EZCORP Inc (EZPW) 2014 Q1 法說會逐字稿

Welcome to the FY14 first-quarter earnings release conference call. My name is Adrienne, and I will be your operator for today's call.

(Operator Instructions)

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.

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.

Also we have provided supplemental information on our website. The information gives more detail on the impact of gold and jewelry scrap on earnings per share and net earning assets by segment. 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 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. I want to take a few minutes and share with you what we are seeing in our business and marketplace today, and ultimately what the impact of that is on our consolidated Company.

In the United States, where we operate our two largest businesses, the recent changes in the gold market and regulatory environment are well documented so I will not spend a lot of time on that here. On the pawn side of the business, our largest, let's talk about the consumer for a minute.

We continue to see strong demand for both our loan and retail offerings, as evidenced by our growing loan transaction counts and positive sales trends. Their clear shift to general merchandise for collateral and retail is in full swing, as our pawn loan balance is now 60% gold and diamond jewelry, down from 70% as recently as 3 to 4 years ago.

The more significant swing is in retail sales, where general merchandise now accounts for nearly three-quarters of our sales versus 60% over the same time frame. That confluence of change demands that we be better retailers in order to be better lenders, as general merchandise, substantially electronics, has a shorter shelf life than gold, and unlike gold, it is always deflationary, so sophisticated pricing and promotions must be in place every day.

The additional online selling channel is another key to our long-term ability to move significant inventory at strong margins. In less than 18 months, we've grown our capacity rapidly. We expect that explosive growth to continue as we add additional websites to highlight our products, introduce our own website in the coming months, and gain further brand awareness that comes with time in our growing business. Hence the need for strong point-of-sale pricing, loan management, and inventory management systems, and more importantly the expertise to run them.

Those are the investments we have made at EZCORP and we feel very confident that our team can deliver strong financial results over time. Here we believe our scale and talent will consistently win in the marketplace.

We do expect the impact of gold volume declines to moderate beginning in Q3 of this year. Should we continue to drive strong gold retail sales of 30% plus year-over-year growth, as we did in the quarter, we expect to see that merchandise return to our loan portfolio as future collateral.

At some point, gold will generate year-over-year improvements, and with our improved ability to execute general merchandise in concert with that, we will continue to be a leader in the US pawn market. All of this points to our ability to leverage the investments we have made here and turn US pawn into a growth business again.

Turning to US financial services, our second largest business, roughly 20% of segment contribution. The regulatory environment is again well documented.

Somewhat less documented is it the consumers' response to our products today. The fact is, like US pawn, the demand is growing. Our overall loan balance grew again in 2013, even with the regulatory changes, as did the number of customers that we served.

You all know that over 90% of our customers use our products exactly as intended, and their acceptance of our products have not waned. In fact, it is as strong as ever. So the choice is simple to us -- you're either in or you're out. Our customer wants this product and we want to provide it. While others are opting out, we are in.

The second choice is, how are we in. Again, we have chosen to give them options between our storefronts and online channels. One is very mature for us and the other is new, but a customers deserves and demands both options.

Over time, we expect the yield from this business to continue to decline, but because of our store-within-a-store operating model, our increasing online channel, and our consolidated leverage expense structure coming together now, we will continue to be a market leader.

Today, we are focused on executing the day-to-day activities to drive customers to us and thus drive loan balance. At the same time, we are consolidating our underwriting, loan origination, and collection systems and teams to leverage our best resources and talent at reduced costs. Most of this work will be done this year with additional loan management synergies coming later.

What does all of this mean? Simply this: we project that by the second half of this year, the business will be serving more customers than ever with its largest loan balance ever, as you expected to deliver this business back to earnings growth during the same time frame.

To be clear, we expect continued choppiness of the market, as the market and regulatory environment continue to shake out -- the new normal, we call it -- but that does not make it a bad business, not when the consumer clearly wants it. We're definitely in.

In the US segment, we lead with our storefront pawn business, now accented by the online selling channel. Our US financial service business is a great complement, as it gives further choices to our customers when they need immediate cash.

We have three of the four pieces of the puzzle -- storefront pawn; online sales; and storefront financial services generating earnings, with our online lending channel soon to join. That combination will keep our US/Canada segment the largest and most important segment at EZCORP for the foreseeable future.

As for our Latin America segment, with Empeno Facil and Grupo Finmart, it has moved from losing money three years ago to contributing roughly 15% of our consolidated segment contribution. We expect that to continue, with penetration as high as 20% in the near term.

