EZCORP Inc (EZPW) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the EZCORP fiscal 2009 fourth quarter earnings release conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Joe Rotunda, President and CEO of EZCORP. Mr. Rotunda, you may begin.

Thank you, Jamie.

Good afternoon, everyone. Thank you, all, for joining us today. With me is Dan Tonissen, our Chief Financial Officer. Today, we'll be addressing our fourth quarter and 2009 fiscal yearend results. I'm going to begin with a high level overview of the quarter and the year and include commentary on each business segment. Dan will follow and provide detail on our consolidated results. We'll conclude with our guidance for 2010 before providing an opportunity for questions.

I'm pleased to point out that this quarter marks our twenty-ninth consecutive quarter of year-on-year earnings growth. It's also the ninth consecutive fiscal year of earnings improvements. We're proud of what we've accomplished over the years and the fact that even in an economic environment that reflects an extended period of adverse business influences we've demonstrated our ability to continue to strengthen our balance sheet as we've constantly and consistently grown our earnings.

For the fourth quarter we're reporting net income of $20.9 million, a 31% increase over last year. Diluted earnings per share are $0.42 compared to $0.37 last year and reflect a 14% improvement. When making this comparison to last year we should note two unusual elements in 2008. First, the drag of Hurricane Ike and, second, the advantage of a foreign tax benefit related to prior periods. These two elements netted to a benefit of $0.03 per share during the fourth quarter last year. When you exclude this unusual net benefit from last year's quarter our fourth quarter diluted earnings per share grew by $0.08 and 24% over last year.

During this quarter our Value Pawn and Pawn Plus acquisitions contributed just over $4 million. This is approximately $0.04 of that $0.08 per share improvement after netting the affect of the additional acquisition related shares. These results I believe clearly demonstrate the value of our strategy to build earning assets, including the pursuit of quality acquisitions.

Now, let's take a look by segment. I'll begin with our domestic pawn operations, which is the first column of numbers on page six of our release. If you go to lines 15 and 35 you can see that we had a $7.7 million increase in our store level operating income, a 32% improvement over the same quarter last year.

Here's what's happened with the key components of U.S. Pawn. First of all, we continue to grow our loan portfolio. In total our pawn loan portfolio grew by $27 million and 37% over last year.

On a same-store basis, including an adjustment for extensions provided to our pawn customers affected by hurricane Ike last year, our pawn loan portfolio grew by approximately $4 million and 5% over last year. The related pawn service charges grew by $10 million, which is more than 40% above last year in total and up more than 4% on a same-store basis.

The second element is sales. Our U.S. pawn sales continued to be challenging in the quarter. Although our retail sales grew to $46 million in total they decreased 4% on a same-store basis. By category general merchandise sales increased over last year, while jewelry sales which are a much more discretionary purchase declined.

But there's some light in here. Throughout this quarter we had a strong pre-season layaway campaign in place, and completed layaway transactions represent about 25% of our sales. This quarter's layaway sales were considerably stronger by more than 25% on a same-store basis than a year ago, and they're not reflected in our financial sales until the layaways are fully paid out, which is expected to be in the December quarter.

Now, our margins were down 4 percentage points the last year in total, and they were adversely influenced by both the acquisition stores and the tight retail trading environment. On a same-store basis retail margins decreased 3 percentage points to 39% for the quarter.

Jewelry scrapping is the third key pawn component. Total gross profit from scrapping increased $5 million or 47% in the quarter. On a same-store basis scrapping was about flat, down less than $100,000 on approximately $10 million in net proceeds.

The resultant net revenues in U.S. Pawn increased by about $20 million and on a same-store basis were about flat to last year. All in, with expenses well managed, U.S. Pawn operating income was $32 million, an increase of almost $8 million to last year. On a same-store basis operating income increased 2.5% and generated a 50% operating income margin.

Now, I think it's noteworthy to point out that there is a significant geographical variation in the U.S. Pawn operating income performance to last year. Two areas had a dramatic drag on the growth in operating income. Those two, Las Vegas and Florida, are the areas that have experienced the most dramatic job losses in the United States. Excluding those 22 same-stores of our 293 same-store U.S. pawnshops, our growth in operating income was 6% over last year.

The point is that the severity of the economic downturn in those two areas resulted in a significant drag on our overall operations, and as those local economies recover we anticipate just the opposite, a significant benefit to the overall results.

Looking at the entire year, our U.S. Pawn operations generated $448 million in total revenues, with a 28% increase in store operating income to over $109 million.

Moving on to Empeno Facil, you'll see that our Mexico pawn segment is growing, both organically and through new store development. During the quarter we opened 15 new stores, that brings this year's total to 24 new stores in Mexico, and Empeno Facil's total store count to 62 at yearend. And, as an aside, we just opened four more in October.

Of the 15 stores we opened in the quarter four were our first jewelry only pawnshops, which we branded [Intena Suoro], which is Spanish for Pawn Your Gold. Although very early we're encouraged by the initial acceptance of this companion concept. This gold only concept provides a nice complement to our full line pawnshops in Mexico.

The second column of numbers, on page six, summarizes the financial results of the quarter versus last year for this segment. This is in U.S. dollars and reflects the adverse impact of currency translation.

Total revenues grew 32%, net revenue growth was 23%, operating income grew 4%. That operating income also reflects the impact of costs associated with those 15 new stores opened in the quarter.

Now, if you look at this on a constant currency basis, pesos to pesos, you see results that are much stronger. Total revenues grew by 69%, and total store operating income increased by 33%. For the year Empeno Facil contributed operating income of $3.9 million, a 21% increase over last year. On a constant currency basis our annual increase in operating income is 55%.

