EZCORP Inc (EZPW) 2010 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the EZCORP fiscal year 2010 first 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 Chief Executive Officer. Mr. Rotunda, you may begin.

Thank you, Christine. Good afternoon, everyone. Thank you for joining us today. As previously announced, Dan Tonissen, our former CFO retired in December just as planned. With me today is Brad Wolfe our new Chief Financial Officer. Brad brings over 17 years of financial and operating experience in a variety of industries in both the private and public sectors. Not only does he have an MBA in finance, MIS in marketing from the Kellogg School of Business, he's also an attorney. We are all pleased to have him as a member of our team and we are excited about the experience and knowledge he brings to the Company.

Today we will be addressing our first quarter 2010 results. I will begin with a high level overview of the quarter, and a few remarks about each of our business segments. Brad will then provide more detail with a review of our consolidated results. We will conclude with earnings guidance for the second quarter, and increased guidance for the full year before providing an opportunity for questions.

This quarter marks our 30th consecutive quarter of year on year earnings growth. That is an outstanding accomplishment which clearly demonstrates our ability to consistently enhance earnings and provide shareholder value. Coupled with this strong financial performance, is an expanding worldwide presence, with our store growth in Mexico, entry into Canada, and our strategic affiliations with Albemarle & Bond in the UK, and Cash Converters in Australia.

Quarter one was an outstanding quarter for EZCORP. Our net income was $25.7 million, a 73% increase over last year. Diluted earnings per share are $0.52 compared to $0.33 last year, and they reflect a 57% improvement. Included in these results are the Value Pawn and Pawn Plus acquisitions, which incrementally contributed $5.8 million or about half the dollar earnings improvement over last year. They were also accretive approximately $0.07 per share. This is after netting the effect of the additional equity we issued in conjunction with those acquisitions.

I believe these results continue to demonstrate the value of quality acquisitions as part of our overall strategy of an intense focus on building earning assets. You should note that beginning with the second quarter, all of the acquired stores will be in the results for both this year and last year's numbers. As you study these first quarter r results, you also see that they reflect substantial growth, generated organically, in our core business.

In all segments of our business, we saw strong loan demand. It appears that our broadened range of loan offerings provides solutions to customers cash needs and are found to be more attractive than other available options. Our domestic pawn and EZMONEY segments both delivered exceptionally strong financial performances, while our operations in Mexico and Canada grew and made significant strategic progress.

Now let's take a look by segment. I will begin with our domestic pawn operations. In the December quarter, we opened one new EZPAWN shop in Texas and although it's till early we have been very pleased with the initial results. Shortly after the close of the quarter, we opened one more new store, a Value Pawn store in Florida. These are the first two domestic pawn shop openings in over a decade. And we plan to open at least four more in the remainder of this year, as we build on our core strengths in this business segment. The financial results for our US pawn operations are presented in the first column of figures on page 5 of our release. You will note that US pawn had more than a $14 million increase in store level operating income, a 61% improvement over last year. That $14 million improvement is inclusive of both same-store organic growth, and the contribution of last year's acquisitions. I have already pointed out the impact of the acquisitions.

So I direct my comments to our results on an organic or same-store basis. Now here is a little color on the key same-store drivers. As I said earlier, loan activity was strong. Our like for like pawn loan portfolio growth was 10% over December a year ago. This was very well balanced, with growth in both number of transactions as well as the average dollar and loan value per transaction. It was also well distributed between both the general merchandise and the jewelry categories. Coupled with this strong loan growth, is a rising redemption rate which tells us that the loans are high quality. This, I believe demonstrates that our pawn operators are doing a nice job at the loan counter with loan values, for our customers. All this comes together and it generates the pawn service charge revenue stream which grew by 19% on a same-store basis compared to our portfolio growth of 10%. The other side of the pawn equations, the sale of forfeited collateral and merchandise purchases, we do that via retail and scrap sales. Retail sales did show some resiliency in the quarter, with modest growth just a little over 1% on a same-store basis. Although not as strong as we like, this is our first same-store sales increase since the same quarter a year ago.

This year benefited substantially from the pay out of layaway sales initiated during our Christmas in July, preseason layaway program. With retail margins down about a percentage point to last year, at 38%, our same-store retail gross profit dollars were down slightly. Also on a same-store basis, scrapping gross profit dollars increased almost $2 million, which is 32% over last year, with margins of 37%. In most cases, what we didn't sell we were able to scrap at almost the same level as the retail margin. Combining all these components, net revenues in US pawn still on the same-store basis, increased by more than $6 million, a 13% increase. One of the positive attributes of our pawn proposition is our ability to leverage revenue growth with relatively fixed operating cost. That 13% increase at the net revenue line translates on a same-store basis to very impressive 21% increase in operating income. I'd be remiss if I didn't point out the operating income margin on line 21 of our combined US pawn operations which is at 49%. That's an improvement of almost 2 percentage points over last year. All in all, it was a very strong quarter for the US pawn segment, with a 61% increase in operating income to $38 million.

Now let's take a look at our Mexico pawn segment, EMPENO FACIL. In the last six months we have opened 23 of the 70 total stores with eight opening in this quarter. We continue to be pleased with the performance of these new stores in Mexico. With the exchange rate approximately the same as this quarter last year percentage changes based on dollars are also indicative of the performance and local currency. Our revenue stream grew over last year on a same-store basis. Total sales were strong, with 23% same-store growth. Pawn service charges increased by 4%, on a 6% larger ending pawn loan balance. However, merchandise margins decreased to 28% from 39% this quarter last year as a result of focused promotions to liquidate aged and damaged merchandise during this period. This effort has been successful and we expect solid gross margins going forward. Overall net revenues increased $600,000 with operating income down $300,000 as operating expenses from these new stores grew at a faster pace than revenues as expected.

Now for a look at our third segment, EZMONEY signature loans, still on page 5 of the schedules. I think you will see that the results in this segment amplify the benefit of adding a broader selection of loan products, while maintaining a relatively fixed expense base of existing stores. Our total revenues were strong. They grew by $5 million and 15% for the quarter to $40.8 million. Auto title installment loans introduced in the last two years represented three-fourths of the growth in this segment's total revenues. The EZMONEY segment was almost double its outstanding auto title loans in the last two quarters ending December with a balance in excess of $5 million. This product continues to ramp and contributed $1 million more in fees during this quarter than in the prior September quarter.

