EZCORP Inc (EZPW) 2013 Q1 法說會逐字稿

Welcome to the EZCORP fiscal 2013 first-quarter earnings release conference call. My name is Laura [Sutton], 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. Now I'd like to turn the call over to Mark Kuchenrither. Mr. Kuchenrither, you may begin.

Thank you, and good afternoon everyone.

This call will address our first quarter 2013 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'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 expectation. 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. I will review our results for the quarter and will provide our guidance. Paul will then provide some commentary regarding our overall strategy and outlook before providing an opportunity for questions. As discussed last quarter, this is another year of significant investment for EZCORP as we transition from a primarily US-based storefront-focused company to a multi-channel leading provider of cash solutions across the world.

Execution of our strategy is on track, and our team delivered earnings of $0.59 per share during the quarter, at the higher end of our guidance range. I will provide forward guidance in a few minutes, but it is important to note up front that we expect each quarter through the end of the fiscal year to improve sequentially relative to last year.

Our earnings release provides consolidated financial highlights for the first quarter with accompanying financial statements. I will focus on our performance by operating segment. I would also like to call your attention to the supplemental information that we have provided on our website to assist your understanding of our Business.

The US and Canada operating segment now includes 1050 stores, 496 US Pawn and Retail locations, 486 US financial services locations, and 68 buy/sell and financial service locations in Canada. Just over one half of these storefronts utilize our store within a store concept today, and we expect that penetration to grow over time. US Pawn and Retail operations added seven de novo stores during the quarter, increasing our presence in existing markets. We announced earlier that we intend to open 25 to 30 de novo pawn locations this fiscal year, and we are on track to meet that goal.

We also entered the Arizona market through the acquisition of 12 USA pawn and jewelry stores, for a combination of stock and cash. This continues our strategy of using acquisitions as a means to gain an immediate concentration in new markets. The acquired stores are expected to be immediately accretive to earnings. The segment also ramped up its online selling presence through several third-party auction and retail sites. In the quarter, about 8% of our US retail sales occurred online, compared to essentially none in the first quarter of fiscal 2012.

US Pawn and Retail continues to be challenged by the impact of gold. We obtain gold by providing loans to customers where gold and jewelry is used as collateral, and by purchasing gold and jewelry directly from customers. In dollar terms, jewelry as a percentage of the total US pawn loan balance decreased 200 basis points to 65%. The jewelry redemption rate was 85% at quarter end, versus 84% last year, as we improved our qualification of the customer at the point of transaction.

The volume of gold and jewelry purchases in the quarter decreased approximately 27% in total, and 33% on a same-store basis. We disposed of gold and jewelry through retail sales to our customers and by scrapping. Jewelry sales in the US decreased 5% in total, and 10% same store. The gross margin rate on jewelry sales was 46%, essentially unchanged from the prior-year quarter. For the quarter, jewelry scrapping sales were down 20% in total, and 23% same-store from last year, while margin dollars were down 34%.

The continued downward trend in rate is a function of a very competitive marketplace and our intention to gain market share. The effect of these combined factors cost this segment approximately $9.4 million in net revenue in the quarter compared to last year's first quarter. I will refer you to our website for supplemental information regarding the historical impact by quarter that scrapping has had on our Business.

Other portions of our US Pawn and Retail business showed continued strength, offsetting to some extent the challenges in the gold and jewelry environment. Sales of general merchandise increased 15% in total, and 6% same-store, while margins improved 130 basis points, excluding the prior-year one-time inventory valuation adjustment. Pawn service charges increased by 7% in total, and 4% on a same-store basis. Pawn loan balances grew 5% in total, but were down 1% on a same-store basis, driven primarily by a decrease in gold and jewelry loans. Rate changes in Nevada and operational improvements in Texas contributed to a 500 basis point increase in pawn loan yield, and this is reflected in the delta between the increase in pawn loan balances and the increase in pawn service charges.

