EZCORP Inc (EZPW) 2016 Q4 法說會逐字稿

Welcome to the EZCORP fourth-quarter and full-year FY16 earnings conference call.

(Operator Instructions)

As a reminder, this call may be recorded.

I would now like to turn the conference over to Jeff Christensen, Vice President of Investor Relations for EZCORP. Please go ahead, Jeff.

Thank you and good morning, everyone. 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 on our website at investors.ezcorp.com.

Before we begin, 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 the 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 disclosed 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, everyone. It's a chilly day here in Austin but we will go through the financial year that has just completed. It's been a -- quite a long year and there's a bit of stuff to get through but we've got some pleasing messages which have come out of the year with very hard work.

On Slide 3, I'll touch on four of the messages that we do want to leave you with. And the first one is, we've continued the intense focus on meeting our customers desire for cash whenever they want it and wherever they want it. We've got some strong training programs that we have been executing behind us, particularly the mystery shop program where, on a quarterly basis, we have three phone calls and one video of the interaction our customers have with our staff.

That's important training to which we continue to utilize and learn from, which is leading to some strong positive metric growth in the Net Promoter Score as well. And we continue to invest in that towards that is bringing the desired results. The results have actually followed through on the second point that we are capturing market share and we are leading the market in PLO growth both in the US and Mexico.

Same-store PLO growth in the US is up 4% year on year and this is the fourth consecutive quarter of positive growth. And in Mexico, it is up 20% year on year and it's the ninth consecutive double-digit quarter.

But importantly, the same quarter last year was at 20% growth as well so we comped 20% on 20%, which is an exceptional outcome and it shows the focus and the strength of the management team in Mexico. We have a proven track record of pawn execution with strong operating leverage and I will deal with that particularly over the page.

But importantly in the last, we have a strong liquidity position, of which we finished the year. We've got a $66 million cash balance at year-end, $50 million of undrawn credit facility, and we anticipate receiving $45.7 million of the $89.8 million notes receivable from the Grupo Finmart sale, and Mark will touch on that a little bit later in the presentation.

So I turn to slide 4, and what we see here is the strength of the operating leverage in the business. We look at the total revenue is up 5%, net revenue is up 9%. Profit before tax is up a large number.

But if you look at the drop in the dollar, we increased our net revenue by $37 million, and $20 million of that actually dropped to the bottom line which means that $0.54 of every $1 in net revenue was finding its way to the bottom line. And that's a very strong leverage factor that we've been able to achieve.

We look down as the metrics below, the pawn loans outstanding, we talk about strong PSC growth of 4% and 22% for the US and Mexico, respectively. Inventories are up in the US and Mexico. US, particularly, we had a very low inventory balance last year. As many of you recall, we actually started moving our aged inventory quite rapidly and our sales growth profits have been up quite strongly up over that period of time.

On to slide 5, which is a consistent slide that we've shown, shows the path of execution and we've achieved quite a lot in a very short period of time. But as we look forward, we are looking to how we further invest in the fabric of our pawn businesses. The technology structure and point-of-sale system is a new point-of-sale system which we will start policy in the first quarter of next year, calendar year, so our second quarter, financial.

We are investing in the product and customer data for analytics. We have a lot of rich data that sits in a business that we are now starting to use and integrate into the point-of-sale system as well. Still early days but we are finding that, that's providing us with some great insight into how the customer is behaving and which products are actually starting to move quickly.

We are investing in process analysis and improvements. We don't have as much standardization through the stores as we would like to have. So we've embarked upon a complete analysis of process efficiencies. This is still in its early days but we can see there will be some easy wins out of the analysis that's already been undertaken.

Store refurbishment program. We haven't actually touched the stores for quite a period of time. That actually makes it somewhat hard for our customers and our staff to interact so we have to invest into the fabric of those and that's a three-year program which we will be running through.

And we're tracking towards the end corporate expense of $50 million in FY18 as we've always outlined and I'm sure Mark will touch on that just a little bit later on. So that's introduction on our path and now to Mark Ashby.

