EZCORP Inc (EZPW) 2013 Q2 法說會逐字稿

Welcome to the EZCORP Fiscal 2013 Quarter Two Earnings Release Conference Call. My name is Adrian and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Mark Kuchenrither. Mark Kuchenrither, you may begin.

Thank you, Adrian, and good afternoon everyone. This call will address our second 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 expectations. Actual results in future periods may differ materially from expected 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. Paul will discuss a few macroeconomic issues and then I will review business segment highlights and provide our guidance. Paul will then comment on our outlook before providing an opportunity for questions.

I will now turn the call over to Paul.

Thank you, Mark and good afternoon everyone. I will review two key issues at the outset that have obvious effects on our customers and our business. First, let me address gold in the marketplace. For the first two quarters of our fiscal year, gold behaved as we expected. Gram volumes available [for] scrap were off significantly to last year as our customers had less to sell and kept the jewelry in our loan portfolios longer before paying their fees in full and redeeming. Our scrap margin rates were under pressure as well as we aggressively pursued market share.

The end result of all of this was that gold negatively affected us by roughly $0.21 earnings per share for the first half versus last year. This significant decline in grams, margin, and earnings was unwelcomed but expected.

We also expected to begin to see moderation of this effect in the back half of this year as we began to anniversary gram and spot price declines. What happened recently with the dramatic drop in the price of gold to below $1,400 per ounce was unexpected and should that volatility continue it will put pressure on short-term earnings. Mark will provide those details in just a bit.

In spite of all of this, we expect to deliver the financial trajectory that we originally planned this year, negative earnings growth in Q1, moderating in Q2 and Q3 and growing earnings again in Q4 and into 2014. The investments that we have made in the last two and half years have positioned us to return to double-digit growth.

The second issue is regulatory. Our efforts on the regulatory front related to pawn and financial services have been very successful across multiple local, state and federal levels. Our customers benefit from these actions every day through better transparency, flexible products and services, and a very competitive environment.

In the United States, the CFPB recently released a white paper on payday and payroll advance products, supplied by banks and our industry. I encourage you to read this paper as it clearly spells out the growing need for our products and services. The US consumer, like so many others around the world, must have access to nontraditional credit as more and more are abandoned by traditional providers. Beyond that, it would be premature of me to comment on the intentions of the Agency.

In Texas, the legislature is in session until May 27 and there is currently a Senate bill pending in the House that we do not support in its current form. It is far too limiting on our ability to provide the products and services the customer clearly wants. We continue to communicate with legislators to find the right balance between transparency, consumer protections, and customer choice to drive the market. I will make no further comment or take any questions beyond that as it would be inappropriate to speculate further at this time.

With that, I will ask Mark to take you through the quarter and I will finish with a few broad comments before taking questions.

Thank you, Paul. 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 $0.63 per share during the quarter, within the upper half of our guidance range.

Our earnings release provides consolidated financial highlights for the second quarter. I will focus primarily on our performance by operating segment. The US and Canada operating segment now includes 1,058 stores, 499 US pawn and retail locations, 490 US financial service locations and 69 buy/sell and financial service locations in Canada. More than half of these storefronts utilize our store within a store concept today, offering customers multiple options to solve their immediate cash needs.

The US pawn and retail operations added 3 de novo stores during the quarter. We have opened 10 de novo pawn stores so far this year and collectively they are performing ahead of our expectations. We announced earlier that we intended to open 25 to 30 de novo pawn locations this fiscal year. Although we have the ability to open the remaining 15 to 20 locations, our intention today is to open roughly half of the original number of locations in an effort to be fiscally prudent in the challenging environment.

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 64%. The jewelry redemption rate was 87% during the quarter versus 86% 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 17% in total and 28% on a same-store basis. We dispose of gold and jewelry through retail sales to our customers and by scrapping jewelry sales in the US -- decreased 13% in total and 15% same-store.