Now, for a look at our third segment, EZMONEY signature loans, still on page six of the schedules. The results of this segment reflect the substantial benefit of adding new products to an established expense base of existing brick-and-mortar. This leverage significantly impacts operating income and margins.

Our total revenues grew by $3 million and 9% for the quarter to $36 million. This performance is particularly strong when you consider the current macroeconomic environment. There's little doubt that the magnitude and duration of continued job losses has restricted our growth potential in this segment.

Much of our growth this quarter was associated with our broader loan offering. Auto title and installment loans represented two-thirds of the growth in this segment's total revenues over last year. The auto title loan product contributed $1.6 million in fees during the quarter. We added this product in an additional 17 stores this past quarter and now offer auto title loans in 263 EZMONEY stores in six states.

During the September quarter we doubled our portfolio of auto title loans in the EZMONEY segment from the prior quarter and nearly tripled the revenue. In addition, at September quarter end we had the installment loan product in 194 locations in six states, and similar to auto title loans our installment loan portfolio doubled from the prior quarter.

Having these additional products available in our stores is a significant point of differentiation. We've always offered our customers superior and respectful service in an open, bank-like environment. We now also offer multiple loan solutions other than just payday loans to get them the cash they need, which further distinguishes us from our competitors. It also diversifies our revenue streams.

In total EZMONEY net revenue, which is after bad debt, grew by $5 million and was 23% over last year. The stronger growth in net than gross revenues is the result of continuing improvements in the management of bad debt. As a percent of fees bad debt was 29% compared to 36% last year.

Although last year was adversely impacted by Hurricane Ike, this year is a solid performance for this seasonal time of the year. In fact, it's much lower than our historic norm for our September quarter, with operating expenses basically flat to last year, and store operating income growing $11 million, an increase of 71% and almost $5 million. Also noteworthy is the operating income margin for EZMONEY that reached 42.8% for this period.

As I commented earlier, we also opened two new payday loan stores late in the quarter in Canada. Canada is a very attractive payday loan market. It's underserved with a much lower storefront penetration than the United States, and the provincial legislators developed a regulatory environment after much study that resulted in fee structures that are reasonable for both the industry and the consumer.

Our Canadian stores look quite similar to our U.S. storefronts. The primary difference is the brand. After considerable research we found the EZMONEY brand didn't work for a number of reasons, including the Canadian pronunciation of the letter Z, which is [Zed]. We converged on Cash-Max payday loans, which is our brand in Canada.

After all of six weeks in operation for these two stores the initial results are very encouraging, and we're confident in the up side potential in Canada. We see it as a significant storefront expansion opportunity with the potential for impressive returns.

For the entire year EZMONEY generated $133 million in revenues, an increase of 6.1%, and contributed operating income of $40 million, a 21% increase over last year. Bad debt for the entire year was 25% compared to 29% in fiscal 2008, a nice improvement. Overall, a strong quarter and a strong year for EZMONEY.

Moving across the Atlantic to the United Kingdom, there's also more excitement with Albemarle & Bond. As you're probably aware, A&B is a public company in the UK and trades on London's [AIM] Exchange. We are their largest shareholder with slightly less than 30% ownership and three of their nine Board seats.

Their fiscal year ended June 30 and they recently released the results, which are quite impressive. Revenues increased by more than 18%. Pretax income increased 50%. And diluted earnings per share grew by 46%. During this quarter we recognized $1.9 million in pretax contribution from our ownership participation in the earnings performance. This compares favorably to last year's $1.2 million.

Having addressed the United States, Mexico, Canada, and the United Kingdom, it's now on to Australia. In August, EZCORP entered into an agreement to purchase new equity resulting in a 30% ownership of Cash Converters, a public company that trades on both the Australian and London Stock Exchanges.

Cash Converters' business model has two primary components. One is as a loan provider for consumers who have difficulty accessing credit, and the other is as a retailer of previously owned merchandise. They do this primarily as a franchisor and have about 500 owned or franchised locations worldwide, with significant concentrations in Australia, the United Kingdom, Spain, South Africa, and France. Their annual revenues are approximately $94 million Australian, with earnings of $16 million Australian.

We view this as a strategic partnership, similar to our position with Albemarle & Bond. Cash Converters plans to use our investment to continue to repurchase franchised stores and grow its installment loan business. Cash Converters' shareholders approved the transaction last week, and we just closed the deal yesterday.

There is a significant worldwide need for access to both cash and credit that's not satisfied via traditional banking. The relationship with these strategic partners expands our reach and provides easy [core] with many long-term opportunities to satisfy that need. And they also provide immediate returns.

With that, I'll turn the call over to Dan for a better view of our consolidated results.

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 see on page three.

Keep in mind that I'm reviewing our consolidated results, while Joe mainly covered our segment results. Consequently, some of the segment metrics he discussed are going to be different than some of the metrics that I will discuss in the consolidated results.

Looking on line eight, you see that our total revenue for the quarter increased 33.5% to $164.8 million. Total revenues includes about $37.4 million of revenue from Value Pawn and Pawn Plus acquired stores. On a same-store basis total revenue for the quarter was up approximately 1%, with our U.S. Pawn operation down 1%, and Empeno Facil up 4%, and our EZMONEY operation up 5%. On a constant currency basis Empeno Facil had 33% same-store revenue growth.

Merchandise sales, line two, increased 38.5% to $48.4 million. Same-store merchandise sales were down 3%. After a 4 percentage point margin decrease from the prior year period, merchandise gross profit, line two minus line 10, increased 26% to $18.2 million. Scrap gross profit, which you see is line three less line 11, increased 48% to approximately $14.8 million.

