EZCORP Inc (EZPW) 2016 Q3 法說會逐字稿

Welcome to the EZCORP FY16 third-quarter earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Jeff Christensen, Vice President of Investor Relations. Sir, please begin.

Thank you, Vince, and good morning, everyone. Welcome to EZCORP's third-quarter conference call. Joining me today are Stuart Grimshaw, Chief Executive Officer of EZCORP; and Mark Ashby, Chief Financial Officer of EZCORP. During our prepared remarks, we will be referring to slides which are available for download from our website at investors.ezcorp.com.

Before we begin today, I'd like to remind everyone that this conference call contains certain forward-looking statements regarding the Company's expected operating and financial performance for future periods. These statements are based on the Company's current expectations.

Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks and other factors that are discussed in our annual, quarterly, and other reports filed with the Securities and Exchange Commission. Now, I would like to turn the call over to Mr. Stuart Grimshaw. Stuart?

Thanks, Jeff, and welcome, everybody. Today's results continue the strong Pawn operating results we've seen over the last three to four quarters. I think it's worthwhile congratulating our Pawn team and particularly, store managers in the way they've gone about their business and met the needs of our customers.

The results show (inaudible) percent growth in net revenue, which is translated through to 20% of improvement in profit before tax. Which evidences some fairly strong operating leverage that sits within the Company. As we started down our path about a year ago, we highlighted three areas of focus for us. Being focusing on our customer, simplifying across our business, and optimizing for the future.

On slide 4, you will see those highlighted. But the strength of the quarter, we can see with same-store PLO growth increasing 10% in the US and 19% in Mexico, and that's on a constant currency basis. This represents four consecutive quarters of improvement in same-store PLO growth in the US and eight consecutive quarters in Mexico.

We spent a lot of time over the past 12 months, and looking at how we serve the customer and this is being driven through investments in our customer engagement and we are seeing that through the strong Pawn results. We've embarked upon a lot of coaching and mentoring at the district manager level, where we have invested in resources where we have narrowed the span of control, where it used to be 10 to 8.

We're starting to see the benefits of being closer to the store manager. We've also invested in video mystery shop programs, which gives us an insight as to how the customer interacts with us and we use that as well in our coaching and mentoring which is proving very beneficial to our outcome.

The strength of the programs that we've invested in is highlighted in the Net Promoter Score that we've seen. As you see at the bottom point where our US scores increased to 46 points from 39 points, and in Mexico, it's improved to 50 points to 48. They are very strong results, across most industries where single digits is more of the norm.

In terms of simplifying our business, hopefully, after the sale of Grupo, 99% of the EZCORP revenue will be generated from the US and Mexican Pawn businesses, which makes us -- it takes us back to where we originated and where our strength lies and that's being close to the customer. As a result of the unwind of the businesses that we've had over the past 12 months, the corporate structure has become a lot simpler and has allowed us to focus again on the customers' need for cash.

As a result of that, the expense management at the corporate level has started to shrink with the reduction of 15% in Q3 and we're on track in that 2018 to reach around the $15 million corporate cost level. As of the 1st of July, we entered into a definitive agreement to sell Grupo. And we provide a summary of the terms of that transaction in both the press release and 8-K filing and we've disclosed the purchase agreement itself.

As you would expect, the terms of the agreement restrict the public statements we make about the terms of that agreement and the transaction. For that reason, until we close the sale, we won't be making any further statements or responding to questions regarding the terms of the proposed sale until such time as that sale has occurred.

We've also received, as part of that, we received a commitment for $100 million secured credit facility to continue to support the business and its growth. We're upgrading all of our training programs once more to ensure that we remain close to the customer and understand the needs that do change. And we're also investing in technology which will bring us a new point-of-sale system, which will be very leading-edge in what it will do.

