EZCORP Inc (EZPW) 2013 Q4 法說會逐字稿

Welcome to the FY13 Quarter Four Earnings Release. My name is Chris and I will be your operator for today's call. (Operator instructions) Please note that this conference is being recorded. I'd now like to turn the call over to Mark Kuchenrither. Mark, you may begin.

Thank you, Chris, 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.

Today's 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. We have provided supplemental information on our website. The information provides detail regarding the impact of gold and jewelry scrap on earnings per share. Net earning assets by segment is provided as well.

These materials can be found at ezcorp.com in the Investor Resources section.

Now I would like to turn the call over to Paul Rothamel, our President and Chief Executive Officer for his opening comments and then we will open the call to your questions. Paul?

Thank you, Mark, and good afternoon everyone. FY13 was obviously a very difficult year for us at EZCORP, our industry and our customers. Our own internal growth, significant market changes and regulatory activity all came together to pressure our short-term financial performance.

On many fronts, we did a credible job of growing market share across the US and Mexico particularly. We posted solid lending and selling revenue gains, grew our customer base and our loan and inventory earning assets are healthy.

The investments we've made over the last several years in de novo store growth, pawn acquisitions, Cash Converters and Grupo Finmart are working and accretive today. The additional investments in underwriting and collections and to support our storefront and online retail business are also working and adding to our earnings.

Our diversified growth has created financial challenges. Our most recent acquisitions in online lending have not yet met our high expectations and will continue to be a key focus over the coming quarters. We expect both of these businesses to improve materially over the coming year, and combined should add to earnings in 2014. This will require improved execution from the management team in underwriting customer acquisition and collections as we grow our portfolio more profitably.

And after three and a half years of rapid store expansion and earnings growth, Empeno Facil struggled in the back half of 2013, as the marketplace shifted rapidly from gold to general merchandise. We were slow to react to the increased competition and we stressed our store teams too far. Both our loan book and our margins on inventory were negatively affected. We are making the necessary adjustments and today the bulk of the discontinued operations are behind us. We intend to slow de novo growth in the year, which will allow our Empeno team to focus on operational execution to drive better results in the near term.

Overall, we expect to continue to see an expanding consumer demand for our products and services, due to the economic pressures they feel, the continued reduction in the number of providers in the marketplace and the regulatory changes that make it harder for them to access cash. We believe this will be true for the foreseeable future. What that means for us and others is that we have to get a lot better at anticipating and serving the changing needs of this growing population. Loan-to-value ratios, retail pricing and inventory management systems, underwriting and collections, [precision science], consumer-driven marketing and of course regulatory compliance all have to get better quickly.

At EZCORP, we've already made many of these investments and continue to improve them today. We expect to see these efforts more than pay for themselves in 2014 and the coming years. While we've had our growing pains in 2013, we've spent the last four years growing into one of the largest, most diversified providers in the industry. We are focused on improving our financial performance quickly and driving profitability to the bottom line. We understand that our shareholders want to see us deliver the kind of results they saw from us in 2010, 2011 and 2012 and we agree and are intent on doing that.

And with that, we'll take your questions.

(Operator Instructions) Bill Carcache, Nomura Securities.

Thank you. Good evening guys. Can you talk a little bit about what drove the impairment charge at Albemarle & Bond and is there more to come and how should we think about the P&L contribution of the earnings among unconsolidated subsidiaries going forward, just wondering how much of that's going to be impacted as a result of the impairment?

I'll let Mark walk you through that.

I'll tell you what, Bill, I'll answer that, but I'd like to take you through a bridge for the year and for the quarter and then inside that I'll talk about Albemarle & Bond, if that's okay.

Absolutely.