During the quarter we scrapped about 2.9 million grams of gold jewelry, compared to 2 million grams last year. Compared to the prior year quarter proceeds per gram were relatively flat at $13.69, while our total cost per gram increased slightly to $8.72. Scrap proceeds includes approximately $500,000 in liquidated diamonds in the quarter compared to $400,000 in last year's quarter.

We continue to forward contract our gold scrapping and currently have approximately 70% of our estimated December quantities and a small portion of our March quantities locked at $970 and $1,040 per ounce. In our guidance for the quarter and year we have assumed an average price of $900 per ounce on all the uncovered quantities.

On line four you see that pawn service charge revenue increased approximately $10.5 million or 39% to $37.4 million, and this is up roughly 3% on a same-store basis. Annualized yields on our pawn loan balance were 150% compared to 148% for the prior year quarter, and the increase is largely due to the addition of the higher yielding pawn portfolio and the acquired Value Pawn stores.

For the quarter our signature loan contribution, line five less line 14, increased 15.5% to $24.6 million. The benefit of a 4% increase in signature loan fee revenue, line five, was compounded by a 16% decrease in signature loan bad debt, line 14. Signature loan bad debt expense measured as a percent of signature loan fee revenues decreased to 30% from 37% for the prior year quarter.

Hurricane Ike indirectly impacted the 2008 quarter's performance by approximately 3 percentage points, so we still had substantial improvement without the impact of Hurricane Ike in the prior year.

Looking at bad debt levels, relative loans originated in the quarter, our net default to principal came in at 5.6% compared to 6.3% a year ago. Loan originations for the quarter were up 2% to $173.2 million.

In the quarter auto title loans contributed $1.7 million to net revenue, line six less line 15. The bad debt on title loans, measured as a percent of the auto title loan fee revenue, was approximately 12%.

After higher levels of operations expense, line 19, and administrative expense, line 20, offset by a gain on disposal of assets versus a loss in the prior year, line 22, operating income increased $11.8 million to $30.3 million.

Value Pawn and Pawn Plus incrementally contributed an approximately $6.6 million to incremental income in the period.

Increases in operations expense are primarily due to the acquisitions and new store openings, higher administrative expenses due to growth from acquisitions and new store openings, a software license dispute settlement, relocation expense, and some other inflationary increases.

The gain on the 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 improved 6 percentage points to 31%. After higher net interest expense, greater equity interest and the income of unconsolidated affiliates, and a 34.2% tax provision, net income increased 31% to $20.9 million or $0.42 per share.

The Value Pawn and Pawn Plus acquisitions contributed incrementally $4.2 million to net income. 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, I'll make a few comments on the balance sheet, which you'll see on page five of the earnings announcement. You can see that we have approximately $44.8 million of cash, on line three on our balance sheet, and $35 million of debt, lines 23 and 29. Of the cash balance approximately $38.5 million is non-operating cash. Our pawn loan balance, which you see on line 4, increased 34% from the prior year to $101.7 million. Our pawn loan balance increased 1% on a same-store basis.

You can see that our signature loan balance, line five, grew 17% in the last 12 months to $8.4 million. Not included in this balance is $22.3 million of short-term loans and $700,000 of installment loans brokered with unaffiliated lenders. These brokered loans are down 2% from the prior year.

On line seven you see that our auto title loan balance has grown to $1.7 million. What you don't see on our balance sheet are $2.2 million of auto title loans brokered with unaffiliated lenders. So the total auto title loan balance including these brokered loans is $3.9 million.

On line 10 you see that our net inventory, made-up largely of forfeited collateral, was $64 million. This net inventory is after an 8% or $5.7 million valuation allowance for aged, obsolete, broken or missing inventory.

At the end of September the percent of our jewelry and general merchandise gross inventories that had been in our inventories more than 12 months were 22% and 7%. The actual ending inventory per ending store that you see for the current period on line 35 includes the inventories from our two acquisitions. Same-store inventory levels per ending store increased to $140,000 at the end of September versus $130,000 a year ago. For the quarter we turned our inventory 3.6 times, a small improvement over the 3.5 times that we turned the inventory in the prior year quarter.

Our strategic investment in Albemarle & Bond carried on our balance sheet at $38.9 million, and you see this on line 15. Assuming a 241 Pence market price for A&B stock and an exchange rate of $1.66 per Pound, our 16.3 million shares would have a market value of just over $65 million.

Finally, you see on lines 38 and 39 that we ended the quarter with 431 pawnshop locations, including 62 Mexico locations, and 479 signature loan locations, including two stores in Canada. Sixty-eight of our U.S. pawn locations and 263 of our U.S. signature loan locations offer auto title loans, 194 of our U.S. signature loan locations offer installment loans.

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

thanks, Dan.

2009 was another busy year for us. During the period we made, brokered, extended, and renewed approximately $1.7 billion in loans, that's about 23% more than last year. We completed two acquisitions, each of which was the largest in our history at the time it was done, and we successfully integrated them into our operations, and we still ended the year with more cash than debt on our balance sheet.

We also continued opening new stores in Mexico adding 24, and we entered Canada with two new stores. Our total revenues grew to $597 million, an increase of 31% from last year. Net income grew to $68 million, an increase of $16 million and 31% from last year. Diluted earnings per share grew to $1.42, which is 17% higher than a year ago. All in all, particularly when you consider the recent macroeconomic environment in which we operated, it was an excellent year for EZCOR.

Looking forward, here's our guidance for fiscal year 2010, with a conservative view on the speed with which we'll see the economy recover during the next year. In our U.S. Pawn operations our guidance incorporates same-store growth in net revenues in the mid single-digit range with expense growth in the low single-digit range. We also have the incremental benefit of Value Pawn for the entire December quarter before those stores will be in the prior year numbers. Additionally, we believe there'll be some up side potential in operations contribution from the Value Pawn shops during the balance of 2010. We also plan to open six domestic pawnshops this year.

