EZCORP Inc (EZPW) 2012 Q3 法說會逐字稿

Welcome to the EZCORP fiscal 2012 third-quarter earnings release conference call. My name is Christine and I'll be your Operator for today's conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note, today's conference is being recorded. I will now turn the call over to Paul Rothamel, Chief Executive Officer. You may begin.

Thanks, Christine. Actually, it's Stephen Stamp who is going to start the call. Good afternoon, everyone. This call will address our third-quarter fiscal 2012 results. We issued a Press Release earlier today that is available on our Website at 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, our President and Chief Executive Officer, and Mark Kuchenrither, our Executive Vice President. I'll cover our results for the quarter and then Paul will provide some perspective before we open the lines for questions. I'll begin with our consolidated results. The third quarter's record net income of $28.5 million was up 8%. And diluted earnings per share of $0.50 were up 6%. For the 9 months, net income and earnings per share increased 23% and 20%, respectively, on a GAAP basis. And 13% and 11% on a non-GAAP basis. Compared to the prior year, our third-quarter results were positively impacted by our international businesses. Specifically continued growth of Empeno Facil and the consolidation for the first time of both Crediamigo and Cash Genie.

At a consolidated level, the big movers in revenue terms were jewelry scrapping sales and consumer loan fees. I'll talk about scrap, and gold in particular, inside the US and Canada segment discussion. The 38% in consumer loan fees to $53.5 million in the quarter was driven almost entirely by Crediamigo and Cash Genie. The two acquisitions diversify our unsecured lending business, both geographically and in terms of product mix. The two businesses are also expected to provide accelerated growth in our unsecured lending business. Lastly, at the consolidated level, $4.9 million of the $8.3 million increase in administrative expenses resulted from the two acquisitions. Neither Crediamigo nor Cash Genie are store-based businesses and therefore the majority of their cost base is included in administrative expenses. The remainder of the increase includes the Company's continued investments in broadening the management team and infrastructure to support the Company's globalization strategy and other domestic and profitability initiatives.

I'll now move on to the segments. As you might remember from last quarter, the Company is now reporting segment results based on geographic lines. And I'll start with our largest segment, US and Canada. Which includes our 914 stores in the US offering pawn, buy/sell, and/or financial services. And our 68 cash advance and buy/sell stores in Canada. The US and Canada delivered segment contribution of $44.4 million, a $1.9 million decrease compared with the prior quarter. Driven by the challenges related to jewelry merchandise sales and scrap sales, specifically gold inside the US pawn business. We estimate that on a same-store basis the changing gold metrics, both price and volume, from the year-over-year quarter caused a decrease of around $6 million in net revenue for the US and Canada segment. And that's assuming we've been flat for last year.

So let's discuss for a minute the impact gold had on the US business. In dollar terms, jewelry as a percentage of the total US pawn loan balance has remained largely unchanged. In terms of grams, it has declined as prices have risen. The jewelry redemption rate has, however, increased over time, reaching 86% in the third quarter. Resulting, obviously, in less jewelry dropping out of the loan portfolio into inventory for sale. At the same time, volume of jewelry purchases in the quarter decreased 38% on a same-store basis. With less forfeited gold collateral and fewer purchases, it's not surprising that jewelry and gold dispositions were also down. Jewelry sales in the US decreased 19% same store. And scrap sales declined 26%, again same store. It was these same-store decreases that drove the $6 million net revenue shortfall referenced earlier.

Other elements of the US pawn business, however, shows continued strength. Offsetting to a large extent the challenges in the gold and jewelry environment. Sales of jewelry merchandise -- that is, everything other than jewelry -- increased 23% in total and 9% on a same-store basis. Pawn service charges increased 14% in total, and 7% on a same-store basis. Underpinned by a 7% growth in total pawn loan balances or 2% on a same-store basis. Growth in the pawn loan balance is a telling indicator of the overall health of our pawn loan business.

