores we're not selling jewelry. We're only loaning on it.

Ah, okay. I get it. All right, and then have you guys, and I don't know what the lead time is in terms of your store openings in Mexico for next year, any kind of sense you can just -- on guidance on what we might think about modeling?

No, not at this point. Our next conference call we'll be talking about store builds for Canada and for Mexico and some other things for our new year. But one of the things we found in Mexico is that it takes a much longer lead time to be able to bring the leases to fruition. And we didn't have sufficient scale or numbers of leases in our pipeline, which is extreme- -- more important in Mexico than in anywhere. And this year we have quite a few sites that we've already -- the real estate committee's already approved and leases are being developed on, some of which have been signed for next year, so we have quite a few more in that pipeline.

Okay, but that would be the real thing to focus on, that your pipeline is a lot fuller than it was at this point last year?

Yes.

Yes.

Okay. And then in terms of the installment product, so if I understand what you said correctly, you're going to -- you've got a new software that will enable you to roll this out. But is it -- what states, or I guess you don't want to talk about what states, but maybe you can tell us how you determine those states.

Well, before I -- I'd rather not disclose the states now. After we roll them out I would.

Okay.

Because in each of those states we need to be compliant with the individual state regulations, and the software that we've developed, and it took quite a period of time to get it done for Texas, works well in Texas. As we go into these other four or five states, that software had to be modified to allow us to be compliant with the various financial regulations in those states, and that's been the delay is getting that done. And there's some real upside in these other states with the installment loan, I think even more so than the State of Texas, and I'll talk about that also as we talk about our next year.

So, Joe, is it -- could it just be something that can go in every state or do some states have a barrier to this that you could -- ?

Oh, no -- yes. The financial regulations in some states are such that we have no interest in going in.

Okay.

Of the 11 states that we have our payday lending in today, there are five of them that we've identified, six total, that we've identified that we feel we can do installment loans profitably with an adequate return.

How are the stores in Houston? It's been not quite a year yet. I mean, how are they coming back into -- close to where they were, are they 50%?

Oh, they're beyond 50%, but in -- collectively, that group of stores has not grown to the same rate above where it had been as we would've expected. That's in payday lending. In pawn, much of it has come back now, although we still -- at the beginning of the quarter, we still had two pawn shops that were still closed, still hadn't reopened, and during the quarter we reopened one of them, one of them is still closed, from where we were a year ago in September.

But now just -- it's down to one store that's not open?

One pawn shop --

Right.

-- that's not open. That's correct.

Okay. And then curious on your thoughts about -- I mean, obviously you gave us your comments on gold for the fourth quarter. Any thoughts about what you think for fiscal '10 and would you think of changing any of your strategy or forward contracting strategies?

Not currently. When we announce our earnings for the fourth quarter, we'll give you our thoughts on what we've built in our guidance at that point.

Okay. Fair enough, and maybe you guys can get some air time on the pawn reality store show that's going on in Vegas.

Yeah, the Christmas in July event.

Well, there you go. All right. Best of luck. Thanks.

Thanks.

(Operator instructions.) We have a follow-up question in queue from Chuck Ruff of Insight Investments. Please go ahead.

Okay. Hello again. I think there was a proposal in Wisconsin on payday loan restricting the rate. Can you talk about that a little bit and maybe what the status is?

Okay. In Wisconsin, there were two state representatives that I believe have been circulating a bill, talking about a bill, with a 36% rate cap. That rate cap would, in effect, be a prohibition rate for payday lending in the state. Now, it has not been introduced. This has just been, I think, a discussion -- at a discussion level. There are two other representatives, I understand, who have a different bill that is basically just a best practices bill, has no rate cap or anything of that nature. Those are the two bills, I believe, that are circulating or being discussed in Wisconsin. They're all in recess now, I believe, until this fall, September. And there's a state industry association that is very strong that is focused -- their [high line] is the consumer choice. And I believe that's part of the consumer choice coalition. There's -- it's part of their name. They're, I believe, addressing these bills at this point.

Okay.

That's as far as I know about.

Thanks. And can you talk about the Financial Product Safety Commission that's being proposed in Washington, DC, what your opinion is of whether that's going to happen and what kind of impact that would have?

It's almost impossible to predict what is happening in the political arena, I think. There's an awful lot of controversy around this proposal. The primary function of it, as I understand, is to ensure adequate disclosures and prevent unfair and deceptive type of practices. And it goes on with certain authority levels, but one of them is -- that they cannot do that's specifically excluded -- is the ability to establish any type of usury limits. As far as its potential, I'm not sure. I think it was Bernanke today --this morning's paper came out against this. It's a Treasury Department agency, I believe, but everything I've seen on it has just been consumed with controversy from different aspects of the government, and I have no idea where it's going. And by the way, this is not directed at payday lending. This is directed at all credit products.

