EZCORP Inc (EZPW) 2010 Q2 法說會逐字稿

Welcome to the EZCORP fiscal 2010 second quarter conference call. My name is Kim and I will be your operator for today's 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. Brad Wolfe. Mr. Wolfe, you may begin.

Thank you, Kim. Good afternoon, everyone. This call will address our second quarter 2010 results. We issued a press release earlier today and it is available on our website at www.EZCORP.com.

Before we get started, I'd like to remind everyone that this conference call will contain certain forward-looking statements including statements about our expected financial and operating performance in future periods. These statements are based on our current expectations.

Actual results in future periods may differ materially from current expectations due to a number of risks, uncertainties and other factors which are discussed in our press release and in our filings with the Securities and Exchange Commission.

On the call today is Joe Rotunda, our Chief Executive Officer, and Paul Rothamel, our President and Chief Operating Officer. Joe will make a few remarks and then Paul will provide some color around our business segments and trends. I'll wrap up by covering the details of our consolidated financials and then we'll open the lines up for q and a. I will now turn the conference call over to Joe Rotunda. Joe?

Thank you, Brad. Good afternoon, everyone. I'd like to thank you all for joining us today. I introduced Brad during last quarter's call in January. He joined us December 1, became our Chief Financial Officer upon Dan Tonissen's retirement.

Today I'd like to spend a few minutes telling you about Paul Rothamel. We recruited Paul from Pamida, a chain of general merchandise and pharmacy stores headquartered in Omaha with annual sales in excess of $800 million. Paul was their president and chief executive officer and had been with them for over ten years.

Paul joined us in September and was a student of the business until November, when he took charge of all of our storefront operations, as well as real estate and construction. He easily assimilated himself into our operations and quickly grasped the complexities and nuances of our business.

At our annual shareholder meeting in early February, we announced Paul's election to our Board of Directors and his appointment as President. At that time, Paul additionally broadened his responsibility to include strategic development and human resources.

Our Board of Directors also designated Paul as our next Chief Executive Officer upon my retirement later this year. Obviously, Paul was recruited as part of a well thought out succession plan and a process designed to ensure a seamless transition into the chief executive role. I'm particularly pleased to have someone with Paul's extensive experience as a Chief Executive in a multi-unit environment, as well as his fresh vision, new ideas and strong operational skills.

Now on to the results. Overall, the March quarter was another outstanding quarter for the Company.

It marks 31 consecutive quarters of year on year profit improvement for EZCORP. We grew our net income to $23.8 million from $18.3 million last year. That's an increase of $5.5 million, an impressive growth of 30%. On a diluted earnings per share basis, we grew to $0.48 from $0.37 a year ago, also a 30% improvement.

These results were driven by both a strong and accelerating demand for our loan products in both domestic business segments. Our US total loan portfolio grew by 10% over last year, with improving redemption rates which reflect quality loan growth. Our EZMONEY loan portfolio, inclusive of new loan products, grew by 23% over last year and also reflects quality loan growth, which is demonstrated by the substantial improvements in bad debt.

I believe these results clearly demonstrate that our customers continue to recognize that our expanded assortment of cash solutions provide a lower cost, more convenient alternative to products offered by traditional financial institutions. Consumers are well educated with regard to their financial alternatives and they're exercising their choice in selecting short-term loan products that satisfy their needs and allow them to maintain control over their finances.

Now I'll turn the call over to Paul for his perspective on the segment results. Paul?

Thank you, Joe. Good afternoon, everyone. Very excited to be able to address you all today, particularly based on our outstanding quarterly results. As Joe mentioned at the consolidated level our customers responded well to our varied solutions that keep them in control. I think you will see this is evident in each segment of our business as I walk you through them.

As I talk about each segment we'll focus on how they performed this quarter, some of the factors that we see as contributing to today's results. These are included on page 6 of the press release.