The Mexican pawn market and Empeno are going through a radical change right now, as the entire marketplace is seeing the customer shift from gold to general merchandise, later but much faster than the US consumer. In Mexico, this really means from gold to electronics, and specifically cell phones. Cell phones are the number one collateral item today for our consumer and the number one retail item, as well. You can imagine the complexity here versus gold jewelry.

The challenge for us is that we have always been in this business but with fewer competitors. But today nearly the entire industry has jumped in and disrupted the marketplace. For us, the combined impact of the year-over-year gold declines and the rabid move to general merchandise, are pressuring our immediate loan and retail business. The good news is that we have made some of the same investments in systems and people as we made in US pawn to drive a more complex business model.

Our Quarter 1 trends in loan volume, loan quality, retail sales, and expense leverage are all better than the back half of last year. We have slowed our new store growth to focus on maximizing profitability in our existing store base, and we expect to see continued consolidation in the marketplace due to these competitive pressures, as well as the positive regulatory changes at the federal level. We believe that with our locations, footprint, and scale, we are well-positioned to weather the short-term market volatility and return to growing the business again in 2015.

Grupo Finmart continues to be the fastest-growing business we have today and our key metrics remain consistently strong. The ability to generate loan originations in active contracts and add new and renew existing contracts are the building blocks to this business. We're focused heavily there today, as well as offering additional services that our existing consumers have asked for; things like refinance options, access to other loan products, et cetera.

Just as in the pawn industry in Mexico, we are an active participant in the regulatory process and are proactively working at the federal level to ensure proper regulations to protect the consumer [earn place] for our industry. As one of the top three largest providers in the country, in conjunction with our industry association, we are taking the leadership role today in government affairs.

Finally, our minority partners have a strong history in this industry with outstanding credentials across all of Mexico. They are as committed as we are to being one of the largest providers of credit to our customers for years to come.

Our combined segments of US/Canada and Latin America are generating 90% plus of our segment contribution. We expect that to continue for the foreseeable future.

The combination of our big core businesses growing stronger, and our new channels becoming more mature are coming together. Our focus is on detailed day-to-day execution to drive revenues within an expense structure that will leverage against those rising revenues.

In the near term, our remaining smaller businesses, all very promising -- Cash Genie, Cash Converters and Tuyo will continue their incubation. We will continue to refine their operating models, improve their profitability, and get them ready for growth sometime after this year.

To close, before taking your questions, at the consolidated level, we are pleased with what we see from the consumer. Our segments are beginning to show the benefits of our investments and we're really wholly focused on getting those investments to pay back through detailed execution at ground level.

Our balance sheet remains strong, our cash flows remain strong, and our income statement is improving every day. We have taken and continue to take the necessary steps to be the customer's first choice. We are committed to executing at a high level on their behalf, as we look forward to delivering on our own short- and long-term commitments.

With that, we will take your questions.

(Operator Instructions)

Bill Carcache, Nomura.

Paul, I wanted to ask if you could go back to revisit the comment that you made about having three out of the four segments with online lending soon to join. Could you expand on that a little bit?

Yes, how we look at it today inside the segment -- obviously US pawn is the largest business we have in the United States and it will continue to be. It has also been hit hardest by the gold headwinds, but we expect that to anniversary all of that really by the fourth quarter for sure and even possibly the third quarter.

US pawn storefronts is the biggest business. US financial, second largest business. We're committed to the business, as well, and we have been able to withstand a lot of pressure from the regulatory environment and replace almost all of the earnings that we have lost related to those activities.

The newest -- then we added the online selling channel, which is inside US pawn. That is how we think about it, because it is the new channel for the consumer for us. That, as you saw, we were around a 21% increase in the quarter; it is now 9% of our retail sales, very healthy margins.

The fourth piece of the puzzle for us really is online lending. That is the business that we bought that we really are essentially making a channel of our storefronts. That has -- and you will see it in the Non-GAAP information in the back of the press release -- we lost money in the first quarter like we lost money last year. We expect that loss to moderate in Q2, be flat in Q3, and then begin to make money in that part of the segment in the fourth quarter.

Okay, that's very helpful. On Cash Genie, when you guys talk about -- you say in the press release that you expect the favorable trends to continue for cash Genie. Can you talk about what you are expecting or what you are assuming happens in the UK regulatory environment, for example, with respect to caps that are being talked about?

Sure, we -- let me talk about the trends just for a second -- if you remember from the last call, we talked a bit about that we had a good second and third quarter of last year, had a poor execution of a change in product to an installment product. We've rectified that, took our volumes down a bit. To do that, we are now growing those business. So inside the business the underlying trends to our ability to grow the business and grow them profitably along with expense reductions that we have made, we feel good about the underlying business trends.

