EZCORP Inc (EZPW) 2012 Q4 法說會逐字稿

Welcome to the EZCORP fiscal year 2012 fourth quarter earnings release conference call. My name is Adrian and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Please note, this conference is being recorded. I will now turn the call over to Mark Kuchenrither. Mark, you may begin.

Thank you, Adrian, and good afternoon, everyone. This call will address our fiscal fourth quarter and 2012 year-end results. We issued a press release earlier today with supporting documents that are available on the Investor Relations portion of our website, at www.EZCORP.com. I would 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 material 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. I will review our results for the quarter and fiscal year, and will provide our guidance. Paul will then provide some commentary regarding our overall strategy and outlook, before providing an opportunity for questions. I want to set the agenda for this and future earnings calls. I will not spend much time restating financial information that you can retrieve from the financial statement schedules attached to our earnings release. Rather, I will spend my time providing commentary and color around the factors that drive the results that are reflected in those schedules. In addition, we have provided supplemental information on our website to help you better understand our business.

I also want to take a few seconds to talk about guidance. We are rightfully proud of our record consolidated results over the past quarter and year, but we are disappointed in our ability over the past year to accurately forecast our operational results. That will change. As you will see in a minute, we are moving to both quarterly and annual guidance, and I will commit to you that I will provide you the most accurate guidance possible, based on the circumstances as we see them. Please remember that ours is a dynamic, fluid business. Circumstances change, sometimes daily. But we will always strive to give you our best view of the future. And with that, I will review our segment performance.

We'll start with US and Canada, which includes our 919 stores in the US offering pawn, buy-sell and/or financial services, and our 68 cash advance and buy-sell stores in Canada. For the quarter, US and Canada delivered a segment contribution of $55 million, a $9 million decrease compared with prior year's quarter. The segment is facing two significant challenges that more than account for this decrease, the continued adverse impact of gold-related transactions and the decline in consumer loan fees in Texas. The first significant challenge, and the greater of the two, is the impact that gold had on the US business. We obtain gold in two ways. First, we provide loans where jewelry is used by the consumer as collateral. 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 gold values have risen. The jewelry redemption rate has, however, increased over time, reaching 84% at quarter end, resulting in less jewelry dropping out of the loan portfolio into inventory for disposition. This happened even as we increase our loan and buy tables multiple times.

Second, we purchase gold and jewelry directly from consumers. The volume of jewelry purchases in the quarter decreased 19% in total and 28% on a same-store basis. With less forfeited gold collateral and fewer purchases, jewelry and gold dispositions were also down. As a reminder, we disposed of gold and jewelry in two ways. First, we sell gold and jewelry at retail to our customers. Jewelry sales in the US decreased 17% in total and 24% same store. Second, we scrap gold and jewelry. For the quarter, jewelry scrapping sales were down 10% from last year, while margin dollars from jewelry scrapping were down 31%. These declines were driven primarily by a 1,000 basis point decline in margin rate, with the remainder attributable to reduced gram volumes. The effect of this cost us roughly $11 million in net revenue in the quarter, compared to last year's fourth quarter. I'll refer you to our website for supplemental information regarding the historical impact by quarter that scrapping has had on our business.

Despite the gold challenges, other elements of our US pawn business showed continued strength, offsetting to a large extent the challenges in the gold and jewelry environment. Sales of general merchandise increased 18% in total and 7% on a same-store basis. This reflects our focused efforts with regards to category management. Pawn service charges increased 10% in total and 4% on a same-store basis, underpinned by a 9% growth in total pawn loan balances, or 1% on a same-store basis. With the exception of jewelry sales and scrapping activities, our US pawn operations are strong and growing. This segment's second significant challenge is related to our consumer loan business in Texas. Outside of Texas, total loan fees have increased 14% and net fees have increased 25%; but the regulatory environment and increased competition in Texas have more than offset that growth. In addition, bad debt as a percentage of fees increased in the quarter, moving to 26% compared with 24% in the prior year quarter. This increase is due to a change in product mix and the introduction of online lending.