Right.

And payday lending would be included with that --

Right.

-- for sure.

Yes.

But the banks, I believe, have rallied against this, as well as many other consumer financial service industry comp- --associations.

Okay. Both the payday loan and the auto title loans seem to be kind of targeted by some politicians and consumer advocates. I guess the question is why expand in an area that is kind of in some people's target?

First of all, when you talk expansion, in Canada, Canada is a fully regulated environment. This has gone through from the federal government down to the province. The provinces are establishing regulations. They've been very thoughtful. They took a very pragmatic approach. They studied this, and they have basically defined regulations that are very conducive to doing business in Canada. I would say that it is very, very low risk. So you push that to the side. And if you're only talking the new products, installment loans and auto title in the United States and we stop storefront expansion in the United States, we've done -- we did that probably six months ago, the -- much of the controversy and discussion that you hear about payday lending as it's defined, doesn't affect installment loans because they're beyond a 92-day definition of payday lending. And auto title loans are, in most -- in states that we're doing the product, are -- except for Texas, which is CSO -- are well-defined by the state regulations for that product, in the states that we are doing that product. So we're operating under state regulations. I think auto title lending has gone through this regulatory period of its lifecycle some years ago, as payday lending is doing it today, and it's basically been fairly well stabilized. The regulations today provide quite a bit of consumer friendly requirements in holding period, notice periods, and the like with auto title. So we feel it's a much more regulatory stable product than payday lending.

Okay.

Even in payday lending, I would point out to you that there has been in the past considerable talk about the doomsday scenario of payday lending. But if you -- and there are several bills that have gotten a lot of attention on a national basis, and certainly one's the Durbin bill that puts a 36% cap on payday lending that was introduced in the Senate. But the bill lacks co-sponsors and the bill appears to be stalled, and I think many people understand the adverse impact that that would have.

And if you look at the House today, in the House of Representatives there's three bills that have been introduced. One of them is the Gutierrez bill that's received an awful lot of press. And today that bill has 35 sponsors. And we don't support the bill, but the fact of the matter is that the bill establishes a 15% rate on payday lending for the payday term. And if that's a two-week term, that's a 390% APR annually with that, and we feel that's restrictive because there are many states out there that have established rates higher than that.

Then there's another bill that enhances it that's much more conducive to the industry. That's the Baca bill. There's another one that's the Shuler bill. The Shuler bill basically would allow rates that are higher than we're charging, I believe, in any state that we operate today. And that bill has 19 co-sponsors at this point in time. So I think it's -- and Gutierrez' hearings and these others, I think, have demonstrated that there's a recognition of the need for the payday loan product. And this -- the issue with the APR, and that's what everyone seems to focus on --

Yes.

-- is what gets so many people's attention, but an APR implies the consumer's going to have it for a full year.

Right.

And it's no different than going into a hotel and asking what the room rate is and rather than telling you it's $100 a night, they tell you it's $35,000 or something like that because that's what it would be if you had that room for an entire year. It's no different than quoting rates in that manner and you can apply that to car rentals and anything el- -- many other, as well.

Understood. With Gutierrez, you meant to say a $15 cap, not a 15% cap, correct?

It's $15 per $100.

Yes.

That's right. It's 15% only for the period, yes.

Yes, okay. Can you talk about what you see is the upside in Canada, what -- how big of an opportunity is Canada? We're obviously just going to start there, so I'm trying to get a better idea of what you see ahead.

We believe, and we'll talk about numbers at the next call as to our potential there, but there are two primary players that have about 400 locations each in Canada. There's a third one that has roughly 100 stores and from there it's down to a very fragmented group of payday lenders in Canada. We believe that the customer has a high degree of need and demand for the payday loan product as we've studied the market, and we believe they have a much greater tendency to repay the loan. So the economics look very good. As far as number of stores, I would think that they probably could easily have twice the stores that they have today. One of the things you need to look at is the concentration of population and the concentration of those stores, and I think that identifies some additional opportunity for store growth.

Okay. The last thing I wanted to ask you about is you obviously have a whole lot of things on your plate. You're going to be entering Canada. You're growing very rapidly in Mexico. You just made two acquisitions. We've got a couple of newer products, installment loans and title loans. How will you know if you're trying to do too much? What are the things you're going to be looking for to -- that will indicate to you that perhaps there are too many irons in the fire?