We also expanded auto title loans to an additional 130 stores midway through the quarter, and now offer them in 393 EZMONEY stores. Installment loans are the other new product in EZMONEY. We didn't add any additional stores this quarter but the outstanding balance did increase 41% over September's ending portfolio, as the product continues to mature in 193 stores. Results of this product are embedded in the signature loan fee and signature loan bad debt lines on the earnings schedules. Our core Payday loan business also enjoyed healthy growth with a $1.3 million increase in fees. And our bad debt performance was again very good. As a percentage of fees, inclusive of all three products, we ran 22% bad debt compared to 26% this quarter last year. Our EZMONEY team has done a consistently good job in managing this element.

Put it all together, and EZMONEY has more than $5 million in an incremental fee revenue, and actually lower dollars of bad debt than we had a year ago. It is also noteworthy to point out that for the first time, in ten years, we had a significant calendar event. January 1st fell on a Friday. In the EZMONEY segment, Fridays and the first of any month are the largest volume days for both loans due, as well as loans made and renewed because they're pay days. We chose to be closed on Friday January 1st to allow our associates time away with friends and family.

In anticipation of this unique calendar event, we focused our efforts on courtesy calls to our customers to facilitate their store visits on Thursday, December 31st. We estimate that this effort and this calendar shift had a net favorable impact of approximately $1.5 million in net revenues which were actually received in December this year that would have normally as in last year been received in January had it not been for the holiday timing. Keeping all of that in mind with operating expenses up less than $300,000 our EZMONEY store operating income grew to $15.9 million an increase of more than 50% over last year. And our operating income margin was in excess of 50%, up from 40% this quarter last year. So all in all a very strong quarter in EZMONEY with excellent management of bad debt, and a robust contribution from new products.

We also opened six more Canadian CASHMAX payday loan stores in the quarter. This brings our total store count in Canada to eight, with the oldest store at about 120 days. The initial results remain encouraging, and we are quite confident of the upside potential in Canada, as we continue with our expansion strategy. It is an underserved market with a newly enacted and favorable legislative environment.

Moving across the Atlantic to the United Kingdom there's also continued positive results from our strategic affiliate Albemarle & Bond. As a reminder, A&B is a public company in the UK, and trades on London's AIM Exchange. EZCORP is their largest shareholder, with slightly less than 30% ownership and three of their nine Board seats. A&B is a jewelry-only pawnbroker that also offers check cashing and signature loans. During the quarter we recognized $1.3 million in pretax contribution from our ownership participation into earnings. This was a 36% increase from last year.

Having discussed the United States, Mexico, Canada, and the United Kingdom, it is now on to Australia. In early November, we completed our purchase of new equity in Cash Converters, a public company that trades on both the Australian and London Stock Exchanges, resulting in a 30% ownership. Similar to our business, Cash Converters is a supplier of financial products and a retailer of previously owned merchandise. They do this primarily as a franchiser and have over 500 owned or franchised locations worldwide with significant concentrations in Australia, United Kingdom, Spain, France and South Africa. Cash Converters plans to use our equity infusion to continue to repurchase franchise stores and grow its installment loan business.

Like A&B we account for our portion of their earnings on a three month lag to enable us to access their published financial results. Consequently, we have to wait until our second quarter to begin recognizing any income from Cash Converters. We view our relationship with Cash Converters as a strategic affiliate, similar to our position with Albemarle & Bond . The relationship with these strategic partners expands our reach and provides EZCORP with many long-term opportunities to satisfy a significant worldwide need for access to both cash and credit, that is not satisfied via traditional banking or other sources of credit. With that, I will now turn the call over to Brad for a deeper look at our consolidated results.

Thanks, Joe. Now I will give you a little more detail focusing on our consolidated results starting with a consolidated statement of operations for the quarter on page 3. Keep in mind that I am reviewing our consolidated financials while Joe mainly covered our segment financials. Some of the segment metrics he discussed may be different than similar metrics for our consolidated results. Total revenues for the quarter increased 43.6% to $184.8 million. The acquisitions of Value Pawn and Pawn Plus contributed approximately $40 million of incremental revenues. On a same-store basis, total revenues for the quarter were up approximately 12% overall, with our US pawn operation up 11%, EMPENO FACIL up 16% both in US dollars and in constant currency, and EZMONEY operation up 14%.

Merchandise sales increased 39.5% to $62.5 million, offsetting the increase in sales was a 2 percentage point decrease in margins from the prior year quarter. Resulting in a 32% increase in merchandise gross profit, to $23.2 million. Same-store merchandise sales were up 1%. Scrap gross profit increased 117% to approximately $14.1 million, higher gold values, net of higher costs and more volume generated the increase in scrap gross profits.

During the quarter we scrapped about 2.5 million grams of gold jewelry compared to 1.6 million grams in the prior year quarter. Compared to prior year quarter, proceeds per gram were up approximately 23%, to $14.83, while our cost per gram increased 15% to $9.21. Primarily due to increases in gold prices, and the price paid to purchase gold. Scrap proceeds include approximately $300,000 in liquidated diamonds in the current quarter compared to $150,000 in the prior year quarter. We continue to forward contract our gold scrapping and currently have approximately 70% of our estimated March quarter quantities locked at $1,100. In our guidance for the balance of the year, we have assumed an average price of approximately $1,000 per ounce for unlocked quantities.

Pawn service charge revenue increased approximately $14.4 million or 55% to $40.8 million. This is up approximately 18% on a same-store basis. Annualized deals on our pawn loan balance were 160% compared to 141% for the prior year quarter. The increase was largely due to the addition of higher yielding pawn portfolio and the acquired Value Pawn stores in Florida. Signature loan contribution increased nearly 13% to $29.9 million, this was a result of a 7% increase in signature loan fee revenue, and a 7% decrease in signature loan bad debt. Signature loan bad debt expense measured as a percentage of signature loan fee revenues decreased to 23% from 26% for the previous year quarter. Signature loan bad debt measured as a percentage of loans originated in the quarter was 4.5% compared to 5.2% for the previous year quarter.