Moving to US Financial Services. This segment added 44 new stores, primarily inside or adjacent to existing successful pawn stores. Roughly one third of these were in the lucrative Las Vegas market, where we now offer a full suite of products for the first time. The remaining new stores were spread across five states. The planned expansion in US financial services is on track, as we intend to open a total of 65 to 75 locations this year.

We also acquired US online lender GoCash, giving us the ability to quickly move toward becoming the leading multi-channel lender in the United States. Currently, we are lending in three states and intend to grow that to 12 to 15 by year end. Most of those states will be where we already operate storefronts successfully, and the remaining states will be based on customer need and financial opportunity. Finally, the technology platform we purchased will integrate with our storefronts over time and deliver a seamless solution for our customer regardless of where, when, or how they transact with us.

Inside of our base business, we are growing our revenues as well. Total loan balances were $46 million, up 8% from the prior-year quarter. Our balances outside of Texas grew by 54%, driven by both new locations and new products in existing stores. While are first generation single payment products remain the largest portion of our balance, customers continue to migrate from those products to lower yielding second generation installment loans and collateralized auto title loan products. Balances related to installment loans and other multiple payment products increased 20%, and auto title loan balances grew by 42%, as customers respond to our newly enhanced product suite.

Loan fees were $43 million, up 1% from prior-year quarter, reflecting the shift in mix previously mentioned. Bad debt as a percentage of fees grew by 70 basis points to roughly 25%, driven by the higher mix of new stores. The profitability of the Financial Service business was negatively impacted by over $1 million during the quarter, as a result of ordinances enacted in Dallas and Austin. Other Texas cities have adopted or are considering lending ordinances. We are actively supporting the enactment of consistent statewide regulation and expect the Texas legislature to continue such a measure in its current legislative session, which is scheduled to adjourn in May.

The fastest growing of our segments, Latin America, includes our Empeno Facil pawn business, our Payroll Withholding Lending business Crediamigo, and our buy/sell stores TUYO. Latin America had another outstanding quarter, with net revenues up 107%, and segment contribution of $9.4 million. Empeno Facil added 24 de novo stores during the quarter compared to 14 new locations opened during the first quarter last year. This brought the total store count to 254 at quarter-end, of which 64 locations have been open for less than 12 months.

All these new stores are full-service store within a store format. The full-service format locations, which make up 80% of all Empeno Facil locations, regardless of age, are performing well ahead of our investment model. The planned expansion is on track, as we intend to open 70 to 80 locations this fiscal year.

Our underlining business trends remain very strong. Pawn loan balances were up 55% in total, and 28% on a same-store basis. Pawn service charges increased 44% in total, and 25% on a same-store basis. Merchandise sales were up 46% in total, and 20% on a same-store basis. The only challenging metric was scrap sales, which increased by only 7%, while scrap margin dollars decreased by 41%, as we aggressively sought market share. Overall, the revenue, margin, and expense rates at Empeno Facil are very strong. We are excited that the team has been able to drive the base business while accelerating their growth.

Moving to Crediamigo, they contributed net revenues of $13.8 million, with bad debt as a percentage of fees less than 1%, and segment contribution of $6.2 million, roughly two thirds of the total segment contribution for the Latin America segment. All three of these key financial metrics were ahead of our expectations. At quarter-end, Crediamigo's loan portfolio was $81 million, up 24% since acquisition. Crediamigo signed several new employer contracts during the quarter, a key measure in the payroll withholding sector and a leading indicator to future loan growth.

These new contracts alone provide access to over 175,000 new potential customers. During the quarter, we completed the acquisition of a controlling interest in TUYO, a 20-store buy/sell chain in the Mexico City area. TUYO has a similar business model to our Cash Converters business, and our acquisition provides a logical geographic extension and opportunity for growth.

The other international segment includes Cash Genie, our online lending business in the UK, along with net income we recognize from our strategic investments in Albemarle & Bond and Cash Converters International. In November, Cash Converters International Limited, our strategic affiliate in Australia, announced that it had achieved a 43% increase in EBIT during its first quarter. Because we reported their results on a three-month lag, that performance positively impacted our results in our first fiscal quarter. Our equity investment in Cash Converters International, combined with our equity investment in Albemarle & Bond in the UK, generated a 21% increase in earnings attributable to each [core] for the quarter as compared to the same period last year.