Thanks, Stuart. Good morning, everybody. We'll take you through a few financial slides, with the focus on the adjusted results so we are taking into account restructuring, restatement cost from last year that fell into FY16. Constant currency impacted and some non-cash impairment charges and there's a reconciliation of this in the rear of the deck.

As we have a look at the year, some of the points that Stuart has already touched on. We had PLO growth of 6.2%, merchandise gross profit, up [7.8%]. And that really did drive the net revenue up 9% to $438.2 million for the full year. US Pawn segment, you can see down at the bottom, there was good growth in US Pawn segment profit and Mexico Pawn segment profit, and Stuart has touched on some of the drivers of that in the focus in those areas.

As we look at the cost structure, the key forecast are really not representative of the run rate. This -- in the quarter, we increased the accrual for store operation incentives as well as corporate incentive and bonus plans. And the annual is probably a bit more meaningful to look at. As you look at the annual number, we are announcing a $2 million per quarter reduction that will annualize into next year so that's an $8 million number, coming off that $64 million as we come into FY17.

Overall, the underlying cost, excluding the changes to the SDI and long-term incentive plans were actually down a bit, $8 million and are offset by that amount. So as you look at the bottom line, for the year, is that profit before tax of $23 million on an adjusted basis compared to $3 million of last year.

If we look at the next page and look at the annual performance, especially the US Pawn business and these charts are available for the quarter a bit further into the pack as well. Again, just reinforcing the PLO growth, same-store up 4%; Pawn service charges up 6%; 4% on the same-store basis.

Looking at average PLO per store now at an industry-leading $288,000. Continued improvement in merchandise margin as we reduced our aged inventory even further and that will also apply to Mexico as there was substantial growth in merchandise margin by 300 basis points.

Consistent yields in PLO and inventory for last year also supported the growth. The expense growth really primarily, I touched on for each of the stores, there's a bonus pool that's been implemented and a strong incentive program for the year and we have seen the benefits of that. Also, the increase is driven by the cost of new stores that were acquired during the course of the year.

If we turn to the next page, which is Page 8, which is the Mexico Pawn, similar types of positive improvement. The PLO same-store at 20%. We're really compounding 20%, as Stuart mentioned last year, which is a very strong effort. This drove Pawn service charges up some 22%, with the -- and the monthly yield has been consistent over the year.

Similar to the United States, the merchandise margin had a very strong increase, up to 32% from 20% last year, and that really drove improvements in the inventory yield. Expense increase really driven to -- again, through store incentives, some new stores that were open during the year and other stores and the increase in the marketing, which we have seen the benefits from growth into the business.

If we turn to Page 9, Stuart touched on this earlier in his presentation, as you are aware, we touched on the -- we saw the Grupo Finmart business in September and it is a part of the deal, there's a notes receivable to EZCORP, and that -- they were created to the tune of $89.8 million. All the commitment -- committed payments to date have been received, with some $6.4 million. And during 2017, we expect $45.7 million with the cash to come into the business.

If you add that incoming liquidity to our opening cash position for the year of $66 million plus the $50 million undrawn debt facility, that gives us a very positive framework to provide investment and supporting investment back into the business.

One question that does tend to pop up is what's the exchange in exposure? At the bottom left-hand side, we break out what the denominations are for the notes and there is very little FX exposure back into the United States. So on that note, I'll pass back to Stuart.

Thanks Mark. On Slide 10, what we have outlined there is exactly how we are focused on the market leadership position that we are aspiring to. The important thing here that you've seen that 99% of our of our revenue is actually coming out of pawn operations. So the investments that Mark is talking about is actually going (inaudible) into the Pawn business.

There are eight items there that we focused on and a couple of them I've touched on already. So I think the things that we are ready are focusing on is around the people, which we look at the incentives training coach and the mentoring. We've increased the number of district managers in the field by three to four people. We have greater depth at the district VP level and that has allowed us to actually have more people in the field looking and training the people on the ground.

The discipline in pawn loan values is quite critical. If we -- as we've seen in the past, the discipline actually makes us successful and we've seen with the new point-of-sales system coming in, that will allow us to have very tight discipline around the pricing that happens at the store level. The store acquisitions and the mobile openings, as we've said before, we are looking at the de novo openings in Mexico in particular.

