EZCORP Inc (EZPW) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the EZCORP second quarter of fiscal year 2014 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to host, Mr. Mark Trinske, Vice President of Investor Relations and Communications. Sir, you may begin.

Thank you, operator and good afternoon everyone. I am Mark Trinske, EZCORP's Vice President of Investor Relations and Communications. On the call with me today is Paul Rothamel, our President and Chief Executive Officer and Mark Kuchenrither, our Executive Vice President and Chief Financial 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, changes in 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 provided supplemental information on our website. This information gives more detail on the impact of gold and jewelry scrap on earnings per share and a breakdown of our net earnings assets by segment. These materials can be found at ezcorp.com at the Investor Relations section of our website.

On today's call, Paul Rothamel will present his opening comments. Mark Kuchenrither will talk about a few items on our financial statements and then we will open the call to your questions. Now, I would like to turn the call over to Paul Rothamel. Paul?

Thank you, Mark, and good afternoon everyone. I want to take just a few minutes and share with you what we're seeing in the marketplace and our business today. First, we continue to see growing demand for our loan and retail services, and we're seeing it across all of our products, geographies, and channels. We're constantly looking at our own transactional data, third party data, as well as survey and market data. All of that information continues to point to our customer demographic getting access to cash more than ever. Couple this with the macro trend of tightening credit and you see the growing need for our various products. Our largest businesses are in the US today. The consumer is definitely feeling the pressure of these converging influences.

On both the loan and retail side of our business, we see the consumer activity growing over the mid and long-term. We see similar trends in the data coming out of Mexico, Canada, and the UK, with Mexico and the UK being the most disrupted markets today due to shifting competition and regulatory changes.

The second area is the negative impact of the gold marketplace. Obviously, we in the industry saw significant negative financial impact beginning in 2013 and the first half of this year. We do expect to see material moderation in the second half, as year-over-year scrap profits and gold driven pawn service charge comparisons should improve as we anniversary the gold volume declines.

Couple that with expected continued strong pure to retail sales and our largest business, US Pawn, should return to financial growth by the end of the fiscal year. With that business contributing roughly 65% of the Company's segment contribution, it bodes well for the expected consolidated performance. Lastly, we continue to see increased regulatory activity at the local, state, and federal levels. While this activity is generally seen as negative to our business in the short run, it also creates significant challenges for companies that are unprepared or lack the necessary infrastructure.

Those competitors that lack flexible systems, structures, and resources to deal with the rapidly changing landscape are disappearing. At EZCORP, we simply expect to grow our market share with lower yielding, longer term products that are well received by the consumer. These products will continue to be the best, cheapest choice for our customers. For us, it means a longer cash cycle and lower overall yield than historically seen by our industry. But as it is ancillary to our pawn and retail business, we expect solid earnings and cash flow to complement our main business.

I believe that it's worth mentioning again that the investments that we have made over the last three years to our systems, structures, and processes uniquely position us to capitalize on the changing marketplace. Examples like our storefront lending and retailing system improvements, our investment in online selling technology and processes, and our investment in gold processing from the loan customer to the retail customer, or refiner are just a few of the examples.

These advancements are what drive our competitive advantage in the marketplace and we intend to continue to exploit them more and more as time goes on. Specific to our second quarter business, we saw continued strength in our US jewelry sales and our online sales. Our jewelry presentation and promotions at store level delivered strong comps of 25% and strong margins of 43%, while our scrap volume margins were ahead of our expectations as well.

Our online selling business, primarily general merchandise and specifically, electronics, also had another strong growth quarter, accounting for 8% of our sales volume and growing by 68% versus the same quarter last year. Margins were also very strong at 44%, running well ahead of our storefront margins, as you would expect. Overall, our pawn loan balances were down mid-single digits in the quarter compared to last year. Right now, we've seen that moderate from the first month of the third quarter by roughly 200 basis points and as we've already said, we expect our pawn loan balances to be flat by year-end.

We also saw strong growth in our installment and auto loan products in the US and Mexico, while traditional [payday] lending continued to decline. Those traditional payday loans now make up less than 10% of our earning assets as we focus on pawn, installment, and auto type loans across the diversified business.