The fastest of our growing segments, Latin America, includes our 230 Empeno Facil pawn stores and our strategic partner in Mexico, Crediamigo. Latin America had another outstanding quarter, with net revenues up 134% and segment contribution of $20 million for the quarter. Empeno Facil was strong across the board again, with a 51% increase in merchandise sales, a 40% increase in pawn service charges, and a 63% improvement in merchandise sales margin. Pawn loan balances were up 54%, as well. That, combined with the excellent expense management, delivered an 78% increase in operating unit contribution, even with the continued drag of new stores opened in the year. This is exceptional performance, despite a 10% devaluation of the Mexican peso relative to the US dollar in the quarter versus last year's quarter. Our full-service pawn format is working well, and our team on the ground is getting stronger every day. Empeno Facil also continued to execute on its market growth strategy. During the quarter, we opened 7 de novo stores, bringing the total number of stores opened during fiscal 2012 to 52. This gives us a total of 230 Empeno Facil stores at year end.

Crediamigo continues to outperform our investment pro forma and contributed net revenues of $27 million and net income attributable to EZCORP of $10 million for the year. $4.5 million of the net income was driven by strong operational performance, including a 22% increase in the loan portfolio during the quarter. At quarter end, Crediamigo's loan portfolio stood at a record $73 million. The remainder of the net income increase is attributable to purchase accounting adjustments largely related to debt refinancing. This refinancing effort was a key assumption in our investment analysis and will result in significantly reduced interest expenses going forward. We have provided supplemental information regarding Crediamigo on our website. Our Mexican operations have become a very important part of our business over the last 24 months. We expect to continue to grow the Latin America segment and we will look for additional opportunities there, as the marketplace for our services is growing rapidly.

The third of our segments, Other International, includes Cash Genie, our online lending business in the UK, along with the net income we recognize from our two affiliates, Albemarle & Bond and Cash Converters International. Cash Genie contributed net revenues for the quarter for $4 million, inclusive of bad debt as a percentage of fees of 38%. Cash Genie's loan portfolio grew by $2 million, or 105% for the quarter. After administrative other expenses, tax and non-controlling interests, Cash Genie was profitable for the quarter and within our original investment expectations. Contributions from Albemarle & Bond and Cash Converters were up 9% combined in the quarter.

Moving on to the balance sheet, I just want to call out a few things. First, our cash and debt position. We ended the quarter with $54 million of cash on hand and debt outstanding of $220 million; $90 million of this debt is recourse only to Crediamigo. The balance of $130 million was drawn on our revolver. Second, total earning assets, which we define as pawn loans, consumer loans and inventory on our balance sheet combined with CSO loans not on our balance sheet, totalled $279 million at September 30, up from $187 million a year ago, an increase of 49%. And third, inventory. Our inventory at year end is up about $19 million from the prior year end, principally because of our store front growth, both in Mexico and the US. In the United States, inventory on a per-store basis is down 2%.

And now let's talk about our guidance for the upcoming year. We believe our US and Canada segment will continue to be adversely affected over the short tem by the gold marketplace. In addition, our planned investments in store front and online growth will moderate results for the coming year. We also anticipate continued pressure on our signature loan fees, due to pending and potential regulatory changes in Texas. Customer demand for our loan products will not be reduced, however, and we have flexible options for our customers; but the financial metrics of this business could be changed in the short term.

In our Latin America segment, we expect both Empeno Facil and Crediamigo to continue to grow rapidly, although the rate of growth in Empeno Facil will be impacted by our accelerated de novo strategy. In our other international segment, we expect Cash Genie to continue to grow earnings rapidly in 2013. Cash Converters has announced that they expect earnings growth within the year, while Albemarle & Bond have announced that they expect earnings to decline due to the gold marketplace in the United Kingdom. When we roll all that together, we expect fiscal 2013 earnings per share to be in the range of $2.55 to $2.80. In addition, we expect first quarter earnings per share to be in the range of $0.55 to $0.60. As we stated in our release, we do expect to return to quarter-over-quarter earnings growth in the second half of the year.