Moving on to our consumer loans business in the US and Canada. Although total loan fees increased only 1% in the quarter, net fees increased 7%, reflecting a much improved bad debt performance. Bad debt as a percentage of fees in the quarter was 24% compared with 28% in the prior-year quarter. You might recall in the third quarter last year we had introduced new installment loan products in Colorado and Wisconsin.

The fastest growing of our segments, Latin America, includes our 223 Empeno Facil pawn stores and our newest strategic partner in Mexico, Crediamigo. Latin America had another outstanding quarter, with revenues up 109% in total. A 38% increase in total revenues within Empeno Facil was driven by a 59% increase in merchandise sales, or 17% on a same-store basis, and a 37% increase in pawn service charges, 7% same store. Scrap sales were up 6% in total. A 240 basis point improvement in merchandise sales margin, offset by 190 basis point reduction in scrap margin, helped drive a 64% increase in operating income and a 310 basis point improvement in operating margin at Empeno Facil. The average Mexican Peso to US dollar exchange rate for the third quarter was 13.5 compared with 11.9 in the prior year. A devaluation of 13%. Pawn loan balances were up 37% in total and 8% on a same-store basis. Again demonstrating the robust growth of our Mexican pawn basis. Empeno Facil also continued to execute on its market growth strategy.

During the third quarter we opened 18 de novo stores, bringing the together number of stores opened this year to 45. Crediamigo contributed total revenues of $10.8 million in the quarter and net revenues of $10.2 million after bad debt as a percentage of fees of 6%. During the quarter, Crediamigo refinanced a proportion of its $92.2 million of third-party debt at a lower interest rate. This refinancing led to a one-time reduction in interest expense of $2.8 million for the third quarter due to the amortization of debt premium associated with the refinanced debt and will lead to reduced interest expenses going forward. After administrative, interest, other expenses, tax, and non-controlling interests, Crediamigo contributed $1.8 million to EZCORP net income for the quarter. Crediamigo is continuing to refinance its third-party debt at lower interest rates, which will result in further enhancements to Crediamigo's profitability going forward.

The third of our new segments, other international, includes Cash Genie, our online lending business in the UK. Together with the net income we recognize from our two affiliates, Albemarle & Bond and Cash Converters International. Cash Genie, which closed on April 14, contributed total revenues of $4 million, and net revenues of $2.9 million, after bad debt as a percentage of fees of 29%. After administrative, other expenses, tax, and non-controlling interests, Cash Genie broke even for the quarter. The acquisition is expected to be accretive in its first full 12 months. Contributions from Albemarle & Bond and Cash Converters were up 2% combined in the quarter. Recall, that we recognize our earnings with a three-month lag and this quarter is an estimate based on the last four reported quarters ended December 2011.

Now moving on to the balance sheet. We ended the quarter with $51.8 million cash on hand and debt outstanding at June 30 of $206.9 million. $92.2 million of this debt is recoursed only to Crediamigo. The balance of $114.7 million was drawn on our revolver. Total earning assets, which we define as pawn loans, consumer loans, and inventory on our balance sheet, together with CSO loans not on our balance sheet, totaled $344 million at June 30. Up from $254 million a year ago, an increase of 35%. Lastly, our strategic investments in Cash Converters and Albemarle & Bond are carried on the balance sheet at $125.3 million. Collectively, their market value at June 30 was $144.6 million, representing an unrecognized gain of $19.3 million. As noted in our earnings release, based on a continuation of recent gold and jewelry trends, we expect earnings per share for fiscal 2012 to be at the lower end of our previously-announced range of $2.85 to $2.95 per share.

And now I'll turn the call over to Paul.

Thank you, Stephen, and good afternoon, everyone. As we enter our fourth quarter of the 2012 fiscal year, I'm very pleased with the financial performance of the Company and the continued progress toward becoming a leading multinational provider of instant cash solutions. We have continued to add stores, product, services, channels, and talent to our rapidly-growing portfolio of businesses. This year alone we added our 200th store in Mexico. We opened our 1,200th location on a consolidated basis, as well and had 1,250 locations at the end of the third quarter.