I think the most important aspect here is what we've done with the organization, and we have been muscle-building in our organization over the last several years. If you look at the functional head of development, we have an individual who came on board about a year ago who has tremendous experience, had it with Blockbuster and opening up to 500 stores a year. We brought in a general counsel who was the general counsel with Dell. We brought in and actually moved through the organization a very experienced payday lender. Put him in charge of our stores and moved him into the head of the operations for payday lending. We took an individual who ran our payday lending operation, put them in charge of all of our pawn operations in the Americas. He's responsible now for the United States and for Mexico. And we -- as we did the Value Pawn acquisition, we picked up significant strength in the management talent there and we have an individual running that organization who's quite capable and competent of -- knows the pawn business well and makes a great contribution and can even do more.

So we've got an organization that can -- and I haven't gone through them all. There's more, but we have an organization, we believe, that has the capacity to be able to move our company forward and do the things we talked about doing. I think thus far we've been -- we've got a pretty good track record of doing the things that we said we were going to do.

I agree with you, and those are all reasons why you expect to be able to continue to do that, but I guess what I'm asking you is are there some indicators that you're looking for that will cause you to say we need to pull back here or there because we can't handle this many challenges?

Well, we have a series of business reviews that we do ourselves. We do it with each of the segments. In fact, we actually go down a level beneath the segments as we look at the performances. We have functional reviews corporately. We have objectives established for the year for each of these types of elements that we have consistent reviews of. We have individuals who are assigned responsibility for each of them. We have frequent reviews and meetings as an executive committee to review our progress, and we attempt to stay on top of the business and the key metrics of the business on a very, very consistent basis. At least monthly we have these reviews and we have actual functional reviews every two weeks.

Okay.

When you say identify the metrics, each of these elements has its own series of metrics.

Okay. Thanks.

You're welcome.

(Operator instructions.) Our next question comes from Ted Hillenmeyer with Northstar Partners. Please go ahead.

Just following up on the last caller's question. Do you feel you are in a position to make acquisitions now? Are the other guys assimilated enough that you feel like you have the bandwidth to do them, and if so, in what areas would you be looking? Is it just pawn or is it payday in Canada, as well?

First of all, the two acquisitions, our two most recent acquisitions, we've taken our -- the stores in the Las Vegas metropolitan area and those stores have been completely rebranded. And in most cases we expanded the showroom with the stores and a couple cases we expanded the capacity. We have an experienced group of four multi-unit managers that are now responsible for the 15 stores that we have in Nevada, and it's just a matter now of building on the base business that we have.

In Value Pawn, we have -- there's been one change in a regional director of ops. An outside -- a very experienced person took that role. Outside of that, we have the same management team managing the 66 domestic stores from Value Pawn and we're quite pleased with their capacity, their ability to run the business. And the head of their operations prior to the acquisition is still the head of operations subsequent to the acquisitions and is doing a fine job with the business.

So these businesses are stable now and it's just a matter of generating organic growth in both of them. So I believe we have the capacity to continue to seek out additional acquisitions at the current time. And we're interested in pawn domestically. We're interested in at least exploring to see if there's anything that makes sense in Mexico. And in Canada, if we were able to get a small base of operations to use to build on, we'd be interested in that, as well. And that's where our focus in acquisitions will be at least for the near term -- is for the near term.

And are there any earnouts with the past acquisitions you made? You already paid the one payment for the -- was it Value Pawn?

Yes. That's actually over now. There's -- we have no other obligation. We do have a consulting agreement with the former proprietor of the Pawn Plus locations, and he's working with us in that marketplace. That's the only out- -- only continuing obligation.

And how are those two markets doing? Are you able to break out how same store sales -- you threw a lot of numbers, and I forget if you provided the same store sales.

No, we didn't go that granular with the businesses. Suffice it to say the contribution -- we did give their sales, combined sales, and their accretion. I think it was right at $6.1 million in operating contribution in the quarter and accretion of about $0.04 combined.

Do you know were the same stores roughly in line with the rest of the Company or above, below?

The performance -- the metrics are a little bit different actually between them, between sales in PLO compared to EZPAWN, but collectively the overall performance is pretty close. There's a difference in the Las Vegas acquisition because there's a substantial change in the model in the disposition of forfeited collateral to what they have done before, which was quite heavily leveraged on eBay and jobbers, wholesalers.

And can you just give what you have hedged for gold for the rest of the year or however long you have hedged for?

It's 70% of the September quantities, and that's at 938. And then we're assuming where the other 30%, 920.

And anything hedged out in December quarter?

Nothing.

And the 10-Q would be out when?

Should be the -- around the second week of August.

August? Okay. Okay. Thanks, guys.

We have no further questions in queue. Back to you, Mr. Rotunda.

Okay. Thank you, Monica, and thank you all very much for your time, attention, and continued support. Appreciate it.

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