I'll begin with the largest component of the business, US Pawn. US Pawn continued to perform extremely well during the quarter, generating store level operating income of $36.1 million, an increase of 28% or $8 million compared to the same period last year.

This is a result of strong revenue growth across the business while leveraging our expense structure. Operating income margin improved to 48% of net revenue, a 600 basis point improvement over last year.

Same store revenue increased 11% to $134.4 million during the period, compared with $121.3 million in the second quarter last year, driven primarily by a 12% increase in pawn service charge revenue, due to strong pawn loan growth coupled with a healthy redemption rate. In fact, our redemption rates improved 200 basis points to 83%, driven by our operational focus on loan values, as well as significant increase in our inventory purchases.

Inventory purchases during the quarter increased over 40% as compared to the same quarter last year. We believe this demonstrates how we find cash solutions for our customers by sometimes buying the product from them, rather than always using it as a collateral for a loan. Many of these purchases were gold jewelry and contributed significantly to our scrap proceeds.

Scrap revenue increased $6.7 million or 24%, while scrap cost of sales increased $3.4 million or 18%. These elements led to an improvement in scrap gross profit of $3.4 million or 36% and margin of 38%, which is a 400 basis point improvement over last year.

We drove these results with a focus of enhanced buying and marketing programs like the Gold Guru and Three Times More campaign, as well as other in store events.

Same store merchandise sales or retail sales improved $800,000 or 1%, and same store merchandise sales margins also improved 60 basis points. Overall general merchandise sales continue to show strong growth while jewelry sales were soft.

We also continue to introduce new products and services into our stores as well as enhance existing programs. Things like product protection plans and jewelry VIP programs coupled with an enhanced layaway program resulted in better options for our customers, and they responded positively. Leveraging our infrastructure with new products is one of our key strategies. These three programs combined to deliver an additional $1.5 million over last year's quarter.

It is also worth noting that we opened two greenfield stores so far this year, both of which are performing above our pro-forma revenue expectations. The drag associated with these greenfields is included in the results already discussed and we're on track to open a total of six US greenfields by year end.

The second segment of our business, our pawn segment in Mexico, Empeno Facil, continues to be a critical element of our growth strategy. Operating income was up 12% to $900,000 driven primarily by an increase in pawn service charge revenue.

This performance is particularly impressive considering that 41%, or 32 of our total locations, have been opened within the past nine months. With the breakeven point for this model in the nine month range, nearly all of these stores dragged rather than contributed to our earnings.

We believe our organic growth in this market was impressive during the quarter, with 54% same store revenue growth over the same quarter last year, primarily due to same store pawn service charge revenue and same store sales. This growth combined with the growth in other segments continues to reinforce our fundamental belief that our customer and the need for short-term cash exists worldwide.

Same store pawn service charge revenue increased approximately 40% or $500,000 this quarter due primarily to same store pawn loan growth of 23%. We saw an increase in merchandise sales gross profit of $400,000 driven by a strong increase in sales.

Merchandise sales gross profit was 35% versus 38% the prior year. The 300 basis point decrease still reflects the movement of aged products but not to the same extent that we saw in the first quarter where we had a 900 basis point reduction from previous quarter. Going forward, we expect our margin rate to be in line with prior year.

Scrap sales gross profit was up approximately $100,000 again as a result of higher sales. Scrap sales gross margin was 11%, down from 40% in the prior year quarter. This decrease is attributable to the jewelry-only pawn stores that were not present in the prior year. This model, with its higher cost structure, provides an attractive return on invested capital around 40% in year three.

Both our full line and our jewelry-only stores opened so far are performing in line with our expectations. During the quarter we opened nine new stores for a total of 79 locations at quarter end. Of the nine open, seven are Oro, or jewelry-only pawn stores. With 17 stores open year to date, we're on track to open a total of 40 to 50 new Empeno Facil locations this fiscal year.