I'll now turn the call over to Paul.

Thank you, Mark, and good afternoon, everyone. Mark has already provided commentary around our performance in the quarter and the full year. Suffice it to say it, I am very proud of the EZCORP team for delivering strong revenue, net income, and earnings growth in a challenging marketplace, all while making significant progress on our multi-year growth plan. As gold has impacted our pawn businesses and regulatory changes have impacted our financial services businesses in the short term, it only illustrates our flexible business model is the right strategy for the long-term. It allows us to seize various opportunities and reduce the kind of vulnerabilities we are now experiencing. Our customer's need for cash is growing, and the number of disenfranchised people around the world is growing. Those facts are irrefutable. And we intend to be one of the worldwide leaders in satisfying that need for years to come.

Our growing multi-product and channel format gives us the products and services our customers want and have asked us for. If they don't have gold, they can bring us general merchandise. If they want a payroll advance loan, but we can't provide it due to local regulation, we can offer installment or auto products or direct them to our online capability or to our pawn capability. While some of those options may change the short-term metrics to the business, the relationship with our customers is long term and our model continues to be a high return, strong cash flow business.

We are looking to accelerate our investments where they make sense, in areas like de novo stores at 25%-plus return on invested capital that we have proven out over the last three years across Mexico and the United States. In fact, for fiscal 2013 we intend to open 70 to 80 full-service Empeno Facil pawn stores in Mexico, 65 to 75 financial service centers in the United States, and 25 to 30 US pawn stores. Most of these stores will utilize our most successful store model, a store within a store. In investments like Crediamigo and Cash Genie, where we partner with local experts to drive similar or better returns in businesses and/or geographies that are not yet our core competency. In strategic partnerships, like the one with Western Union that we announced today. We selected them as our global payment solutions provider because their proven brand, products and services complement ours very well. And also, in our own existing high return businesses through remodels and improved systems and infrastructure, to ensure they continue to deliver the kinds of returns and cash flows that we have become accustomed to.

Our cash flow will be used to ensure our balance sheet remains strong and our debt levels and debt ratios remain conservative. With what remains, we will invest in these types of additional earning assets. These investments may be immediately accretive to earnings, like a pawn acquisition, or they may immediately drag earnings, like de novo growth. But over time we expect the combination of our investments to deliver double-digit growth with very high returns and very strong cash flow. From a strategic standpoint, our diversification strategy will allow us to seize opportunities we may not have otherwise seen and will also reduce our dependency on any one geography, product, or revenue stream.

As I mentioned earlier, the customers are really driving the marketplace today, just as they have always done. They are smart, sophisticated and know their options well. Our research shows that they will continue to frequent those providers that treat them well, give them real choices, and are consistent across their interactions. While we always have work to do, we believe that we are better positioned today than ever to deliver on that expectation. And with that, we'll take your questions.

Thank you. We'll now begin the question-and-answer session.

(Operator Instructions)

And we have John Rowan on line with a question. Please go ahead.

Good afternoon, guys.

Hello, John.

Why is administrative expense so high at $30 million? And is that a new run rate?

John, it's Mark. How you doing?

Good. I've been better.

Well, John, I think we addressed that in our press release. And what we'll tell you is that when you look at the administrative expense, the first thing you have to do is adjust it for Crediamigo and Cash Genie's businesses, as they're not store front operations. The bulk of their operational expenses are in administration. So when you back that out, you'll see the adjusted run rate that we have. And we continue -- we will continue to invest in our infrastructure that we need to ramp up for the de novo store growth that Paul mentioned earlier and for the IT investments that we need to scale our business.

Okay. And then the credit through the interest expense line, can you explain that to me, as well?

And we have John Hecht from Stevens Incorporated on line with a question. Please go ahead.

Part of the question was, I think, a continuation of the prior John's question of maybe within the guidance it seems like your tax rate might be changing because of more profits from international markets on a relative basis. And then maybe if you could talk about within guidance what kind of run rate accounting interest expense should we incorporate, given the purchase accounting on the debt refinance?