In our Empeno Facil segment, we plan to add 40 to 50 new stores, approximately 60% will be the gold only concept. This will create some drag that will result in modest growth in contribution for this segment, but it will significantly increase the store base for greater expansions and earning potential in future years.

In our EZMONEY domestic loan segment we're continuing our focus on leveraging our existing storefronts with the ramp of new loan products. We anticipate significant single-digit growth in revenues over 2009, and our bad debt on an annualized basis should be in the mid 20% range with normal seasonal fluctuations. With no new domestic stores planned, the growth in expenses will be minimal.

In our Canadian Cash-Max operation we plan to add as many as 45 new stores during 2010. Although the model was attractive and we expect stores to turn profitable in the first year of operation, this will result in a drag in earnings during the new year.

In regard to our new strategic affiliate, Cash Converters, we expect this transaction to be immediately accretive and contribute to earnings.

All in, considering what I've just covered, we expect fiscal year 2010 earnings per share to be in the range of $1.65 to $1.69. That's an improvement of about 18% over this year's $1.42 per share. We expect first quarter earnings per share in the range of $0.41 to $0.43 versus the prior year of $0.33.

It's also noteworthy that the forecasts include a drag from over 100 new store openings in Mexico, Canada, and the United States that totaled just over $3 million. Additionally, we're investing an incremental $3 million in building our organization to effectively manage a growing and more complex business.

Before I turn it over to Dan for the Safe Harbor, I'd like to make a few personal remarks. Dan has announced his retirement effective December 31st. Dan has been the Chief Financial Officer of EZCORP now for 15 years. He's been our partner in growing earnings and strengthening our balance sheet since 2000. He's built a great team in both accounting and financial planning, and that's the legacy that will remain after he retires.

He's now gone through 61 earning calls, and today is the last one for him. And he's going to be missed, and I say that with all sincerity. But I'll point out he still has two more months to work, and there won't be any coasting.

And, with that, I'll turn it over to Dan.

Thanks, Joe.

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 new store expansion, anticipated benefits of acquisitions, and expected future earnings. These statements were based on our current expectations.

Actual results for future periods may materially differ from those expressed or implied by these forward-looking statements due to a number of uncertainties and other factors, including changing market conditions in the overall economy and 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.

Now, Jamie, we'll open up the conference call to questions.

Thank you. We will now begin the question and answer session. (Operator instructions.)

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

Good evening.

Hi, John.

Dan, just a couple of quick questions. Do you have the CapEx for the quarter?

I do not have that, John. It's going to be for the year about $19 million, just under $20 million, about $19.5 million for the year.

Okay, and the other revenue line, it was actually fairly strong relative to the June quarter, what is behind that?

There would be a significant increase in layaway fees during this period, and there are also some additional products that we offer in our pawn operations that are allied to the general merchandise sales that we record in that line, that we've had a very good take-up on.

Okay, so there's nothing that's nonrecurring in that line?

No.

No.

Okay, at this point are you guys still resisting or not planning on any type of internet offering in Canada?

We are not planning internet payday loans in Canada.

Okay, and as far as the payday loan business in the U.S. goes, have you introduced any type of gold buying in the EZMONEY shops?

We do have it in a number of our stores. We still consider it to be a test phase.

Okay, and, Dan, I think you gave the number before, but what was the -- or it may have been Joe -- what was the same-store operating income growth on the pawn side?

2.5% I believe it was in the quarter.

2.5%, okay. And can you -- just one more question -- can you give what the EPS, the new store drag is in the first quarter, kind of your EPS guidance on the EPS, I think you said it would be $3 million, if I'm not mistaken?

That's for the entire year.

Okay, well what was -- what is it in the first quarter guidance?

I don't have that broken out.

Okay, all right. Thank you.

Our next question comes from Henry Coffey from Sterne Agee. Please go ahead.

Good afternoon, everyone. I'll save all my tough questions for Dan next quarter, but, no, congratulations and we'll miss you.

Could you give us at least some perspective, Cash Converters, what sort of contribution is likely on either a dollar basis or a per share basis in 2010?

Yes, Henry, the -- I mean given that they're a public company you can get their annual numbers, and so this would be trailing, but their trailing net income was about $16.2 million and this will be accounted for much like Albemarle & Bond, so you would convert that into U.S. dollars. I think today the exchange rate is about $0.91 to the dollar, and then just take 30% of that.

Now, there will be since that shows up on our income statement above the tax provision line, we do get a foreign tax credit, which when the income is that degree of magnitude and the tax differences stay virtually where they are today, there would be additional tax in that provision of about $300,000. I think when you do all the mechanics of that based on their trailing number after the net affect on our tax provision it's going to be around $4.2 million, $4.3 million.

And the cost of capital in that also.

Yes, and that assumes that there's not, obviously we used $49 million to do that acquisition so there is an opportunity cost associated with that.

And then so now you're -- with the $49 million out the door, your net cash position is -- or your uninvested cash position is now sort of close to zero and your debt is a little higher?

To complete that we did draw down a modest amount of the revolving credit facility. But with the heavy cash flow that we would expect in the December period, we should be back basically with the full revolver and just the term debt on the balance sheet, and generating additional non-operating cash.

The two stores you opened were in Canada, were in Ontario, or--?

They were, the Toronto marketplace suburbs.

And can you give us a sense of two goes, how many, how fast?

Well, we'd like to open quickly. We don't have a lot of sites in our pipeline, although we've been working on it for a little while. We anticipate this year that we'll open approximately 45 stores.