Our third major business segment is EZMONEY, which includes our operations in both the US and Canada. Operating income improved an impressive 30% to $14.5 million, with an operating income margin at 48%, a 500 basis point improvement over the same quarter last year. We drove these results with strong revenue growth, excellent bad debt management and leveraging our expense structure.

Total revenues were up 12% or $3.7 million driven primarily by an increase in auto title loan revenue, as well as installment loan revenue, as we continue to see these new products ramp. We're very excited about the diverse products that we are now offering in our stores and the customers' response. We will continue to focus on developing new products and enhancing existing products to meet our customers' evolving needs.

Bad debt as a percentage of fees was 13% versus 16% last year for the same quarter. We're very proud of that 300 basis point improvement. In fact, that performance is one of the best quarterly performance in EZMONEY history. We believe the results were driven by our combined investment in our people, our systems and our processes.

A quick update on Canada. We opened an additional 12 stores in Canada during the quarter for a total of 20 locations at quarter end. We are on track to open a total of 35 to 45 CASHMAX locations this fiscal year, our first full year of operations there.

We have reforecasted our earnings drag out of Canada from $1.3 million to approximately $2 million for the year, due to a slightly more aggressive store opening schedule and associated investment in infrastructure. We're very bullish on the market place and are looking to accelerate our growth.

Nicely complementing the results of our core segments are the positive results seen from our strategic affiliates, Albermarle & Bond and Cash Converters. Collectively they added an incremental $1.9 million in pre tax contribution over the prior year quarter. Our relationship with these strategic partners expands our reach and provides us an opportunity to learn and understand these markets and business models while capitalizing on local management expertise.

As you can see by my brief overview, our business was strong across all brands, formats and geography. Our customers responded to our fresh ideas and our core programs. Our associates delivered it all with a fanatical focus on the details. Finally, we leveraged over overall infrastructure and our bricks and mortar to be very productive and build for the future.

Brad will now spend some time discussing our consolidated numbers. Brad?

Thanks, Paul. You can see our consolidated financial results on page 3 of the press release. All results are stated in comparison to the previous year's quarter unless noted otherwise.

Keep in mind that I'm reviewing our consolidated financials while Paul mainly covered our segment results. Some of the metrics he discussed may be different than similar metrics for our consolidated results.

Total revenue increased 13% to $176.6 million. On a same store basis, total revenues were up 12% overall, with US Pawn up 11%, Empeno Facil up 54% and EZMONEY up 12%. We saw a 3% increase in merchandise sales, to $63.1 million with same store merchandise sales also up 3%. There was also a 40 basis point improvement in gross margin over prior year.

Scrap gross profit increased $3.5 million or 36% to $13.1 million, as a result of slightly higher volume and higher gold values net of higher cost. We scrapped approximately 2.2 million grams of gold jewelry, up approximately 1% from the prior year. Proceeds per gram were up 28% to $16.43 and cost per gram was also up 25% to $10.36.

We continue to forward contact our gold scrapping and currently have approximately 70% of our estimated June quarter quantities locked in at $1120 per ounce. In our guidance, we have assumed a gold price of $1100 per ounce for all unlocked quantities.

Pawn service charges increased 14% to $38.3 million, with same store pawn service charges also increasing 14%. This resulted in an annualized yield of 164% compared to 160% a year ago.

Contributions from our signature and auto title loans increased 15% to $30.9 million as a result of increased revenue from product diversification coupled with the 300 basis point improvement in bad debt expense measured as a percentage of fees. Signature and auto title loan bad debt measured as a percentage of related fee revenue decreased to 13% from 16%. Signature/auto title loan bad debt measured as a percentage of loans originated decreased from 3.2% to 2.8%.

Operating expenses and depreciation amortization are all up this quarter primarily as a result of additional stores. Higher administrative expense is primarily due to our higher incentive compensation related to our strong performance and investments made in infrastructure to support our growth.

Our revenue growth continues to outpace our total expense increases. As Paul mentioned, we continued to leverage our infrastructure and fixed costs which is reflected in our 23% increase in operating income to $34.1 million while our operating income margin improved to 31% of net revenue from 29%.