We began lending online in a meaningful way in the UK through Cash Genie. We entered the payroll withholding business in Mexico through Crediamigo. And we now serve customers in nearly half of the United States, all of Mexico and the UK, and five Canada provinces. This does not include the reach of Cash Converters to an additional 20-plus countries. Crediamigo and Cash Genie, along with Empeno Facil and our strategic affiliates, Cash Converters and Albemarle & Bond, accounted for roughly 20% of our segment contribution in the most recent quarter. Compared with 9% only one year ago. Look for those segments to continue to make meaningful financial contributions over the long term =, as well.

We have delivered strong financial metrics while deploying our capital wisely to get these things done. Strong earnings growth, high returns on equity and invested capital, and a conservative balance sheet with very little debt have been the cornerstones at EZ. We intend for that to continue as we grow and diversify over the coming years. Our customer, our marketplace and our industry are all evolving. There are fresh sources of capital, new players, and strong global competitors all vying for the growing number of disenfranchised consumers. There are also a host of macroeconomic pressures our customers are facing today that they have never seen before. We recognize that to be a leading provider in this environment, we have to be experts across many products, channels, and markets. We have to be nimble and recognize opportunities and marshal resources to capitalize where and when possible. And most of all we have to listen to our customers well and often.

We're doing these things today with strong local teams across the United States, Canada, Mexico and the United kingdom. Our business leaders and support staff are delivering record performance across an ever-widening business. We expect to get even better over time as we add more partners and experts and new businesses in new places. With our sector expertise, our flexible business model, our growing size and scale, and our strong and balanced approach to financial metrics, we expect to provide great shareholder value for years to come.

With that we'll take your questions.

(Operator Instructions)

John Rowan with Sidoti & Company.

A series of questions. First, does the tax rate stay at 30%?

The annualized rate will be 33.5%, John. We had a catch-up in the third quarter.

Okay. The gain from the debt retirement referenced, is that reflected anywhere on the P&L?

It's reflected in a lower interest cost in the Latin American segment.

Okay. All right. Do you have the same-store pawn loan balance?

Yes. For the US, is 2% -- plus 2%. And for Mexico plus 8%.

How should we look at bad debt expense? Is it going to trend lower on a year over year basis going forward because of the Crediamigo transaction?

On a consolidated basis, the answer is yes. The bad debt at Crediamigo is running about 6%. The one thing you have to remember, John, from third quarter of last year, in Colorado and Wisconsin we were transitioning significantly from payroll advance due to regulatory advance to installment loans. And our bad debt spiked on us in the third quarter and got slightly better in the fourth and much better in the first. But on a consolidated basis, the big mover is Crediamigo going forward.

Okay, fair enough. All right, thank you.

Bill Carcache with Nomura Securities.

First off, can we take a step back, and can you give a little bit of an update on some of the commentary that you made last quarter about consumers shifting to more general merchandise collateral and away from gold collateral. And the impacts that you saw that having. In some of the conversations that we had with other folks in the industry suggests that they weren't seeing those same trends. So I wonder, maybe now with another quarter behind us if you can just revisit that thought process and share any new perspectives that you might have.

Bill, this is Stephen. We tried to explain last time, the dollar value of gold and jewelry inside our pawn loan balance hasn't changed a lot. But if you separate out ounces and dollars per ounce it has changed quite a bit. So the number of ounces is down at 17%. But that's being compensated for in increased value such that it hasn't moved the overall dollar percentage.

What has changed is the amount that's dropping out of that portfolio where the redemption rate continues to climb and is now, as I referenced in the call, 86%. And it's been moving steadily up 0.5% to 1% per quarter. So what that's telling us is the gold the customers do have, they do not want to let it go. And secondly, the other source of gold dispositions, which is our purchases, continues to decline very materially. And, as I said on the call, it was down 38% same store this quarter. From memory, it was down 49% same store last quarter. So the inputs in terms of ounces continue to decline and therefore the outputs are matching those. And until we start comping these numbers, I think it's probably going to continue for another quarter or three.