And the six pawn stores that you're going to open in the U.S., have you identified locations yet, or--?

We have two of them that are going to open in the -- we have opened this first quarter. Yes, we have sites for those, and we have a number of other sites that we've identified that we're working through the CapEx process.

Well, thank you. Great quarter, and you'll be missed.

Great. Thanks, Henry.

Our next question comes from [Josh Eldine] from [Healthy & Company]. Please go ahead.

Hi, good afternoon.

Hi, Josh.

A couple of I guess maybe higher level questions. Just kind of thinking about your strategy as far as entering new markets, you know, you've made some nice acquisitions of minority interest in a few companies in some markets, yet expanding de novo in other markets. Can you kind of maybe talk a little bit about the thinking behind why you do what you do when expanding into those markets?

The minority interest that you're -- we're looking at in both Cash Converters and Albemarle & Bond are markets that have a greater barrier or requires more effort and expertise to enter.

The more mature markets?

And they're foreign markets, as well. Unlike Canada and Mexico, that's quite accessible to us, and much of it's similar to the operations that we've had and are experienced with in the United States, there's an expertise associated with those other markets that we're able to gain cultural expertise, that we're able to gain with this type of an entry.

So we're quite pleased with what we've done in Abemarle & Bond, if you look at that over the period of time that we've owned it, and we've watched them grow, and we've now become more active in their business. And there are things that we can assist with them as engaged shareholders to help them even accelerate their growth. We think Cash Converters has that same type of opportunity with a much broader international, worldwide footprint, and give us that much more exposure.

Okay.

And that's the reason we've elected to do those as we've done. The other ones that we've been able to embrace in the United States as acquisitions and integrated them fully into our operations, we've been able to, have, and believe we'll be able to continue to enhance their performances with the expertise that we have.

Canada and Mexico, again, very low cost of entry, very, very high returns. We've talked about the proformas that we have in those markets in the past, and in Mexico and by the time we open a store and get into the second year of operation we're looking at returns on invested capital of about north of 40%. And we did a small acquisition there to expand our base of operations to help accelerate our expansion, because in a pawn operation as we open the stores we need product, and we couldn't figure a way to get general merchandise from the United States into Mexico to see those stores to get them.

Sure.

So that's helped us accelerate that. Of course, that's not necessary with -- when your product is only cash, such as in Canada. We find it very attractive because the regulatory environment appears to be very stable, and they really have done their homework quite impressively, with a pragmatic approach to what's the payday loan product and what's the cost of providing it to the consumer, and what's an appropriate rate.

And in Ontario, with the $21 per 100 for the pay cycle for the customer, it's very attractive to us, as other Provinces have adopted quite similar or even higher rates in Canada. It has a similar model that allows us to go in and open the store, and by the time we get to year two we're looking at returns on invested capital that are beyond 40%. And quite similar to the model in Mexico, these stores actually cross over and make a contribution somewhere between month nine and 12.

We've been able to validate it in Mexico, we've been able to validate with a similar model in the United States with our signature loan business. And the early results after only six or seven weeks in Canada are quite encouraging.

Great. That's good color. Thank you very much. I guess, you know, just with regard to your outlook for new locations in Mexico, I think and tell me if I heard this wrong, but I think you said 60% of your 40 to 50 new Empeno Facil or I guess I should say Mexican locations will be the gold or the jewelry only model?

That's right. It's basically gold. We call it aura, which is gold.

Right. Okay, so --

About 60% of them --

Yes, go ahead? That's what I was getting at, why 60%?

The reason is that in Mexico it's very difficult to find a 5,000 square foot location that is in the appropriate trade area to be able to support a full line general merchandise pawnshop. And, thus, the -- it's a slower build of new stores because of that challenge.

However, the aura or gold only stores are only about 400 square feet, and it's very easy to find a 400 square foot facility in the right trade areas to offer the product to the consumer in Mexico. So it would allow us to accelerate our growth as we're sorting through and finding good, solid (inaudible).

Okay, and so not to push you on it too much, and so it really doesn't have anything to do with maybe not the best experience with operating the general merchandise model, but it's more just for the opportunities that you see to find the number of spaces for the expansion?

That's right. If you look at our performance, which we report in U.S. dollars, and you look in pesos to pesos, as I went through and pointed out the key metrics, you can see the metrics are very strong in Mexico. In fact, if you laid side by side the proformas for the full line store and the gold only store, you'd basically find that the biggest difference is that the aura, the gold only stores require less capital.

Yes.

And they provide actually a return on invested capital that's a few percentage points higher but they don't have quite the scale of the full line stores.

Okay.

The full line stores present, provide a higher dollar amount of volume with them.

Great.

But that's still a pretty close return on invested capital. And we're quite pleased with both models. We want to accelerate our growth as quickly as we can, and the primary expertise we need is finding good sites and that's (inaudible).

Thank you very much. That's very helpful. I appreciate it. Good quarter.

Thank you.

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

Hi. Can you talk about the operational challenges with opening so many stores in Mexico and Canada? I would think beyond finding locations it'd be very difficult to hire enough good people and get them in place and train that quickly. Can you talk about that and how you're meeting those challenges?

Certainly. And that's a great point, as well. I'll start with Canada. It's probably the easiest to address. In our payday loan operations we have a store operating system that basically makes all of the decisions relative to the loan transaction. Our associates in store basically take data and confirm information from the customer, input it into the system. The system then provides an approval or a rejection of the application, and if approved, the dollar amount. And it's just a matter, an administrative matter of taking care of that. We can train an associate to handle that type of a transaction in a relatively short period of time.