We, like everybody else in the UK, is waiting for the regulatory group to come out with exactly what their requirements are. We fully expect that we, like everyone else in the marketplace, will have to alter our products in some way, shape, or form. We, today through a myriad of sources, are very active in that process with the governing body and we will see where that comes.

We should know really within about 60 days exactly what that government body is looking for and then we will have, I believe, the six months to implement. We're comfortable that we can be flexible in order to do that.

Okay. That's helpful.

Finally, switching gears to the -- on the pawn side, there is a comment in the press release, which I was struck by, that the average loan for general merchandise is roughly one-third that of an average a jewelry loan. There had been a time where the thought process was that if gold prices did go down and people shifted to general merchandise, that, potentially that would be up to almost the full amount. So, I was surprised by that.

I wondered if you could comment on whether that is a number that you feel is pretty set or is that fluid, that one-third -- do you still see that moving around? Along those lines, is capacity becoming an issue in any of your stores given, that growing shift to general merchandise?

On the first point, historically we have run relationship like that -- one-fourth to one-third, GM to jewelry loan balance size. Like you have heard from others, our transaction counts are, up but our loan size is down and that is why you are seeing overall loan balances in our case flat because we do not have a lot of store growth, and down slightly on a comp basis really for the first time.

In some cases, the consumer is taking out more than one loan to offset that jewelry -- the fact that they do not have the jewelry anymore, but we have not seen -- we have not seen a big movement in either jewelry or GM size of loan although jewelry is down slightly in the single-digits right now, obviously because of the spot price.

We generally look at it in terms of pushing transactions up. That may mean that a single customer takes out more loans than they would have in the past to try to get the money that they need. But there is no question, that was certainly an industry-wide belief that somehow the consumer would be able to replace gold was general merchandise, and we are feeling they're doing it, but not nearly to the degree that we'd all like.

Concerning capacity, I assume you are talking about sales floor and backroom capacity. The answer is that across our 500-plus pawn shops, we have a lot of capacity to handle the shift to GM.

In fact, we -- because of this -- move along with some of the other things that we touched on. From systems and things, we kicked off an initiative to improve the efficiencies of our backrooms. That will actually finish this year, and on average, we are able to improve capacity without any expansion of the building or anything like that in their backrooms by roughly 30% -- some stores more than that, some others.

We are quite comfortable. But that points to, by the way, not just the capacity of the facilities, but it is our capacity to move and dispose of goods and that is going to be the key. That is why we were pretty excited about our sales numbers out of the last quarter, particularly in jewelry because that was a big shift in strategy for us, but even our GM sales have been very strong all year.

The good news in January is we're coming out of the chutes again in positive single-digit right now. A little bit off fourth quarter in GM, but, frankly, just as strong in gold right now. We are running about 20% comp in gold.

John Rowan, Sidoti and Company.

What was the reasonably large gain on sale of disposal of assets?

That is actually a strategic action that we took in the quarter. It has been in play -- it has actually been in process for about 18 months. That was the sale of seven stores in a secondary market to us to strategic investors that we know very well and have been partners with the Company in the past, recent past as well.

They're going to develop the market. We will have the opportunity to take that back at some point. But that is really what that was about.

I know it shows a gain on sale on the one line. There were costs associated with it that really are buried in other lines that we did not show. But that is what that is.

Okay, but you sold the seven stores? Just making sure--

We did. Yes.

Okay. Can you explain your online strategy? Obviously, you drove substantial increase in online sales. How has that changed over the past year?

To give you an example, I was searching for a clock radio the other day, and EZCORP showed up as the seller of it. I was pretty surprised by that. I just want to know what you've done in the past year to drive such volume through the online channel?

Yes, my first question is I hope you -- or my first comment would be I hope you bought that, John.

I didn't (laughter).

Really we -- I go back 18 months and it grew out of individual stores that we picked up through acquisition. Even some of our own stores in the past have done it on a one-store basis.

We've looked at a hard, we built the business model probably two years ago. We started to roll this thing out 18 months ago. It went through some early iterations, but the fact of the matter is, we studied the heck out of third-party auction sites; we also studied some retailers in their early days, and when I say retailers, I mean generally Target and Walmart and companies like that, in their early days of online selling.

For us, we have obviously millions of dollars of merchandise sitting in stores. Our first attempt were really to get it to consumers that maybe wouldn't come into our stores. We have done it across the third party that you all know -- you just mentioned Amazon, eBay, Kijiji, and several others.