Loan originations for the quarter were up 4% to $184.6 million as compared to the previous year quarter. Auto title loans contributed $2.6 million to net revenue, bad debt on auto title loans measured as a percent of auto title loan fee revenue was approximately 15%. Auto title loan bad debt measured as a percentage of loans originated in the quarter was 3%. Operations expenses, administrative expenses, and depreciation and amortization were higher than the prior year quarter. There was also a loss on disposal of assets versus a gain in the prior year quarter but despite the increased expenses operating income increased $16.9 million to $38.9 million, due to increased net revenue. Value Pawn and Pawn Plus incrementally contributed about $9 million to operating income. Increases in operations expense and depreciation and amortization are primarily due to acquisitions and new store openings.

Higher administrative expense is primarily due to our higher incentive compensation and related to our strong performance and investments made in new people to support our growth, increasing complexity, and international business. Despite the dollar increase in administrative expense, administrative expenses as a percentage of net revenues decreased 2 percentage points to 11%. The loss on disposal of assets for the quarter is due primarily to the closing of five EZMONEY locations. Operating income margins as a percentage of net revenues improved 6 percentage points to 34%. Equity interest in the income of Albemarle & Bond increased 36% to $1.3 million.

As Joe already mentioned, we will report Cash Converters contribution on a quarter lag basis as we do with Albemarle & Bond. The current quarter's earnings do not reflect the impact of this acquisition. Despite higher net interest expense and a 35.5% tax provision, net income increased 73% to $25.7 million or $0.52 per share. To repeat what Joe already mentioned the Value Pawn and Pawn Plus acquisitions contributed incrementally approximately $5.8 million to net income. The two acquisitions after considering the impact of additional shares issued were accretive to earnings by approximately $0.07 per share for the quarter.

Now a few comments on the balance sheet on page 4 of the earnings announcement. We have approximately $17 million of cash on our balance sheet, and $32.5 million of debt. Of the cash balance approximately $6.1 million is nonoperating cash. Our pawn loan balance increased 10% from the prior year to $103.4 million. Our signature loan balance grew 8% in the last 12 months to $8.9 million. Not included in this balance are $24.8 million of short term loans and $700,000 installments loan, brokered with unaffiliated lenders. These brokered loan balances are up 1% from the prior year. Our auto title loan balance has grown to $2.1 million, not included in this balance are $4.3 million of auto title loans brokered with unaffiliated lenders. So the total auto title loan balance including these brokered loans would be $6.4 million.

Net inventory is made up largely of forfeited collateral and was at December 31, $63.5 million. This net inventory is after an 8% or $5.8 million valuation allowance for aged, obsolete, broken or missing inventory. As of December 31, the percent of jewelry and general merchandise gross inventories that has been in our inventories for more than 12 months were 22% and 6%. The actual ending inventory per store on line 35 is inclusive of all stores. On a same-store basis, inventory levels per ending store decreased to $153,000 at the end of December, versus $157,000 a year ago. For the quarter we turned our inventory 3.7 times compared to 3.3 times in the prior year quarter. Our strategic investments in Albemarle & Bond and Cash Converters are carried on our December balance sheet at $90.5 million. At December 31, Albemarle & Bond was carried on our balance sheet at $40.9 million.

The current market value of our 16.6 million shares is approximately $72 million. At December 31, Cash Converters was carried on our balance sheet at $49.6 million, the current market value of our 108.2 million shares is approximately $67 million. We ended the quarter with 440 pawn shop locations including 70 Mexico locations, 480 signature loan locations including eight Canadian locations. 68 of our US pawn locations and 393 of our US signature loan locations offer auto title loans, 193 of our US signature loan locations offer installment loans. Now let me turn the call back over to Joe.

Thanks, Brad. Again, all told, it was an excellent quarter for EZCORP. Given the performance in the first quarter, and the strong loan balances at December end, we expect the remainder of the year to exceed our initial guidance of $1.65 to $1.69. We are increasing our expected diluted earnings per share for the entire year to approximately $1.81. This represents an earnings per share improvement of approximately 27%.

We expect the second quarter earnings per share to be approximately $0.43 versus the prior year of $0.37. Keep in mind that we had about $0.02 move into quarter one from quarter two, as a result of the calendar shift impact on the EZMONEY segment that I addressed earlier. On a comparable basis, adjusting for that $0.02 we expect quarter two to produce an improvement in earnings per share of approximately 22%. That concludes our prepared remarks for today. Brad if you will read the Safe Harbor we will go on to questions.

This conference call and earnings announcement contains certain forward-looking statements regarding EZCORP's expected operating and financial performance for future periods. These statements are based on our current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward looking statements due to a number of uncertainties and other factors that are discussed in our press release and in our annual quarterly and other reports filed with the Securities and Exchange Commission. Now we'll open the conference call for questions. Christine, you can open it up for questions now.

(Operator Instructions). The first question comes from David Burtzlaff from Stephens Incorporated. Please go ahead.

Hello, Joe and Brad, congratulations on a great quarter here.

Thank you.

Just have a couple of questions, first on the retail sales side, how much do you think the promotions involving like the layaway, do you have any idea how much that helped? What -- was the margin on the layaway the same as -- or do you have to discount on that?

It is hard to quantify the exact impact that the layaway program had, but we know that the layaway adjustment that we had in this time frame was the largest in at least the numbers that we have that we could find that has ever been recorded. So we got quite a benefit. Some of that also benefits the other months between July and December as the customer would take out their layaway. Redeem their layaway. So there's that impact as well. So, we are not sure of the exact amount but I would say this. With a very marginal same-store sales increase of just over a percentage point I would think that we could attribute the increase that we had in the quarter to that layaway program.

Now as far as the margin on the layaway sales versus the overall margin, the retail trading environment has been more difficult for the last year, year and a half now. And as a result of that, we tend to discount more to close the sale in the store. But with our layaway program we had a 10 and 10. A 10% down and a 10% discount on the product, that 10% discount on the product is less than our average discount through this period of time. So I would say probably the margin on the layaway was at a higher level.

Okay.

That would be the -- for all retail margin.

Okay. And then on the, on the pawn loan balances, I mean those -- they seem to strengthen from where you have been running the last couple of quarters? Is there -- is there any kind of read there? I mean did -- because you said you've had issues generating a -- gold balances? And -- In jewelry?

On the aged merchandise?

Well, no I am talking about on the loan balance growth, that you had this quarter, seems to be a little stronger than it has been in previous quarters on a same-store basis.