Loss on disposal of assets for the quarter is due primarily to the closing or consolidation of ten EZMONEY locations in the US.

Next let's look at our income of equity in net income of unconsolidated affiliates. As Paul just mentioned, our two affiliates are Albemarle & Bond in the United Kingdom and Cash Converters, which is based in Australia.

Equity interest in the income of Albemarle & Bond increased 83% to $2.5 million compared to $1.4 million in the previous year. Equity interest in the income of Cash Converters was $800,000. This represents approximately two months of income as we report Cash Converters on a three-month lag and the acquisition was completed in early November 2009.

After a slight reduction in net interest expense and a 35.7% effective tax rate, net income increased 30% to $23.8 million, or $0.48 per share.

I'll now provide a quick summary of our balance sheet as seen on page 5 of the release. As of the end of the quarter, we had $51.2 million of cash, of which $45.8 million was nonoperating. Additionally, we had $30 million of term debt outstanding.

Our prime loan balance was $89 million, a 12% increase over the same time last year, 11% increase on a same store basis. The US Pawn segment had growth of $8 million or 11% resulting from a 3% increase in transactions and a 15% increase in average loan size. We saw loan growth in both general merchandise and jewelry.

Empeno Facil had growth of $1.7 million or 51%. On a same store basis Empeno Facil grew $700,000, or 23%.

Signature and title loans combined are $9.2 million. When combined with the $21.7 million of loans brokered with unaffiliated lenders those loans increased 22% over the prior year to $30.9 million.

Net inventory was $56.4 million at quarter end, after a valuation allowance of $5.5 million or 9% which is the same reserve percentage used in the prior year. Inventory over 12 months old was 15% compared to 14% last year. On a same store basis, the quarter ending inventory decreased 1% to $55.2 million or $134,000 on a per store basis. We turned our inventory 4.2 times versus 3.8.

Our strategic investments in Albemarle & Bond and Cash Converters are carried on our balance sheet at $90.9 million. Albemarle & Bond is carried at $41.6 million with a market value of approximately $61.2 million as of March 31. This represents unrecognized appreciation of $19.6 million.

Cash Converters is carried at $49.2 million with a market value of approximately $57.7 million as of March 31. This represents unrecognized appreciation of $8.5 million.

Let me finish up with a quick recap of some of our core metrics around store counts. As of the end of the second quarter, we have 450 pawn store locations including 79 in Mexico and 482 signature loan locations including 20 in Canada. To show some of the product diversification, 54 of our US Pawn locations and 391 of our signature loan locations offer auto title loans, while 197 of our US signature loan locations offer installment loans.

Thank you for your time. Now I'll turn it back over to Joe for some concluding remarks. Joe?

Thanks, Brad I'll conclude our prepared remarks with an update to our earnings guidance for 2010 and then we'll move on to questions.

Our December quarter was a strong quarter and concluded the noncomp benefit of both the Value Pawn and Pawn Plus Las Vegas acquisitions. We moved into the March quarter with strong momentum and were quite pleased to see the resumption of the accelerated same store loan demand during the period following the federal tax refund peak in mid February. This was stronger than last year.

Coupling our recent financial performances with our strong loan portfolios, we are once again raising guidance for this year. We expect the full year to be $1.91, compared to last year's actual $1.42. That represents an increase of 35% for the full year. We expect our June quarter to be approximately $0.39, an increase of 34% to last year. That obviously leaves the September quarter guidance at $0.52, an increase of approximately 24% over last year.

And with that, Kim, we're ready to open the lines for questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). At this time, we have a question from Liz Pierce from Roth Capital Partners. Please go ahead.

Thanks. Congratulations, everyone. Nice job.

Thank you.

Joe or Paul, whomever, what do you think the contribution was of the Value Financial stores now that you've kind of lapped some of the transition and also the contribution perhaps on the Pawn Plus?

