EZCORP Inc (EZPW) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the EZCORP fourth-quarter fiscal year 2014 conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Mark Trinske, EZCORP's Vice President of Investor Relations and Communications. Sir, the floor is yours.

Thank you, Operator, and I'd like to welcome everyone today to EZCORP's fourth-quarter and fiscal year end September 30, 2014 financial results conference call. On the call with me today is Mark Kuchenrither, our President and Chief Executive Officer.

Stuart Grimshaw, our Executive Chairman of the Board, had planned to be on the call today, but he had an unscheduled minor medical procedure today and is not able to be with us. He sends his regrets and said he is looking forward to meeting many of you over the next month and at our Institutional Investor Day on December 11.

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 risks, including uncertainties and other factors that are discussed in our annual, quarterly and other reports filed with the Securities and Exchange Commission, and in the cautionary note contained in our earnings press release.

Before turning the call over to Mark, I'd like to announce that we are hosting an Institutional Investor Day in Austin, Texas, on December 11. The meeting will be broadcast online and the webcast will be open to everyone. Details on how to access the webcast will soon be on our website, at ezcorp.com, or you can contact our Investor Relations Department for more information.

On today's call, Mark Kuchenrither will present his opening comments and discuss our business strategy. And following his comments, we will open the call to your questions.

Now, I would like to turn the call over to Mark Kuchenrither. Mark?

Thank you, Mark, and good afternoon, everyone.

Before I start my prepared remarks, I want to wish Stuart Grimshaw a speedy recovery. I planned to introduce Stuart on the call today and, although Stuart is not here, I think it is important to share a bit about his background and his established track record.

We are fortunate to have someone of Stuart's caliber join the EZCORP team. He brings a tremendous depth of experience in international banking and consumer financial services. He is an exceptional strategic thinker and has a proven track record in driving operational excellence across large, complex international corporate and consumer finance organizations.

Most recently, as the CEO of Bank of Queensland, he led the bank's turnaround beginning in 2011. The bank is traded on the Australian stock exchange and is a consumer banking and financial services institution with branches in every Australian state and territory. During Stuart's tenure he initiated fundamental changes to the bank's culture, operating model, and strategic direction and established a strong track record of execution.

Under his leadership the bank's market capitalization more than doubled, and after-tax profit grew from $28 million in 2012 to $301 million in 2014. As a result of a strong capital and provisioning strategy the banks' credit rating was upgraded twice, to A-. The bank also successfully raised close to $800 million through two global equity offerings.

Throughout Stuart's 30-year career in financial services, he has held a number of executive positions across a wide variety of banking and financing functions. Stuart is a proven leader who generates results and we are proud to have him join our team.

Now I'll start my presentation with comments about our fourth quarter and significant actions that we have taken. Then I'll discuss our 2015 strategic plan. And, finally, I'll open the call to you for your questions.

During the quarter, as part of our review process we identified areas for improvement and have taken initial steps to address our organizational design to support our strategic plan for growth. As a result, we discontinued certain businesses and reduced our overhead expenses. These actions have positioned us for sustainable growth, with a more efficient cost structure.

Today our company is better aligned to provide instant cash solutions to our customers with an improved operational strategy in our pawn and financial service businesses. We are committed to satisfy customer needs and enhancing shareholder value through a sustainable growth model.

By discontinuing our online lending businesses in the US and the UK, we have streamlined our business into a more fully integrated financial service model, where our customers will benefit from easy access to cash from our various channels and storefronts.

We have completed our 90-day review of our businesses and we have implemented measures to align the skills of our team with the needs of customers. We have reduced the non-customer-facing overhead structure in all of our businesses to streamline operations and create synergies and efficiencies. The actions we took in the fourth quarter will generate sustainable savings, resulting in an improvement to net income of approximately $9 million annually.

We are in the very early stages of fundamental changes in operations, and while the implementation of initiatives will take time, we are confident that we have the right strategy in place to drive the Company forward.