It has been stronger. The biggest benefit that we received was virtually everything was on all eight cylinders. We had growth in the number of transactions, comparable to a year ago in both jewelry and general merchandise. Both of them grew during this period. In addition to that, the average loan size, grew in not just the jewelry category but the general merchandise category as well. We would have expected it in jewelry because I think over the last year, we have raised our loan values on jewelry four times as the gold market has improved over that period.

So we would expect the higher average dollar amount per loan which we did get, but it wasn't just as a result of that. It was also in the general merchandise category as well. Coupled with all of that our redemption rate actually improved during this period of time. So it was very strong.

Okay.

I think what's happening, the customer has just responded. It isn't just in the pawn offering because if you look at our payday loan balances, as well, our same-store growth, if you include the new products, is substantially higher in the payday loan segment, the signature loan segment, than it was actually in pawn.

Okay. And then, finally, I mean it is immaterial now, there's some sales in the EZMONEY operations, what is -- is that gold buying?

Yes, we have a small test underway, in just three stores in the Company. And we haven't moved beyond those three stores yet. We're still looking at how we can increase the scale per store. We want to minimize any type of interference between buying gold in these stores and the loan offerings that we have there. That's our first priority with the customer.

Okay. All right. Well thank you very much.

Thank you.

The next question comes from Bill Armstrong from CL King & Associates. Please go ahead.

Good afternoon. Very nice quarter. The bad debt expense ratio was down pretty substantially, how were you able to reduce that?

We've had a pretty consistent rate of improvement in bad debt for about a year and a half, two years now. And there are several factors; probably the most important factor is on the front end. It is the underwriting which we haven't really tweaked too much recently, and it is talking to the customer actually before the due date, the relationship is established, courtesy calls with the customer, setting appointments for them to come in on their due date and then working with them to be able to do that.

That's probably the single biggest factor on the front end. But then if the customer defaults, we have a central collections group. We have made considerable investments in technology in the group from a predictive dollar to a lot of software enhancements that allow us to get information that makes it much easier for us to work with a customer, and also to understand our collectors, our associates, those that are most productive, and so forth. And to then couple rewards and incentive programs with those who are able to do the best job. We have also invested in professional collections management. We've got a really strong leadership team in our collections group that have made a significant impact over the last several years.

So your collections have improved then also.

They have. If you look at this past year, we were, as I recall about 25% of fees -- bad debt as a percent of fees, which was at least within a fraction, the best performance we've had in our history. This year is trending better thus far.

Okay. Turning to pawn operations, your retail merchandise gross margin was down, I think you adjust that a little bit. Is that really just because you had to mark stuff down because retail conditions are slow or was there anything else? Was there a mix issue? Anything else going on there?

It's primarily, Bill, the tight trading market that we are in today, but say this, as we look forward and we reflect on where we have been over this last year, we're fairly comfortable that we've cycled this negative impact on our margins as we come into quarter two, quarter three. I am not saying they're going to improve but I think that we're going to see that deterioration basically flatten out or go away.

Okay. And then finally, gold scrap margins were up, is that pretty much just the result of rising gold prices?

I think it is our -- it is our loan values, and our locks, and when you look at the margin that we have, it is our cost versus what we are able to sell it for basically a compliment of our cost versus what we are able to sell it for. We've had, as long as we have a rising market, we tend to have a very favorable margin performance with it.

Great. Thank you.

Thank you.

Bill, I should point out also on the scrap, one other thing that we have done, is we have a lot of attention on actually buying gold in the stores and we have been tracking our purchases as a percent of loans made and extended, and when we look at our performance this year with actually buying gold from the customer in our pawn shops our rate of purchases versus the loans made that are up substantially has increased about 50% to where it was a year ago. So I should point out and compliment our pawn operators for the job that they've done on that too. Being able to get the gold for us. Typically when they buy it outright it is at a little lower cost than the cost that we, we record on forfeited collateral.

Understood. Thanks, Joe.

You're welcome.

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

Thanks, congratulations and welcome, Brad.

Thank you.

Joe, would you mind just repeating what you just said on the rate of purchase? I didn't quite get that.

We [track it]. When a customer comes into the store with a piece of merchandise, and they're looking to convert it to cash, most of the time, their desire is to take out a pawn loan and from the redemption rate do a pretty good job of coming back and redeeming it. Many customers however, come in with and are interested in selling their product. We'd much rather buy the product from the customer than loan on it. But if we buy it we have to hold it a couple of weeks and then we can monetize it, we can sell it or scrap it, whatever we like. However if it is a loan we have to hold it for two or three months before we can do anything with it.

So we track our purchases as a percent of loans made, redeemed, we actually do it by store, in total. If you look at the percentage of loans made and redeemed in gold, purchases relative to loans made and redeemed in gold, our rate of buying the merchandise from the customer is increased about half again to what it was a year ago. So the -- a year ago we were buying 8 -- our purchases in gold were 8% of the loans we were making. This year, they're running about 12%. And those are fairly directional numbers.

Got it. Okay. I just didn't -- I kind of missed part of what you said. That's fine. Thanks. I wanted to talk a little bit about Mexico, and just try to figure out is this really kind of a new store drag that is taking, that you are seeing on the expenses given how many of these stores are so new, and then maybe you could also share with us a little bit on the gold only stores and what you are seeing, and then, if you have it, if you have any sense on how we should think about the store roll outs for both Canada, and for Mexico, by quarter? Thanks.

Okay. Let me see.

Let's talk about Mexico and new store drag maybe first.

The new store drag first. At the beginning of the year, I pointed out that we expected in Mexico to have drag somewhere in the neighborhood, I believe of $1.5 million to $1.6 million for the year. With that drag, we still expected to improve our operating income marginally in Mexico. This -- a new store in Mexico will drag, won't cross over to profitability, until about its third quarter of operations, somewhere around month nine or so.

So when you look at the new stores we have today, and 23 of them being opened in the last six months, you would expect all 23 of those stores to be creating some level of drag. And that is 23 of a total of 70 stores in Mexico. And you have the other ones that were open in the prior quarter or so that probably still aren't contributing at all at this point. So, the drag that we have here is something that would be expected. Now, as you look at the ORO store, we talked -- you asked about the new concept.

Right.