Good. If we look at net income from continuing operations attributable to EZCORP, in the year FY 2013, we had $57 million of net income compared to $148 million in 2012. Approximately $91 million variance. In fourth quarter, we had a $26 million loss compared to a $40 million net income figure for 2012 in the quarter, or $66 million variance. When you normalize 2012 for prior year favorable purchase accounting adjustments that related to Grupo Finmart, those adjustments had an $8 million impact for the year and $6 million in fourth quarter. So if you subtotal that, your variance for the year is $83 million and inside the quarter is $60 million. The one-time adjustments accounted for $35 million, both in the year and in the quarter and that was led by the write-down of ABM.

And what we can say about that is what's been publicly talked about through ABM information and that is, it's primarily the gold market that has driven their shortfall and we had to view that as a permanent reduction in valuation and we've accounted for it accordingly. The remaining balance on our balance sheet -- the remaining value on our balance sheet is approximately $10 million and we don't anticipate at this time any further writedown. The go-forward earnings, we do expect them to be lower next year from A&B, although we think CCV will have a solid year, we think A&B will be down year-over-year.

The gold impact to operations in the fiscal year was $31 million and $12 million in the quarter. 63% of that $31 million was driven by volume, or $19 million, and inside the quarter 70% was driven by volume or $8 million, and that's important to understand that more and more of that variance on a go forward basis is really volume-related more than price.

The regulatory impact in the year was $7 million and that's at the federal, state and local level, primarily state and local level is inside of Texas and impacted us $2 million in the quarter. We made several business investments during the course of the year, acquiring businesses and opening up de novo locations and we made investments in our multi-year plan with our information technology systems that we've talked about previously, and we've had to add G&A to support those as well. And that [drug us] $20 million in the year and $8 million in the quarter. And then to your question, affiliate performance, driven primarily by our estimated performance of A&B has hurt us both $5 million in year and $5 million in the quarter.

Okay. That's helpful. Switching gears to cash, can you give a little bit more detail on the comment in the press release regarding the poorly executed introduction of an installment loan product that caused performance to deteriorate in Q4 and then more broadly can you talk about what gives you confidence that there won't be further concerns of poor execution as we look ahead?

Sure, Bill. So if you recall, we purchased Cash Genie in the third quarter of 2012. At that time, they did not operate to [OFT] best practices. We made those corrections, cleaned up the operations and they all along have offered the payroll advance product, it's a 30 day loan product. And if you recall, the division actually crossed into profitability in the second quarter, was very profitable in the third quarter and in that third quarter, we launched the installment product that I referenced earlier. And we didn't launch it particularly well. We had sub-standard execution related to underwriting end collections. We actually moved good payroll advance customers into that product as well. So, we recognized that, made the necessary changes in moving many of those customers back to the payroll advance product. We are in the process of retooling the installment product as well. I'd say we're in the process; we've made improvements already in the underwriting and on the collection side of that product. We feel better about it and in fact we made management changes as well. So, the run rates that we look at and the sensitivities would show us back into profitability, potentially in the first quarter, but more likely in the second quarter.

Okay. Switching gears, one last question, if I may, and then I'll jump back in the queue. Can you share your current thinking on capital return and buyback, particularly given with your stock now down at levels not seen since the crisis, I guess I'm just wondering if you could talk about whether you see value in possibly buying back shares here?

I think how I'd answer that Bill is, we look at all those things, we look at buybacks, dividends at the Board level on a consistent basis and I'm sure we will look at it again. And we haven't done it to this point, because we've always felt we can deploy our capital into higher returning earning assets and I would think, frankly based on past behavior, we would continue to do that, because we get plenty of opportunity to do that. But that is looked at on a regular basis, and we'll continue to do that.

Okay, thank you. I guess a related point, is your basic share count has increased by 31% in the last five years, and could you remind us what's driving the increase in that? Is that the equity-based employee compensation, and if so have you thought about, I guess if not buying back shares, to reduce the share count at least at a minimum to offset the dilutive impact of the equity issuances?

Yes, the vast majority of the share count increase has to do with our acquisition activity. We've financed our growth through equity, primarily. There is some compensation in there as well, but primarily it's acquisitions over the course of the past years.