We are introducing a workforce management system that will allow us to understand what happens with the employees and our customers on a minute-by-minute basis. And we are entering into an investment of the three-year store refurbishment program, as we haven't actually invested into the stores for a period of time, and now is the time to start reinvesting. So with that high-level overview, I will pass across to Mark Ashby.

Thanks, Stuart. Good morning, everyone. I'm going to take a short few pages and talk about the financial results for the quarter and the year-to-date basis. Just before I do, just thank you for your patience. In fact, we delayed the call for a week. As Stuart touched on, we've had a pretty complex structure and as part of our remediation plans, we reviewed some of the tax accounting going back quite a few years, and we thought it was prudent to complete that before we filed the results.

Good to see that we're now actually up-to-date with those remediation plans. So if I kick off talking about the GAAP results for the quarter and for the year-to-date, it was a strong quarter, really focusing on continuing ops. Grupo is now classified as discontinued ops. So if we look at the quarter, as Stuart mentioned, the Pawn Loans Outstanding, or the PLO, is up 9%. The strong growth in PSC, the Pawn Service Charges, is 8%.

Merchandise gross profit was up in dollars and percentage continued to improve. That gave us a profit for the quarter in the continuing ops net income of $2.9 million against a loss last year of $700,000. On a year-to-date basis, the total revenue was driven positively by $11 million improvement in PSC revenue, offset by lower scrap sales.

The movement in the exchange rate also had some negative impact swing on a GAAP basis, but I will talk to those -- the constant currency numbers a little bit later. But irrespective, the net revenue was up 6.6% -- sorry, 6% for the year to date. A continued focus on cost management, that gave us the opportunity to leverage the profit growth, $7.6 million improvement for the quarter, and $10.6 million year to date, which is 116% improvement.

If we turn to page 6, these results are adjusted for constant currency, and also, other discrete items. So, if we look for -- at the quarter, the same-store metrics, the PLO increasing 11%. Pawn Service Charges increased 10%; merchandise gross profit also increased 10%.

We're seeing some -- the flow-through of that into profit by reducing our corporate expense structure by $2.4 million, or 15%. So EBITDA increased just over two-fold for the quarter, and 34% on a year-to-date basis, with profit before tax for quarter three improvement by -- improving $8.3 million to $4.9 million and year-to-date to [$7.5 million] improvement.

So we turn to page 7, and we look at the US Pawn business. The continued focus on the customer experience that Stuart touched on earlier, the double-digit same-store PLO growth in Q3 at 10%. Pawn Service Charges also increased by the same amount. The gross profit margin increasing from 35% to 37% for the quarter, and 34% to 38% on the year to date also helped the flow through to net revenue.

Our aged inventory continued to decline in the Pawn business, down to 9%, and we just put a note in there. It's worth noting that, historically, we have higher first-half net revenue merchandise gross profit and profitability reflects the fact that there is a seasonal impact when the tax refunds come in the first half, and, obviously, Christmas and Valentine's Day also in the first half of a financial year so you do see that sort of demand. The profit before tax for the segment was up 25% for the quarter and 12% on a year-to-date basis.

Page 8 gives you a simplified view of some of the statistics I've covered. These really are the key drivers. This is focused on Q3. We have the same-store PLO up 10%; and 13% in total. The Pawn Service Charges up 10%; same-store up 8%. Inventory increased 16%. The inventory increase is really driven by -- it's been a proportional increase in loan forfeitures or redemptions compared to last year, and seeing we're in a period of relatively large sales demand, you do get an increase in inventory coming through.

Obviously, we monitor the aging of the inventory. And as I mentioned earlier, aged inventory profile is improving. Overall, on the right-hand side, net revenue up 9%, total expenses are up 5%, so the profit before tax is up 25% to $20 million.

Next page, on page 9, is the Mexico Pawn business, continued strong performance in Mexico. Profit before tax, $4.2 million for the quarter, against $1.3 million last year; $11.6 million year-to-date against $5 million last year. The continued focus is double-digit PLO growth, which is now for eight consecutive quarters. 20% growth in Pawn Service Charges. With continued merchandise gross profit growth and a reduction in aged inventory now down to 3%.