We're pretty pleased with the new concept, and ramp up is right on slightly better than our pro forma. We are very pleased with it. The good thing about that concept, one of the benefits of it is we are able to get real estate much easier than with a full line store in Mexico because it is much easier to find a 300 or 400 square foot facility in a very good location than it is 4,000 or 5,000 square feet. So we are able to move quicker. It also has a lower initial capital investment and start up losses as well. And it still ramps up fairly quickly.

But is this a -- it shouldn't take nine months I would think then to ramp?

It takes -- well it does. It is in that neighborhood of somewhere around month six to nine.

Okay.

With -- some are better, and some aren't quite as good. But it is in that same neighborhood.

Okay.

Take (inaudible).

And what is the mix --

That's volume ramp up that's associated with it because your operating expenses, you still have as well.

I'm sorry, the -- about the volume ramp?

Yeah. It is not as fast because it is a much more limited assortment, it is only the jewelry.

Right. And -- what is the mix right now, of those, how many, how many ORO stores are there?

I believe in total right around a dozen of them. And if you look at the 23 we opened in the last six months, half of them, half of them are ORO, so about half of the ones opened, in the last six months, were that concept.

Okay.

As we said in the new year, that we expected to have about 60% of our new stores in Mexico as the ORO stores.

Okay.

As far as store openings as we move through the year, three, the next three quarters, we expect to have about the same number through the three quarters depending on how leases close, we tend to end up with a couple of extra or a couple more in the last quarter of the year than the prior quarters but our fan right now is pretty level.

Because I think you -- did you change the number from to 35 from 45 versus -- is it lower than we had originally thought?

No, I think the initial guidance that went out was 35 to 45 for the year, and --

Wait. That's CASHMAX. So 40 to 50 you have always been there 40 to 50 for the Mexico. Right? That hasn't changed. So it is going be a little back end loaded then?

Not a lot, one or two stores, but it will be pretty flat through the, the three quarters. Canada will be a little more back end loaded than Mexico.

Okay.

But again not a lot.

Okay. And you're finding that in Canada, that there's plenty of real estate opportunities? Is it, I presume, more where you are going in and looking at just opportunities on an acquisition basis, or de novo.

De novo. The metrics are just so strong on a greenfield store. Okay. You can't price out or it tends to price out the kind of return you would get, if you did an acquisition. Now if something made good economic sense, we would be interested in it if it could make good economic sense for both the seller and for us.

Okay. And then big picture on -- kind of on a global company-wide, how should we be thinking about operations expense? I think you said -- for the rest of the year? When do you start to see some - a little bit more leverage on that?

We have had some fairly significant leverage thus far. I think as we, what you have seen that's different is that we've had the acquisitions, that haven't comped themselves, so you are seeing the incremental expense associated with those over last year when you're looking at the consolidated numbers. But, I think you will find as we go forward, we'll continue to have the same type of leverage on a same-store basis that I described earlier. As I recall in, EZMONEY for instance, we had minimal increase in operating expenses, it was about $300,000.

Right.

More than [5] (inaudible) in incremental revenues , and much of the incremental expense that we are having there as well as in our pawn business, relates to the bonus incentive compensation type programs that we have in our -- within our store organization.

Okay. So it would be just, the acquisitions and then bonus, and can you give us a sense on which is more?

I'm not sure what you mean, Liz.

On the operation, on the expense, I mean is it more from the -- coming from the acquisitions? Not being or is it more from the stock compensation? Bonus, sorry, bonus.

In the first quarter if you are looking at pawn. That, the vast majority of the expense increase is a result of having about 76 or 77 incremental stores.

Right.

This year. That wasn't in last year.

Okay. Okay. You know what? Okay. I got it. We can maybe talk a little bit about it off line. I may not be asking it correctly. All right, thanks and good luck.

Thank you.

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

Good evening.

Hi, John.

Joe, do you think that loan demand was more from existing customers or do you think you got a lot more new customers?

It is probably an influx of additional customers that we are seeing now, that possibly see the value in the product offerings that we have. If you look at the auto title business, and see the volume that was generated there, the vast majority of that business are new customers who haven't been in our stores before, and that is not just in the EZMONEY business. It is also in our pawn shops.

We have just a little over 60 pawn shops that also offer the auto title loan. In both segments, those customers are new to our stores. It is more difficult to tell that in the pawn and payday loan segments as it relates to those base products. But I think we've seen with the increase in transactions at least a good number of new customers coming into our stores.

Okay.

The magnitude of our portfolio growth, I think would certainly indicate that -- our portfolios growth.

Okay. The reason I ask is because you obviously stated that the rate of transactions that are purchases versus the loan transactions, at least on the pawn side is moving up. I want to try to understand if you risk cannibalizing your own customer's future ability to take out a loan because you're just buying the item off of them and selling it. Or if you have new customers that you can just buy something off of, turn around and sell it and then not really worry about them in the future because when the economy turns around, they're not going to be a customer anymore. Can you maybe discuss that a little bit?

If you look at the same-store growth, in pawn and payday lending, that I think, John reflects significant amount of new customers or customers coming to us with their products. If you look at the redemption rate in pawn, with the customer as well, those customers are redeeming their merchandise at a higher level that would allow them to come back in the future, pledge it again, and take out loans in the future. So the strong double digit pawn growth that we've had is certainly sustainable -- would indicate that it is sustainable because the customer continues to redeem their merchandise at a higher level than they did before.

The purchases that we are making call out what would have been in many cases forfeitures before. So we are able then to take care of that customer immediately. The scale itself is grown so significantly I think that much of that has to be from new customers coming in. So, is it sustainable? As we look at the growth from our portfolios and the fact they continue to grow, I would think certainly it is. With the payday loan, auto title loan and installment loans as well. If you look at the growth that we've had over last year, it's almost 20%, growth in portfolio, and the redemption rate of the customer is at a higher level than it has been in the past as well. So it seems that the customer's coming in, satisfying their obligations, satisfying their need for cash, and I would think become part of our consumer base as we go forward.

Okay. And as we go into the March quarter, obviously a typical cash inflow season for you guys. You are still running a fairly low debt level, you're obviously haven't announced any type of acquisition. What's going to be the use of cash here? And when do you guys consider a dividend or buying back stock, in lieu of continuing to make acquisitions?