And finally, our online lending channel continued to grow with over $7 million of loan balance in the US and UK. This growth comes as we improve our bad debt, lower expenses, and improve our lead generation processes with reduced costs as well. With just over five months left in our fiscal year, we remain focused on day-to-day execution at the point of transaction, the customer interaction. We expect continued choppiness as the markets that we serve continue to sort themselves out, but we expect with our strong balance sheet, strong cash flows, and focused execution, we'll continue to be a leading provider of cash to our customers.

And with that, I'll turn the car over to Mark to talk about a few of the line items on our financial statements. Mark?

Thank you, Paul. I want to highlight a few line items on our consolidated statement of operations. If you look at the other revenue line, that is where the accelerated gain of $5 million is recorded from the Grupo Finmart structured asset sale. This structured financing also resulted in $16 million of cash poor receivable inside the quarter, which was received by the Company in April. This is the second of these type of transactions this year and we will continue to consider this type of transaction in the future to finance our growing business.

Moving down the income statement to administrative expenses, the $20 million of expenses were impacted by $8 million due to charges related to the retirement of Sterling Brinkley, our Executive Chairman. This is also broken out for you on the reconciliation of GAAP to non-GAAP result schedules provided. Further down the statement, you will see the line item described as equity and net income of unconsolidated affiliates. This is where the cash converters international limited and Albemarle and Bond earnings combined resulted in a $4 million quarter-versus-quarter shortfall. Cash converters international limited announced their third quarter results yesterday, which reflected strong earnings growth when compared to their first half of the year. This will be reflected in our next quarter earnings as we record based on a lag methodology.

The next line of the income statement is described as impairment of investments. This is where the write down of the remaining investment in Albemarle and Bond is reflected. This is also broken out for you in -- on the reconciliation of GAAP to non-GAAP's results schedules provided. Just below that line is other expenses. This includes $400,000 foreign exchange loss from the Albemarle and Bond write down. This is also broken out for you on the reconciliation of GAAP to non-GAAP results schedules provided. The other expenses line also includes $900,000 foreign exchange loss on the final Grupo Finmart earn out payment.

Now, if you'll please turn to the consolidated balance sheet, I'm going to point out a couple items. When you analyze both restrictive cash and restricted cash non-current lines, you will notice an approximate $27 million increase year-over-year. Grupo Finmart has collateral obligations with respect to some of the loans outstanding. The collateral can be either in the form of loans or cash. Due to the success of the second securitization, they have temporarily used cash as collateral in some cases and will replace with loans over the course of time. There will always be a balance, though, as some of the loan structures create sinking fund balances to ensure adequate liquidity to make payments.

Finally, the deferred tax asset and deferred tax liability lines were impacted by the Albemarle and Bond write down. The write down of Albemarle and Bond creates a cash tax savings of approximately $5 million, which will be taken by fiscal year end. And with that, we will now take your questions.

Thank you, sir. (Operator instructions) Our first question comes from Bob Ramsey of FBR. Your line is open, sir.

Hey, good afternoon, guys. Just to I guess follow-up on Albemarle and Bond that you mentioned, you talked about the tax cash savings. Does that affect your GAAP effective tax rate over the remainder of the year? And if so, what should we expect if not sort of where it's been historically?

No, it does not. It's just a cash pickup on our tax books. But we expect that our effective tax rate will be around the 31% level for the remainder of the year.

Okay, great. And now that Albemarle and Bond has been written off, does that now become no longer have any impact on your income statement? or to the extent that there remain losses until it's completely unwound, does that still have any impact on you?

No, there's no impact.

Okay, great. You also mentioned in the press release some incremental expenses related to the new FCA regulations over in the UK and planned changes in your online lending business over there. I was just wondering if you could give a little more color on what sorts of changes you're implementing and how you're thinking about the evolving UK regulatory landscape?

Sure, Bob. It's Paul Rothamel. We -- also as we said, I think we lost roughly $2 million of segment contribution in the first quarter in that business, broken even. Essentially, I think we lost just under $100,000 in the second quarter, which is where we were projecting to be. The FCA activity, technically they took over on April from the OFT, but they've been very active for 90 days. I know you guys are well acquainted with this from other conversations with competitors and obviously, the public releases from the FCA.

For us, it kind of comes down to some simple things. We're primarily an online lender. While cash converters does have a presence in the UK and they do lend under the FCA purveyance, our number one concern is the Cash Genie business there. We're an online lender, pure play online lender. There are -- in that space today, there's probably less than 100 when it was growing to 130 plus online lenders. And the big three, which is Longa, Cash America, and Dollar, frankly, own by some estimates as much as 60% to 70% of the marketplace.

