EZCORP Inc (EZPW) 2011 Q2 法說會逐字稿

Welcome to the EZCORP, Inc. fiscal 2011 second-quarter conference call. My name is Monica 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 Stephen Stamp, Chief Financial Officer. Mr. Stamp, you may begin.

Thank you Monica and good afternoon everyone. This call will address our second-quarter fiscal 2011 results. We issued a press release earlier today that is available on our website, www.ezcorp.com.

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 with me today is Paul Rothamel, President and Chief Executive Officer. Paul will make a few opening remarks and talk about some of the strategic initiatives that took place in the second-quarter. I will then cover our results before we open the lines to Q&A. I'll now turn the call over to Paul.

Thank you Stephen, and good afternoon everyone. We appreciate you dialing in this afternoon. Let me start with a few financial highlights.

The second-quarter was another great quarter for our Company and we remain on track for another solid year of performance. Continuing our trend of year-on-year earnings growth, our diluted earnings per share for the quarter was $0.63, up 31% from $0.48 a year ago. Underlying our second-quarter performance was double-digit growth from all three of our operating segments.

Combining all segments, same store revenues were up 12% and same store operating income was up 22%. Combined loan balances, including CSO products, the engine that drives our businesses, were up 17% compared to last year. And that trend bodes well for the remainder of the year.

At 81% of revenues and 74% of store operating income, Pawn continues to be the bedrock of the Company. same store revenue growth in US Pawn of 11% was complemented by 23% growth in Empeno Facil.

Empeno Facil store operating income was $1.6 million compared to $0.9 million in last year's quarter. This is extraordinary growth considering that 46% of our stores are less than a year old. It demonstrates that our investment in infrastructure in Mexico is paying off and we are well positioned to compound that growth nicely in the years to come.

same store revenue growth at Easy Money was 13%, another solid result, particularly as we continue to migrate customers from our Payday product to other loan products. I would just like to call out our appreciation of our team members. While customer demand for our products and services may be strong on its own, it's our team members through their efforts everyday, that turn a 21% growth in total revenue into a 34% growth in net income. Thanks to all.

I'll leave it to Stephen to fill in some of the details around the financials a bit later in the call, but I'd like to take a few minutes to talk about three key initiatives that were announced in the quarter, including our strategic alliance with Cash Converters International, our rollout of the change card, and our continued focus on acquiring and green-fielding US Pawn shops.

Starting with Cash Converters. Cash Converters International puts us in a position to rapidly understand and create earning assets in the 21 countries they serve today, as well as countries not yet served. We think there are great synergies in products and services between our two companies and that each of our respective strengths complement one another well. We also think the Cash Converters brand is a great one and many types of alternative financial solutions fit well under that brand over time. More specifically, owning 53% of Cash Converters gives us immediate exposure to the UK and Australia, where they operate 80 company-owned stores and 270 franchise stores.

In addition, franchisees operate stores under the Cash Converters brand in additional 19 countries, mainly in Continental Europe, South Africa and Southeast Asia. This gives us a great platform to jumpstart our international expansion in a very measured way. Through the joint ventures, we can leverage Cash Converters local mileage in these markets for greenfield expansion, as well as continue the buyback of existing franchises.

From a products and services perspective, Cash Converters primary businesses is buying secondhand goods from its customers and then retailing them in its stores, what we refer to as the buy/sell model. In some markets, Cash Converters also provides the customer with a repurchase option along the lines of a traditional pawn model. Beyond that, they provide a non-collateralized loan through corporate stores franchise stores, and the Internet, again, depending on local laws and customs.

As you know, our strength lies in traditional pawn broking , buying and selling secondhand goods, particularly jewelry, and offering non-collateralized loans through our stores. Essentially we serve a similar customer in slightly different ways. We think those small differences, gold buying, Internet lending, and debit card marketing, to name just a few, are synergy opportunities.