We have obviously our history shows that we haven't done it. But we consider it frequently, we talk about it frequently. But our focus continues to be on our, our first focus is on investing and earnings assets, and having the liquidity to be able to take advantage of opportunistic deals when they become available. We focused on growing the portfolios, we continue to do that, the Cash Converters acquisition, we were in a position that we were able to do that for cash, do it very quickly, get it done. You heard the accretion or the appreciation we have already had in our ownership with Cash Converters, and we haven't been able to record any portion of their income yet in our income statement. We will continue to focus on that; we will continue also to consider and talk about these other uses of cash that you're bringing up.

Hedging, are you still hedging?

We're locking. We lock our gold forward about three months. We continue to do that, we are locked through the month of March. Brad talked about a lock at $1,100 an ounce, at about 70% of our expected volume.

Okay. One last question, you may have said it already, I apologize. What is the gold price assumption in the guidance?

It is $1,100 for 70% of the proceeds, in the March quarter. Everything else is at a $1,000 an ounce.

Thank you very much.

Sure.

The next question comes from Isabel Sterk from C.K. Cooper & Company. Please go ahead.

Thanks. Hi guys, Compliments on a great quarter.

Thank you.

First question, can we get an update on the Florida and Vegas operations, there was a pretty big negative impact last quarter, and I want to see if you're seeing any improvements in these markets now.

Yes, we have seen improvements in the metrics of the business including the operating income from those markets. They're still not growing at the same rate of our other markets, and I think that the, the whole macroeconomic environment has hit those two markets much more dramatically than any place else we operate in the United States. But the good news is we are building portfolio, and we are seeing improvements in the metrics, in both of those marketplaces.

Okay. So it wasn't as negative as last quarter then. Okay. And the other thing, too is without the incremental benefit from acquisitions going forward, where do you expect the upside operating income will come from? I think you mentioned last quarter too, that you still expect some upside from the acquired stores.

Well, I point out that in the March ending quarter, when we did the acquisition of Value Pawn, which was a very large acquisition, in a very short period of time, we completely changed their store operating system, and a number of other processes, that they had in place. And most dramatic was being able to do a loan in their stores, and getting used to a new system that is completely different from how they do every portion of the transaction, it disrupted business for a period of time. I think this quarter, this March quarter we are in now, will provide us an opportunity to improve substantially on the transition that they went through that period.

But even beyond that, if you look at our entire business, and you look at where our portfolios are, compared to a year ago, I think that you will see there's a substantial opportunity for improvement organically, just because of the magnitude of increase, in the loan portfolios in our pawn business, as well as our EZMONEY payday loan, auto title loan businesses. We're double digit up in all of those and as long as we are able to continue to show good quality, with redemption rate in pawn and the level of bad debt and the EZMONEY segment you will see substantial increases, I think in our net revenue stream, and with relatively fixed expenses that you've seen in our pawn operations, same-store, and EZMONEY, most of which is same-store now, we are able to generate substantial improvements, in operating income. So I think you will see that now as we continue to go forward, and that's embedded in our forecast. And as the example I used with pawn in the quarter with a significant increase at the net revenue line, much more dramatic in excess of 20%. It was 13% to 21% at the operating income line because we are able to maintain relatively fixed expenses.

All right. Thanks, and then last question and this may be a follow up question, on the EZMONEY stores, are you seeing an increase in loan renewals too, in addition to the new loans?

I don't think there's been anything significant. Each quarter, as we file either our K or our Q, you'll see we disclose our fees from loans that are new loans and then fees from extended renewed loans. As I recall this last quarter we actually saw, I believe compared to a year ago, a slight decrease in the renewal rate compared to new loans. It's less than 3 times, by the way. In fact it's, I think just about 2 times, we basically have two extensions for each renewal, and I think it went down fractionally, this last quarter compared to a year ago.

All right. That was it. Thanks.

You're welcome.

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

Hey, guys. The balance sheet, does that reflect all the acquisitions? Are there any other payments being made and/or earn outs for Cash Converters and/or acquisitions from before?

No, it is fully reflective of all the activity we've had. There are no further commitments that I can think of, no earn outs, certainly --

Then I think I missed it. What was the same-store sales, growth rate for payday?

It was $5 million on a base

It was 14% on total revenue on EZMONEY.

New products, it is 14%.

Right with new products.

New products being auto title, and -- is that included in there or no?

[The title and] installment.

Okay. So when I see signature loans up 7%, to get me to 14% it is because of the juice from the new products?

That's right. Correct.

Although that has installment loans in it, not auto title.

Okay. And of the 7%, do you know what portion of that came from opening new stores, opening Canada?

It would be minimal. The oldest -- we opened two stores; I think it was the third week of September. And then in the first quarter, we opened another six stores. So, they're all very new, and we did close a couple stores, also in the EZMONEY sector in that same time frame. So I doubt -- I don't think there's any favorable impact from that.

It is nice to see growth back in payday. Do you attribute that to just greater demand, or are competitors closing shop? Or --

We have had it fairly consistently across the, the system. And the unemployment hasn't changed. I mean the numbers there are still staggering. I'm not sure there's going be any real change to it in the near term. But when we look at our business, through this entire period, in payday lending, we have managed, I think just about every quarter, if not every quarter, through the last six or eight quarters, to have same-store increase over last year. I believe in our payday lending spending segment. So we have been very fortunate or we have some very loyal customers.

I think you had newer stores there for a period. But you haven't opened that many stores and it has continued here. So nice to see.

That's right. A few years now, three and a half.

Just a check on the gold assumptions you said 70% of it's hedged just for this coming quarter; correct? Or it is not for the entire.

Hedged --

Pardon me.

We don't technically hedge but it is a forward loan.

Right but just for the quarter, it's not for the year.

That's correct.

Okay. And then, do you have an updated estimate of what percentage of revenue or EBIT, EBITDA operating income would come from pawn versus payday?

If you look at this quarter, on the schedule that we put out with the segments, if you do a percentage of payday, EZMONEY operations, and store operating income, the total consolidated store operating income for wall is 29% payday. If you look at a year ago directly below it on that schedule, it is 30%. So it is down one percentage point to a year ago.

Will it not be higher though? Was this past quarter not the bigger pawn quarter? Than the coming quarter the bigger payday quarter?

This payday quarter we actually our balance is fall. As the customer has an influx of cash with their tax refunds. We have strong cash flow, but remember we moved out of this quarter into the first quarter with a calendar shift in some of our activities, about $1.5 million in net fees but I don't think that you will see a higher proportion there.