Okay. That's helpful, thank you. Shifting to international growth, you mentioned in the release that 20% of your contribution was attributable to international businesses outside of the US versus 9% last year. And as we look forward, can your just give us a sense of what kind of growth rates we should expect? That big increase, I think, my sense is a big part of that was basically acquisition driven. But as we look forward, the relative mix or the relative contribution from the domestic versus international businesses, can you give us some perspective on the growth there?

I think if you look at -- let's talk about Empeno Facil first. You should be able to model that based on our store openings and the results that we've had. That's been a fast-growth business over the last couple years. We expect that to continue. Because we expect to continue greenfield locations down there at the same rate or slightly accelerated than what we've done over the last couple of years. We certainly didn't invest in Cash Genie and Crediamigo to slow our growth. We invested in them to diversify, number one. And also because they are fast-growing companies. So we would expect that those businesses would grow more rapidly than what I would call our more mature businesses in the United States. And Canada is still very small to us today. And while we're happy with the results, I don't expect that they will move the needle like Crediamigo, Cash Genie, and Empeno Facil will, as we go into next year and the following year.

Okay. And as far as loss rates go, we saw 24% in the US and 6% in Latin America. Should we continue to expect that 6%? We don't have as much history there with the consumer loan fees in Latin America with Crediamigo. Is 6% the right level to expect going forward?

Yes, Bill, I think 6% is a reasonable assumption.

Okay, great. And then just to wrap up. I guess the timing, Stephen, of your hedging program change was a little bit unlucky in hindsight. Would you share some thoughts on whether the plan is to stick with that at this point? Or would you go back? And then for perspective, can you just give us an idea of how much an impact the change had this quarter under, just staying under the old model that you were following versus where we are today. Under the new approach, what kind of impact did that hedging program change have?

So the collar expired worthless for this quarter. The average price throughout the quarter was inside the put and the call of the collar. Which I guess tells you it was kind of working. Had we sold the gold forward, I haven't actually done that math but my gut tells me that gold was actually pretty flat front to back in the quarter. I think it was up and down in between the quarter, but front to back it was fairly flat. So I suspect there wouldn't have been a big advantage to selling forward. But I'd have to do that math.

Okay, thank you very much. I appreciate it. Thanks for taking my questions.

Kyle Joseph from Stevens, Inc.

Could you guys give us some more details on Mark -- I apologize, I don't want to pronounce his last name, I'd probably butcher it -- Mark's promotion? And exactly what Change Capital's responsibilities and strategies are.

We'll let Mark answer that for you.

Hi, Kyle. I would not have been offended if you butchered my name. I butcher it on a daily basis. So it's pronounced Kuchenrither.

I'll talk about Change Capital. Change Capital is an investment arm of EZCORP and acts as a valued-added investor. And we assist local entrepreneurs with our sector expertise, operating excellence and capital. And we try to maximize their return on invested capital as partners. And maximize ours, as well. We differentiate ourselves through flexibility in our approach. And that enables us to be a partner with the experts. And we select the entrepreneurs because we view that they are local experts in their local markets. And they're looking for strategic help like ours to take their business to the next level. In addition to that, we offer best practices. Identification and implementation of best practices throughout the business units inside our core businesses at EZCORP.

Okay, great. Thanks, Mark. And then, Paul, maybe you could answer this. In terms of the UK, can you give us an idea on what you're seeing there in terms of competition, as well as any potential regulatory developments? There's a story out about UK payday lenders unveiling a new industry code of practice potentially this week.

Yes. The UK, from our view, is one of the fastest-moving markets today, particularly in the non-collateralized part of the UK. That's probably the thing you should keep in mind. We own interest, obviously, in both Cash Converters, who has a big presence there, which is a pawn broking presence, primarily. And Albemarle & Bond is a pawn broking, as well. That's actually the smallest segment of the alternative financial business over in the UK. So all the competitiveness you're seeing and the rate of growth is really on the non-collateralized side. And that's why we chose to jump in with Cash Genie, for all the reasons we've talked about before. It's a great marketplace.