The final attraction for us is the Cash Converters brand. They've done an outstanding job of establishing a brand in 21 countries over the course of 26 years. For those of you not familiar with their stores, they offer a different shopping experience than a traditional pawn store. As a result of their buy/sell model, Cash Converters stores follow much more closely a mainstream retail format and therefore appeal to a wider customer segment. In addition their brand is supported by innovative marketing initiatives.

As I said before, we agree with their management team, that Cash Converters lends itself to a myriad of alternative financial solutions for our customers across the globe. While we look forward to a positive shareholder vote and the eventual closing of the transaction in our fourth-quarter, we are already moving forward with our Cash Converters strategy.

Earlier this month we acquired the Cash Converters franchise rights in Canada and expect to convert the majority of our current Cash Max stores and any future stores, to the Cash Converters brand. This Canadian strategy will be immediately accretive as we begin to collect fees and reduce our current new store forecast at drag.

In Canada today, we operate 59 Cash Max stores and Cash Converters operates 13 franchised stores . With this change in strategy, we are now planning to add an additional 5 to 10 stores in Canada and the remainder of the year, which will bring us to a total ending store count of approximately 80 stores.

While this is slightly less than our previous estimate of 85 - 90 Cash Max only stores, we are extremely excited about our evolving strategy in Canada. We expect this strategy to be even better than our stand-alone Cash Max strategy, as we will better leverage our bricks and mortar stores and eventually transact on the Internet as well.

The second major initiative that I want to speak to is the rollout of our reloadable debit card, ChangeCard. While we are not the first to market, we think we have a differentiated product. The luxury of being a second adopter is that it gives us a view as to what is and isn't working in the marketplace and greater insight into the customers' evolving needs. We can benefit in these areas while still having significant market share opportunities.

We have a three-fold strategy that we think will make a difference in the marketplace. First, we have partnered with experts in the field of reloadable debit cards, Rev Worldwide. They are the processing engine between us, our customer and the banking institution. They also have current international capabilities in places like Mexico, Canada, the UK, and Australia.

Second, we're taking an integrated technological approach, so that our customers will be able to transact with us in our stores, on the Internet and through their phone at their convenience. And finally, we will be a low cost provider to our customer. Our intent is to provide them a superior card that they want to use again and again.

Our early test results have provided us with great feedback on what customers value and don't value. One key indicator that has us excited about the card is that we have an attachment rate of over 50% since the beginning of the test. Meaning, that more often than not, when we present our customer with the option of taking cash or our card, they choose our card because they see the value it provides.

We expect to provide further updates as we tweak the product and complete the rollout across the Company. The financial impact is factored into our guidance.

The final initiative I want to talk about today centers on US Pawn growth. We continue to execute against our rollup strategy during the quarter. In particular, we acquired five pawn stores in South Florida for $17.9 million. These stories bring our total number of stores in Florida, where we were already the number one operator, to 90.

At an aggregate cost of $31.5 million year-to-date, we've closed on 6 transactions for total of 9 stores, most of which are high-volume and have the potential to be some of our top performing stores. We also opened 5 greenfield stores in 4 states; Oklahoma, Georgia, Florida, and Illinois. We expect to greenfield an additional 5 domestic pawn stores during the second half of the year while we continue to look for additional acquisition opportunities.

In the last few days, we also signed an agreement to acquire 15 pawn stores from Mister Money for $18.5 million. There are 11 stores in Iowa, 3 in Wisconsin, and 1 in Illinois. Both Iowa and Wisconsin are new pawn states for us and we will immediately become the Number 1 operator in Iowa.

The Illinois store will bring the total in the state to 10 and would strengthen our position as the second largest pawn operator in Illinois, a state in which we had no presence this time last year. Pending Mister Money shareholder approval, we expect the transaction to close in May.

In the 10 months since we aggressively began our rollup growth strategy of US Pawn acquisitions, we have acquired 25 stores for a total cost of $53 million. The Mister Money transaction will bring that total of 40 stores for a total cost of just under $72 million. The greenfield component of this strategy has added 12 US Pawn stores over the last 16 months as well. As before, we expect these US Pawn acquisitions to be immediately accretive and have included them in our revised guidance.