Okay.

And also in that quarter have an -- really strong sales, very strong sales, I believe in our pawn operation, again as a result of the tax refund. It may not be strong increases to a year ago. But proportionally it's just the magnitude that's very significant.

Okay. Can you just provide a regulatory update? I don't remember where Wisconsin is and, I don't know if you have any comments nationally.

Well, it's very hard to predict any kind of activity from a regulatory perspective. There's a few states that will be -- the legislatures will be reconvening soon, and where there has been activity in the past, we have been fortunate thus far, the three states that I think there will be some activity -- there is some activity will be carry over from the past. Colorado has been quiet. It's quiet this past year, if you recall two years ago we had a lot of activity but it is all subsided. Missouri has several bills that I think have been introduced, and just kind of a little humor, one of the bills was to prohibit soliciting payday loans at nursing homes. I'm not sure where they're going to go but there doesn't seem to be a lot of momentum with those in Missouri, but you never know.

Then Wisconsin is where there has been some activity. There was even a, a 36% APR bill that was introduced, but there has been a number of bills there that are now ending. A study group, a committee, that's looking at them and will be coming back I am sure with some recommendations. But, nothing has happened there to this point in time. That is the activity in the states that we are in.

On a national level, I think everyone has been watching what's going on and it is hard to predict. The House passed the CFPA I think everybody is aware of that, a lot of concern for what would happen with that once it reached the Senate. It is in there, it hasn't, hasn't moved at all there and Senator Dodd now is talking about potentially stepping down not running for re-election. There's a lot of talk about different things going on with that bill in the Senate. And there's all of this other noise nationally with the election in Massachusetts, the healthcare bills, a lot of attention to big banks. So don't know where all of that is going, but it seems at least right now, the CFPA has basically been stalled at least at this point, and the certainty of it moving forward certainly isn't as high as it was before.

That's all for me. Thanks for having a nice finish to a tough day here.

I'm glad I made your day.

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

Hi. I'm sorry if I missed this. Did you talk about how many stores you plan to add in Canada?

Yes. It is up to 45, this year.

I'm sorry, 45?

45, yes, sir.

Okay. Sorry I missed that. How should we be thinking about the equity line for this year? Can you give us a feel for where you expect that to be now with Cash Converters?

You mean our banks indication?

Let's -- in your earnings estimate of $1.81, can you tell us approximately how much the equity line is going to be the equity income line?

The income from A&B and Cash Converters?

Yes .

Combined? We won't be able to really forecast well, Albemarle & Bond until they do a public announcement of their half yearly results, which they should be doing this quarter late February, early March.

Well you must have assumed something for the two together to come up with your $1.81. I'm just trying to get at what you estimated the number to be for the year.

To about 10% year on year growth in our estimate.

Correct.

Until we get the actual results, and then we adjust on a -- about a quarter lag.

Okay. So that 10% for Albemarle and then plus Cash Converters though, right?

Cash Converters would be new, and we basically looked at what they did before, and their performance a year ago. And we own 30% of them. I don't have the number in my mind. It is probably between $0.05 and $0.06 a share that would impact us but it is 30% of their earnings which last year were about just over AU$16 million, you convert that to US dollars, tax effected about an additional 10% or so, and usually cost of capital, then your earnings per share -- translate that to earnings per share. It comes out to that range, I think you'll find.

One other little surprise in there was the tax rate for the quarter. Should we expect that to stay here for the year?

Yes, 35.5%.

Okay. And the previous caller was talking about the pawn payday loans bullet, and I understand it is 71, 29% on a store operating income for the past quarter, and do you expect that to stay there for the year, or should we expect that to move much if we look at the fiscal year, how -- how should we think about that split?

Much of it is going to depend on the auto title loan ramp. It is still very new. It's in 393 or so of our payday loan stores. It is in over 60 of our pawn shops. The product is only a couple of quarters old and you can see the results and they've been very strong. That's not a payday loan product. The accelerated growth of that, which we expect as it continues to ramp, will help payday lending significantly. But in addition, we are growing pawn very strongly because we still have a double digit portfolio growth over a year ago. So -- and this past quarter benefited significantly from the shift of quarter two into quarter one. I don't have the metrics worked out to balance the year of the split between the two. I think you are going to see pawn grow to total as we move forward. Even with the payday loan volumes improving.

Okay. All right. That's all I had. Thanks.

Thank you.

The next question comes from Alan Brochstein from AB Analytical Services. Please go ahead.

Hey Joe. Congratulations. I have been listening to your calls, I think this is the sixth straight one and the tone of this one is the best I have heard yet. Sounds like things are going well. I had a few -- I had just a few questions for you. First of all, I am just wondering if there's any sort of change in the seasonality given where we are in the economy, and maybe there was more benefit to the fourth quarter leaving out that shift that you talked about. Have you thought that through? I know in the past with the stimulus checks and things like that, there can be kind of challenges to your historical patterns. Is there any reason to think that the struggles with the access to credit and the demand for low cost retail products might have made the -- I'm sorry, your first quarter stronger than normal?

I'm sure if there's anything that's unique to this quarter that probably hasn't been there for a number of quarters thus far, so no.

Well, Christmas is a big spending time. I guess that's what I am getting at.

Oh, but the seasonality year on year, there's nothing unique in this quarter that I think would have changed that. When you look to last year, this past year, we were looking at prior year that had stimulus checks in it and a number of things that were unique. This year, there's nothing I can think of nor are we copying anything a year ago --

Okay. And the second thing I wanted to ask was, you guys are obviously doing a lot of things, some of them are unique, some of them aren't, just wondering, what's your view of the competitive landscape outside of payday lending and pawn lending in terms of, do you expect your competitors to copy you or are they copying you in terms of, I know everybody's in Mexico but in terms of Canada or the auto title loans, some of the new things that you're doing. Just wondering what your view on that.

I think everyone in the industry has a number of common element that they pursue but there are other ones they find much more attractive with their business model than their peers. If you look at one of our peers, they are -- they were the first into Mexico they're doing a wonderful job of expanding in Mexico and that's been their focus and if you look at another, they have moved away from the store front payday loan business, and they're really going into the internet to satisfy that consumers need for cash, where we haven't elected to do that. I think all of us look at one another, and try to figure out what's working the best, and what we can adapt and I think everyone in our industry or any industry will steal with pride anything that they find is working somewhere else.