Got it. Thanks very much guys.

Thanks.

Bill Armstrong, CL King & Associates.

Good afternoon, Paul and Mark. The bad debt expense provision -- percentage obviously was up and you mentioned the transition to the multi-payment loans and I understand that. I know the accounting, how that works, but could you talk about, within the payday bucket and then within the multi-loan bucket, are there any trends, either positive or negative in terms of bad debt?

Yeah, I'll answer that. So, basically, your payday bucket is within 100 basis points year-over-year. And we haven't seen a lot of movement either in the CSO inside of Texas or outside of Texas, and frankly the 100 basis points is primarily being driven outside of Texas with the new stores that we opened. The biggest movement for us in the multi-year bad debt is really being driven by auto title right now, because we've grown those balances very aggressively, we're comfortable. Our bad debt balance, I think are historically within 11 to 12 range and now it's moved up to 18 and 19 and we're very profitable at that kind of bad debt level. But once you -- but because those multi-products are growing faster and our installment products are up a little bit, but because those are growing faster than the payday product, obviously, the mix out causes that 300 point deterioration in the year, and it was a little higher in the quarter as our -- as we pushed down [line one] balance a bit and frankly pushed the auto title a bit.

So I think the current run rates in the fourth quarter were a bit elevated, but that 300 point deterioration, the 24% for the year, 25%, I think is very appropriate for us, and we're comfortable at that level.

24%, 25% of fees?

Yes, yes on a blended basis. Exactly.

Okay, right. Blended, okay. Got it. Okay, thanks.

John Rowan, Sidoti & Company.

Good afternoon, guys.

Hi John.

Mark, I was wondering, could you just kind of walk us through getting from the net -- GAAP net loss of $0.46 to what you view as a more operating number for the quarter, kind of talk about the what would be your pro-forma tax rate and how you would look at any type of addback for the impairment charge and also for the loss of store closings?

If you look at the earnings release income statement, you'll see that our -- for the year, our diluted earnings per share attributable to EZCORP from continuing operations is $1.06. And if you take the $35 million and adjust that $1.06 for the $35 million of one-time adjustments, you're at a $1.71. Our tax rate this year is 33.5% at a consolidated basis. On a go-forward basis, we expect that to be closer to 30% based on some of our global tax planning that we're doing next year.

Okay. But just for the quarter, right --

For the quarter, were at a negative $0.48 from continuing operations, it's on that same line. And again, the $35 million was inside the quarter. So if you adjust that negative $0.48 by the $35 million, you'd be at $0.16 earnings per share.

Where do you get -- I'm sorry, I'm not seeing where the $35 million addback is. You had the $44.6 million of addback from the AMB, which tax-affected is $29 million and then there was a little bit for the non-recurrent, which would be for the loss on store disposal. How do I get to -- or just say $32 million addback.

There are $35 million of one-time items that was driven primarily by A&B. The other were -- other writedowns or write-off of other assets with the remaining $6 million and there were legal expenses associated with the A&B underwriting activity that we had previously in the quarter and so when you look at that $35 million, and that's adjusted for tax already and divided by the 54.3 million weighted average shares diluted and add that back to those $0.48, you come up to -- [before $0.08] loss, you come up to $0.16.

Okay. I guess my question is I don't see -- maybe I'm missing it, but I don't see kind of an itemized addback that gets me up to that. I obviously see the big $45 million charge. So maybe I'm missing it. I mean, I don't see a pro forma table on here.

Well, there is not. We didn't provide pro forma table. You can see the loss, gain on sale disposal of assets of [1.2], you can see the 45 --pardon?

Yes. No, I see those. But together even tax-affected I'm still not getting to the $30 million -- the $35 million a quarter. It's a little bit off from that, but I don't --

We could then go through that tomorrow if you like.

Okay. Where do you guys stand relative to your -- any type of debt covenant and talk about -- what your bank would -- is going to view of this earnings release and what they're going to pro forma out for the covenants?