Before turning the call over to Stephen, I'd like to share with you what is happening on the Texas legislative front. The state legislature meets every two years from January to the end of May. This session has seen several bills put forth with and without industry input. The effect of these bills ranges from outright prohibition to rather straightforward implementation of our industry's best practices.

Currently we have one bill sponsored by Senator Wendy Davis, that has passed on the Business and Commerce committee on the Senate side . The bill in its current form would negatively impact the pay day business in Texas as we know it today. We, along with our industry association, CFSA, have been working with Senator Davis and senator leadership on potential changes to the bill, centered on our ability to continue to offer innovative products and services that our customers want and deserve.

On the House side, 3 bills sponsored by Representative Vicki Truitt, were passed out of the Pensions Investment and Financial Services Committee about the same time as the Senate bill moved out of its committee. Two of the Truitt bills deal with licensing regulation and customer disclosure and are the results of our industry working through a mediation process at Truitt's request.

The third bill deals with the economic model and we cannot come to closure with the consumer groups through mediation. It represents Representative Truitt's own ideas and expectations. We generally support the two bills that reflect the successful mediation process and see them as meaningful efforts to enhance oversight of our industry.

We also think they will effectively raise the bar in various industry practices that will improve the customer experience. We do oppose the third bill as it is written today, as it would negatively impact the financial model of the business and make it harder for us to innovate and differentiate ourselves in the market place.

As you know, the legislative process in Texas is one with many steps and moving out of committee on either side is a relatively early step in the process. We've been very active and will continue to be very active in the legislative process to represent the interests of our customers, our team members and ours shareholders.

As I mentioned before, there are roughly 5 five weeks left in the session and we would like to see legislation passed that enhances the customer's ability to choose products and services that fit their unique need while elevating disclosures and protections. At this point, I'll turn the call back to Stephen to talk in some detail about the second-quarter financials. Stephen?

Thanks, Paul. Before I begin a segment by segment overview, I'd like to point out that we made a change to the presentation of merchandise sales on our consolidated statement of operations and in our operating segment results. Previously, the Company included fees from its jewelry VIP and product protection plan as well as lay-away fees in other revenue.

This quarter, we have included those fees in merchandise sales on the basis the fees and jewelry VIP, product protection plan, and lay away transactions are incidental to sales and merchandise. Prior figures in margins have been reclassified accordingly.

So, onto the segments, beginning with our largest segment, US Pawn. The same store revenue growth of 11% in the quarter that Paul referenced was driven by same store increases of 8% in merchandise sales, 17% in scratch sales, and 12% in pawn service charge. Store level operating margins expanded 390 basis points to 51% on revenue of $160.4 million, to yield an operating profit for the quarter of $46.4 million, up 28% on the prior year quarter.

Our second segment, Empeno Facil, same store revenue growth in the quarter of 23%. In this case driven by same store increases in merchandise sales, scrap sales, and pawn service charge of 22%, 15%, and 37%, respectively. Empeno Facil recorded store level operating income of $1.6 million, an increase of 82% over the prior year quarter. At constant exchange rates the increase was 71%.

As already mentioned, we have opened 32 Empeno Facil stores so far this year and are on track to open a total of 55 to 60 new stores by year-end. As you might expect, both pawn segments continue to benefit from rising gold prices. In the quarter, we saw a 19% in proceeds per gram, offset by a 26% increase in cost per gram on a 10% increase in volume.

As of today, we've locked approximately 90% of our anticipated third quarter scrap at an average price of $14.50 per ounce. Increases in both jewelry and general merchandise drove our pawn loan balance on March 31 - $106.5 million, up 20% from the prior year. It was up 11% on a same store basis.