We are now managing EZCORP based on a focused strategy with four clear pillars: number one, build a high-performance organization; number two, deliver a superior customer value proposition; number three, drive operational excellence; and number four, maintain disciplined growth.

Much of what we have accomplished over the past 90 days has been focused on building a high-performance culture within our organization. Through defining key operating principles, the restructure of certain roles and responsibilities, changes in key management positions, and the continued strengthening of our Board, we have taken important steps toward building this foundation.

We have introduced a measurement and management structure with quarterly reviews and key performance metrics. We are reviewing compensation plans and aligning pay-for-performance goals. We are overhauling our hiring and training processes and we are committed to hiring talented people and providing team members the support, training, and resources they need to best serve their customers.

Across our businesses we are emphasizing a customer-centric approach. We want to make sure that every customer's contact with an EZCORP team member is always a great experience. The business will be focused on how efficiently and effectively we serve the customer and support the field operations. We are instituting customer surveys in order to benchmark the net promoter score of each of our business units, and will conduct regular focus groups and enhance our feedback channels from our customers. We are making the necessary changes required to understand the customer needs in order to enhance the customer experience and provide the financial options they prefer.

To drive operational excellence we are implementing a balanced scorecard approach to measurement and management, with key performance indicators clearly stated so that each team member understands the metrics that drive our success and what's expected from them.

For our pawn business units we consider the critical success factors to be developing quality loan portfolio growth and increasing inventory turnover while managing margins.

Our financial services businesses, the critical success factors are growing a quality loan portfolio through effective underwriting and collections.

We are actively shifting the corporate focus back to the field and toward supporting our stores. Key actions we will be taking in 2015 will include reinvesting in store labor and in the stores themselves, as well as reviewing the field management structures to ensure we have the right organization to maximize our success.

We will grow in a disciplined manner consistent with our customer-centric strategy. We are firmly committed to a focused and disciplined approach to growth in the areas where we have had great success in the past, our pawn and financial service businesses. Over time we will look to expand our pawn and financial services footprint through a combination of carefully selected and accretive pawn acquisitions which meet our return on invested capital objectives and through de novo store growth in attractive markets.

We are in the early stages of fundamental changes in operations and implementation of key initiatives, but our strategy is in place and we are confident that, through focused execution, we will create a great experience for our customers and superior returns for our shareholders.

Operator, we are now ready for questions.

Thank you, sir. (Operator Instructions) Bill Armstrong; CL King & Associates.

On the pawn side, I know at least in the short run you're looking -- you're willing to sacrifice some margin in order to increase inventory turns, although margins did decrease by a very significant amount. Should we expect your gross margins in that kind of high 20s range going forward? Or was there just a lot of inventory clearing during the quarter and we may settle in at something a little bit higher? I'm just trying to figure that out for modeling purposes.

First, let me talk about the go-forward strategy and we'll talk about fourth quarter. We are focused on improving our velocity of our inventory turns. But we are confident we can do that without sacrificing margin, and we're taking the necessary steps to ensure that that happens. And we're very focused on protecting the margin while improving the turns.

In the fourth quarter our margins were reduced because we took the appropriate inventory valuation reserve adjustments in the US because of the drop in gold values. And that was primarily the adjustment we made in the US. And then in Mexico when we looked at our inventory values in the fourth quarter there was small electronics that when we did the analysis we had to make appropriate adjustments as well.

So those adjustments were made in the fourth quarter. They pulled down the margins that we experienced in the fourth quarter. But the go-forward gross margins we expect to be in the mid-30s and with every effort to improve upon those margins.

Okay, thanks. That's helpful. And as a follow-up, or actually a second question, for a while you guys have struggled with the more restrictive regulations that a number of the large Texas cities have put in place, particularly on unsecured lending or at least nonpawn lending anyway. I was wondering what your game plan is for operations in those Texas markets.

Well, certainly the regulation has impacted us in our Texas markets. Most recently the Houston regulatory changes have impacted many of our store operations. But we actually believe that, through focused operational execution we can improve upon our loan portfolio growth. And with improvements in our underwriting and collection activities we think we can manage our bad debt expenses better. Our plan going forward this year is conservative in those areas, but it does reflect growth and we are confident that we have the strategies in place to ensure that that happens.