We have no issues at all with any of our covenants. We are still very under-levered as a company and there are no issues at all with any of our covenants.

Okay. Internally, what are you guys thinking about for jewelry sales heading into December? Obviously, your inventory is up drastically. How are you going to turn that inventory in December and how much price cutting do you think you're going to need to do in order to do that?

John, we showed in the press release, we ran up 18% and a 14%. We know the inventories are up 66%, I think or it is 70% range, and that's just a factor of timing. That's a dramatically improved jewelry run rate. We've got it nice -- that's continuing for us right now. Obviously, Christmas is the mother load. For us, Christmas is mother load, but we get a second crack at it with Valentine's Day, because of the money that comes into our consumers' hands from their federal income tax return checks.

So, we expect to carry -- as we described before, we expect carry heavier inventories. We actually think that 18% and 14% will improve. We've got sensitivities around that and based on how we've hedged, forward-locked gold, we'll retail the [card] through December and all the way to February and if we have to scrap, we'll scrap.

We talked earlier, I think in the last call that we had got to the point where frankly we were about 80/20, scrapping 80% of our potential inventory, and only inventorying 20%. We talked it could go as much as 70/30 the other way. We frankly think it's more of a 50-50 proposition today and I would tell you, actually in the -- last month as an example, we ran up actually 20% I think in the month and our margin rates were higher. So, we are comfortable that we're not going to have to [baster] those margin rates to drive sales, we haven't seen that at this point. So, our assumption is we can be in the margin rate range with double-digit sales increases and if we have to scrap, we'll scrap.

Okay. And just one last question from me. I know this is not necessarily within your control, but is there any way that shareholders can see how the Board is viewing the fairness of the retainer agreement with Madison Park? I bring this up because it was in the 8-K that they rendered an opinion about the fairness or you have an independent committee render that opinion, but is there any way that we can look at the comps that you're -- that they're looking at in order to justify the $600,000 per month that's paid for Madison Park?

I will take your request and advice and we'll put it in front of the Board.

Okay, fair enough. Thank you.

John Hecht, Stephens, Inc.

Afternoon guys, thanks for taking my questions. Real quick on the quarter, the other revenues had a significant drop-off from last quarter. I'm wondering was there any contra items in there or what's the run rate we should think of for other revenues?

In general, John, that's a pretty small number. What that had primarily to do was Western Union fees, we signed last year at this time a contract with Western Union and the timing of the revenue recognition was favorable last year in the fourth quarter. And now what you're seeing is a more normalized run rate. It will grow as we expand stores and expand penetration, but I don't think it's a number that's going to grow dramatically.

Okay. And then what -- same kind of question on the admin side. It has been a little bit volatile in terms of the administrative expense, but it went from $12.6 million to $17.5 million. Was that some of those legal fees or -- and if so, what's the kind of rate -- normalized run rate going forward?

Yeah. I've got that. If you look at our fourth quarter, we are at $17.6 million this year versus last year of $14.4 million. So it's a $3.2 million difference. And for the year, we're at $52.5 million versus $48 million; so about a $4.6 million difference. So up 22% in the quarter, up 10% for the year. Part of the one-time adjustments that John asked about, there is $3.3 million of those in admin and that affected both the quarter and the year.

So inside the quarter, we're actually down on a normalized basis 1% year-over-year and we're up 3% for the year. That 1% down reflects what we expect our go-forward run rate will be as we have -- we've told you before, in admin we've spent money in investment with IT in our multi-year plan. We've set up that IT investment using primarily contractors. So as those projects reach their finalization, then we can start to move the contractors out of the business and we've started that process, and that will continue during the course of the next 12 months.

Okay, that's very good color, thank you. Last question, you did a good job bridging via what the report was to -- your core operating number was from the quarter and then we talked about the heightened provision and credit losses and some of the drag from transition to more retail as opposed to scrapping the gold and so forth. So not asking for guidance, but asking for you to -- in your opinion, when do you normalize these trends, Paul, and when you get to that 50-50 scrap versus retail level on gold and normalized margins and when do you think you get back to normalized credit provision? And the basic concept here is you're trying to figure out when do you achieve kind of your maximum normal core earnings profile going forward from here, how quickly can you recover the business?

