EZCORP Inc (EZPW) 2013 Q3 法說會逐字稿

Welcome to the EZCORP fiscal year 2013 quarter third earnings release. My name is Adrienne 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, Adrienne and good afternoon everyone. I am Mark Kuchenrither, EZCORP's Executive Vice President and Chief Financial Officer. On the call with me today is Paul Rothamel, our President and Chief Executive Officer.

Before we begin, I'd like to remind everyone that this conference call contains certain forward-looking statements regarding the Company's expected operating and financial performance for future periods. These statements are based on the Company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of uncertainties and other factors, including fluctuations in gold prices or the desire of our customers to pawn or sell their gold items, changes in the regulatory environment, changing market conditions in the overall economy and in the industry, and consumer demand for the Company's services and merchandise. For a discussion of these and other factors affecting the Company's business and prospects, see the Company's annual, quarterly, and other reports filed with the Securities and Exchange Commission.

Now, onto the call. As many of you have noticed, we have not offered forward-looking guidance in our press release. We are continuing with our strategy of diversification and investment in our business, and we make our decisions based on what is in the best interest of shareholders for the long-term. These long-term decisions do not easily translate into short-term quarterly guidance. In addition, we and others in the industry have struggled to provide accurate and appropriate guidance in the face of the current volatility in the gold market.

Gold is having an overriding impact on our earnings and in this environment, we do not feel comfortable that we can provide guidance that gives an accurate forward view of the Company's financial metrics.

Starting this quarter, we are changing our traditional call format. We're adding more content to our press release and adding supplemental information to our website so we can focus on questions and answers during the conference call. On our website, you'll find an analysis of US net revenues from loans excluding pawn, growth in earning assets by segment, and the impact of gold and jewelry scrap on earnings per share. For this additional content, please go to investors.ezcorp.com and look under the heading Investor Resources and Supplemental Information.

We encourage you to visit our website, as we will continue to add content that helps explain in greater detail the significant factors that drive our business.

Now, Paul Rothamel, our President and Chief Executive Officer, will present a brief commentary and then we will open the call to your questions. Paul?

Thank you, Mark and good afternoon everyone. As Mark noted, we've added more content to our press release and our website this quarter so I'll keep my comments brief. In the quarter, we saw growth in all of our non-gold revenue streams. We took significant action to jettison several legacy businesses that were not contributing in the current environment and were not a part of our go-forward strategy.

Finally, and more importantly, we continued to diversify our business according to our multiyear plan. These efforts are working as evidenced by our growth in revenue and earning assets, our penetration of revenue and segment contribution coming from new businesses and geographies, and the growth of our second-generation loan projects in our storefronts and online.

While consumer behavior is obviously changing due to the macroeconomic environment, customers continue to come to us to satisfy their cash needs. We are seeing more use of collateral other than gold and greater demand for our other financial services' products. We planned for this transition and are offering the right solutions that fit our customers' evolving needs. In fact, we believe we have significant competitive advantage in the marketplace due to our size, scale, and flexibility. We understand the consumer and are evolving rapidly to serve them best.

We continue to enter new geographies where we believe we can be the market leader and we are growing other channels to complement our storefront businesses, including online retailing and online lending. We are also developing new products, both storefront and online, that will help us maintain our leadership position.

We still have much to do and we will continue to be prudent with our growth plans and our investments. We remain committed to providing our customers with the products and services they want, when they want, and how they want them. And with that, we'll take your questions.

(Operator instructions) And we have Bill Carcache from Nomura online with a question. Please go ahead.

Thank you. Good afternoon, guys. I was hoping maybe to start off with some of the comments in the press release on the online business. You talked about your efforts there to increase marketing investments as you try to drive loan growth. I guess just trying to get a sense for how comfortable you guys are that you could accelerate loan growth while keeping credit in check?

Sure, so I'll answer that Bill. Two things I guess I'd preface that with. Our Cash Genie business in the United Kingdom has, frankly, crossed over into profitability and been profitable now for us for the last six straight months. And the trajectory that we put in place in that business is, frankly, the trajectory that we're putting back into our US online business. We expect Cash Genie, as an example, based on their loan growth, and marketing, things we've done there, and obviously, that's a different market than the United States, but there are certain basic underlying principles that work in any online business. So that, Cash Genie, will flip from minorly accretive to earnings this year to being a material impact, a positive impact during its next year. And the US online business, frankly, is tracking on the same trajectory about nine months later, which is about the time we made the purchase.