During the quarter, we invested an additional $10.6 million in Cash Converters International, as part of a $32 million share placement. This additional investment allowed us to maintain our ownership percentage at 33%. We expect Cash Converters to use the new funds to finance expansion and drive future earnings growth. During the quarter, we also increased our ownership percentage in Cash Genie from 72% to 95%, with the remaining 5% held by local management.

Now let's talk about our earnings guidance. We reiterate our full-year guidance of $2.55 to $2.80, with a second quarter in the $0.60 to $0.65 range. This guidance includes the expected drag associated with the acquisition of GoCash and TUYO, which we expect to be $0.04 in the second quarter and $0.05 for the year. We believe that our year-over-year earnings performance will improve each quarter as we go through the year and that we will return to earnings growth in the back half of the year, and carry that momentum into fiscal 2014.

I will now turn the call over to Paul.

Thank you, Mark. Good afternoon, everyone.

I will keep my comments very brief this afternoon, as Mark has already covered our financial performance, key trends and initiatives progress. Today, we are a leading worldwide storefront provider with over 1300 corporate locations in three countries and another 1000 plus locations in more than 20 countries operated by our strategic affiliates. Through these store fronts, we deliver varied products and services that we believe meet our customer's needs for immediate cash.

The difference today and going forward is that we are growing other channels to complement that Storefront business and provide the service and convenience that the customer is demanding. For example, in the United States, we announced selling and lending online in very material ways. In Mexico, we are buying, selling, and lending in the client's home, place of work and our own convenience stores and offices through Empeno Facil and Crediamigo. In the United Kingdom, we retail and lend in stores and online through our affiliates and Cash Genie. Our intention with these and other similar investments is to position the Company in a flexible way to solve our customers' immediate cash needs in-store, in-home, online, or any combination. We are customer-driven, and our customers will choose the channel, product, and time to meet their needs.

This strategic evolution of the Company to a multi-channel, multi-service, multi-national provider costs money and takes time. There's no way around it, particularly when you are focused on where the customers' expectations are headed, not where they have been or are today. We expect to see continued consolidation of our industry, and intend to be one of the largest, most diversified providers for decades to come.

Over the last several years, we have moved EZCORP significantly forward, with more and more revenue and profit coming from these new channels, new geographies, and new, or what we call second-generation products. Our core business is benefiting as well from these innovations, and we expect those benefits to become larger, as our revenues outrun our initial investment costs. We intend to continue full speed down the path we have chosen. We believe that we will deliver on our customer-driven strategy, and that the customer will choose us first in the marketplace for years to come, and that will drive superior shareholder value over the long term.

With that, we will take questions.

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

(Operator Instructions)

Bob Ramsey, FBR Capital Markets.

I was curious, you use the term first-generation, single-payment products and second-generation, multiple-payment products -- I'm just not familiar with the first-generation, second-generation terminology. Does this imply that the goal is to graduate the same customer base from single-pay to multiple-pay? Or what exactly does that mean?

It's a couple of things. I think we -- you are absolutely right. The original payday product is still our largest product. The customer still uses it extensively. But we've used second-generation as the installment loan products, auto title products, auto equity, lines of credit, all those kinds of products. Even in payday, we believe -- we are working and evolving even that product, single-pay products to make it more flexible for the consumer. So depending on underwriting and things like that, a better consumer may not just get more money on the loan, but they may get a different term. Those would be second-generation.

Okay. When you say, make it better terms, are you talking about pricing? So rate would actually vary based on the quality of the borrower?

Absolutely.

Okay. That's helpful. I guess you all talked about the GoCash acquisition that you made. I was just curious if you could provide any sort of color into the size of the loan portfolio with GoCash or if it's more of a platform and opportunity you all are buying. What exact you've got there and what the goal is. I know you talked a little bit about markets. Just any additional detail.