Yes, we're well aware of all the discussions around the regulatory fronts over there. And I could tell you that we're comfortable and confident that Cash Genie operates in a way that we could flexibly handle whatever regulatory changes they may or may not throw at us. And I think, frankly, as we've said here in the United States, over time, we think we benefit from more regulatory action. Because I think today there's over 100 online lenders in the UK. Many of them are small and many of them are not great players. They do things they shouldn't be doing. So we invite appropriate regulatory action. And through Cash Genie and through Cash Converters, particularly, we're very active on the regulatory front in the UK.

Okay, great. Thanks for answering my questions.

(Operator Instructions)

Bill Armstrong with CL King & Associates.

Good afternoon, guys. Back to the gold and the forfeiture rate being low. Why not adjust your LTVs to get that forfeiture or redemption rate to the range that would be better for you?

We do that, Bill. We actually did get more aggressive in the marketplace as is evidenced by the 300 basis points we gave up on rate. We can argue all day if we got aggressive enough. But I can tell you that our US pawn folks are all over it in managing, obviously, price volumes and rates. But it's just a challenging marketplace today on the volume side.

Echoing another questioner earlier who commented that competitors are not reporting the same type of experience that you are. And that's been consistent with my conversations, as well. Are your LTVs out of line with the rest of the market?

We don't think so. We do competitive shops all the time. We do consumer feedback, both quantitative and qualitative. So we think we're doing some of the right things. As I just said, we got aggressive, and we may have to get more aggressive in trying to get some volume.

Got it. Okay, thanks.

Jordan Hymowitz from Philadelphia Financial.

One of the most intriguing opportunities you guys have is international. And with Cash Converters especially you have a 33% interest. And there's been legislation more clarifying the regulatory environment over there. Is that something, now that that's clarified, do you have an interest in taking a larger stake in, as you had at one point?

I'll take a stab at that, Jordan. The legislation in Australia, as I understand it, has been promulgated but it has not been passed yet, and may not be for a while. At least until the next session of parliament. And it won't come into effect until July 2013. So there's still a reasonable amount of uncertainty around the whole deal. But I think you can be pretty assured that the board of EZ has a watching brief and, when the time is right, we may or may not do something.

Okay. But there's nothing that's changed fundamentally in their business that would make you less interested in that if regulatory clarity occurred?

No. I don't think so today, Jordan, other than you're two years removed, or 1.5 years removed from the original deal. So we'd have to be looking at all of it in totality.

And have they performed as well as your expectations in that intervening time period?

I think, yes, they've been within -- I can't say anything publicly other than what they've said themselves. But I think they've performed in line with expectations, yes.

Thank you.

Bob Ramsey with Friedman, Billings, Ramsey.

I apologize if I missed this earlier. But I was curious with your guidance what that incorporates in terms of gold scrapping margin and volume from today, or from this quarter forward.

Bob, it's Stephen. It assumes a continuation of current trends.

So narrower margins and less volume?

Yes.

Okay. But you don't want to quantify it?

Not really because those two things are somewhat interrelated, as Paul was just talking about. You can buy volume, to some extent.

Okay. Thank you.

Bill Armstrong with CL King & Associates.

I had a second question I forget to ask before. And that was, there's a bill in the House that is fairly new. The House of Representatives, that is. That would put in federal regulations that, in some cases, could supersede state regulations for short-term, unsecured loans. I was wondering if you had any thoughts on that bill. If this is something, if passed, you would view favorably or not.

It's early in the process and we're following it through our lobbyists and through our association. We're just keeping an eye on it. Frankly, our preference -- and I know there's some other discussion out there right now -- but EZCORP's preference is states rights, as complicated as that can be sometimes. We'd prefer the federal government leave it up to the states.

Okay, great. Thanks.

That concludes the question-and-answer session for today. Please go ahead with any final remarks.

Thank you for your interest. And we look forward to talking with you on our year-end call. Thank you.

Thank you for participating in the EZCORP fiscal 2012 third quarter earnings release conference call. This concludes the conference for today. You may all disconnect at this time.