I'd say in addition to that, the way we look at that business is the two variables to that business primarily as marketing expense and bad debt. And we feel very comfortable that our scorecards and our modeling allows us to underwrite appropriately. We've taken our time to make sure that those models are pressure tested and that's why we have accelerated the market spend on customer acquisition, because we're very confident that the underwriting is working appropriately.

Okay, and can you guys just remind us on Cash Genie's standing with regulators. There currently are some players in the industry that have some outstanding issues. Is that not the case with Cash Genie? Are they kind of in good standing with regulators? Can you just remind us where would they stand on that?

Sure, I'd be happy to answer that. We made that investment mid-April of last year and we made a small amount of profit last fiscal year because we purposely took the time to put in best practices and implemented the best practices, which allowed us to grow a quality loan book, albeit at a slower rate than some of the competition in the UK. And the benefit of that is when the [OFT] has become more active, the best practices that we've put in place are what the OFT is requiring from all competition in the marketplace.

So the OFT actions have not impacted us at all to date. Most recently, the Catholic Church is getting involved and looking at Wonga. We're not sure what that -- if there are any ramifications of that, if anything will happen to our business, but we feel very comfortable that we have -- continue to be one of the leaders in terms of best practices.

Okay, that's very helpful. Switching gears to the jewelry scrap sales contribution to net revenues now down in this quarter to 4% of net revenues. Just kind of -- just pretty striking when looking at versus at the peak we were at 18% contribution to net revenues in the September quarter of 2011. I guess for modeling purposes, I understand that you guys aren't giving any specific guidance, but how would you think about that? It's a pretty big drop off that we've seen and I guess just going forward for modeling purposes, is it kind of reasonable to -- would you guys expect that relative contribution of 4% of net revenues to kind of be at a level where it's kind of reasonable to expect going forward? Or could there still be some, I guess, in theory we could still go to zero. But I just wonder what your perspective is for modeling purposes, how you're thinking about it.

Well, I think it's a good question so let me try to answer it and break it down and answer it. So a big assumption is gold prices -- are gold prices going to remain stable. And if gold prices remain stable, then we are -- the outcome of that will be is that we will wholesale or retail approximately 65% to 70% of our gold gram volume and the other 25% or 30% to 35% of gold will be scrapped, because it's truly scrapped items, broken items and things that are not in a condition to sell.

If gold remains stable, it will take us about three quarters to work through our pawn loan balances for collateral that was loaned on at a previous valuation, for that to cycle through. And then at the point that those items drop into inventory, if those items aren't redeemed and they're dropped into inventory, inventory sales for jewelry is about one turn per year. So it will take another 12 months, at that point, for those items to move through our retail disposition channel.

Now, if gold continues to drop then it will continue to impact us adversely because the lending that we're doing today is based on gold pricing today. The impact of scrap will be minimal because there's less exposure, but we'll still have an impact to our PSC and our retail sales if scrap drops. We'll have pressures on margin in our retail channel. Now, we also have wholesale channels that we will continue to develop and that will help us with inventory turns and to mitigate the transition from a -- what was in effect a smoothing of profitability and cash flow that scrap provided to more of a seasonality, a seasonal type of flow based on retail seasonality. And so building out the wholesale will help us mitigate some of that, but won't help us mitigate all of it.

Okay, thank you. That is helpful color. If I may, just one last one. There's this notion out there that as everyone kind of shifts their focus more towards the retail channel away from scrapping, the potential that you could see some margin pressure as competition increases. I wondered if you could comment on that and maybe give a little bit of perspective on where you guys, where you kind of see your LTVs in the industry relative to some of your competitors? Are they all pretty much kind of hovering around the same area? Or are there any standouts? If you could give any commentary on that, that would be great.

I'll answer that. So Bill, I'm going to answer it backwards on how you asked it. So the loan to value question you're asking, we are extremely active in the marketplace, understanding the loan to value from the independents to the other major public chains that you all speak with. And remember that in the United States the pawn industry is so highly fragmented. So 85% of the industry is mom and pops, as we like to refer to them. Some of them are very sophisticated, but what we're seeing is that portion of the industry has dropped in loan to values dramatically.

So we are, with our probably public brethren, very competitive in the marketplace. We've seen, among the three of us across major markets, we've seen a confluence over the last really 45 days of who is loaning what in the marketplace and we're very similar. And frankly, that is above spot price today, just to give you a sense. So the question around 4% scrap, we see that for the foreseeable future as markets drive at these kind of gold levels. And as they go down, we'll see it -- it'll continue. We won't be scrapping any harder, which pushes it into your other question, which is essentially retail or wholesale discussion, primarily retail.