All right. I'm sorry. I appreciate it. I'll answer both of those questions. The answer is, from a tax perspective, we forecast that our tax rate will be 33% for this next year. And it's primarily due to our investments internationally and how that's being reflected in our go-forward tax rate.

To answer the previous question about the interest expense, the interest rate at Crediamigo when we made the investment was between 18% and 19% on an average basis, and now it's just under 11%. So I think it's around 10.9% today. And there's still some additional improvement that we expect, probably second quarter on. But I think you can -- it's safe to say that you can use around 11% as an average for Crediamigo on a go-forward basis.

Okay. So the next quarter and the following quarter is your interest -- the total interest expense would be around 11% on the Crediamigo balance, and then whatever the revolver rate is for the remaining amount, and that would be a charge rather than a credit?

Yes.

Okay. Kind of move into the business. Redemption rate of 84%. I know that makes it more challenging on the gold front and the volumes. Are you guys looking at this a secular change now, or is there something you'd see in the future that would bring this back to the more normal rates of the mid 70%s?

I'll answer that. Yes, it's ticked up a little bit. What you'll find interesting, I think -- we certainly have, is that when you segment the pickup rates based on how long somebody's had their collateral, those pickup rates are higher the longer that they've had them. Meaning if they put that piece of jewelry in six months ago or eight months ago, they're hanging on to it. Some of our pickup rates -- and you see it, manifest itself in our scrap margins that declined almost 1000 basis points, actually are much lower. So their pickup rate is in the 50% and 60%.

So I think certainly as the marketplace has gotten more aggressive, us included, in giving the customer more over the last 60, 90 days for their gold, the pickup rates aren't 85%. They're much lower than that. So we will see how that shakes out and mixes out over time. We do think -- and of course, the GM generally runs -- right now, it's been running 3% to 4% below our jewelry pickup rate.

While we are not seeing a huge shift inside the PLO right now, it's just a little bit. It's 1% to 2% a year. So I would expect that they would moderate back into the high 70%s to low 80%s, but I think it's going to take some time. I don't think that's going to happen in the next couple quarters.

Okay. The second question, you began to address that in your response to the prior question, how are you -- gold seems to be a little more on a volatile tract than we are accustomed to historically. How do you manage the loan to value in that type of environment?

Well, I will tell you we have -- you know, we study it all the time. Mark referenced that we've made changes to our loan tables. We've done it by market. We've done it literally by store, in some cases in this environment. And we gave up -- if you remember in the third quarter, we gave up about 300 basis points. I think one of our competitors gave up about 750 basis points in rate, on a scrapping rate. Here we gave up almost 1,000 basis points in the fourth quarter. And we're still in the 31% range against public competitors, I think, in the mid 20%s. So we're not sure.

I would not have guessed that I was going to give up 1,000 basis points in the fourth quarter. And that is part of the reason that we delivered $0.75 instead of $0.78 or $0.79, frankly. So, gold is still a huge part of the pawn business. If you step away from gold for a minute, all the metrics on GM on us are very good. Average loan is up. Average loan is up. The redemption rate is good. The sales side is all very good. So GM is working very well for us. But the gold side is a challenge right now. Have to see where the bottom is on it.

Great. I appreciate the color. Thanks.

And Bill Carcache from Nomura is on line with a question. Please go ahead.

Good evening. I think it goes without saying that your guidance for next year is obviously disappointing. Paul, can you talk about as you look back at where we stood this time last year and you gave guidance for the upcoming year, and now we stand here today and you look out over the course of the next couple of years. You talk about confidence and double-digit revenue and EPS growth in 2014 and beyond, what gives you that kind of confidence in light of the uncertainty that we're in today? And what gives you confidence we're not going to find ourselves in the same place next year with another disappointing outlook for 2014?

Sure. I would say a couple things. I think you go back a year ago. We just didn't call -- we did not call the gold markets well at all. And we struggle with that, as have others in the marketplace. There is no question about it. And it wasn't a price issue. The price was masking the real issue, which was volume. And so that singularly is the most -- had just damaging effect on our business from how we saw it in the front. We've mitigated it significantly with things like Crediamigo and Empeno Facil's growth. That's what gives me confidence as we go forward.