In the United States we opened our first two payday loan stores in July of 2003 and we have almost 500 of them today. We were able to open over 100 stores in one year with that type of a model. So our challenges there I believe are primarily in finding the locations.

When you get to Mexico and you look at the pawn transaction it's more difficult to train an individual on the -- all the dynamics of the pawn transaction, because it's relatively complex, and there's a balance between several of the elements between the loans, the loan values, the forfeitures and cost of goods of sales and the like.

But the aura stores, the jewelry only stores, it's again much more simplified and quite similar to the payday loan transaction because the store operating system which has the metrics in it for the loan or buy value on the jewelry product, and it's just a matter of tweaking it within ranges with not as much judgment or training necessary with that.

The major challenge is in training associates for the full line pawn operations. The bigger our base of stores, the easier that is because we're able to train them in the stores before they move on to another store, as it's being opened.

We've moved some -- we've moved a very talented area manager from our U.S. operations into Mexico to also assist with that, and we've also taken a district manager who was in Mexico, who now works in training, and we have a training organization. And we bring people onboard about a month before the store opens and begin that process.

Okay, good. You, on a completely different subject, you had said that the results clearly demonstrate the advantages of your acquisition strategy and growth strategy, and certainly the results have been good. On the other hand, I would think it would have been even more advantageous to have purchased your stock, especially some of the prices we've seen in the past 12 months, you know.

When you say it clearly demonstrates that the acquisition strategy is working, I guess I also feel like, well, maybe not, because if you had invested the same amount of money in your own stock I think the results would have even been better on a per share basis.

I think one of the biggest differences, Chuck, is the fact that what we have now through these acquisitions is earning assets. These earning assets that we're now operating, we have the opportunity to significantly enhance and grow over time. So it's not that it's a point in time benefit, it's rather a benefit over a long period of time.

I'd also point out that the two acquisitions we did, one in Las Vegas with 11 stores, versus the four stores we've had ourselves, and I talked about with the impact they had on our same-store operating income growth because of the economic impact on that marketplace.

We have 11 stores that in that market still contributed, and if you go to the beginning of the year I think you'll find that the contribution from Value and Pawn Plus Las Vegas is beyond the guidance that we had provided at the beginning of the year.

We enjoyed a nice benefit from them. We have an even greater future opportunity to enhance that benefit because we aren't able to thoroughly mine it. I'd say the same thing about Value. The Value acquisition in the southeast, as well, except the benefit we had there was the infrastructure and the leverage of our back offices that really enhanced that acquisition going forward, the opportunity to continue to grow it organically.

We have a great team of people in both of these businesses, and they've been operating in difficult economic environments. And the thing that we have that we'd never have with the share buyback is that continual growth in contribution to our performance.

Okay.

I tell you it's -- it is a Board topic, it is an issue that's addressed and discussed.

Okay.

It's not --

Okay, I, you know, the only thing I'd add to that is buying back stock is not a onetime thing because if the Company as it currently stands will be growing over the next three to five years then it provides a benefit over that same timeframe, also. But, anyway, I appreciate the answer. Thank you.

Yes, sir.

Our next question comes from [Alan Rochen] from [A.B. Analytical Service]. Please go ahead.

Hey, thank you for taking my call, and my questions are kind of on the same line in terms of when you think about your decision to invest in Cash Converters, which seems like a good deal by the way, but as opposed to repurchasing the stock, I mean your PE was like 8, and if I'm just doing a simple calculation based on the numbers that Dan just shared, it's more like buying it at a 12 PE if I'm not mistaken, if I'm doing the math right there. So what's your thinking on that?

I'd say again with Cash Converters, this gives us with our franchise network an opportunity to look at a number of countries that we're not in, and their strategy, their growth strategy is stated in buying back franchisees as they go forward, appears to have tremendous potential. And this is a Company that basically grew by franchising, they're not particularly, I don't believe that they've had the expertise in operations.

But one of the things we do have is expertise in operations, process, strategy development in this business, as well as systems. And it may be that as good Board members that we'll be able to help provide guidance and strategic input to get help in the future, accelerate their growth, and we can participate in them.

So you view it as a diversifier as well as maybe higher long-term growth, especially because you can influence it, if I'm summarizing that properly?

That's right, as well as a worldwide footprint.

Okay, did they come to you or did you come to them, how did that all transpire?

It's been an interactive series of discussion between [Addison Park] on our behalf and Cash Converters over the years. And although there have been discussions that appeared to bring it to resolution in the past, it just hasn't occurred until we were able to do this deal and the timing was right, because of their need for cash to fund what they perceive to be a significant expansion opportunity.

Okay, and then I notice that, and I hope I have the timing right. It looked to me like you guys made your announcement regarding corporate governance related issues to the A&B deal before you announced this transaction. Was this -- did you do that just to put them on the pari passu sort of that you'd be on the same footing? Can you talk about the timing of that, like why is it that you all made the change at A&B?

Are you talking about the new Board members?

Yes, in the past you guys had been passive on A&B with no Board participation, then you come out and make an announcement that you're, you know, you have these Board seats, and then you announce Cash Converters, if I'm not mistaken. Was that just because you wanted those to be consistent? You realized what you could get at Cash Converters, or you wanted to put it into place, or just coincidence?

Just coincidence. These are two separate transactions.

I knew that, I'm just wondering why -- I guess the reason I ask is I was confused when you all made the announcement. It seemed like there might be a problem at A&B is why you all were going in there, and obviously that's not the case?