I've been in the jewelry industry 25 years and a good retailers generally get -- if they can't fall out of bed getting 60% margins, they're not a very good jewelry retailer. In the pawn industry, we accept lower margins than that because of the profitability of the PSC. And so therefore, we give up retail margins to get that profitability on the front end. I think that, and we just showed it in the quarter, we -- our inventories, we allowed them to climb, particularly in jewelry in the third quarter a bit, and it's up about 6% on a same-store basis I think. But the fact is we were able to hold our margin rates at 42%.

And it's all about elasticity of the product and that kind of thing. But the fact of the matter is, we feel comfortable that regardless of what happens in the marketplace, we can get healthy margins here and they shouldn't drop anywhere near where you've seen scrap margins go from 40 down to 20 and now in the teens. We don't see anything like that at all. So you're talking about maybe 100 or 200 basis points depending on how aggressive you get with your marketing plans, your teammate incentives, and those kinds of things.

Thank you very much. That's really helpful. I appreciate it guys.

And we have William Armstrong with CL King and Associates online with a question. Please go ahead.

Good afternoon. In Mexico, I see you had zero scrap jewelry sales. Is there a change in policy down there or is it all going up into the US? What happened there?

Well, we had two things. One is we had -- a big part of our gold business was part of our discontinued operations. And so part of what happened inside the quarter was we shut down our 57 locations, 52 of which were [wholesale] only stores and so the inventory associated with those stores are part of discontinued operations. And so that was the majority of what was caught up in that quarter and that really explains why we didn't scrap during the quarter.

So even the full- service stores didn't generate any scrap jewelry?

We didn't scrap it because of the cost associated with it and that's a very small part of it, Bill, but that we're frankly holding until we can see if we can get better pricing on it. If not, we'll retail it. Remember, in our Mexico stores we haven't been retailing jewelry in any really way, shape, or form. So we've begun that, but that's why we're not scrapping it. We're literally filling cases in stores -- new cases in old stores to start to sell jewelry.

Yes, so let me clarify that too. What we mean by holding, if we're not holding as a commodity strategy, what we're doing is shifting from scrapping to retailing as the strategy. So we're not adding gold in the effort of saying, gee, if gold goes up we're going to scrap it and play a commodity game. That's not our strategy at all.

Okay, good, all right. Operating expenses, Q3 was roughly flat with Q2 down about $1 million. With these store closures and write-downs, one the dust settles what kind of quarterly run rate should we be looking at in terms of operation expenses?

Well, I will tell you that we have taken out cost inside the quarter in our continuing operations, but there are one time severance costs associated with that, that are inside the quarter, and we really -- you won't see the benefit of the run rate really until first quarter of our fiscal year as those severance costs move out. In addition to that, we're going through our planning process now and we'll be scrutinizing our overhead expense structure and adjusting it accordingly based on our planning process going forward.

From a discontinued ops, I don't know if I answered your question, on discontinued ops it was -- inside the quarter there was about $1.7 million of pre-tax net income loss that was taken out of discontinued ops.

Right, and in terms of the run rate that we might start to see in fiscal '14 operating expense, we're $104 million for the third quarter. I mean, how much lower do you think it might get on a quarterly basis?

Well, again I'm not trying not to be transparent here, but we're going through our planning process and we haven't determined that yet. What I will tell you is this, is that we're in the middle of investing and diversifying. We're diversifying channels. We're investing in new products and we're investing in new geographies and that costs money to do that. And so we're going to continue to commit to those strategies. We've built the variable cost components of that overhead in a way that as projects are completed we can strip out those costs and be very prudent in our spending. Obviously, in this dynamic environment, we are taking a look at everything we're doing again with a fresh set of eyes, and as we finish the planning process, we'll adjust accordingly.

Okay, and then my final question concerns installment loans, which has been growing for you guys. I was wondering if you could -- if you have these numbers, the percentage of originations that are refinancings rather than new loans to new customers.

We don't have that in front of us, Bill. I guess can I ask why are you asking that question?

Well, one of your public competitors, for example, about 75% of their loans, their originations are actually refinancings and they generate additional fee income from that. I was wondering if that was the way you're approaching the installment loan business or if you have a different approach to that.