A couple things. Empeno Facil is a great example of, we built models. Those models are working. We're in our third year of that. And that is a GM-driven business. It is not a gold-driven business. It's a pawn business and we're good at it. So I have a high confidence that, that thing will continue to deliver, as it has over the last three years for us, beyond our expectations. I also think Crediamigo has been beyond our expectations, and not just because of the purchase accounting pieces. That was expected, because we fully expected to take their loan costs in 50%, which we've essentially done.

And I think in the US -- let's stay in the US for a second. On both the pawn and the financial services side of the business, the fact of the matter is, is that even with our gold challenges, the greenfield locations that we have opened have performed very well against our performance and are still, as I said, in the 25% return on invested capital side. So we're going to accelerate that growth in things that we know and that we do well with, and that will help us against some of the large, mature pawn store base that we have today. So we've got to get our footprint moving.

And to give you some sense of scale of that, we opened up 14 stores last year for first quarter. And we're expecting to open up over 80 stores this year for first quarter. So the amount of ramp-up on de novo store is tremendous. And the drag associated with that is built into our guidance.

Okay. Moving on to some of your comments on the regulatory pressures that you are facing. Could you give a little bit more color on exactly what those are? The persistence of that, and to the extent that, that can potentially impede the model going forward, and to what extent that relates to anything that might have to do with what the Texas legislature convening in the coming months. Whether it has anything to do with that, or whether the Texas legislature convening in the coming months represents a completely separate set of risks that would potentially introduce additional regulation.

Yes. So when we reference regulatory pending and proposed, that's really -- and you've seen it -- it's often in Dallas, primarily, along with San Antonio, that's pending. And those you've seen, I believe, several competitors leave the marketplace. We have not left the marketplace, but it has negatively impacted our performance. We are going to stay, and we've got the models that continue to make us profitable, but not nearly as profitable as we were.

Similar, we look at it similar to how we looked at Colorado and Wisconsin about 18 months ago to 24 months ago, where we took a hit for 12 months and now those are two of our fastest growing states today, after 30% to 40% of the store fronts left. So the challenge -- so it's a city-by-city challenge for us. And those are significant volumes for us in Austin, Dallas, and San Antonio.

The Texas legislature, in January last year, two years ago, we thought they'd passed significant legislation along the lines of transparency, licensing, and those types of things. We are an active participant and we believe those make sense. And we actually believe the state -- we'd like the state to supersede the cities, come January, as well. And so there are -- there's that angle that we're working. And of course, there are lawsuits out there in both Austin and Dallas. And there may be some in San Antonio when that goes into effect later in the year. So those are what we're dealing with and those are what we are referencing.

And those are essentially what's being captured in your guidance at this point?

That's correct.

Okay.

Let me make one other comment. And Mark touched on it. Our growth outside of the state of Texas is actually double-digit on both revenue and segment income. And I referenced that we're actually opening store fronts in our SWS model. So we're going into states like Nevada, where we're very successful with pawn business and some counters of non-collateralized business, and in Georgia, we're going with auto title. Those are some of the very quick store fronts that we're opening. And some of them are already open and they cross over into profitability in roughly six months. And so we're dragging now and we expect them to be profitable before the end of this year.

I guess just taking a step back and looking at the industry in general. If we look at Texas, I guess I personally was kind of -- felt like it was a little bit of a surprise that the regulatory environment in Texas, I guess now a couple of years ago, became less friendly, and we're seeing that develop. And of course over time, we've seen it happen in other places, like Ohio and other states. You referenced some of the positives in other states that are kind of providing some offsets to the headwinds in Texas. But aren't we kind of -- isn't this always a repeating process? It seems like eventually the regulatory headwinds start to pop up. We're seeing that in Texas. What gives you confidence that we're not going to see that in some of the other states where you are getting a bit of a tailwind today?