The gross margin rate of jewelry sales was 46%, a 100 basis point improvement over the prior year quarter. For the quarter, jewelry-scrapping sales were down 18% in total and 23% same store from last year while margin dollars were down 40%. The continued downward trend in rate is a function of a very competitive marketplace and our intention to gain market share. The effort of these combined factors caused the US and Canada segment approximately $9.5 million in net revenue in the quarter, compared to last year's second quarter.

I want to make a comment right now about the consolidated business net income. Beyond the volatility caused by the gold environment, it's important to note that our consolidated business is growing. Excluding the impact of scrap, net income grew 6.4% over the prior year quarter.

Now returning back to US pawn and retail, other portions of our US pawn and retail business showed continued strength offsetting to some extent the challenges in the gold and jewelry environment. Pawn loan balances grew 10% in total and 3% on a same-store basis, driven primarily by a 12% increase in general merchandise loan balances. Pawn service charges increased 8% in total and 3% on a same-store basis.

Sales of general merchandise increased 5% in total and were flat on a same-store basis. In the quarter, about 5% of our US retail sales occurred online compared to none in early fiscal 2012. Our US pawn and retail business was impacted by the delay in US tax refunds this year as the payment of loans was delayed. The benefit of prolonged pawn loan balances was partially offset by delay in the expected surge of merchandise sales as customers received their refunds.

Moving to US financial services, we now provide financial services in 490 storefront locations in 16 states and online loan products in five states. The planned expansion in US financial services is on track and we intend to open a total of 65 to 75 locations this fiscal year and intend to offer online products in 12 to 15 states by the end of the year. Most of these states will be where we already operate storefronts successfully and the remaining states will be based on customer need and financial opportunity.

Inside our base business, we are growing our revenues. Total loan balances were $38 million, up 13% from the prior year quarter, of which the online lending portfolio balance represented over $1 million. Our balances inside of Texas grew 7% and our balances outside of Texas grew 17% driven by both new locations and new products in existing stores.

Customers continue to shift from first generation loan products, traditional payday and installment loans, to second-generation single payment, multiple payment and auto title loan products. Balances related to these products increased 57% driven by auto title loans. Loan fees were $42 million, up 3% from prior year quarter, reflecting the shift to lower yielding products.

Bad debt as a percentage of fees grew 150 basis points to roughly 15% driven by the higher mix of new stores, new products and online lending. The profitability of the financial services business was negatively impacted by over $1 million during the quarter as a result of ordinances enacted in Dallas, Austin, and San Antonio.

The fastest growing of our of our segments, Latin America. includes our Empeno Facil pawn business, our payroll withholding lending business; Grupo Finmart, which conducts business under the brands Crediamigo and Adex; and our buy/sell stores TUYO. Because our payroll withholding lending business added another brand this past quarter, you will start to hear us refer to this business as Grupo Finmart rather than Crediamigo.

Latin America had another outstanding quarter with net revenues up 50% and segment contribution of $6.4 million. Approximately two-thirds of the segment contribution came from Grupo Finmart. Empeno Facil added 23 de novo stores during the quarter compared to 14 new locations opened during the second quarter last year. This brought the total store count to 277 at quarter end, of which 76 locations have been opened for less than 12 months. All these new stores are full service, store within a store formats. The full service format locations, which make up 81% of all Empeno Facil locations, regardless of age, are performing ahead of our investment model. The planned expansion is on track as we intend to open 70 to 80 locations this fiscal year.

Our underlying business trends remained strong. Pawn loan balances were up 39% in total and 17% on a same-store basis. Pawn service charges increased 36% in total and 17% on a same-store basis. Merchandise sales were up 37% in total and 12% on a same-store basis. The only challenging metric was scrap sales which decreased by 23% while scrap margin dollars decreased by 53% as we aggressively sought market share. We remain pleased, as the team has been able to drive significant growth in the base business while accelerating de novo store growth.