I think Paul should take that.

All right.

So, on Value and Pawn Plus, I think you know that in the first quarter they were non comp. Now, frankly, they're comp, and because they are comp we don't break those out differently. We would just tell you that both of those acquisitions were very positive influences on the earnings in the quarter and both of them delivered particularly well against last year and our plan.

And, in fact, in both of those markets, we had talked about Florida and Nevada in the past as being, as struggling against the rest of the chain in performance on operating income. In fact, I think both of them delivered something like 40% improvement over last year, in both Florida, both the states of Florida and in Nevada.

Thanks. And then, you said I think, Paul, that the new stores, if you just wouldn't mind repeating, in Mexico, you opened nine stores total? Or did I misunderstand something?

I'm sorry. How many new stores we opened in Mexico? We opened nine new stores. Nine new stores in the quarter.

Nine new stores in the quarter. And seven of those were the jewelry-only?

Yes.

Okay. And what, for the remaining, can you give us a sense of how we should think about the remaining store openings between the jewelry-only and --?

Sure. We projected earlier, we had publicly stated we were going to open 40 to 50 this year. We've always said if we were going to open 40, about 15 of those were going to be full-sized stores. So we said that we thought about 60% to 65% of our new store openings would be Oro-only. We may actually have a slightly heavier percentage of Oro-only if in fact we open at the higher end of our guidance (multiple speakers) more stores.

Okay. Okay. And then, in terms of domestic acquisitions, are you seeing any pricing pressure? We know the market is very fragmented. Kind of what are you seeing? I guess I'm thinking about some of the excess cash that you have on the balance sheet.

Sure. I think the Company has done a very solid job over the last several years in US Pawn acquisition. Generally on larger acquisitions, the market is evolving as you just described it. There are very few larger targets out there, but there are a lot of smaller targets, and we are actively looking for those opportunities. As far as pricing pressure, we don't see any issues there.

And then maybe just moving on to Canada. It sounded like from your comments you guys are really pleased with what you're seeing and perhaps might be accelerating the growth there. Is that the case?

Yeah. Yes. Very simply, the answer is yes.

All right. I'll get back in the queue. Thanks. Good luck.

Thank you.

Thank you. Our next question comes from David Burtzlaff from Stephens.

Good afternoon, guys. Again, congratulations on a great quarter. Just kind of have one question and, Joe, I don't know who you want to take this. Just wanted to get your perspective on the Colorado bill that passed the house. What do you think the prognosis for that is in the senate? And are there other alternative forms of reform that you could look at in Colorado as well?

I'll take that, Joe. Yes, we're obviously very keeping a close eye on the Colorado legislature right now. As the bill as it is today, frankly, would make it uneconomical for us to continue in the payday business. So, the only callout I'd give you is that less than 8% of our EZMONEY store fronts are located in Colorado.

The rates we charge are among the lowest in the states where we do payday lending. And we are one of the largest pawn providers in the state. So that if, in fact, this goes forward, we may have opportunity on the pawn side. But it's uneconomical on the payday side.

Do you have any kind of idea of what the prognosis is for the senate or any opinions there?

No. I mean, it's unpredictable. We certainly are optimistic in that we hope that we can continue to provide the services to our customers in that market. But, no. It's just an unpredictable thing.

Okay. Well, thank you very much.

Thank you.

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

Good evening.

Hi, John.

Just to I guess follow up on the Colorado question. Your stores that are in Colorado, are they adjoined pawn and payday stores?

The vast majority of them are, yes.

Okay. So, I mean, you don't have to close out any stores, you can keep the pawn side open, and hopefully, if you were to lose payday lending in that market, take on the demand on the pawn side.

Good question, John. First and foremost, many of our stores are inside of the leases of the full-size stores, so we wouldn't have any lease exposure there. Even on the ones we have free-standing we have change of law provisions in most of our stores. And I think all but one actually in Colorado has that provision. Which essentially, and as we understand the way the law is moving through, even if it were to go through, we would have some time here to move out of the business, which really means that we can manage this thing.