The metrics chart on page 10 shows the same format as for the US Pawn. You can see same-store PLO growth up 19%, which is also the same in total for the quarter. Pawn Service Charges up 20% on the same-store and total basis.

Merchandise and scrap gross profit, up 48%. Same-store inventory levels up 21%. All in all, net revenue up 28%; total expenses are up 1%. So profit before tax was up to $4 million for the quarter.

So turn to page 11. On Grupo Finmart, just a couple of charts on Grupo Finmart. As Stuart mentioned, we've entered a definitive agreement to sell Grupo, which is still on track. We expect to close by the end of September. Importantly, the closing of the transaction is not contingent on financing by AlphaCredit.

The sale price itself, the base sale price is $50 million. There are closing adjustments that will affect that number and the cash that comes in depending upon the scenarios, but we expect the aggregate adjustments, excluding transaction costs, could reduce the proceeds by around $10 million.

On page 12, it's just two pages on the Grupo initiatives update. Interest income for the quarter is reducing of -- the loan portfolio is actually reducing. So the two go hand in hand. A bad debt expense increased on last year. It's maintaining, the reserving is basically being flat, and again, represents timing in predominantly in an industry delays, assisting from out-of-payroll performance.

Net revenue was down to $7 million for the quarter, as a result from $40 million last year. As you can see on a year-to-date basis, net revenue was $12 million versus $35 million last year. Interest expense is reducing as the size of the loans, the debt profile within Grupo reduces. Operating expenses are up and that just -- those reflect the investment in the management structure that we put into place to run the business.

If we go to page 13, just to give you a call out on how the cash flow structure was for the quarter. Collections were relatively flat. Originations were slightly higher than Q2 but we're maintaining a disciplined origination profile. Cost, I have already spoken about.

The operating cash flow was negative $4 million compared to positive $2 million in quarter two. That was supported through some external funding that was originated by Grupo, some support for the debt repayments by EZCORP to support the $11 million worth of debt repayments that occurred during the quarter.

The negative $2 million for Q3 was funded by existing cash that was in the Grupo business at the end of Q2. The collections performance fee, the reduction, you can see the reduction in the gross line balance that's driven part of the collections reduction. We've also had lower originations, so collections are higher than our origination profile.

The total reserve hasn't moved. It's still sitting at $70 million, which is but now at 50% because we have a lower loan balance. The collections on the reserve loans dropped from $4 million last quarter to $3 million this quarter. Pleasingly, in the month of July, we saw an uptick on that as we got some positive collections from some of the aged government agencies. So in summary for me, I'll hand it back to Stuart.

Thanks, Mark. Turning to slide 14, it's about a year since we announced the strategic plan. As we look back, it was really triggered by bringing Joe Rotunda back to run the Pawn business which was a terrific asset for us and then bringing Mitch Fadel on from the US Pawn, which was a start of the change of the leadership and a refocusing of the business back into the Pawn business, which we know so well.

But if you look at the path that we've taken, a lot has happened in that 12-month period of time. We're at a stage now where we're moving forward. We've got the Pawn fundamentals continuing to improve. So, as we've refocused the business, we haven't lost sight of the customer through the whole process.

We've got the commitment for the credit facility and we entered the definitive agreement for Grupo Finmart. We still remain on track to close that by the end of the fiscal year. That means we're upgrading in the POS technology. We've had the point-of-sale technology in place since 2001 in its current format. While we have invested in it, it's time that we actually move into the next-generation.

That will be supported by the investment in customer data analytics which will provide more information to the store manager at point-of-sale, provide more efficiency to the storefronts, and its processes as well. So we see that as quite critical in the next stage of our evolution. Our corporate expenses are tracking down, which is pleasing to note. We're also implementing the workforce management system, which will actually provide greater productivity at the storefront level.