John Rowan; Sidoti & Company.

I just want to understand. The last Board Meeting that you had, was there any discussion whatsoever, or any proposals, to reinstitute the advisory agreement with Madison Park?

No. We just had a Board of Directors Meeting on November 3rd, and there's been absolutely no discussion regarding the Madison Park contract renewal whatsoever.

Okay. I have a few, so I'll probably get back into queue after this. Can you give us an idea what the earning assets were for the quarter, what if any growth there was on a year-over-year basis?

Earning assets for the quarter were -- including CSO, which is off balance sheet, were approximately $432 million. Now, when you look at that on a consolidated basis year over year you need to consider that the Grupo Finmart model has changed with the addition of the distribution model that they've implemented.

So Grupo Finmart has sold approximately $77 million worth of loan assets during the course of this year. So to compare apples to apples you need to take that into consideration with last year.

(Operator Instructions) Robert Ramsey; FBR.

I guess first I wanted to ask if you had any guidance to share. I think this is normally when you would give some sort of guidance for the next fiscal year and I didn't see that in the release. Or, if not at this point, if there are plans to provide any guidance down the road?

Our strategy that we've laid out, that I laid out today on the call and that we're implementing, is not a short-term strategy and a quarter-by-quarter strategy. We're focused on developing long-term, sustainable shareholder value. And at this time I think we're still in the early stages of implementing that strategy and so we're not in the position to provide guidance.

Now, Stuart Grimshaw, our Chairman, has just started a couple days ago. And Stuart and I will, and the Board of Directors and our Executive Management Team, will constantly be reviewing where we're at and what we're doing. But at this time we decided not to provide guidance.

Okay. Maybe thinking about the operating expenses, given the efficiency steps you want to take in this quarter, is it fair to sort of say next quarter we should see the step down by -- I think $2.25 million. I think you said $9 million in annual cost saves. Is that fair? And I guess similarly I'm curious what the sort of unusual costs. I know you said that there was, or the release says that there's $3 million some-odd of other nonratable items. Is that in the expense line somewhere? Or where is that adjustment?

Bob, why don't we turn to the income statement that was with the earnings release and I can give you a little bit of guidance. Okay? So if you look at the operations line you'll see that for the year we spent $420 million in operation expenses. And there's a variable component of that because those are operations that are tied to each of our businesses. But that's about 43% of revenues. And we expect that that will improve, based on the actions that we've taken, by 1% at this point. And we're going to continue to look for ways to improve upon that.

And then our administrative line, you can see we've spent $64 million for the year in administration, administrative expenses. You need to normalize that because we've got the former Chairman's retirement in that number, and that's about $8 million pretax. And then there's about $4 million of compensation and other expenses that are no longer part of that number due to the restructuring efforts that we took. And so a normalized number for 2014 is about $52 million. And with the -- our plans at this point are to run about 12% better than that. And we're still seeking for additional improvements.

When you say 12% better, you mean as a percent of that $52 million? So we would take 12% off the $52 million and that's sort of where you're looking to shake out this year?

Yes. So you have to normalize it to $52 million and then it's 12% below the $52 million.

Got it. Okay. That is helpful. Another question, then I'll hop back out. But the consumer loan fees were definitely lighter than I expected this quarter, a lot lighter than I expected. Just trying to get a sense of how much of that maybe is tied to the wind-down of the online businesses or Texas or if there's anything else unusual. Or at least on a go-forward basis is this sort of a good level to build from? And I guess seasonally this next quarter should be stronger than the last.

Well, I think there's a couple of components to what you're seeing. First, there was an impact with the wind-down of the two online businesses. And so those fees are no longer part of that line.

We also have I think some operational opportunities for improvement in our US business and our leadership and our teams are focused in those areas. We have -- auto title is one of the areas that I think we have real opportunities to improve our performance. And we're taking a closer look in those areas.