The third segment, Easy Money, recorded same store growth of 13% driven by same store increases in signature loan fees and auto title loan fees of 9% and 44% respectively. Express as a percent of fees, signature loan bad debt increased from 14% -15% this quarter. The increase is not significant and is well within our expectations given our product mix. Auto title bad debt, again is a percent of fees, decreased from 8% - 6%, mainly due to some operational improvements at our collection center.

Store level operating income increased 17% - $16.9 million. The 140 basis point improvement in margin was helped by the continued maturation and reduction in drag of the stores in Canada. Added together, the three segments produced store level operating income of $64.9 million and a blended margin of 50%, up 260 basis points on the prior year quarter. This drove the increase in our consolidated operating income of 32% - $44.9 million with a 320 basis point increase in margin.

Now moving down the P&L, the pre-tax contribution from unconsolidated affiliates increased from $3.3 million - $4.7 million this quarter. Although the prior year quarter included less than 2 months contribution from Cash Converters. Strategic affiliates representing close to 10% of total pre tax income for the quarter.

Now onto the balance sheet. We ended the quarter with $59.8 million cash on hand, having spent a total of $17.9 million on acquisitions in the quarter. We also mollified another $2.5 million of our term debt, leaving us with $20 million outstanding at March 31. We had no borrowings under our revolver.

Our earning assets, specifically pawn loans, signature loans, auto title loans, and inventory on our balance sheet, combined with our CSO products, not on our balance sheet at March 31, totaled $210.3 million, up from $176.3 million a year ago. The average annualized yield on these earning assets during the quarter was 230%.

Lastly, our strategic investments in Cash Converters and Albemarle and Bond are carried on the balance sheet at $112.4 million. Collectively, their market value at March 31 was $184.3 million, representing an unrecognized gain of $71.9 million.

Before we move on to questions, I would like to conclude our prepared remarks with an update to our earnings guidance for the full fiscal year. We are increasing our full year guidance to $2.55 per share, excluding the one-time charge recorded in the first-quarter. This is up from our previous estimate of $2.40 per share and represents a 30% increase over last fiscal year.

You should note that this revised guidance takes into account our continuing organic growth and both the acquisition of the Cash Converters franchise rights in Canada, which closed on April 8, and the acquisition of the 15 Mister Money stores expected to close in early May. It does not take into account the Cash Converters international transaction. We will address guidance again around the time that transaction closes. With that Monica, we are ready for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from John Rowan at Sidoti & Company. Please go ahead.

Good evening guys. I'm just trying to piece everything together and understand what the cash flow looks like in the back half of the year. Because it seems like, obviously, the Mister Money thing will fund later in the year and then you have the outflow for the cash converters. So, call it $90 million worth of outflow. Just remind me what the level of operating cash is that you need and how much you have available under the revolver, which is undrawn at this point.

The revolver is completely undrawn and we have $80 million available. And we expect to be able to fund both of those two deals out of cash flow and utilization of the revolver, John.

What's the operational level of cash needs?

It will be cash positive in the second half.

No, I'm saying what's the amount of cash floating around in the registers? What can you bring a number down to? Because, obviously, what you're reported as a cash balance at the end of this quarter, close to $60 million was more than you need

Right. 10 to 12 is floating the stores. That's what the question was?

That's what I was asking. And then the large increase in minority interest is that more driven by gains in Albemarle bonds or Cash Converters or both?

Cash converters was the primary driver

It was cash converters? Okay. And then one last question on Texas. When you guys were talking about the three bills, you said the third bill you don't support. That's the third Truitt bill, correct? You weren't talking about the Davis bill, right?

That's correct. There's 3 in the house, 1 in the Senate. And it's the economic bill which is actually bill number 2 is the 1 that, as it's written today, we don't support.

Okay, and then just one last question . Could you maybe, again, I'm just trying to piece together what the store count looks like at the end of the year. So, you're going to get the stores are Mister Money. What should we look for the total number of organic stores at the end of the year? Plus whatever you acquire with Mister Money.

We have 1057 at the end of the quarter. There's 15 Mister Money, 5 greenfields, and 10 or so in Canada. And then whatever other acquisitions we do.