Moving to Grupo Finmart, Grupo Finmart contributed net revenues of $12.6 million with bad debt as a percentage of fees less than 1%. At quarter end, Grupo Finmart's loan portfolio was $91 million, up 37% from a year ago. Grupo Finmart signed 1 additional new employer contracts this quarter and continues to focus on increasing penetration of newly acquired employer contracts, and has driven penetration from 1% to 6% over the last year. Grupo Finmart continues to focus on a multi-channel growth strategy designed to more effectively penetrate the new and current customer base, resulting in their distribution channel representing 18% of originations during the quarter and call center operations representing 11%.

Now a review of the other international segment -- the other international segment includes Cash Genie, our online lending business in the UK, along with the net income we recognized from our strategic investments in Albermale & Bond and Cash Converters International. Cash Genie's loan book is $4.8 million and is expected to continue to ramp up operating income in the back half of the year. For recent OFT activity will not adversely impact the business, as Cash Genie has been following best practices guidelines for the past year.

Albermale & Bond, our strategic affiliate in the UK, is feeling the negative effects of reduced gold buying profits. They announced a 31% decrease in net income during the first half of its fiscal year and recently announced that it expects earnings for the full fiscal year, which ends June 30, to be materially below market expectations.

In February, Cash Converters International Limited, our strategic affiliate in Australia, announced that it had achieved a 39% increase in net income during the first half of its fiscal year. Cash Converters' outstanding performance resulted in a 43% contribution increase at EZCORP. Our equity investment in Cash Converters International, combined with our equity investment in Albermale & Bond in the UK, reflected a 10% decrease in earnings attributable to EZCORP for the quarter as compared to the same period last year.

And now let's talk about our earnings guidance. The Company affirms its fiscal 2013 earnings per share guidance of $2.55 to $2.80 and currently expects earnings per share for the third quarter of fiscal 2013 to be between $0.47 and $0.52. The Company believes its performance in year-over-year comparison terms will improve each quarter for the rest of fiscal 2013 and expects to return to a year-over-year earnings growth in the second half of the year. A continuation of a challenging gold environment and the unfavorable financial service regulatory environment in Texas will likely lead to earnings in the lower end of the guidance range.

I will now turn the call back over to Paul.

Thank you again, Mark.

As I said earlier in the call, the customers' need for short-term cash is growing. Nearly every study we see, every empirical set of data that we look at, screams that our consumer is terribly underserved and their ranks are swelling. What we also know to be true is that our customers are sophisticated in their choices. They correctly see us as their cheapest and best alternative. They're generally well-educated, hard-working people that appreciate the product and services we provide in a respectful and transparent way. That's why they come back again and again and we are proud of that. The cornerstone of any good business is the frequency and the satisfaction of its repeat customers.

Our customers also utilize the latest technologies and demand that we do as well. In the first half of this year, roughly 6% of our retail sales came from online transactions and over $6 million of our current loan balance was generated online. We expect both of these penetrations to more than double in the next 12 months and grow exponentially in the coming years. Their preferred method of communication with us is quickly moving to their smartphone. That is why we are investing in the technologies that will support our ability to be at the forefront of that communication for years to come. These investments in online selling and lending, in mobile capabilities and communications and in target marketing are intertwined with the other necessary investments that we have made at our storefronts and back office, investments to better manage our inventories and loan portfolios as general merchandise becomes more and more important to our pawn business.

Investments to our decision science platforms, collection systems and underwriting models through people and technology to match the consumer with the product that fits them best. Investments in storefront technology and processes to create a better transaction environment for our customers and team members. At the same time, we have also proven out our de novo new store models in the United States and Mexico and have accelerated that growth. I am happy to say that across the board our new stores are performing ahead of our high expectations. Particularly pleasing is that those stores opened in 2012, '11 and '10 are trending well ahead of our year one, two, and three return-on-equity hurdles.

Finally, we have identified numerous businesses and partners to invest in while reinventing our core business. Grupo Finmart, Cash Genie, TUYO, to name a few, along with our over 100 pawn store locations acquired over the last three years provide us growth engines and diversify our business significantly. While many of these investments have been and are accretive today, many more are on their proper trajectory to become accretive within the next several months. The back half of this year represents a tipping point of sorts for us as these investments begin to pay off in the form of net income growth.