So we're a small player, but large enough to be able to handle the sophistication of the FCA changes. So we think, while we don't have a lot at risk over there today, we think we have a lot of upside as this picture becomes clearer. But the picture is going to remain a bit unclear, we believe, until as late as December and January, December of this year and January. And the reason is because that's really the timeframe when all of the players have to get final license and permit to operate. And so we're going to see a lot of fallout between now and then from the players that have decided that they just can't do the work.

And then I think the second thing is they also have been asked to review rate caps. And what we understand what's been publicly stated is that they're going to look at those rate caps in that same timeframe. So I think there's going to be a fair amount of uncertainty between now and then. There is certainly plenty of demand there. We're seeing that. Our ability to grow a loan balance today is not an issue. It's going to be really about as you go into the timeframes I've described, it's going to really be about those affordability requirements that the FCA requires and then the collection practices on the back end.

So how do I think all that shakes out in the end? I think you're going to have a lot less providers online and at the storefront. Those of us that are left will grab larger market share on more yielding products and I think we're all going to have to move upstream with the customer, meaning that we're all going to be kind of fighting for a higher demographic because that's where your underwriting is going to take you. And so the unfortunate thing in that will be that some of the people that need services the most will probably not have access to those services and products.

Okay, and remind me, in terms of rollovers for Cash Genius today, are you all at three?

Yes, we were at three with the industry best practices. That's correct.

And as you sort of think about some of the changes that you're taking to position yourselves for the FCA new rules, is the further constriction of two rollovers or continuous payment authority guidance, or affordability assessments kind of most impactful for you guys? I think one of your competitors said affordability assessments actually are potentially a greater, I don't know if challenge is the right word, but a bigger hurdle right now than the new CPA guidance.

So I'm just kind of curious where you see the pressure points?

Yes, I would agree with that. I think that the real issue, really, is when you're talking, you're touching on it. There's the affordability. There's the number of rollovers. There's the types of collections that you can do. And as is the case in any of the jurisdictions we deal with, when you put them all together, it's the impact of all of them together that in the end causes you to do what I said, which is you'll end up with a lower yielding product and therefore you move upstream to reduce your bad debt exposure and drive your business.

And so one without the other, frankly, would work much better than the combination of those things.

Okay. Fair enough. I guess last question and I'll hop out, but Paul, I'm curious if you could share any thoughts with us about the announcement from the Board that Sterling is retiring and that they're considering additional corporate governance sort of reviews? I can remember the exact wording. It was in the press release, but how should we think about that announcement from the Board?

Well, obviously, the retirement of your Executive Chairman after 25 years is a significant event in the Company's history. I think that the Board, in the press release, talked about that, that they formed a governance committee. I believe that they are exercising great care. I think they've selected excellent outside advisors with great national reputations that I won't steel the thunder. I think that'll all become transparent to the shareholders at the appropriate time. And I think they're working quickly as well. So I think they've taken the opportunity to look at, as you mentioned, everything around the Board, from structures, to size, to the roll of the Chairman and their interaction with management.

So I think all of those things are being considered and I think they're moving with great expediency, and I think the transition with Sterling exiting on June 30, I think they'll be in a very good position to let the shareholders know exactly what it will look like going forward by that point.

Great. Okay. Thank you very much for taking the questions.

You bet.

Thank you. Our next question comes from Bill Armstrong of CL King and Associates. Your question, please.

Good afternoon, guys. Can you hear me?

Hi, Bill. Yes.

Hi, Bill.

Okay, great. Could you remind us on the US side, what federal regulatory changes you're referring to that's causing the bad debt to go up?

For us, it's really around ACH activity and on the collections side. And that's what's driving that piece of it.

That's not a CFPB rule. That sounds more like a -- whose regulations are those?

Well, it's the -- it is the CFPB in our case.

Oh, it is. Okay.

Yes.

We're not hearing that from any of your competitors.

Well, it's centered around frequency of ACH activity and partially ACH activity, primarily.

Then that would refer to electronic debiting in the collections process?

That's correct.

Okay. Okay. Got it. Okay. That was the only question I had. Thank you.

Okay. Thanks, Bill.

Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Rothamel. Sir?

Well, thank you for your interest again this quarter and as we mentioned, we look forward to an improving back half on our year-over-year financial comparisons and we look forward to talking to you more about that next quarter. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.