We've really refined all the processes and it is generated at store level and that is how we do it. The key to the whole thing is logistics, because you have got to keep your customer service levels very, very high.

So we didn't race because we weren't going to come out of the chutes and have problems. We went slow, we built this thing hub-and-spoke from our stores, we identified specific people in the stores that would be Internet people, online selling people, and then we built some structure in Austin to support all of that, with experts that are not pawn experts and they are not lending experts, they are online retail experts. They brought some skills with them.

We feel very -- and how this thing has moved in 18 months, is faster than I would have ever thought we could move it and that is a credit to the team. I feel very good about that.

I do believe that if you go and look at others' business case scenarios about people doing this, we are ahead of the curve. So the idea that we are now going to launch off our own website is the natural progression and the next step. We will stay on the third parties for quite a while, frankly.

Okay. Just one last question, just to address the inventory levels.

On a dollar basis, they are still up a decent amount year-over-year. Obviously, you had a good retail season. But my understanding of your strategy was we're going to hold all this gold, and we're going to retail it, and whatever we cannot retail, we will scrap. I just want to -- what you are looking at as far as we have an inventory and that build year-over-year -- I want to make sure that there is still a chunk that you can scrap to bring that inventory level down and scrap still at a profitable margin?

Yes, there is. If you remember, John, what we talked about was for us it was not at the end of the Christmas season in Q1, it was at the end of the tax season and Valentines season in Q2 that we would scrap if we needed to.

But I would tell you, yes, our inventories are building back to capacity. That was asked earlier, I know that was a general merchandise capacity, but the fact of the matter is we have a lot of capacity at our store level to sell jewelry today and we're just getting good at it.

We have the opportunity to scrap it and, in fact, our scrap -- we scrapped, compared to our own expectations in Q1, we scrapped better than we expected to be and our margins were 28% on scrap. Even the scrapping portion that we did, we did effectively.

We retailed effectively at 45 points of margin; we scrapped at 28; and we still have the biggest selling season in gold ahead of us over the next three weeks. Then we will take a look and I expect that we will scrap, but I will also tell you that we are not going to scrap to a point that we are starving our stores for sales.

John Hecht, Stephens.

Real quick on that gain, do you have a sense or can you quantify what some of the offsetting expenses would have been during the quarter, just to give us a sense?

Just specific to that deal, we were talking about one -- we didn't get into a ton of on-time discussions. The gain on sale, you can see on the line, is $6.3 million. There's about $0.5 million of expense in the quarter buried in other lines related specifically to that.

We also -- we disclosed in the 10-K earlier, we had a one-time discretionary bonus payment in the quarter, which was a one-time the other way. If you roll all those things up, our one timers, essentially, were plus $0.01 to $0.02. That, to us, wasn't worth the call out that A&B and online were in relationship to our $0.42 earnings.

This adjustment to 30% tax rate, is that permanent based on the current shift, domestic versus international?

John, it is Mark. Yes it is. We expect our tax rate to run at 30.2% for [ranning] over the year.

Okay and then can you give us a sense -- it would be combination of US and UK, just consumer lending, generally speaking. How much of that on a composition basis is title and installment relative to payday lending?

The fastest growing segment we have is auto title; the second fastest is installment; but roughly 60% of our lending in the US is still payday lending. For us again, we -- that is not all in Texas anymore; we have moved balances significantly outside of the State of Texas.

Remember, what we call a payday loan isn't what everybody thinks as a two-day payday loan, which is the old legacy products. There's other products now that, as examples, that we run in San Antonio and in Austin that are appropriate for the regulatory environment, and the consumer still comes to us for that loan. So, it is a little muddy when you just ask about payday lending, but the legacy product for us is probably 25% to 30% of our volume today.

Bob Ramsey, FBR.

Quick question. The other fee income line looked bigger this quarter than I was expecting. I know you had a big number in there last year, but I know then it was the Western Union agreement, and I think it was $0 last quarter. So I wasn't expecting the $5.6 million. Is there anything unusual in there, or is it just lumpy or--?

I'll be happy to talk to that. When we look at the other revenue lines that you called out, last year we had an implementation fee that we collected from Western Union that was reflected last year in other revenues in the US.

If you look at the Latin American segment, this year we had a benefit of a financing strategy that Grupo Finmart employed that was similar to a CSO model where they sold part of their receivables and so they have received a gain on the sale of those receivables. They will service and collect the portfolio that was sold and manage it for the financer.

Okay.

Bob, they actually did that last year, as well. This was just -- in first quarter, this was just a bigger transaction and it is something that will be recurring and has been recurring inside that business as a form of finance.