Okay what about stores in Mexico

1100 in total.

About 1100 in total? Okay, thank you very much.

Our next question comes from John Hecht of JMP Securities. Please go ahead.

Good afternoon guys thanks, for taking my questions and congratulations on a good quarter. Real quick, the Empeno Facil, the store opening, the greenfield openings, are all these all multi-line at this point?

No. We are planning to stick with our strategy of roughly 70/ 30 between full line and oro. And in the quarter itself we added15 stores, of which 14 were full line and 1 was oro.

Okay. And the Mister Money acquisition, can you give any details of the about consideration and the integration is something like this -- do you retain some management and do you quickly change the branding on this to an Easy Pawn? And can you give us any details about that? And I'm kind of speaking to this in the sense that you guys have been fairly quisitive and I'm wondering when you do this, how often do you look to retain management versus replace them and put you own systems in place

I'll answer it kind of broadly and I'll talk about Mister Money real quick. We, in US pawn acquisition, primarily so far we have moved very quickly. We've retained in some cases area managers or, certainly store managers, and area managers, and the teammates in the stores.

Oftentimes, the owner or the principal wants an exit strategy so we provide that, we may keep them for six months or put them on a retainer for a year to help us if there any issues along the way, that kind of thing. We do clawback provisions in some deals so that we're protected. In Mister Money particularly, if you remember, these are a sophisticated group of owners out of Colorado. We actually bought, several years ago, about 20 locations in Mexico from them.

So they know us, we know them. And they're actually going to continue to operate some of their Mister Money stores in Colorado. We'll retain the folks in the stores and I believe some of their regional and district people, but they'll then report into our structure. And we'll move fairly quickly. Again depending on size of acquisition, sometimes it's 30 days, sometimes 120 days before we'll move it to an Easy Pawn brand.

Okay. And then, it's just respect to the trends and multiples kind of a valuation consideration, what are you seeing in the market nowadays and is that consistent with Mister Money? Or was that kind of a different framework given that you have a history with them that worked out?

We hesitate to answer on multiples. The way we answer this is that it's not just accretive to us, but it certainly fits within our return on equity hurdle to 20%, and that's the best right answer. I don't like to talk about multiples and things like that because we're in a competitive environment out there today trying to do additional acquisitions.

Yes, I understand that and with respect to the Cash Converters, is there any difference in kind of the multiple arrangements there? Given that it's a franchisee and you'd have some incremental information for the performance or when you buy in Cash Converters related units, is it a similar kind of consideration evaluation framework?

I think the difference in our mind would be that it's clearly a strategic move. So, as we talked about the significance of the brand opportunity, but we still -- but we still have financial models and hurdles and every things got a fit into. So, on a consolidated basis everything we do had got to rollup to the kind of returns accretiveness in stock and returns that we've expected for years here

I guess, more specifically, I was referring to, as I understand, the strategic benefits with the Cash Converters partnership, but you have several franchises that you can buy from within that network, as well. And I was specifically referring to the multiples on those units, given that there is already a business affiliate relationship in that network. So, do you pay when you buy in a franchise do you pay similarly to what you pay for a Mister Money or is there a different type of valuation framework.

Actually it is a very similar. If you look at Cash Converters public disclosures over the last 12 - 18 months, they specifically call out deals that they've done, and they are in the same neighborhood.

Okay, great thank you very much. And you had a pretty sizable increase in the store margin. Based on the history of my model, it looks like you might be running at record levels on store margin. I'm wondering, do you see this maxing out at some level or can you continue to drive revenues through the stores to improve this? Or , it's nice growth there, I'm wondering if you had any commentary on where you see that going over the next 12 - 18 months.

I would think we're at a point of diminishing returns to some degree. We've got -- it is a very strong performance at th 50% operating income margin. But it does get tougher and tougher and, you know, part of it is we want to make sure that we're investing appropriately the store level, as well. So, I would see diminishing returns there

Okay, great. Appreciate the call, thanks very much.