Twelve months ago when we saw the gold market dynamics changing, it really pointed to what we had already identified. We needed to continue diversify and modernize EZCORP, but faster than our original multiyear plan had contemplated. We've done that in 2012 and 2013 and the work continues. Our current financial projections for the next several years show us delivering double-digit revenue and earnings growth each year. That growth is based on the assets we own today and includes continued investments for the future similar to those we are already making.

EZCORP continues to be a leading provider of financial services for the sophisticated underserved. With the investment in talent, systems, channels, products and services, we intend to grow our market leading position for years to come. And with that, we will take your questions.

(Operator Instructions) And we have Robert Ramsey from FBR Capital Markets on the line with a question. Please go ahead.

The question I want to ask is sort of how you are thinking about gold heading into next quarter as far as the scrapping margin as part of your guidance?

Bob, we are forecasting gold on a blended rate for really the remaining of our fiscal year to be at 14 -- $1,460 per ounce and we're planning our margins to be at 30% on a go-forward basis.

Okay. So basically margins flattish for the quarter, for the rest of the year?

Yes.

And did you have a hedge coming into the next quarter that will help you guys?

We don't have a hedge. What we have a forward-lock and we've locked in a couple months out. And it's something that we look at on a daily basis and review. We put in floors appropriately and then lock in accordingly based on what we see going on in the market.

Okay. To your credit, your margin certainly held up this quarter better than the other US pawn companies that are out there. But I guess I am a little confused since both of those companies are guiding margin down. What gives you optimism that you will be able to hold flat?

Well, it's a discipline. I can't speak for them. I would tell you that from our perspective it's a discipline in how we manage our stores and our tables. We adjust our lending rates accordingly based on what's happening in the marketplace and what we know we can just disposition the gold for. So that determines how much we are willing to lend on the items.

Okay. Thank you again for taking the questions.

(Operator Instructions) And we have John Rowan online with a question. Please go ahead.

Of the $389 million in total earnings assets that you quoted in the press release, how much of that are CSO loans?

Well, we can figure that out for you.

Maybe while you're grabbing that, another question. The last quarter you kind of -- I'm sorry.

John, I'm sorry, I'm getting it for you. It's 19% -- $19 million, I'm sorry. $19 million.

And those are all loans in Texas, correct?

Primarily. We have a small amount of CSO loans in our online business in Ohio, but the bulk of it, the vast majority of that is Texas.

Does that include auto loans in Texas as well?

Yes.

Last quarter you kind of framed all your growth initiatives and said that there was whatever the dilutive impact to earnings was. I noticed you kind of segmented it a little bit in this press release. Can you just kind of put all the growth initiatives together and tell me what the dilutive impact in this quarter was?

I don't have that in front of me. We'll have to get that for you and call you back with that one.

Okay. Administrative costs down quite a bit. What's the reasoning behind that?

What we're doing is we're managing our expenses, our variable expenses, accordingly. We knew that we're facing some headwinds and so we looked at our variable expenses and managed them down accordingly.

Okay, and just one last question if I may. Again, was the store growth -- you kind of gave it on a per unit basis. Can you just kind of put that together? Am I right, it sounds like 65 to 70 new financial services stores and 70 to 80 pawn stores, which will mostly be in Mexico. Is that correct? And then there was no other growth in the US as far as pawn?

So you're close. 65 to 70 US financial service stores in the US. We said I think 65 to 70 Mexico pawnshops and we'll probably about 5 US pawn de novos in the back half to go with the 10 we already opened.

Okay, so the 65 to 70, that's not back half, that's full year, correct?

The 65 to 70 is, yes, is full year for Mexico.

So the 5 US pawn in the back half plus the, what'd you say, the 15 or 10 that you opened?

Ten that we opened.

Thank you very much.

(Operator Instructions) And we have no further questions.

Okay, well, we look forward to talking to you again at the end of the third quarter. Thanks for your interest.

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