So we would be dramatically lower than that number and frankly, the -- we do have, and I guess I'll answer this slightly differently. On our installment product, our renewals would be much, much lower than that. Now, having said that, I will say that the fact that we've added additional products into existing storefronts, and also, we actually tie our storefronts to our online business in the United States. So there is some cannibalization going on among products, right. So Payday customers go to installment loan or they go to auto title, or vice versa. That's why we generally look at our loan balances on a consolidated basis, and you can see in the press release that they're growing double-digit.

But I would just say today our new loan, our new customer activity is quite robust and quite healthy, and we're happy with it.

You know what I think it is, I think what you're -- and I'm going to speculate on what you're asking, so let me try this as well. I think the online business, which for us over 75% of our online business is installment products now, the online business is much more dependent on customers refinancing and retaining existing customers because of the higher cost of customer acquisition relative to a store-based business. And our online business is a fraction of one of our major competitors' business. And I will tell you that that, our online business I think is around 40%, is same customers that are -- that we have retained. And that business has a much higher percentage of retention, I think, than our store-based customers would be.

Okay, great. Thanks for that clarification.

And we have John Rowan from Sidoti online with a question. Please go ahead.

Good afternoon guys.

Afternoon John.

One of your peers with the press release stated that they intentionally held a certain amount of gold versus selling it at the depressed margin at the end of the quarter. Is there a similar number for you guys? Obviously, inventories were up, but is there a -- if gold weren't as weak at the end of the quarter, how much different would your scrapping sales have been?

Well, John, I would refer you back to our press release where we talked about the impact of gold inside the press release. And if you look at the supplemental information that we put on the website for scrap and jewelry, you can see kind of the impact of scrap and jewelry year-over-year for the quarter is about $0.10 earnings per share. And you can see what we talked about in our press release, and you can get an idea of what the impact is inside the quarter if prices were different.

What I will tell you is, is that we are not holding any gold with the idea of scrapping it at a later date if the pricing changes. Our strategy is to dispose of the gold in a different channel, which is primarily our retail channel or our wholesale channel versus our scrap disposition channels.

Let me ask you maybe in a different manner. You say that you're going to scrap 30% to 35% of the grams that come in, right, assuming gold prices stay the same. Those are broken items, items that you can't retail. How much has that changed? In the past, how much were you scrapping that could have gone through the retail channels?

All right, so we were scrapping between 75% -- I shouldn't say -- we were scrapping between 70% and 80% of our gold gram volume on a quarterly basis. We were scrapping -- we chose to scrap through our scrap disposition channel.

Okay, moving on. So your US Payday Lending Group obviously expanded its [states]. Are we still on track? What was the guidance you guys had given, something like 14 states I think by year-end. Are we still moving towards that goal?

On the online or storefronts?

Online.

Online, I think we're headed toward nine. We slowed that just a little bit, frankly, to go a little deeper in the states we were in. So we're at nine. We're legally set up to go into additional states. We're ready to go. We just changed the timing a little bit on that and some of that may occur in the fourth quarter, as we described, when we go into a little heavier advertising. But frankly, we're going a little deeper in the markets we're in first.

Okay, and just one last question --

John, just a clarification. We don't describe that as an online Payday business. We're primarily an installment loan business. We offer Payday where it's legal, but primarily it's an installment loan business.

And as far as guidance, obviously after last quarter you were $2.55 to $2.80 for the year. Then you came out less than a month ago and said that gold is going to be $0.35 dilutive, which kind of implied a range. What's changed since then to cause you to not provide guidance? What corporate planning has changed within the past few weeks that's made providing a guidance unfeasible? I mean gold has improved since then. I just want to understand why the change now versus just a few weeks ago.

John, I'll answer that. The early press release that we provided said $0.35 plus. So let's make sure we understand it said $0.35 plus. What's changing for us are a couple things. One is the $30-some odd increase in gold or I think it was maybe [12.75] and now it's [13.30], that $50 increase in gold, we're already -- we're locked in for the quarter. So that had no impact at all for us in the quarter. And quite frankly, pricing inside third quarter didn't have a material impact to us. What did change for us and what is changing is the gold volume. The volume of grams coming in is much lower than we were forecasting or anticipating.

So for example, purchases, direct purchases inside the quarter on average dropped over 33% year-over-year. In second quarter, we were about down about 10% year-over-year. So that significant decrease, it's just not -- we're not able to forecast that. The loan volume, the grams that we've loaned against has dropped 17.6% inside the quarter, which is an increase quarter-over-quarter. And the loan drops have decreased 17% so the gold is staying inside our loan book or being redeemed.