So GoCash today, I believe the loan balance is roughly just over $0.5 million. GoCash combined with Cash Genie would be probably in the mid-single digits of our outstanding balances today. And again, compared to last year, that would've been zero. Just as our online selling in the United States was 8% of sales versus 0% a year ago, so that's clearly our movement into new channels. It doesn't happen overnight. It costs a bit of money to get in. We think we have the right team and the right technology along with about a $0.5 million base, and that's growing, frankly, rapidly every day.

Obviously, it's a relatively small base. How do you think about the growth potential of that business over an 18-month period?

Mark touched on it. We expect it to drag in the second quarter. We are in three states, now. I think the majority of that $0.5 million is in Texas.

But we've got plans to rapidly get, in fact in the year, I think 12 to 15 states. You can do the math and extrapolate it out. We've run sensitivities around it. It will be a significant portion of our business. If it's 5% today, I would expect that if Cash Genie and GoCash are roughly 5% of our loan balances today, I would think they would certainly be in the 10% to 15% range this time next year.

Great. Last question and I will hop out. There was an uptick in the Other Revenue line this quarter. I was just curious what was -- what drove that increase?

I mentioned it during the call. It related to the Cash Converters International and their improved performance. We have that three-month lag where we get the benefit of what they've done. Their business they put out is they've improved on their loans and both in the UK and in Australia.

Okay. And that's in the Other Revenue line on the consolidated income statement?

I thought you meant Other International.

No, sorry. Maybe it wasn't clear. The consolidated revenues -- the Other line went from $2 million to $4.8 million quarter-to-quarter, less than $1 million a year ago, just curious about that increase.

I apologize. I thought you meant Other International. There are a couple things going there. We have FX favorable of about $1 million, and Western Union, if you recall, we announced that we signed that contract about a quarter ago. That's worth the majority of the remaining amount.

Okay. So, the FX maybe fluctuates, but otherwise, it's good level to grow from.

Yes. Every quarter fluctuates in the FX, to your point. Western Union, it's a good basis to start from.

Great. Thank you very much, guys.

John Rowan Sidoti.

Just a follow-up on one housekeeping question. The non-controlling interest went to [$1,400] from [$5,600], what caused that again?

Well, we had purchased accounting benefits last quarter at the end of the fiscal year. This quarter is all earnings from operations. So, that's part of it. The other part of it is, we went from 72% ownership to 95% ownership, which reduces the amount of minority interest benefit that will be shown there.

Okay. As far as the store openings go, I know you gave it by different segment type. I couldn't really get it all down. Could you just run through that again and kind of how that comparison to what you said last quarter -- last quarter was I think around 175 stores, kind of the midpoint of what you were guiding to. Is that still what we're aiming toward? It looked like you were roughly on track in the first quarter.

For the year, we said we would open up 175, grow by 175 locations. For this quarter, the combination of de novo and acquired locations, we grew by 107 locations. The breakdown is 12 locations through the US, a pawn and jewelry acquisition in Arizona, 20 stores buy/sell in Mexico City area with TUYO, 44 US financial service locations, 7 pawn and retail -- US pawn and retail locations.

Actually, what I was getting at is, more so, you said 70 to 80 Mexico stores, right? That's what your plan is?

Yes, and we opened up 24 this quarter.

We are still at 65 to 70 US financial services stores, correct?

Yes.

Are there any other buckets I didn't write down that you were talking about?

I think I called out 25 to 30 pawn stores in the US pawn and retail.

Okay. I knew I was missing something. And then again, you said 12 to 15 states by year-end versus 3 currently?

Yes.

Okay. I think that's about it. One more thing. Do you know what the market value right now is of Cash Converters and Albemarle & Bond? If you don't have it, don't worry about it, but I figured maybe you have it.

I don't have it off the top of my head. We could provide that if you want to give us a call.

I can look at up. Thanks, guys.

Bill Armstrong, CL King & Associates.

The operating expense in the US was up pretty sharply on flat revenue. I assume that most of that is new stores? I was wondering if you could just flesh that out for us a little bit.