So specifically auto title lending in Canada, are your two public traded peers pursuing those markets?

I believe one on the internet, but I don't believe that the other one is. But there are also mono line product -- lenders that I am sure are looking to enter in Canada. In fact some have already opened some stores there as well.

Okay, then my last question is, I know you guys have been building out your management team over the last few years, and I think I recall seeing a couple of additions recently. Given the increased scale, I should say breadth of your business, are you comfortable with where you are or should we expect to see more hiring, can you talk about where you are in that, in the management team process?

If you look over the last two years, we've made some substantial additions to our Executive Team, in functional areas and in operations. We just, we added about not quite a year ago a President of Pawn Americas. We have the position of President of payday lending for a period of time, we just added a Chief Operating Officer, a new position in the Company. Brought in a very experienced senior executive that was the Chief Executive at a company that did about $800 million a year I believe with their volume. We have taken our functional areas and we have got expertise people in charge of these functions who came from bigger companies that joined us because they see the opportunity to be part of a group, part of a business, that has a huge appetite to grow, just not in the United States, but worldwide. And we will continue to upgrade as we need to. Our business has become much more complex than it was a year or two years ago.

Great. Sounds like you have been keeping up in terms of staying in front of that. Thanks a lot and look forward to another good quarter.

Thank you.

The next question comes from Gary Steiner from Huber Capital. Please go ahead.

A number of questions. Can you, I guess first, just quantify what the start up costs were or any of the losses, on the Canadian payday operation, and whether they're in the payday segment or if there are any administrative expenses line?

All -- the drag from the Canadian operation is embedded in the numbers that you see on the schedule for the EZMONEY this year. They're in there, we anticipate this year, that we will have about in the neighborhood of $1.2 million or $1.3 million in drag from that operation this year. The cost of getting the store opened in Canada is somewhere in the $50,000 to $60,000 metrics for a store, CapEx to get it open. They turn profitable some time between month nine and 12. The return on invested capital, in that model is somewhere in the mid-30s and third year.

Okay. But do you know, do you have a sense of what it costs you in the quarter in terms of a P&L impact?

This quarter? Couple hundred thousand dollars.

Just a few hundred thousand dollars?

$200,000 to $300,000 somewhere in that range. That's the cost of establishing the organization, front work at the sites, getting the people trained, getting the stores open and the drag from the stores that have opened this far.

Okay. Great. And then in terms of the auto title business, I mean it seems like this is a very profitable product for you guys, and it is very leverageable on your existing footprint. I am wondering if you have it all quantified, what sort of targets you might have for this business, I mean, based on where we are today, the title loans are about 6% of the total fees at EZMONEY. I mean, can this business generate a quarter of the fees at EZMONEY within two to three years?

I am not sure I can quantify that granular the portion that will be there, but I can give you and idea of how to build. Much of it depends on what happens with the other business line, as well as any other new products that we could introduce as we go forward. Of the stores that we have operating payday -- auto title loans today, in the EZMONEY segment, we're doing on average about two or three or four in that range of auto title loans, per store per week.

Now some of those stores have only been doing this for six weeks or so, other ones have been doing for five or six months in that time frame. So it is still early on, and we haven't fully understood or appreciated what the true upside is. We're very happy with what we're doing thus far and we think it has significant potential and we are looking for ways to continue to advance the ramp up of that product. But I couldn't be as specific, I think as you're asking at this point on where we'll be.

Maybe just I can try this a slightly different way. Of the stores that you put the product in first, can you give us a sense of what percentage of the fees of those stores are coming from auto title as opposed to payday? The ones that are the most mature with this product?

Not at this point. At this point I would not be comfortable providing that information.

Okay. Two other things, in terms of Cash Converters, you had mentioned I guess earlier on that because of the lag in terms of reporting their income on the -- on your P&L that you did not record income in the quarter. But did you record a essentially your cost to carry against, against that, in other words, you paid $49 million whatever interest expense you have against that, did that run through the P&L in the quarter?

Yes, that ran through the P&L.

Okay. So that's sort of a one off hit this quarter and next quarter obviously you will have a full quarter's worth of income from Cash Converters, is that right?

Actually it'll be two months, because I think we closed on November 5th, I believe. So a three month lag, we'll only pick up two months, November 5th to December 31.

Okay. Just my last question. Is there a way that you can sort of quantify the benefit that you got this quarter from the price of gold? Obviously it's been meaningful to your earnings. Is there someway that you can quantify that for me?

It would be extremely difficult to do that because it effects so many elements. For instance, when we do a loan, because of the higher loan value because of the adjustments we've made based on the market value of gold. We loan more, so we generate more point service charges as a result of that. The sales that we have typically have a higher retail price because the higher cost of the goods when the merchandise forfeits. With the market going up we have to look at our locks versus what we loaned on individual items. It'd be very difficult to do, but Gary, it is significant.

Is that the main -- I mean when you look at the numbers that you reported this quarter which were obviously great earnings numbers and you've given guidance for the second quarter, which are good, though not as great. The difference between the percentage change in your EPS in of what you just reported in the first quarter versus what you're expecting to report in the second quarter. The slower rate of growth in the second quarter, would you say that the majority of that difference is because of the price of gold and the fact that there's no assumption for an increase in price in your guidance? Or is there something else?

Actually, if you really segment our earning quarter that we just finished. Take out the acquisitions, and you adjust for what was a $0.02 adverse impact to earnings this quarter a year ago, with a incentive compensation payment from a 10-year old option program, and you do everything on a same-store earnings basis, we're in the mid-20s as far as earnings improvement on the same-store basis as you look at quarter one. When you look at the balance of the year, we're pretty much in that same ballpark, as well, low to mid-20s -- over a year ago.

Okay. Got it, okay. It's the $0.07 accretion that you got in the first quarter year over year that you won't get in the second quarter just from the annualizing.

$0.02 from a year ago on the face. Yes.

Got it. Thank you very much, congratulations.

Gentlemen, at this time there are no additional questions. Please go ahead with any concluding comments.

Okay. Thank you, all, for your time and attention today. We really appreciate it. We're excited about the strong start to the new year. We're looking forward to continuing the momentum as we go through this year and we'll talk to you again next quarter. Thank you.