Next question comes from Liz Pierce of ROTH Capital Partners. Please go ahead

My congratulation, as well. Paul, I wondered if you could backup a bit and just go over the Cash Converters situation getting in Canada. I don't think that I fully understand what transpired.

Sure. So, through our activity in Canada we had come across the master franchise owner of the country and had started some dialogue with her. Frankly, it's kind of that the roots level, ground level.

So, out of that came discussion around a deal while we were doing the broader deal with the international group. They obviously were aware of it and blessed it along the way as well. And so essentially what we've done is buy a franchise, master franchise, prior to any joint venture or the major deal closing.

So, they operate 13 franchise stores today. She is going to come and work with us and help us in our transition to run franchises stores. She's a quality individual we like a lot. That's how we got where we are today.

So, our belief is and what we like about it is, they have the buy/sell model, We've got the financial service version of it. We've put it together and we've got kind of multi-multiple formats that we are going to test from a full-sized, you know, buy /sell model with financial services to a mini store to a financial services only.

But simply put, today if you walk into a Cash Max store we have a very limited product that you can do with us. In the future, you'll be able to walk into that same store with a Cash Converters brand on the front of it and you'll be able to -- we will buy products from you, we will sell products to you, we will provide the same financial services we have before.

We will be buying gold that we do today but probably in a larger role, so we think it's a much better product, frankly, for the customer. And actually for us it seizes opportunities and reduces risks for the model, because we now to multiple revenue streams instead of just one loan product.

And will all the Cash Max stores then be rebranded?

That's our intent. We have 59 stores today . We've already gone through and looked at sizes, locations, and all those things. We certainly want to work closely with the franchisees that are already open as Cash Converters stores. But that's our -- yes, that's our intent.

Will any of them have to be closed since there is potential cannibalization with those 13?

Not any different than a normal process. I think we've closed 2 in Canada since we've opened. They just weren't financially performing. Wish I could bat a 1000 on every opening, but I don't. So, we've closed a couple.

So, at this point where that process right now what will be kind of a financial center, what will become a mini store, what will become a large full-service store. When will we move all of them, that kind of thing. But this isn't something we have to test. This thing has been tested and 21 countries as we described, so we're going to use their expertise and we're going to go fast.

Got it. And then back to Texas and legislation. Can you give us kind of update on the auto title loan? Because I continue to hear a lot of concern about that particular product.

I really can't comment -- the 4 bills that I referenced are what are active. I guess, today. It doesn't mean there aren't other things that could come later, that doesn't mean there are not amendments that could get attached to one of those bills when it goes on the floor. But it's just a fluid process and it would be inappropriate for me to comment on that.

Auto title, if I remember correctly from reading one of the bill, is in there, right?

Yes.

On a graduated scale, on what you can charge?

Yes. Yes, that's true.

Okay

But like I said whether there are -- you know that some of them have rate caps, some of them have rollover vision, some of them have graduated rates. And we continue to work with them and run sensitivities around those bills. And like I said, they're both -- there's 4 bills out of committee that we're monitoring.

I don't know if you listed it, or maybe it'll be in the queue, but you typically give the number of stores that previously have auto titles. I think it was like 400 -- at the end of last quarter.

We do give that. Did we release that this time? It's in the queue for sure.

Number of auto title stores, Liz, was 412 at the quarter end.

Okay. How many of those are in Texas?

We actually don't give that information out. We don't give state by state.

Couldn't slip it in, could I?

No, but you tried.

And then, Stephen, a quick question for you. In the queue, will we have the restated numbers for historically? Or can we get those from you?

All history will be restated on the new presentation basis.

Right, but now we only have -- I mean obviously we can subtract to get the first half of this year and last year, but I'm thinking about the previous years. Is any of that information going to be available?

I hadn't planned to. No.

Okay. Just the shifting of the revenue, from the other up into the sales. And it looks like, did it also have a corresponding impact on cost of goods? When I was looking at last year's number?