So, turning to slide 15, which is a bit of a summary of where we are and where we've come to. We are continuing to focus, simplify, and optimize as we outlined in the earlier slide. The performance of the Company has strengthened over that period of time, and the operating leverage, which we've seen come through these results is clear to see.

The intense focus on market leadership and servicing and satisfying our customers' need for cash is critical to our success, and we've seen the benefits of the programs we have in place around that with the PLO growth in the US and Mexico, strong double-digit. PSC following closely behind that, and pleasingly, the merchandise margin improving quite markedly in Mexico and also in the US.

We will continue this investment in the Pawn business, as it is critical for us. Grupo, we have announced and we have the credit facility in place, about to be in place, assuming we can close that.

With that conclusion, we'd like to open it up for questions.

Thank you.

(Operator Instructions)

Our first question is from John Hecht of Jefferies. Your line is open, sir.

Hey, John? He might be on mute.

I'm sorry, I was on -- sorry about that. So first of all -- (multiple speakers)

That's about the only question I can answer.

Congrats on all the progress and the improvement of the Pawn metrics and also simplifying the business structure. First question is around the Pawn metric. It seemed like you guys are -- did you do something to show the growth at the same-store level that appears to be more rapid than other industry trends? Is this new customer acquisitions or are you optimizing the current customer base? Do you have any thoughts or steps around that concept?

Well, I think the Company is, one, because we're actually growing at quite a rapid rate. We are, by default, getting market share. So, that's pleasing in itself. But having said that, we could lose market share previously.

So, I think we're getting our -- getting everything in the right line, but the one thing we've really focused on is focusing on every customer that comes in the store. We know our customers are quite dynamic and they are adjustable. I know there's been a lot of talk about gasoline processes and the like.

But gasoline prices actually were impacted early last year. We know our customers actually adjusted their patterns in spending and otherwise. We've seen about 60 days of some macro event happening.

So, we're dealing with the customers' needs. The customers have adjusted their needs based on what's coming through the door. I think we've adjusted quickly to that. We're rebuilding the market share. I think our customer engagement, as you've seen, is very good through the Net Promoter Score. We're doing it through mystery video shopping as well, making sure we're on top of it.

But I think the real secret lies at the store level where we're focusing on every customer as an individual, not as a mass group so we're spending time with the customer to understand their needs. Sometimes it does sound a little bit cliche, but it -- actually doing the basics really well drives a lot of value in this business. And if we had too much complexity, which we've seen in the past, it can actually distort the economics of the business.

So, simplicity is actually being one of the key focus -- key benefits of what we've been doing. We're seeing that with the response from the customers.

Okay, that's very helpful. Thanks. Couple of questions on the Grupo sale. First, did you through any, get centralized corporate G&A, or corporate expenses that will go away when Grupo is out of the picture?

Anything was directly allocated, John, to Grupo, we've actually already in discontinued ops. We know that there was at the start of the year, some of the restatement costs and the like, but I think we've really called those out. So as much as we can already isolate has been fundamentally isolated. There will always be some bits and pieces. I wouldn't think as much that we haven't already --

And then, I understand it's not conclusion to financing but I'm wondering from a balance sheet perspective, if you could just give us a quick picture what you're going to do. What your debt, pension debt, so forth, and cash level might look like, depending upon whether you are able to file some of those (inaudible), do you as the provide the business company loans (inaudible) --

I couldn't -- I couldn't make it -- sorry, John, can you repeat that? The line is not very good that you're on.

I apologize. I'm in a train station. I'm wondering if you could give us some a quick picture of what the -- I guess the capital structure would look like, assuming you're able to either, number one, sign to replace the space for the financier for the intercompany loan or you're not. So what are the potential outcomes based on how the financing looks at the resolution of the sale?

I -- well, I suppose there is multiple scenarios in terms of the style, depending upon what's in the contract. So it gets hard to sort of give you an exact position until we complete the transaction.