What has happened is the former Chief Executive Officer was moved into the Chairman's role as the Chairman stepped out with, elected to resign from the Board. And the Chief Executive Officer retired and stepped into that role. A new Chief Executive Officer was recruited. At the same time the business was growing dramatically in the marketplace, and it appears that the UK marketplace is an absolutely great opportunity in the financial products and services that Albemarle & Bond provide, much as we do. The changes in the Board were to strengthen it with operational expertise and to be able to provide some of the insights and assistance that I just talked about relative to Albemarle & Bond.

Okay, so there wasn't a problem, it's just that by becoming more involved you might be able to help the investment even further?

That's correct.

Okay.

Yes, it's just the right time.

And we've always had three Board seats at Albemarle & Bond, all we were doing was changing two of those seats.

Oh, okay. Got it. All right. And then closer to home, if I'm not mistaken you guys have a slightly higher Texas [leaning] than your publicly traded peers, is that your perception, too, for the pawn business?

In terms of number of stores in Texas, we would have the largest number.

Yes.

And probably our money segment is probably one of the larger in Texas.

So I was just wondering if you could share your outlook for Texas geographically, if there's anything going on between Texas and your other geographies? I know you mentioned the weakness in, obviously in Las Vegas and Florida, but any comments on Texas? Should we view that as a positive or a neutral?

I would say Texas is a very strong market for the alternative financial products. If you look across the United States and you look at pawn, there are two or three states, four states that are just excellent pawn states. And Texas is one of them, as is Florida.

However, Florida has had adverse impact, economic impact that's affected it much more dramatically than anything in Texas, actually any place else in the United States, except for Las Vegas. But Texas has had a relatively strong economy. Job loss here is much less, I think you'll find unemployment is a lower, a significantly lower rate than nationally. But it's always been a good market, and I can't think of anything that is out of the ordinary that's adverse in Texas.

Okay, a couple of quarters ago when you all reported that the pawn business was slowing down a little bit, I was wondering if maybe saturation in Texas was an issue, but?

No, if you look over this entire period we've always on a same-store basis we've had consistently 5% to 18% growth, same-store growth in our pawn portfolio over the last for or five quarters, so the demand is there for the loan product.

The issue has been sales, but it's not just here, it's not just Texas, it's throughout. And our sales have been adversely impacted in jewelry, not general merchandise. We've shown consistent growth in our general merchandise sales even during these times. It's the jewelry component, and it's not a Texas phenomena.

Okay. And then just one last question, I know your share repurchase you said that's in front of the Board, it's something that's discussed and obviously nothing has been done. But what is the policy on dividends, is that something -- now that you're getting substantial money re-dividended to you, is there any possibility that you guys might consider paying a dividend?

There's the possibility, and it has been a discussion point, as well, but we have not made any decision to go forward with dividends.

Would it rank above or below share repurchases?

Probably on an equal plane.

Okay, well, thank you very much. And it sounds like you're going to be on, speaking of planes, on the plane a lot checking up on things, so good luck with that.

Okay, thank you very much.

Our next question comes from [Jordon Heimowitz] from Philadelphia Financial of San Francisco. Please go ahead.

All my questions have been answered, but Dan, I would like to say I think you've done a very fine job as CFO, and I wish you all the best.

Jordon, thank you.

Thank you, Jordon.

And I wanted to point out to you that our general merchandise, aged merchandise over 360 days is 4.5%.

Didn't you say it was 7.5% on the call earlier?

Sorry, 7%?

Yes, it's 7%.

4.5%, general merchandise?

I think it's 7%.

It's certainly single digit, which is healthy in this environment.

But I mean I'm confused, I wasn't even going to ask on this, is it 4% or is it 7.5%?

I believe it's 7%, Jordon. We'll have that confirmed with the K.

I think it was two metrics. One is a nine-month metric, I think maybe 7%, and 360 days 4.5%, I think.

Okay, thank you, and good luck.

Okay.

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

Guys, could you give us an update on the regulatory front? I don't get a sense anything is happening nationally, but if not maybe you can give us an update on Wisconsin?

Wisconsin there were several bills that are pending that the State Legislature is considering that has to do with payday lending. None of those bills, as I understand it, have moved out of Committee. And a group of legislators, I understand are looking at and considering all of them, studying them, and supposedly is going to make a recommendation. And they may consider other approaches rather than specific bills that have anything to do with rates and may focus on best practices or other alternatives, as well.

There's an industry association in Wisconsin that's been very active in educating the legislators and working with them. There's also a Wisconsin coalition for consumer choice, I think it is the name of it, a group that's also working with them. We don't expect anything to occur in Wisconsin this year, and we're hopeful that we'll be able to continue to satisfy the needs of the people in Wisconsin for the signature loan product.

And the bills that are out there, is there a range or do we just kind of have the 36% type and --

There's one that was 36%, but as I understand it there was opposition to that in the Legislature as unreasonable, and probably part of the catalyst for what's being done now.

Okay.

There was also, by the way, an editorial in one of the major newspapers that also took exception to the bills that were introduced, and it was unexpected.

Okay, with your acquisitions, there's no earn outs involved with those, are there?

There are none.

No.

Okay, and then the share count at the end of the quarter, 49,287, is that a reasonable share count or was there anything acquired in the quarter that would tick that up?

Yes, that would fully reflect the acquisitions done in the December quarter, so your question is probably looking forward that's a good number to use. Maybe you might have modest increases just from stock options.

Okay, and then with your guidance for 2010, I didn't know if I caught it or not, what's the expectation for payday, growth, no growth, some growth?

With -- heavily -- no additional store count, and we expect our revenues to have significant single-digit increases primarily from the new loan products that we've introduced or may introduce.

Significant means high single digits?

That is correct.

Okay.

And we expect the bad debt, which is a significant factor, to be in the same range that we experienced this year.

Okay, and so that's primarily driven by installment and title loans?

The growth would be, yes.