It affects the margin, it shouldn't affect the cost of goods.

It looked like there was a little bit of shifting. We can talk about that off-line. That's all I have for now. Thanks.

(Operator Instructions) Our next question comes from Bill Armstrong of CL King & Associates. Please go ahead.

Good afternoon guys. Retail gross margins were up while scrap margins were down. I was wondering if you could just discusses that a little bit for us and flesh that out?

Well scrap margins were down about 300 basis points, which generated about $300 million of additional gross profit on scrap, so no question we were aggressive in the marketplace -- $2.9 Million, 300 basis points. So, we were obviously very aggressive in both Mexico and the US. Sacrificed a little bit of rate to get the dollars, but I think we would do that again, we're very happy with that.

And on the retail side -- a little bit if you remember out of Mexico last year, we were very aggressive in getting rid of some aged inventory that we didn't have this year. So, Mexico was up quite a bit and US was up just a little bit I think. But those are the big movers.

Okay, got it. And, just to clarify, when you're talking about the Cash Converters buy/sell model, are we talking about buying and selling gold? Or are we talking about pawn loans? I just want to make sure I'm clear.

That's okay. So, the buys/sell model at Cash Converters is really, depending on country, it is a true buy/sell. Like Plato's Closet, like Play it Again Sports, like Game Stop. I walk in, I sell my TV and we buy it from you, we turn it around and we put it on the floor after a certain hold period and sell it.

In some countries, where the laws allow, you can walk in and sell me your TV for $200 and 28 days or whatever it is, I can hold that and sell it back to you. So, that, in essence, is a pawn loan. So, it depends, so they operate both of these structures depending on the country.

In Canada, for instance, it is only the buy/sell model, not the buyback model. So you can't do the pawn loan in Canada. In the United Kingdom, you can. You can do both models. And you mentioned gold -- that's one of the, probably the opportunities between the two companies is that Cash Converters is a general merchandise based company. They do a vast majority of their buying, selling and buying back with general merchandise on that gold.

Got it. Thanks for that clarification.

And the next question comes from Henry Coffey at Sterne, Agee. Please go ahead.

I'm sorry, I've got a cold. Just a series of questions, but first I appreciate your directness on the legislative issues. But the Truitt bill you're referring to I'm assuming is 2593, which is where she sets business practices?

You know, I don't know.

You said there was a third bill that you guys couldn't work with. Is that --

Yes, that 2593. I just had to find it, Henry.

It's, I think "fluid" is a polite way to describe the legislative process. Last we looked, they allowed for free renewals, no fee capita, and a $2000 loan limit, Is that correct? Because I know it could have changed.

I'm struggling a little bit because you used -- you repeated my term "fluid." There have been a myriad of discussions around it. And on the Truitt side, there are, I believe, six renewals actually. The limits are really more around income, right? Based on (inaudible).

That's 35% .

Yes .

And when you look at the bill, the part that you have trouble working with is obviously not the no fee cap, I'm assuming it's the loan size limits, the 35% income limit?

Well, the challenge with these type bills, is, frankly the biggest challenge I have is that they begin to restrict your ability to offer what the customer is asking for, in the long run. So, they start to hem you in financially and otherwise. And, if you think about what's going on in this industry over the last 20 years, there's been a lot of innovation in the customer's favor.

Some customers prefer a payday loan, some prefer an installment loan, some prefer a collateralized loan related to their auto title, lines of credit, and other loans. And so the real challenge with both of the bills we're struggling with as they continue to hem, hem tighter and tighter.

So, the basic structure of the bill is not as much of a problem as just the whole idea of being boxed in, given the complexity of your customer demands.

That's exactly right, and where we're trying -- we're trying to innovate toward them and not away from them. And these type bills -- you know, it's a free market here. The customer is the one deciding what they'll pay and how they'll pay it, and we should let them decide.