Intercompany debt is payable back over three years on a 30, 40, 30 basis. And that's probably gives you the best insight. We get repaid over three years on a structured basis, and the rest is pretty much a moving part, which is really too early to tell until we can get closer -to the - once we get the antitrust approval, we'll be in a better position to understand it.

Okay and that's the 30, 40, 30 on the intercompany loan that they would pay you back?

Yes, that's correct.

Okay, thanks, very much.

Thanks, John.

(Operator Instructions)

Our next question is from Alexander Lach from Camden Asset Management.

My question has been answered. Thank you.

Thank you. Christian Hoffman, Thornburg. Your line is open.

Good morning. Can you just --

Good morning.

Can you talk about the rationale for the revolving credit facility and some of the key terms there?

At this stage, we haven't actually finalized the documentation, so we're still going through the terms, Christian, so it's too early to do that. The rationale behind it just gives us flexibility. We are very keen on expanding our Pawn businesses, both in the US and Mexico and that will just give us flexibility to take advantage of opportunities how as and when they come up.

Do I understand that correctly that you could use it to grow the loan book as opposed to actually buying stores, or is it both?

At the moment, we are pretty self-sufficient on the loan book, so it's probably -- it would be more -- it's more focused on the acquisition than the loan book, Christian.

Okay, fair enough. Thank you.

Thank you.

(Operator Instructions)

Our next question is from Charles Nabhan, Wells Fargo. Your line is open.

Good morning. It's pretty clear the business, the core Pawn business has generated some momentum based on the same-store sales growth this store -- this quarter. But I think as you alluded to, it's off a low base in the third quarter of 2015. So my question is, as we get into next year, when the comps become-- the year-over-year comps become a little more challenging, is your expectation that you'll continue to generate positive same-store growth? If so, how should we think about that trajectory as we get into 2017?

Thanks, Charles. I'll make it -- I'm not going to be able to provide the input for your model at this stage, but I would say here that the management objectives we always have is to have positive growth, which means that we're actually exceeding the needs of our customers. The internal targets we always have are around positive momentum in our business.

I think it's very hard for you to go to a business to actually model, say, P&L on a negative performance. I think it's fairly appropriate to suggest that we are looking for positive performance but the measure to that is an internal target that we don't disclose externally.

Okay. And as a follow-up, I'm not sure if you can comment on this or not but is the commitment for the facility contingent on the closing of the closing of the Grupo sale?

No, it's not.

Okay, thank you.

Thank you. Our next question is from Steve Wieczynski with Stifel. Your line is open, sir.

Hi, guys. Thanks for taking the call. Good quarter. The new facility that's in place, or should be in place, can you use that to repurchase convertible in the open market?

It's -- we haven't gone through the terms. It will be subject to the lender's approval should we do that. It should be actually -- I'm just speaking out loud but should be actually be using a senior facility to take out a junior facility. It would be up to -- I'm sure in the terms and conditions, it would be subject to lender's approval. I'm not saying, that which is either yes or a no, because we haven't gotten that far down the path, Steve.

Fair enough. Usually, it's a secured facility that lenders are complying because they forgot the collateral to back up the repurchase so your repurchase.

I understand that but, having worked with lenders over many years, I've never found them to be a group that thinks the same way.

Of course not, that's why they are lenders. (laughter) To that point, on that front and I'm sorry if I missed this, but what is the collateral package or has that been disclosed yet for the facility itself?

No. Not as yet, Steve. As we said, we've still -- we feel in the absent, we've got a commitment. We're still going through the terms and conditions.

Great, okay. Thanks very much.

Thanks for your interest.

Thank you. At this time, I see no other questions in queue. I'll turn it back to management for any closing remarks.

Thanks very much, Vince. I would like to thank everyone who dialed or logged in to the webcast for their participation. Mark Ashby and Jeff Christensen are available for follow-up questions later this morning. That concludes our call, and I'd just like to thank you once again for your interest in the Company, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.