You are exactly right. The majority of it is new stores. We did have, frankly, we would have preferred that our expense performance had been a little bit better against the revenues that we had. From the revenue side, we actually -- part of the challenge was we had a very strong October and November and we got soft in December. So, frankly, we rolled the dice and pushed our expense. We didn't cut back on expenses, because it was the Christmas season. But, they just did not come together as we had hoped. So, that gives us some work to do in the second and third quarters to get back.

Got it. On GoCash, I just want to make sure I got this right. Their loan balance, right now, is just under $0.5 million?

Exactly.

Okay. And you paid $50 million for this company, right?

Yes.

What else are you getting besides $500,000 of loan balances?

So, there's a couple of things. The loan balance is a bit deceiving. Frankly, they were operating under an export model. We are not transitioning that model to a state-by-state model. While we transition, the balances, obviously, came back. We have access to all of that data, all the underwriting and the technology that goes along with that, along with a strong team.

Now, this is a very strategic move for us. It's a bit like Crediamigo. If you look at how Crediamigo came out of the chutes, it was a rapid ramp. They are continuing that rapid ramp. We have the same expectation for GoCash.

There's an infrastructure and a lead sourcing infrastructure, as well as a technology infrastructure?

That's correct. That's absolutely correct. As we said, I believe in the press release, they're held to the same 20% ROIC in Year 3 standard. They've got to earn outside of that, and we are very confident that not only will we hit those kind of numbers, and really by the back half of the year this year it begins, but in years 2 and 3, but also that technology platform that I mentioned has obvious ramifications for our storefronts as well.

Okay. Great. Thank you.

Bill Carcache, Nomura Securities.

I wanted to delve into a little bit more, if we could, the expected growth in the online businesses and how are you thinking about -- I guess, is there anything worth calling out in terms of the growth of those businesses, and kind of the learning effect, if you will, as you kind of go through and grow those businesses? Is there going to be some kind of additional provisioning that's going to happen, maybe early on? I guess, just broadly speaking, is there anything worth calling out relating to the provision?

I think Mark touched on it in his opening comments that we are expecting drag in the second quarter of roughly 4%, related to that online business in the United States. Cash Genie is into profitability this year. So, let me just back up for a second, so you get an idea of why did we pick Cash Genie and why did we pick GoCash. We've been working on this for over two years, and doing analysis, we frankly spoke directly with something in the neighborhood of over 30 online lenders in multiple countries before we made our first investment in Cash Genie. The fact of the matter, as you all know, we were behind the eight ball. Three years ago, we had no online strategy.

We started to do the work. We passed on multiple, multiple opportunities that could have been accretive sooner, potentially. But, we didn't think that they had the right platforms, the right team or, certainly, the right integration strategy with our storefronts. So, that's why these two got picked. As I said, Cash Genie will throw off $2 million this year of operating income to us. We expect that GoCash will do the same, but it will all be back-loaded.

Great. So, that pickup, the ramp in the earnings, that comes after that kind of initial investment period. How far out, roughly speaking, is it before we start to see that? Are we talking like within 12 months?

Yes. Yes. In fact, our models which show GoCash in the black in the fourth quarter of this year. Then, ramping up nicely in 2014.

Okay. Separately, switching gears, can you give a little bit more color on the lending ordinances -- the ordinances that you talked about? Just trying to get a little bit better understanding of how exactly they impacted profitability. Then, along those lines, maybe a bit of a better sense of what other cities you are anticipating we'll load ordinances in?

Sure, so in Austin and Dallas, essentially the ordinances were very similar in Austin and Dallas. San Antonio has since adopted a similar stance. Without going into too much detail, they essentially render, or they impact the profitability of single-pay products, installment products and autotype products. We publicly just told you that in the quarter, it affected our profitability in Austin and Dallas by $1 million. That was roughly 90% of our profit in those two markets. You probably have heard from some of the competitors that they have exited those markets. I believe we know of three specific chain competitors that have exited the Austin and Dallas markets.