That sounds pretty radical And then, of course with the Davis bill that the Senate bill that got out of committee, and that's got a specific fee cap and, obviously, that's not something anyone is comfortable with. And you may not be comfortable with this, but can you gather a sense of where you think the politics of the state legislature is?

Yes, I couldn't comment on that, Henry. I really couldn't. I think that would be inappropriate. I think, on both sides, everybody is trying to work through this in an appropriate manner, I do. It's my first time through the Texas legislature, I've not been surprised by anything, I guess. I think people are trying to do, generally, what they think is the right thing.

And looking at Cash Converters, it almost sounds like a pawn shop model. What's the real difference?

As I described to you, there are similarities to the pawn shop model. But again, depending on the country. I'll give you Spain as an example. Today in Spain they got a successful cash converters business there and all they run is a secondhand buying and selling. There is no loan activity in Spain today.

They are exploring that based on regulation and customs, but it's a secondhand good model and it works. If you go back to our model today, while we're a pawn shop, 30% of our purchases --30% of everything we do are purchases. So, we're already dong this, we just do a lot more pawn activity than retail and they're the other way, they do a lot more retail activity than pawn.

And then in Canada, the model is still evolving, is that the thought process?

Yes, absolutely.

Well thank you. Real solid quarter and appreciate the additional commentary here.

(Operator Instructions) Our next question customer Julie Bryant of MKG Financial.

Good afternoon. I have a quick question on your reloadable debit card. If you could talk a little bit more about that. Will that be additive or is that an alternative to cash? You said that it was going to be differentiated, that you're a second adopter, you'll be the low cost provider and there was an attachment rate of greater than 50%. Could you go into a little bit more detail on all of that?

Sure. So, for our business today it would be additive because to date, generally on our easy money side, have been loan providers only. Those have been the primary or certainly the most significant sources of revenue. The ChangeCard, for the first the change time for our Company, will put the of the ability to transfer money, pay your bills, and many other things that you see on other reloadable debit cards, I don't want to go into all the features, but the differentiation we think are probably the two things I just described to you.

So, today many debit cards in the market place are stand alone products. Ours will be integrated in technological way, as I said, so that our customer can sit on the cash and transfer money and we hope, at some point make a payment, those kinds of things, added to their phone on the Internet. So, bricks and mortar company today expanding into digital strategies. So that's all additive.

And then the low cost provider, as a second adopter, we're able to go out, look at the habits of most card carriers in our demographic, exactly how they use the card and exactly the fees that they pay and how it works for them. We felt that we wanted it because it's additive, because we don't have to keep it doesn't have to be a primary driver of revenue for us, but a material one.

We wanted to be a low cost provider. We wanted customers to actually want to carry our card. And we're working on it from that aspect. So, those are the two things that we think are pretty significant in the marketplace and there is a significance to that.

The early results are, when you stand in front of one of our customers and the cash is in their hands and they have the opportunity to walk out the door with the cash that they came in for or take the debit card that we provide, and they hand us cash back and take the card, we think that's pretty significant. We think they are seeing the value. And so --

And so when you offer them the cash versus taking the card and they say, you know I'd like to take the card, what is it -- have they given you feedback and said you know this is what I love about this card as opposed to cash?

Yes, and a lot of it is the cost structure and the ease with which it is to work with us. They like the fact that it's -- that they can interact with us with their phone they can check their balances on their phone and there are other technologies coming. So, yes, that's exactly what they're telling us.

And when have you envisioned when this will be big enough that it really is something that we'll see that it really is an option out there for customers?

So I would say -- we think in fiscal next year it will materially impact our business.

Great. Thank you so much.

I'm showing no further questions at this time. I would now like to turn the call back over to Paul Rothamel for any closing remarks.

Thanks, I would just like to reiterate that we're very happy with the results from our new and existing stores, in the performance of our team members. They produced double-digit growth in operating income in each of three segments. All the more impressive when you consider that we were able to forge ahead in important strategic initiatives without missing a beat. Thanks for joining us today we look forward to speaking with you again on our third-quarter call.

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