Well, I guess what gives me confidence is, we have flexible models. But it won't be smooth. Let's just be clear on that. Colorado and Wisconsin were not smooth. The legislature -- the fact of the matter is, and we have proven it in those two states, that's why I talk about it all the time. The customer didn't go away. The customers need to not go away. They were not satisfied at all. And we stayed, and now they're growing. But it was a tough 9 to 12 months. We went from very positive earnings to negative earnings.

Then, we worked with legislators in Wisconsin, as an example, and got some relief from that regulatory environment, because they realized the customers needs weren't being satisfied. So we just keep working -- you are always going to work, you are always going to have the regulatory challenges, and we are just going to keep working on it. If we think we can't make it, we will exit. But so far, we have been able to take our lumps and then come back strong.

I think in Texas, and I don't think there is any question that the customer -- we talked about it. The number of people disenfranchised today is staggering, and it's getting larger and larger every day. We have to find ways constantly to take care of that need, because it's not going to get taken care of in any other way.

Okay. And if I can squeeze in one last one. If we look at your allowance as a percentage of gross inventory, it's basically got a 6% handle on it. It's about 6.5% in the first quarter and the second quarter. And that's the first time we've seen a 6% handle on it, really going back to '08. It's always been 7%, 8%, 9%-plus. And so I just wonder if you can tell us, one, what's the allowance in the third quarter as a percentage of the gross inventory? Certainly, that reduction has fueled a little bit of EPS tailwind from the release of those reserves. What's giving you confidence in releasing those reserves?

And I guess if you could tell us where they stand right now, and I guess just give us a little comfort that, that release in the allowance isn't going to be something that's just going to have to come back later and be taken up again. Thanks, and that's it.

Yes. That's a good question. I don't have the exact percentage in front of me. But what I will tell you is that on an annual basis, we review all of our reserves and all of our accruals. And this was a case of not changing our methodology or making a policy change as a company. It was just taking a drilling down and taking a look at our reserves from a monthly basis perspective and making those more accurate, based on the changing mix environment of our inventory from general merchandise -- for more jewelry to more general merchandise. And those things are evaluated on a monthly basis. It's reviewed by our audit committee. And again, we didn't make a change to the policy or methodology. We just tightened up the calculations. So we don't expect those to come back later.

Okay.

And we have Bill Armstrong from CL King and Associates in line with a question. Please go ahead.

Good afternoon. I am not sure if you told us this before. I might have missed it. Can you give us the same-store sales change in the US pawn balance and the pawn service fees on a same store basis?

Same-store PLO growth was plus 1%. Same-store PSC was plus 4%. And same-store sales growth, I believe, in the quarter was down 3%. And GM actually was up about 9%, same store; and jewelry, Mark mentioned earlier, was down 24%.

So with the higher redemption rates, wouldn't we expect pawn balances and service fees to be a little stronger and maybe make up some of the slack that we're losing on the gold side?

I'm not sure -- give me that one more time, Bill. I'm trying to do the --.

Well, if the redemption rates are up, so people are taking their collateral back, shouldn't we see more of an increase in the pawn loan fees?

Yes. I think if you look -- believe me, we'd like that. The challenge today is our average loan is actually up as well, but our transactions are down slightly on a same-store basis. So that is the challenge. And I'm not sure -- our data -- that's what the data tells us, right? We are down a bit in transaction. So is the consumer hunkering down? Are they going to other avenues? Maybe.

And I would tell you, our fees are up. Our fees are up 12.6% on the quarter. And so, we are seeing an increase in dollars. But the scrapping margin alone for jewelry was -- more than offset that increase.

Got it. And wouldn't a lower LTV help that?

Lower LTV?

Loan to value?

Yes. You know, in your offers to consumers.

Well, you know, that's the -- that's kind of the opposite of how we think about things. What we try to do is loan as much as possible to the customer without forcing them to drop their item. We want them to keep their collateral, but we want to loan as much as possible to them to drive the fees up. And it's a balancing game. And so we're trying to -- that's why we mentioned earlier, we raised our tables multiple times because we wanted to be competitive in the marketplace and give the customer the most value as possible for their gold without them having to walk away from their item. Because once they walk away and we disposition it, if we end up choosing to scrap that item, we take that item out of the pawn cycle for good.