Sure, I think -- well there's two things I'll talk about, specifically around -- let's just finish the gold discussion. Mark touched on the fact that in the fourth quarter the percentage impact to our business, driven by volume and it's volume -- it's gram volume, that is gram volume coming in the door and that was actually worse in Q4. So we're thrilled that the price of gold has moderated in a narrower band between $12.50 and $13.50, generally speaking, but the issue since the middle of last year to, we believe the middle of next year, is volume. And if you recall, frankly in the first two quarters of this year, we actually achieved the high end of the analyst expectations and it was in the back half, where we got separated from you and it was frankly driven by gold volumes.

Where we sit right now today, our gold volumes in the back half of this year and what just occurred inside of our business is pretty much what we forecasted and expected. We have the same forecast and expectation for the next six months related to our gold business. It is -- every other metric inside of our pawn business in the United States, particularly is working, general merchandise, [pawn], all those things are working; lending and selling, but we can't outrun the gold yet and the volume is the problem. So we think we still have six months of tough sledding. Now we're seeing -- we're getting every bit of market share we can, all those things. We still see a tough sledding on the gold scrapping and the volume of gold coming in. That's why we are selling at 42% to 45% margin instead of scrapping at 15%, and that's going to continue for at least six months, [approximately] six months. And if you think about -- I've just talked about February. You'd end up scrapping in March and April, which is the last month of the second quarter and the first month of the third quarter.

On the financial service side, provision rates, I believe we will blend out in the 24% to 25% bad debt range and I believe that's appropriate for us, aggressive as we're being on some of our loan balance growth.

Our US online business and our US storefront business, I'm comfortable that we're operating appropriately with our bad debt performance and we've already talked a bit about Cash Genie, but that's the one that's got to get corrected. But that also is a much, much smaller piece of our business, the smallest piece of everything I just talked about.

Yeah, fair enough. Final question is, the 24%, 25% blend is that through the course of next fiscal year, or is that where you just think you'll be each quarter from here on now?

Well, there's a seasonality to it, obviously. But that's where we'll blend out. I think it will be a little higher than that in Q1, will certainly be lower than that in Q2, as our consumers get their refund checks and then we'll probably be in that range in the last two quarters is how I think about it.

Great. Appreciate that guys. Thanks.

Bob Ramsey, FBR Capital Markets.

Hey. Good afternoon guys. I wanted to follow up, you were asked earlier about share repurchases and the growth in share count related to acquisitions. Remind me, and the December quarter is when you'll have to make the next payment on Go Cash. Correct?

Yes, that's correct.

And you all have the option to do that in cash or stock, are you inclined to issue stock at these levels for that price?

We are not inclined to issue stock.

Okay, all right. That's encouraging always. And then moving on, I know you all talked about the installment loan product issue in the UK. I was just curious, why that doesn't show in the earning asset segment breakout and that there is not anything under the installment loan line on the international segment?

That's a good question. We're going to look.

Okay. Alright.

Bob, the answer is that the team over there are working to separate that out and at the time that we published this we didn't have a clean separation between the two different numbers. So, we have a good clean consolidated number that we can reconcile to and that's what I chose to put it all in one line instead of putting it out as we sit right now.

Okay. So, it's a sub-piece of that single-pay balance?

That's right. I mean that's all one company right there, that's Cash Genie, there's nothing else that is comingling in those numbers.

Okay. I was wondering, could you talk a little more about the gain on disposition of merchandise pressure in Mexico specifically. I'm curious, I know you all cited heightened competition, is that really on the pawn side or is the TUYO franchise seeing similar or more or less pressure, and what do you really see driving, now where is the competitive pressure coming from, since it seems to be more general merchandise than gold?