Okay. Do those sales happen quarterly, annually or does it just depend on the flow of business?

What is happening is that business is growing, has been growing very rapidly, and so it has been, as the loan portfolio has grown in a size that's appropriate to go to do a transaction. So it is more based on timing of the growth of the portfolio. But we expect, as the business continues to grow, that those will become a more steady stream.

Okay. I know you all also mention in the release that the provision at Finmart was 10% of fees this quarter, which is higher than it should be on a normalized basis. Did the transaction affect the provisioning in any way or if not, why was the credit cost elevated in that business this quarter?

No, that wouldn't have anything to do with it. It was a little bit elevated to us based on our expected run rates. I think we put in the press release, we think will be in the mid-single-digits. So, it was a blip on the radar to a couple points higher than it has been. The team is comfortable that it will be back below that in the next two and three quarters.

Okay. I know you guys highlighted the loss at Albemarle & Bond. I'm just curious, is that your share of their earnings or is there any write-down that is in that line, as well? The $1.2 million?

There was an adjustment made because, as you know, at the end of the year, we estimated their losses because we had lack of visibility. During the first quarter, they finally put out their year-end results, which was -- had a loss greater than we anticipated and so we adjusted accordingly.

Okay. That makes sense. But you all did not change your carrying value of Albemarle & Bond at the end of the quarter, is what I'm asking?

I'm sorry, it does have an effect of reducing our carrying balance. So right now our balance sheet exposure is $7.9 million.

Okay and the $1.2 million loss you all highlighted for Albemarle & Bond is equal to that loss from unconsolidated affiliates. Does that mean the cash converters was basically neutral or break-even this quarter in terms of its contribution?

No, Cash Converters made money in the quarter and we booked a profit there. Remember, we also have Cash Genie in that other international segment.

Okay. I was looking just at the consolidated income statement and that loss -- that income from unconsolidated affiliates, which I thought was purely those too.

That's not a loss. That's not a loss.

That's a gain of (multiple speakers).

Right, okay. You're right. Is it just those two businesses?

I can do the math and back out the $1.2 million loss and Cash Converters then is (multiple speakers) -- okay, I got it now. I got it. Thank you for that.

Only other question I will ask you guys, I wonder if you have any thoughts you want to share on the upcoming proxy vote? I know some people have asked me what would be the goal of increasing authorized shares outstanding, as a lot of people view your stock as undervalued, and aren't sure what the goal would be in issuing stock at these levels?

The easy answer to that is that it is that just because there is a proxy vote for additional series, does not mean anybody is going to run out and issue shares. The fact of the matter is we have no flexibility available for the Company today. We have historically used shares really for only two reasons and that was for any type of equity investments over time and certainly depending upon the market and depending on whether that was the right form of capital to use, along with compensation. To us it is a bit of good Corporate housekeeping to have that flexibility and that is all it is.

John Rowan, Sidoti & Company.

One more follow-up question, the last one. The equity of unconsolidated affiliates, that should be $1.2 million higher because that includes the impairment of Albemarle & Bond? Is that a good run rate going forward for just Cash Genie and Cash Converters?

Yes, there was some confusion in the discussion there. The line that says equity in net income of unconsolidated affiliates does not include Cash Genie, but the $1.271 million in on Page 8 that you are probably looking at is a positive, not a negative number.

I think what you are really asking is what do we expect for run rate out of these affiliates? Look, it is a problem for the next several quarters to us because of A&B. We have got Cash Converters at whatever public information they provided you is what we base it on. So we are based on the same thing. Albemarle & Bond is the crapshoot right now, to be honest, on a run rate. I would think we expect their losses to continue for some period of time, and as I said, and Cash Converters will be with they've publicly stated.

I understand. I am just trying to get at if there was a $1.2 million impairment in the equity value of Albemarle & Bond, that if we just exclude that, would mean that the run rate on that number is $1.2 million higher per quarter. That is all that I'm trying to get at -- if there was in fact an impairment of the equity value in that number?

Yes, if you look at the segment reporting and you look at other international segment reporting, which is where I thought Bob was looking at, the $685,000 loss that showed at the segment contribution includes that write-down of A&B that we discussed. So the run rate in absent of that is what Paul just talked about. Cash Converters ongoing is based on public information, and Paul has already discussed what he expects Cash Genie to do, which is improve over time, so you'll see an improvement on that line item in absence of A&B impact over time.

We have no further questions.

We appreciate your interest in EZCORP and your time today. We look forward to talking with you again in another 90 days. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference.

Thank you for participating. You may now disconnect.