Okay. As far as acquisitions go, you guys obviously have $46 million of nonoperating cash sitting around. Are you looking at deals in Mexico? Is the pricing down there still unrealistic?

I would say that we're looking at domestic. We're looking at international, including Mexico. I don't know, I couldn't sit here today and tell you that the pricing is unrealistic in Mexico. But the challenge thus far for us has been that greenfield is just so attractive in Mexico, but it doesn't mean we're not active.

Okay. And then just a couple housekeeping questions because I didn't quite catch the numbers. You gave a number for same store sales. You also made a comment about gross margins. If you could just go over that one more time.

And then also the hedging. How much was hedged at $1120?

So the same store sales growth was 1% in the US Pawn and the basis point improvement was 60 basis points. And then, Brad why don't you talk to him about the forward lock-in?

Right now we're forward locking approximately 70% of our expected quantities for the third quarter at $1120, as I said in my remarks. And for all unlocked quantities, we're assuming $1100 in our guidance.

Okay. Just one last thing. You guys mentioned something about the gross margin. I didn't quite catch that.

In US Pawn, our gross margin improved 60 basis points.

Okay. Thank you very much.

Yes.

Thank you. Our next question comes from William Armstrong from CL King. Please go ahead.

Good afternoon, guys. I hate to sound confused, but I heard a bunch of different numbers for US Pawn comps. I thought I heard a 1 and an 11 and a 14. Are these --?

In US Pawn, 1% is comp sales, retail sales. What were the other numbers you had, Bill?

I had an 11 written down here and a 14. Was 14 for pawn fees?

I think, Bill, the total revenue is 11%.

That's right.

Okay. Okay. And then, so, is there a 14 there or did I just write down a bad number?

We'd never want to accuse you of that, so we're looking.

I could have. That's very possible.

Pawn service charges on a consolidated basis are 14%, same store.

Okay. That's all right. I got that right then. All right.

Are you telling me I need to slow down, Bill?

Either that or I need to write faster. Okay. Are you seeing any changes in banks in your markets, either getting more restrictive or less restrictive with credit to consumers in your demographic?

You know, there's a lot of discussion around that. I guess, you know, the way we look at it is our transactions were up in our businesses and our loan values on the pawn side particularly were up. So our demand appears to have been greater and growing.

So how is that? I can't say. But clearly there's a demand out there for our business. On both the payday side -- you think about the fact that we offered additional products on the payday side and on the pawn side; and combined, the demand was very strong. Clearly the customers are voting I guess in favor of those products.

Right. Okay. Fair enough. Okay. Thanks. That's all I had. Thanks.

Thank you.

Thank you. Our next question comes from Isabel Sterk from CK Cooper.

Hi, guys. Great quarter. Are you there?

Yes. We're here. Thank you.

Thank you. A couple of questions. How many full-line stores do you have in Mexico at this time?

I have got that.

Hang on here. Full-line stores in Mexico?

Yeah.

There's 60.

15?

60.

60. Okay. You're not trying to open any new stores in that format right now, right? You're focusing on the smaller format?

No, no. We are opening full-line stores. So we have 60 of our 79 stores that are open today are full line. And we're opening both concepts, but the smaller jewelry-only stores, frankly are just a little bit easier because of the footprint. They're faster to make happen. But both returns on investment are very strong.

Okay. And then just to make sure I understand, so you're accelerating the growth in Canada but not changing the guidance in number of stores you're going to open for the year?

We just think we're going to be at the high end of that range.

Okay.

And possibly just slightly above that range. But, yes. Not a ton more, but we're accelerating. Part of the drag is the infrastructure that we discussed, because we're pushing the infrastructure in just a little quicker.

And then finally, could you provide additional detail on the performance in Cash Converters? Do you have anything you can add about that?