There are -- while we remained slightly profitable, it was very damaging to our profitability in those markets, and it impacts, really, as I said, any type of short-term lending product, how they've done it. So, does that mean? It means that we have a couple of options, and we have changed the product a bit, at the store front. We have also, as we just described to you, created our online lending options for those consumers to move to. But, the real answer here is at the state level in Texas.

We believe that the cities have every right to regulate zoning, permitting, and licensing. But at the state level, they should be regulating the products and services that we provide. The state legislature has just convened. If you know Texas, it's a part-time legislature, every other year. But they've just convened, and we are working closely with our association and directly with legislators to try to get some activity there. That would frankly level the playing field for storefront providers and online providers, and that's our intention.

Okay. But, you've got your expected outcome in each of the other potential cities that could be impacted. Those outcomes aren't in your guidance? And, I guess, can you confirm that first, and secondly talk about the risk to an extent --

That is correct. the expected impact in cities like San Antonio, Waco and some other smaller cities in Texas are in our guidance. We have a three-pronged attack. We have [variated] products that we are introducing into those cities today, frankly which will be we think better received by the consumer than they were with our first quarter results. They still comply with the city regulations. The second is that we now have an online option for them of real magnitude. That is being marketed in those cities, affected cities. Again, certainly, at the legislative level, we are looking for more of a longer-term solution rather than playing cat and mouse with the cities.

Okay. So, how confident are you that the outcome, with potential downside risk to kind of what's in your guidance?

As I said, we have expected outcomes in the next three quarters of our guidance. We have taken a conservative view of that. I think, frankly, it would be inappropriate for me to comment on my confidence level because we are in a lot of discussions these days.

Okay. Understood. Finally, if I may, last question -- some of the information that you guys put online that you have started putting up there is very helpful. Taking a look at some of the data, it seems pretty clear that if we exclude scrap gross profits that you have shown steady and consistent EPS growth.

So, the question, then, and thinking about the scrap gross profits and everything that's happening in the environment and the shift to general merchandise away from gold. You guys have talked about in past calls how the gold has kind of been tapped. I guess that environment is -- if we just rely on these things, the fundamental strength of the business is there. But some of these other things are happening, even though they are out of your control. They really do affect the business.

So, I'm just wondering if you could give a little bit of perspective on what it would take to turn that around. Is it really just another bull market that is necessary to kind of allow people to replenish the gold kitty? So, the scrap gross profit can become another meaningful contributor in the future beyond that? Or, I guess, if you could just talk a little bit about what it would take to get that back. Thanks.

So, we would love a bull market. Having said that, as we head into the back half of the year, we are anniversarying the real significant negative gold gram trends and even the beginnings of the margin degradation. So, again, in our -- again, part of the reason we are diversifying as much as we are is for these very reasons. But, in 2000 -- the back half of the of the year, we expect to get profitability, because we expect to be comping much softer gold markets. So, there is some of that built in.

We are also, as an example, we just told you we opened about 44 US financial service centers; they were store within a store. There was a method to the madness of why we are openings 44 in Q1 and only about 70 all year. They cross into profitability usually in the range of six to eight months. They open in the first quarter, and by the fourth quarter, they're making money. So, those are outside of the state of Texas almost exclusively. So, a gold market will help. We're going to anniversary the softer golden, and frankly, our intention is to outrun the gold markets with these other revenue streams that we are talking about.

Thanks very much, guys. I appreciate it.

John Rowan, Sidoti.

Sorry, I forgot to ask earlier. Out of the $4.1 million that you cited as drag associated with new de novo stores, can you kind of break that down a little bit? Is that all operating start-up costs, or is there something else in there?

It is all operating costs. I mean, we are not -- we capitalize our expenses, and I can give it -- from a segment standpoint, I can give you further clarity. But, it is operating expenses and operating income and loss associated with that. So, in US pawn and retail, the drag was associated with those stores are $1.4 million. US financial services is $400,000, again, because those are store within a store formats in existing stores, the cost is less there. Empeno Facil, with the 24 locations we opened up, that's $1.3 million, and let me look here and make sure I'm reading right. In Canada, Cash Converters Canada is $1 million, $1.1 million.