Sure. So, to answer your question, we don't necessarily see it as much on the TUYO side today. Frankly it's a 20-store group, it's a much smaller group for us. But on the Empeno Facil side, what you're seeing in the -- and by the way, it's a buy-sell business, primarily, versus lending and selling. And what we're seeing is that -- if you remember in the gold -- in the pawn marketplace in Mexico, when it was 85% of the pawn shops were gold only and gold got height, and what happened was the -- most of the independents started hanging a shingle with what they would pay for an ounce of gold -- per ounce of gold. And it completely changed the marketplace, got very competitive, margins have shrunk dramatically for gold scrap there.

Those same pawn providers are now jumping into the general merchandise because the gold market is not profitable for them. So, it's just a bit of a chaotic marketplace. And we recognized it, but we didn't recognize the impact to our lending, our loan to value tables. It's not just us, if you look at any of the public providers that provide information, that operate maximum providing -- you're seeing margin compression coming out of that because the vast majority of inventory is still coming out of the loan book.

So, we think, today, our value proposition is still correct, meaning we have the right-sized footprint, we've got very good locations, frankly we were closing 53 stores and opening 66 and we tasked our team too hard. And that's on us, not then. So, we are past the discontinued ops, most of it, we've slowed the new store growth, we'll get back into focused on execution, both the lending side and the retailing side we're doing that today.

And so I think -- this is another marketplace. So we think there's going to be considerable fallout over time. These along with all this market activity, the other thing that's going on and I am sure you know about it is the federal legislation that we all helped to get pushed through. We'll push some of these smaller providers out, because they're not playing by the rules and they're transparent to the consumer. But it's just a bit chaotic right now. And again, most of these providers are going from gold to general merchandise. The general merchandise generally is small electronics, which is very difficult and we think we'll protect our market share and grow our market share, but we've got to do a better job both on the lending side and on the selling side.

I was surprised to see that the general merchandise loan balances were down year-over-year, since that isn't really related to gold or as much to the store closures. Is that because of these other businesses that are sort of as they say migrating more into general merchandise, is that the reason that the balance was down?

Yes. Sure, there are two things. Gold is a factor by the way. As small as it is to us, it's actually about a third of that drop and the rest of it was that we pulled we pull back because we were over-lending. As the competition got in there, we found ourselves over-lending, frankly. So we pulled back hard, and we're now coming back much more appropriately on the loan-to-value ratios, but it will take us a quarter to cleat it out.

Okay, that's helpful. Thank you.

Bill Armstrong, CL King & Associates.

Thank you. I just had a couple of -- I was wondering if you had any same-store data for US and Canada, for same-store pawn balances, same-store revenues, retail sales, do you have any of that -- those data bits?

Yes. So, same-store pawn loan growth I believe was down 1% for the year and 4% in the quarter. Same-store sales was about the same range. Yeah, I'm sorry, same-store sales were actually plus 3% in the year, driven by general merchandise and with jewelry being down.

How about for Q4?

I should have that right in front of me, and I don't.

I've got it. So what do you want me to start with?

He wants Q4 same-store sales.

Same-store sales for Q4, for US pawn same-store sales was 11.6% in total and same-store 8%, in Mexico 20% in total and relatively flat same-store.

PLO.

PLO, we were 1% in total and down 4% same-store. And that was driven primarily by jewelry, we were down 6% and 10%, and general merchandise was up 11% and 6%.

Right. Did you say PLO?

Yeah. Pawn loan.

What's that? What's PLO?

That's your loan balance.

That's your loan balance.

Okay. So that was down 4%?

Down 4% same-store, driven primarily by our jewelry loan balances, were down 10%, but our general merchandise was up 6%.

Okay, thank you.

Thanks, Bill.

At this time, we have no further questions. I would like to turn the call back over to EZCORP's management for any closing remarks.

Well, we thank you for your time today and we look forward to reporting better financials to you next quarter. Thanks.

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