Well Cash Converters, there's a couple things to comment on here. First of all, we're reporting them on a three-month lag. So we're actually just reporting the results from when we bought them in early November through December 31st. Their public guidance is out. The public reporting is out there for December 31st and that's what we're picking up is $800,000.

Okay. All right. That was it. Thank you.

Okay. Thank you.

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

Good afternoon, everyone. I was wondering if we could revisit this discussion on Colorado. How many times has the house passed this measure in the past? And can you give us a sense of what the tone in the senate is like?

Henry, as I recall, it was two years ago during the session the same member of the house, I believe his name is Ferrandino, introduced a bill. At that time it went from the house; passed by one vote on the third reading, I think; and went into the senate. In the senate it was modified in committee, sent back to the house and he withdrew the bill.

This year I believe it's gone by -- passed the house I think also by one vote, and has gone into the senate at this point and that's where it currently sits.

When does the Colorado legislature close? Or are they open all year?

It's within the next month. It adjourns in May until the following year, I believe.

Is this thing on the agenda in the senate to get passed by then? Or what are your ---?

It hasn't been scheduled for the floor at this point, to my knowledge.

All right. Thank you. Very strong quarter.

Thank you.

Thank you, Henry.

Our next question comes from Alan Brochstein from AB Analytical Services.

Hey, guys. First of all, I wanted to congratulate you, Joe, for your methodical upgrading or replacing I should say, I won't call it an upgrade, of your management team. Not an upgrade. That's a great job.

Paul is reaching in his pocket right now for his wallet.

I wanted to understand better the really good bad-debt performance. I think if I heard you right, it was 16% a year ago on the payday side and 13% this year. Was that better than you all were expecting? What would you have expected for this quarter?

Yeah. I'll jump in. This is Paul. Certainly, that was I believe if not, it was the second best second-quarter performance in the history of EZMONEY. While I'd love to place that bet, I don't usually place that bet. So it was better than our expectations.

I mentioned it really is I think a function of the processes that are built in the business and the people and the investment, in our systems. Both on the front end and on the predictive dialer that the Company invested in, in the last 18 months or so. So it's really paying dividends now.

We also think that our -- when I say processes we have got a pretty -- a real process on the front end of how we write the loan and then how we follow up with the customer in a courteous manner to ensure that they come in. So our default rates on the front end have come down. So it's really solid work all the way through the whole thing.

The other thing is, that the penetration of auto title into the business is significant; and our bad debt on auto title is better than bad debt on an uncollateralized manner, on the uncollateralized loans.

I was curious about that. What is the length of these loans typically? Obviously, the payday loans turn over several times during the quarter. But what is going on with -- are a lot of these auto title loans maturing intra-quarter or are you carrying them from quarter to quarter?

Yes, they are actually --- the auto title loan is a 30 day loan.

Okay.

And to your point, payday is 14 to 18 days depending on -- yes.

Okay. So we don't have to be worried that there's anything going on with assumptions about bad debt collection. This is actually real experience. There's no modelling going on. But what about on the installment side? That goes over quarter, right?

Installment loan is a five month loan, but we've had that product now for 18 months I want to say. So we think we've got our --- a pretty good history and a pretty good understanding of how that flows.

Okay. Great. Thanks a lot.

Thank you.

Thank you. (Operator Instructions). At this time, we have a question from Josh Elving from Feltl and Company.

Hey. Good afternoon.

Hey, Josh.

Just kind of a high-level question. Was curious to see if you have any thoughts regarding perhaps payday lending through a different channel perhaps via the Internet. Do you have any interest in that in any of your markets? Why or why not?

Sure. So, historically, we have not. And I often get asked the question, what's going to change? What's going to remain the same? The beautiful thing here is, as Joe talked about, we're going through an evolution of the Company, a consistent evolution.

But we do believe that the market place is obviously changing. How the customer interacts today is changing, and it is becoming more digital is how I would describe it. So we have kicked off a project in the last few months to really take a broad view of how should we be going to market digitally.