All right. Thanks for the color.

David Scharf, JMP Securities.

Actually, I wanted to circle back to the discussion on the next generation, or second-generation products. We appreciate the disclosure on the growth rates. Give us a sense for what percentage of consumer loan balances that they would represent now. I guess, more importantly, based on both regulatory environment in Texas and elsewhere, maybe a road map for how we ought to think about the product mix and the yield structure, maybe 12, 18 months from now.

So, I think that -- you know my 12 to 18 months from now, I think -- and I go back to, as the customer is offered more and more choices, they are an intelligent customer. They're choosing more and more installment products, auto title products, auto installment products, those kind of things. So, again, today, let's say it this way. Two years ago, payday product was about 85% to 95% -- excuse me, 85% to 90% of our loan balance. Today, it's I think just under 50%. So, in two years, it's dropped dramatically.

My guess is, it's still a very valuable product to many consumers. I would guess maybe it goes to 25% and the other products would grow just as we are seeing it today. So, now, having said that, the way that it maintains 25% or 30% of your loan balance is we get into markets that we don't serve today, or we get into it in channels that we aren't providing today. So, online could mitigate that, and maybe it stays at a third of your volume. But, you guys can do the math on our product yields and model it out that way. Essentially, there's still very good investment products. There's still very good, high-return products. But they are not the same kind of return that a two-week payday loan made three years ago.

Granted. Maybe if you shipped it south of the border. Just a few weeks ago, there was an article on a number of the banks stepping up their payroll advance lending in Mexico and other Latin American markets. Could you just maybe give us a little bit of a recap of the competitive environment down there?

We wish them well in Mexico because they are after about 10% of the market share. 90% of the market is on bank. You know, we are having a great deal of success in providing loans to government employees, generally. But, you know, if it were the banks in the United States that were getting into it, I'd be a little bit more concerned, frankly. But there's plenty of market share, and I think that group of banks are marketing to a different customer than we are today.

Got it. And lastly, it's probably a little too early to tell, but should we be thinking at all about the March quarter loan balances as it relates to the IRS potentially delaying refunds? Or is that just rounding error stuff?

I don't think it is too early. I think we are going to see a delay. The question is, is it one week, two weeks, or three weeks? We are seeing some additional loan activity in about the last five days. Sales by the way have softened a little bit as well. So, it looks like there is -- there's no question it looks like it's delayed to last year; it's just a question of is that a week, two weeks, or three weeks. I don't know the answer to that yet.

Great. Thank you.

Bob Ramsey, FBR Capital Markets.

Just sort of following along the same lines as the tax refund question. I'm curious how you were thinking about the impact of payroll tax changes on the US consumer base, as well as the recent declines in gasoline prices.

You know, they're both macroeconomic issues. I don't think there's any question that our consumer will feel the effects of the payroll tax hit immediately. I also think, and you touched on it, the flip side is we are benefiting or our consumer is benefiting from low gas prices. So, we certainly see -- and again, the macroeconomic trends are that Americans, particularly, are saving a bit more. They are not tending to borrow as much. We have seen that.

Our new customer activity is higher, and our renewals are actually lower. So, that would tell you that some of the folks are finding ways to pay off their loans and not take them up again. But, I think it remains to be seen. And you also, just as we talked about, you also have muddying waters right now the timing on the Federal tax returns. Generally, again, to our consumer is a major milestone. It will be an interesting -- I think it's going to be very interesting next three months and six months, depending on if we -- where the fiscal cliff goes and all those kind of things. How much fear mongering goes on between now and then.

Generally, obviously, there are a lot of moving pieces. If you took one of those items in isolation, which reduced the income or disposable income of the borrower, is that good because, there is more loan demand if there is more -- if the budget is a little tighter? Or is it bad, because with a tighter budget, they are less apt to borrow?

Generally, for our business, it's better. Because, for all the retail that we do, now that we've had these other revenue streams, we are a lender first. So, it's generally better for us.