So the first answer to your question is a gram volume shortfall. The second thing that we're seeing is the general merchandise to jewelry transition is not one-to-one as we anticipated. Our general merchandise collateral is growing at a healthy rate, but the loans aren't offsetting each other on a one-to-one basis. Our average GM loan is about one-third the size of a jewelry loan, which would mean we need three times as many GM loans to offset that one jewelry loan that we're no longer getting in the door and we're not seeing that.

And the final thing is, is we did have additional expenses inside the quarter, primarily related to severance. And as we started to get our arms around what's happening in the marketplace and bounce that off our long-term strategies, we're going to have to make adjustments accordingly, and those adjustments, we haven't fleshed those things out yet.

Thank you.

And we have Robert Ramsey from FBR Capital Markets online with a question. Please go ahead.

Hi, good afternoon. I think before in the supplemental gold information you all provided the grams that had been scrapped. Maybe I'm mistaken and it doesn't come until the 10-Q, but I was curious if you had that number.

I don't think we've changed our -- we haven't changed the information we provided. So in terms of the supplemental, I don't think we've changed our information regarding the supplemental information, but it will be provided in the Q.

Okay, and are you hedged at all on gold as you head into the fiscal fourth quarter here?

We don't have any formal hedging. We have done some forward lacking, but we're about halfway -- we've locked up about half of the quarter.

Okay, and roughly what price or what range of prices have you done those forward sales?

I don't have that in front of me, Bob.

That's all right, I'm sure that will be in the Q too. If I switch over to consumer loan fees, I do appreciate the new supplemental breakout where you give all the loans by sort of portfolio bucket. And I guess I was just a little curious to see that you had good growth in the non-pawn consumer loan fees. But fees you actually are -- and consumer loan fees were down very modestly, but down quarter-over-quarter, which suggests that there's a little bit of asset yield pressure or compression there. I'm just curious if you could provide any color on that.

That's a great question and that's one of the reasons why I provided that supplemental information because our business is changing dramatically over the past three years. A non-deductible as I think the entire sector is and what's happening is, is we've done a good job, I believe, of growing our earning assets. It's grown at 20% year-over-year, but the mix of those assets are changing. And gone are the days of having a huge payday earning asset base that has a high yield.

The assets that we're growing have -- are high yield in nature, but not -- but are lower yield when compared to a payday loan. And they're broader and more diversified, and cover different geographic territories. And that's what I wanted to show you was we are -- we have loan portfolio growth inside of channels. We have loan portfolio that has been diversified across geographies and over product lines. And although those yields are lower, they are still very attractive and we're growing them at a high rate.

So is it fair then to say that the sort of shift in the portfolio yield is related more to product mix than to, say, any decline in yield within certain products?

I would say yes. It's that and it's customer preference in terms of which product they're selecting, and it's the mix inside, not the dropping of yield, with the exception of auto title, which has been a -- the auto title products have developed over time, I think much like the Payday market did initially. Auto title a couple a years ago, everybody was at one price and the prices were generally a higher yield than what they are today. Now, the auto loans are based on quality of car and quality of the collateral and are priced very competitively, and more of a tiered structured approach.

Okay, that's helpful. I guess I have a good sense of where sort of single pay yields are and the payroll lending (inaudible) yields are, but I don't have as good a sense of sort of on a blended portfolio basis what the title loans and the installment loans are yielding. Can you give me some sort of range or color on those two products?

Well, I can't -- I don't have that in front of me off the top of my head individually, but overall the US, the non-pawn US business is blending out about 222% in yield.

And the expectation would be I guess if that comes down is you do more of the installment and lower yielding products and less single pay proportionally, right?

Yes, I don't think it will come down precipitously, I think, but it will come down.

Okay, that's helpful. And then last question. You all did see an acceleration in the consumer loan growth this quarter. I think balances are up 44% or something year-over-year. I'm just curious what you think is a good sort of run rate for this business? What do you think over the sort of near to intermediate term you can grow consumer loan balances?

I think actually our loan balances in the storefront were up about 22%. The 40% plus you referenced was for our new generation products. Actually, the storefronts are up 19%. 22% is including online. So we're up 19% of the storefront. I can tell you in June right now we're running up 17%. So this is the effect of those 55 de novo stores in there, along with nice growth in our -- because of the new products in our existing stores. So I think those are -- I think mid double-digits, we would expect that for a period of time.

Okay, thank you.

We have no further questions at this time.

Thank you all for joining us. We look forward to talking to you at the end of the fourth quarter. Thank you.

Appreciate it.

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