Okay, and can you just review how the title loans are set-up, how long is the loan for and has it typically paid back, and if it's not paid back what's the process?

The customer comes in with their vehicle, we input the -- our associates in the stores input the information into the system, it's tied to a black book valuation. It also takes into account depending on the state some level of the consumer's income and their ability to repay it. That determines the loan value. The title has to be clear. We put a lien on the title. It's a 30-day loan. In the states that we do this with our EZMONEY brand, they're all at 25% per month.

The customer then comes in, repays the principal plus the fee. If they default on it it immediately goes to bad debt, and we begin the collection process. If we're unable to affect collection then we go through a repo process, and we go -- we sell the vehicles, they go directly to auction.

Thus far, we've been -- we started testing this back in the December quarter in two states, December a year ago, and we did it again rolling it out then until our third fiscal quarter this year, really beginning rolling it out. And our experience in bad debt has been very good. Dan just talked about just under 12% of fees collected for the quarter, and our -- and that's in a period of time with growing balances, as well.

Can you provide a longer loan, is there something that prevents you from doing a longer loan? And can customers roll it over?

A customer can come back and renew the loan, they can renew the loan, yes.

Okay, and then in Mexico what are the rates that you're charging in Mexico?

We're charging roughly, approximately 14% on jewelry throughout Mexico except for Mexico City and our border stores where we charge 20%. We charge general merchandise 18% per month throughout Mexico, except for Mexico City and the border, as well, at 20%.

Okay, tanks very much. And, Dan, appreciate all your efforts.

Thanks.

Thanks, Ted.

We have a follow-up question from John Rowan from Sidoti & Company. Please go ahead.

Hi, thanks. I missed one quick question. Dan, in the 2010 guidance, what's the assumed tax rate? I assume there's some kind of step-up from the Cash Converters acquisition?

Actually, it's going to work out to be right around 35%, John.

Okay, all right, thank you.

John, the -- I did get that CapEx for the quarter was about $4.8 million.

Okay, very good, thank you.

You have a follow-up question from Henry Coffey from Sterne Agee. Please go ahead.

Yes, while we're all missing Dan, have you taken any further steps towards finding a CFO replacement? And can you give us some sense of when we're likely to hear about that?

Well, naturally, Dan is very hard to replace. And as soon as I say that, I'd tell you also that we --

Well, I thought maybe it was going to take about five minutes?

We have a very strong team internally. And we're also considering external candidates. I would say that with our timeline we expect to have a Chief Financial Officer appointed in time for Dan to have some overlap time with him before he heads either to China or somewhere else on an exotic vacation at the end of December.

[Futon]. Well, thank you. Take care, and a great quarter.

Okay, Henry. Thank you.

And our last question comes from [Dan Masser] from [Harvest Capital]. Please go ahead.

Good afternoon, guys. I was wondering if you could just talk about the impact on, I believe you changed some of your gold LPVs maybe in May, June, and what the impact was? It looked like you had a good rise in pawn loan balances, and it may have been fortuitous timing with the recent rise in gold?

We did -- we made a change I think June or July, actually. And we just recently made another change, as well, not too long ago based on the market value. We -- it takes awhile, Dan, for that to get into the portfolio because the loans that are in there mature, they're renewed, extended, or they forfeit or they're redeemed, and in all that time you're adding new loans to it. But it takes about a turn of the portfolio, which is probably four or five times a year. Jewelry a little bit less. For that to really impact it.

In the quarter we really saw the benefit towards the tail end of the quarter, and we anticipate that as we move forward because of both of the changes we'll get that benefit as we go through our December and into our March quarter, as well.

Okay, that makes sense. And, Joe, you alluded to some potential up side in Value and the outlook, and just wondered if you could talk a little bit about that? Is that just on the margin level, or what else you may look to do at Value?

The opportunity is the transition that we went through in the March quarter where in all the Value's domestic stores we pulled out their store operating system, 65 stores, and we put in a new operating system for every aspect of every transaction with the customer. And although at the same time we had to do the data transfer of all the inventories and loans, as well.

And that creates a disruption to business. Number one, learning the system, and then some of the issues with the system, itself, in the stores and stabilizing them through the entire chain. That creates, that disruption often, you know, has interrupted the flow of business that they had at the time, and at the same time the economy began to set in.

As a result of that, there were some revenues that were interrupted through this period that as we anniversaried that period of time, particularly the March and the June quarter I think, we had some real up side as well operationally in those stores.

Okay. No, that makes sense.

Our greatest benefit was more from expense enhancements and leverage than from growing the revenues. And that I think will create opportunities for the entire team there.

Okay, and, Joe, one last one, sorry to harp on this again, but maybe you could just help me -- help us think about what, how, what the Board's hang-up was with the buyback? I mean A&B has been a great investment, and Cash Converters looks really interesting, but the frustrating part is you almost have 20% of your market cap tied up in these investments and it doesn't seem like investors are giving you credit for it? And with your great balance sheet I'm not sure why you couldn't have both in place, continue to do acquisitions and investments and have a buyback program?

Again, it's something that's considered, discussed, and it's the alternate use of cash and it's the opportunities, the ability to be able to pursue opportunities as they develop, becomes the major tradeoff in the discussion process. But, again, I'll pass on your comments.

Okay, great. And, Dan, congrats again and good luck.

Thanks.

You have no further questions.

Okay, Jamie. Thank you, all, very much. We're pleased with what we've done so far. It's a new year, and we're excited about the potential of the new year. Thank you, again, and talk to you soon.

Thank you, ladies and gentlemen. This concludes the EZCORP fiscal 2009 fourth quarter earnings release. Thank you for participating, you may all disconnect.