Okay. Great. Thank you.

John Hecht, Stephens & Company.

Paul, just going back -- you mentioned that it sounded like October, November on a trend basis were a little stronger than December. I wondered if you could give us a little bit more color. Was it related to merchandise sales, scrap volumes, loan volumes? What's the color on that side of the business?

Actually, it was primarily, what I was referencing was retail sales. We were up mid-single digits in October and November, including Black Friday and Cyber Monday. But, we struggled in December. Part of that was a bit of self infliction. Because last year, we were extremely aggressive in moving some [ace] inventory.

That's part of why you saw an adjustment last year in our reserve, which is a pickup because we moved through so much of this inventory. Helped sales, hurt margin, and we picked it back up in the reserve. Versus, this year, we weren't as aggressive. Frankly, because we were so strong in October and November with our marketing plans. Then, December dried up a little bit.

That's why I go back to, if you remember, there was a whole lot of discussion about going over the fiscal cliff. What was the effect on my paycheck, all those kind of things. We think our consumer did pull back in December. On scrap, to a lesser degree, scrap was strong in October and November. Grams were still strong in December, but we had to give up rate to go get it. So, that's really the color behind that.

And on the scrap side of the business, you do talk about getting into the second half of the year comps getting easier. Are we at a point where -- whether its margins or volumes, you can say that it appears to be stabilizing, admitting there is more visibility at the operational elements of the market right now? Or is there still some uncertainty there?

Well, I think there's certainly still some uncertainty. But, I think if you look at the supplemental information out there and you look at the trends, where we came at first quarter of this year, is equivalent from an EPS contribution to third quarter of last year. We were able to forecast -- our plan, our actual performance versus our plan was very accurate, with the exception of what Paul said. We picked up slightly more volume than we anticipated, but we gave up margin dollars. It kind of netted out to our forecast.

We still think the second quarter is going to be a difficult quarter. You can see what we are anniversarying up against when you look at the supplemental information. But, we also are coming up against a little bit of softening in market price than what we were saying. We will anniversary -- we're anticipating anniversarying a lower market price than what we had second quarter last year as well. We do think that we are starting to see some of the bottom. We believe we are seeing the bottom. We are hoping that it's the case.

Okay. That's very good color. Thanks. Last question, Crediamigo seems to be doing pretty well. You cite that you had eight new employers that signed up, increased the overall customer base. Or, the access to customers. Can you talk about the sales cycle there? Maybe what you've got in the pipeline and kind of how we might envision how much that business can grow over the next few quarters?

Yes. I think that we are going to experience double-digit growth for the rest of the year, quarter-over-quarter. The way that the loans are an average of a three-year loan. About 15,000 pesos, I think, roughly, is the loan size. You can see that bad debt is very minimal.

I think we've provided yield information last quarter for you in the supplemental information. Getting the contract for the [convenio] signed is a very important first step. Then, the penetration -- the sales force's ability to effectively penetrate the contracts and reach the employees is a very important second step for us. So, we measure the penetration effectiveness on each contract, and there are KPIs and incentives built around those type of measurements inside the business.

So, we think that, if you look at where the business was when we made the investment, they had right around 1% penetration on average in their contracts. Some contracts were very high penetration, some were very low. We've increased that to about 4% on average, since we made that investment. But, again, that gives you an indication of what the upside potential is. 4% on -- leaves a lot of room for improvement.

Yes. And what about the -- do you expect similar kind of new customer adds in the near term quarters?

Well, certainly we have a pipeline of new contracts. But, if you look at the eight contracts we signed, that 175,000 represents an 18% increase in opportunity, by itself. So, if we just do our job of effectively penetrating those, and continue to improve our penetration across the board, I think we are going to see some really nice growth. But, the Company looks at Federal, state, and municipality level contracts. It has a team that is actively pursuing those contracts every day.

Thanks very much.

No further questions at this time. Do you have any final remarks?

No. We just appreciate your continued interest in the Company. We look forward to talking to you in another 90 days. Thank you.

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