So that includes, do we buy, sell, loan on line? Do we reach our customers in a different way today through their mobile devices? Do we, in fact, use customer relations management and do a better job of data mining the data that we do have?

So those are all in play today. That's a multi-year strategy that we're looking at. So we clearly think that long-term there's opportunities to get into that forum.

Okay. I think that's good color. Any particular markets that jump out? Or is it just kind of in general?

We're in early discussion around all those things. I would tell you that we are just taking a very broad look at what's the best way to leverage the bricks and mortar and the operational execution that this Company is so good at as we get into digital solutions.

Great. Thanks a lot. Good quarter.

Thank you.

Thank you. At this time we have a follow-up question from William Armstrong from CL King.

I think you guys said in your opening comments, I think it was Paul, that Mexican scrap margins were 11% versus 40%?

That's right.

Why were they down so much?

Last year's 40% did not have any Oro-only stores in the number. And the Oro-only concept, as it is designed and as the market has come together, is a much higher cost of goods on gold. So, we had very little gold a year ago in the stores that we had open in Mexico. And with the very recent growth of the Oro-only stores, we were very aggressive as we opened those stores.

Your cost of goods inside of the model itself is in the 80% to 85% range, I believe. And even with that, the return on your invested capital you are in 40% range.

Sorry. Why would the costs be higher than in the full-line stores?

The cost is higher in both today. What I'm getting at is that in our full-line stores, the number we are up against is a very small, small number. So when we ran 40% margin last year, it was on a tiny, tiny number because frankly, we weren't doing much jewelry at all. Now we're in the jewelry-only business and the market out there today is 75% to 80%.

Okay. Can you tell me what was the number for scrap gold sales in Mexico? How much was it? If you have that.

Brad's grabbing that number.

Scrap sales gross profit was up approximately $100,000.

Sales dollars.

Sales dollars.

Scrap dollars (inaudible).

Sales dollars were up $100,000?

We're looking. We don't usually break it out inside of the segment to that degree.

Scrap sales was $1.8 million.

Got it. Okay. Thanks.

Thank you. At this time we have a follow-up question from Liz Pierce from Roth Capital Partners.

I just wanted to follow up on what Bill was asking. Are you saying your cost is higher on the jewelry because the consumer's aware now and it's the typical lift that we're seeing in acquisition cost? And then also secondarily a mix issue? I am just trying to sort through this.

The way I answer it is absolutely there's significantly more competition in the market place for gold buying and pawning on gold. And we also -- remember, all of our Oro-only stores have been opened within the last nine months.

So, frankly, we're being very aggressive. We're tweaking the model. We're trying some different things. And we're trying to make sure that we establish our brand in the market place. But we got very aggressive. And all I'm trying to convey is, even at those very aggressive levels, this is a very solid return on invested capital.

So it wouldn't matter whether it was in the full-line store or the Oro. Are you being even more aggressive in the Oro stores in terms of acquiring gold and merchandise?

I would not --- no. I think the answer to that is no. We are aggressive in both. We just happen to have a bunch of new stores in that vein and we're trying to make sure we make a name in the market.

Right (multiple speakers) mix issue.

Remember, too, the vast majority of our income is on pawn service charges.

Right.

So we loan more.

Right. Okay. That's great. Thanks.

Thank you. At this time, we have a follow-up question from John Rowan from Sidoti & Company.

Hey, guys. I hate to beat a dead horse but can you tell us how much per gram you're lending in peso?

No. I don't have that. We'd have to look at that and get back to you. I don't have that in front of me.

Do you maybe have it as a percentage of scrap value? Is it in the 90s or is it in the 80s?

That's what we said. It ranges, but we're in the 80s; that's where our model is built.

Okay. All right. Thank you.

Thank you. At this time I show no further questions.

Okay.

All right. Thank you all for your time and attention today. And have a great day.

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