We also, as we've introduced the installment loan product in Texas as the regulatory environment has moved customers away from the payday loans, we've got some areas of opportunity relative to the installment loan performance as well.

And we continue to grow our balances outside of the State of Texas. And so, I'd look to use that number as the baseline, but expect it to grow nicely over the course of the year.

John Rowan; Sidoti & Company.

I guess kind of going back to the sales from Grupo Finmart, how much were they for the quarter? And now with kind of a nonrevolving chunk of debt in your capital structure, are you relying on selling assets from Grupo Finmart in order to meet your liquidity needs?

So the first question I'll answer. We had -- let me find the amount. I had to get to the right page; I apologize. So in the quarter we had -- the portfolio sale was a little over $14 million. And for the year we've sold about $35 million. And you'll see that in the operational segment results under consumer loan sales and other. That number primarily represents our structured asset sales. But then there's also expenses below the line in operations that are accelerated also when we make those sales. But that's the sales results of the fees that have been accelerated based on the sale.

And our strategy at Grupo Finmart for this next year is to sell about 60% of new loan originations through these structured asset sales because we want to pay down our debt and work toward becoming more self-funded at Grupo Finmart.

But Grupo Finmart will be paying down the nonrecourse chunk of debt?

Yes.

Okay. And then just maybe just give us a clean tax rate going forward. Obviously it's been a few quarters since you've had a clean tax rate.

Right. So in 2014 our tax rate was -- I think it came up around 29% for the year. And next year we're planning our tax rate to be 33%. And that's primarily due to having a higher percentage of our net income being derived in the US, which is a higher tax jurisdiction.

Okay. Thank you very much.

Robert Ramsey; FBR.

I was curious with the inventory valuation adjustment that you all took, I can understand sort of their view in Mexico. But in the US with the gold piece of it, what is it that actually triggers taking the provision this quarter? Because gold obviously fluctuates every quarter and you haven't taken provisions around gold in the past.

We do, we look at the inventory on a quarterly basis. And we look at a lower cost to market on a quarterly basis. And with drop of the gold prices -- remember, our gold inventory, gold's turning only about one time a year. So there's a significant amount of time between the time we've created our cost basis and the time that we're valuing it, in many cases. And so it just gets down to math and what we expect that we can sell the item for and we're dispositioning the item for. And we take that into consideration with our inventory turns and we have to make the appropriate adjustments.

Okay, fair enough. And then I guess moving on, a different question. As you think about the newer -- I guess it's probably a couple years ago now you added them, but the store within a store that you pushed out a couple years ago. Given that the consumer loan balances seem to be lower and that these are lower at this point, how are you feeling about those newer locations? Obviously you just came off the 90-day review, so I'm sure since you didn't mention to do anything to that business you're committed to it. Do you think you can get to the 15% ROE is what -- just curious if you have any comments around those locations.

Well, great question, Bob. First I will tell you that the US financial service business still is a tremendous return on invested capital business, even with all the challenges that we've had. And our store-within-a-store model still continues to be our most profitable model. It's a tremendous model for us. We're committed to that model. It's up to us to adapt to the changing regulatory environment and still find ways to offer our customers the cash that they need.

But when we share the rent and some of the fixed costs of a storefront between two different models, both businesses win. And so wherever it makes sense, we're going to be committed to that store-within-a-store concept.

Okay. Thank you. That's all I had.

(Operator Instructions) Presenters, at this time I'm showing no further questioners. At this time I'd like to turn the program back over to Mr. Kuchenrither for any closing remarks.

Well, I want to thank everybody that decided to join the call and listen. And I want to thank everybody that asked questions and participated. It's our honor to be with you today and it's my honor to serve this company and to serve our customers. And we'll be working hard over the next quarter to implement the strategies that I've outlined for you. And we'll look forward to talking to you in the near future. Take care.

Thank you, gentlemen. And ladies and gentlemen, this will conclude today's conference. Thank you for your participation and have a wonderful day. You may now all disconnect.