Understood. Okay. Thanks.

And John Rowan from Sidoti & Company is on line with a question. Please go ahead.

Can you guys break down the de novo growth for next year? It's 175 stores. Can you give us an idea of what is US, what's Mexico, what's pawn, what's in Canada?

Yes. I think I mentioned it was 70 to 80 Empeno Facil stores, and it's -- US de novo is 90 to 105, which includes 65 to 70 financial service. So it's about 25 to 30 pawn stores in the US.

The one thing I -- it kind of goes back to Bill's question. That's a good question. So think in these terms. We're running over 900 locations in the United States today. We look at -- we cut, obviously, all of our stores across multiple ways to look at it. But one of them is just age of store. The fact of the matter is we have an aging store base. And because for so many years we didn't invest in de novo, really over 90% of our stores are over three years old, even with the acquisition activity that we've done recently and the de novo stores that we've opened.

So what it essentially tells you is when business gets a little tough, we're relying on old -- a ton of old stores that are very mature inside of our biggest business. Hence, the reason we're pushing the de novo quicker. And we know that has short-term drag. But the fact of the matter is, and we see it in Mexico, all the metrics inside of one year old stores is better than two year old stores is better than three year old stores is better than four year old stores and five year old stores and beyond.

There is no doubt in my mind that, that will happen for us in the United States. So the fact that we are going to push out over 100 locations for the first time in the United States, they will not only benefit -- they will hurt us in the next six months. There is no question. They will benefit us six months after that, and they will benefit us for years to come. That's just the facts of how store front operators work. So we've got to get moving on the de novo and these kinds of discussions we're having right now, which you never ask me these kinds of questions in Mexico, because the numbers are all so fabulous. And there is a reason for that.

What I'm trying to understand, there has been a lot of talk about gold scrapping being down, but at the end of the day, your total revenue was still up 10% year-over-year. So the pawn business is still functioning, outside of gold. General merchandise is up. You're selling more general merchandise. I assume the pawn loan balances against general merchandise are up. But the balance for the first quarter is horrible ¶ Is this more just a shift of operating strategy away from acquisitions into de novo growth, and now all of a sudden we've got this lag of earnings? I'm just trying to understand it because, again, a lot of chatter about gold, but your revenue is still up year-over-year, and we're looking at now declining EPS in the first half of the year.

Yes, I think it is. Let me answer that question this way. When we look at our overall objectives, in terms of keeping a conservative balance sheet from a cash position, we wanted to invest in the lowest risk, highest return investment that we have. And that has been proven to be our de novo stores. And you heard Paul said, regardless of whether it's US or Mexico, the format consistently delivers in a three-year period a 25%-plus return on invested capital rate. And so that's -- that represents a low-risk investment, because it's proven. We know how to do that. We know how to execute to that.

The acquisitions, we still remain opportunistic for acquisitions. We still remain active in that market. But what we're seeing in the US is a couple things. One is, it's a very competitive situation, as you've seen. Our competitors are out actively looking in the marketplace, as well, for acquisitions. And we believe that sellers in general have not mark to market the values of their businesses to account for what's happening in the gold marketplace today.

They are still looking for multiples that we were willing to pay maybe two years ago. And when you look at the values of their businesses today, we're trying to be very disciplined on what we're -- on how we value businesses. And so we are not betting the farm on those acquisitions. If they happen, it's great. If they don't, I think our de novo strategy is our primary strategy. We will continue to look opportunistically international, as well.

Okay. Crediamigo, Cash Genie, are those still panning out as far as your plans go? Obviously, you said that you've had a historical 20% ROIC on acquisitions and that has held true over -- 80% to 90% of the four wall ROIC gets to that 20% hurdle rate. But I heard you saying there is a 25% ROIC as far as de novo growth goes. I am just curious as to why there has been such a focus on M&A in the past, and what you are saying now is a better ROIC on de novo growth. Quite frankly, if you are stepping away from M&A, why are you increasing the fee to the controlled shareholder who largely provides M&A services?

I'll answer your first question. So the reason that we did M&A, frankly, as hard as we did, was because the marketplace was there, and we were able to get good deals and get the kind of returns that we're talking about here, 20%-plus. Also, the de novo side of it is, the Company just didn't have any history of doing it. In fact, the only time they stepped out many years ago, it didn't work very well. And so they hadn't de novo'd for a while, so we started testing. And it takes a while.

So when I say we're -- I'm quite confident we are going to deliver three-year ROIC, that's because of the stores that opened three years ago, when I first got here. And those are, to your point, John, those are 25%-plus versus the acquisitions that are in the 20%-plus, right? So it drags a little upfront, but it costs you a lot less money and the returns are actually slightly higher than the M&A. So that's why we're doing what we're doing.

Okay. Does this get you back -- long-term, switching from, or deemphasizing M&A and emphasizing de novo growth, how long does it take you guys to get back to that historical high teen, low 20% unlevered return on equity, because clearly you are not there at this point. And that has been, I think, almost a hallmark of EZCORP for many years, and it just seems like we're drifting further and further away from that.

I would disagree with you. But the answer to your question is 2014.

Okay. All right. Thank you.

And we have Bob Ramsey from FBR Capital on line with a question. Please go ahead.

Good afternoon. I know you mentioned that you didn't expect the scrapping margins to be down 1,000 basis points year-over-year this quarter, but they were really down less than 100 basis points from last quarter. I'm just curious, were you all expecting the margin to expand this quarter instead? And what is the expectation for the scrapping margin in the 2013 guidance? As you mentioned, you guys are still at the high end of peers.

Well, I think our guidance, if you look at the supplemental information, you'll see the impact of our guidance and why we're guiding what we are. In terms of what we have, our assumptions, we are assuming really three things. We're assuming -- there are three variables. The market price of gold, which we are assuming is going to be $16.35 for the year. And our cost basis is going to continue to be running the way it's running today. We don't expect there to be any changes.

And volumes, we are forecasting to be down from prior year for the first half. And you can see in the supplemental information, why that is.

Okay. And with the cost around where it is today in that sales price, does that imply a gain -- a scrapping margin that's up, down, or flat from the 31.4% that you all reported this quarter?

Again, we do it in -- we don't just look at margin. We look at volumes and those kinds of things. So I think I'm going off memory of how we built the models. We ran sensitivities around it, but it's down. We have it in the upper 20%s, with volume -- it's in the supplement information. You can look there, and if you still have questions, Mark can answer them for you.

Okay. All right. I will take a look at that. That's helpful. And then I wanted to circle back, too, to the question that was asked about the administrative expenses. It sounds like that $30 million number is a good run rate going forward, and then on top of that you'll have the increase in the Madison Park fees starting this next quarter. Is that the right way to think about the administrative line?

Yes.

Okay. Okay. And then on the Crediamigo debt, I wanted to ask, too, I know you all highlighted you use a 10.95% cost on the debt and thinking about its cost. It does look like some of the more recent pieces of debt, where you all have refinanced in that business, are a lot lower. And you mentioned there are still some opportunities. Is [7.3%], which looks like more recent securitizations, is that kind of where you're hoping to drive the all-in costs over time at Crediamigo?

Well, the Crediamigo is made up of several different pieces of debt, right? We have institutional debt. We have private debt. Private party debt. And then we have the securitization. And on a blended basis, we're at 10.95%. I think we can drive that down a little bit further. But I really think that right now between 10% and 11%, I think probably 10% is the low end of where we will be able to get to in the near future.

But right now, again, we are at the 10.95%, which is ahead of our pro forma, by the way. When we looked at the investment, we thought there was a real opportunity to drive down the interest rates. It's happened quicker than we've anticipated. And from a market standpoint in Mexico, we're really happy with where we're at today. But we do think there is some more opportunity.

Okay. All right. Thank you, guys.

And we have no further questions at this time. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.