And with store acquisitions, we have looked at many potential acquisitions over the last three to six months and a number of them haven't actually met our hurdles, so we have backed away from that and we will continue to exercise capital discipline should any further store acquisitions come across our desk.

On to slide 11, this is a summary of where we are. The industry is an attractive one. It's a large industry. It's mature but it's highly fragmented. And with that, provides opportunities for us and as -- we've seen that through the positive PLO growth that we are achieving.

It's a fully collateralized loan portfolio and the recourse to the customer doesn't exist. So it's a very, very good product for the customer base that we do service. From an EZCORP perspective, we've now established a very strong track record of execution as we've talked about.

Four consecutive quarters of positive PLO growth in the US and nine consecutive quarters of positive PLO growth in Mexico. We have also done what we've said. We said we would the shut the US financial services down and we did that on time, ahead of budget. We also completed the sale of Grupo Finmart, as we had announced to the market on time.

I talked about the focus on customer leadership, and I can't reiterate how much this is driving the results that we are seeing. We are relentless on ensuring that we are meeting the needs of our customers, and the results we are seeing ensure that that does happen.

The last thing I would say is that we are actually very disciplined. We have improved our liquidity position. We've got strong leverage, and we continue to exercise with caution the way we allocate capital to the shorter returns and meet the hurdles that we do have.

So with that overview, we will now turn it over to questions.

(Operator Instructions)

Mike Del Grosso -- I'm sorry. Bill Armstrong with CL King & Associates.

Nice quarter. I'd like to talk about the retail margins in the fourth quarter. Roughly flat in the US and up big in Mexico. In Mexico, can you remind us, were margins depressed in any way? Because of clearance sales last year? And what other drivers might there have been? And then in the US, are we at maybe at level of margins that are a steady run rate going forward?

Thanks, Bill. In Mexico, we actually sold off one of our aged inventory towards -- in the last quarter particularly, which caused the compression in that margin. And we finished the year with 4% aged inventory. We are down to 3% this year which means that we can capture some of the margin. So we had a healthier inventory position coming to this year, which is reflected through that Mexican margin.

With the US, we did offload a fair amount of aged inventory also but we think the margins -- we are pretty much hitting around that level if we can keep it to that 36% to 38% level, we'd be doing pretty well.

Okay, got it. And then on the administrative expenses, obviously, down year over year but they were up versus Q3 on a sequential basis. And I think you mentioned something in your opening comments. I was wondering if you could just expand on what drove that and what we should look at as we go into the new fiscal year.

It is Mark here, Bill. There was a couple of drivers in the fourth quarter, the -- particularly the bonus impact in the -- if you're talking administrative expenses in the stores. If you are talking administrative expenses in what we call corporate [admin] you have a similar effect where we increased our [full] quite substantially. It's actually across the business. So it does tend to be a bit lumpy from that perspective.

Hence, I'm trying to give an indication when we look at the corporate numbers coming forward rather than coming down and by that $2 million a quarter, over the course of the year so off that $64 million type base. And there was -- outside of the -- there was obviously, we took an equity loss on the CCV business of about $5.8 million, I think it was or so during the last quarter. So that actually reflects in some of the numbers as well.

Okay. So if I understand that then, we had $64 million in the year just ended, and so would you be targeting around $56 million in that neighborhood in FY17? In other words, an $8 million decrease?

That's a run rate we're expecting at the moment, Bill.

Okay. Okay. Great. Thank you. I will get back in queue.

Mike Del Grosso with Jefferies.

Quick question actually on a similar line. On the store OpEx, you mentioned the store efficiency program you are planning on running out and wanted to ask about the trajectory as we head into next year. Are there any upfront investments associated with that and how do we think about that?

There's only -- most of the upfront investments will be through the capital expenditure. As I mentioned, the IT install refurbishes will be capital expenditure. We have -- there is been a slight increase in staffing levels through the stores. So we're probably more focused on ensuring that the corporate expenses are minimized while we continue to invest in the front.

So we don't want to -- as far as choke the stores off by issuing cost regime -- we are actually in a -- we're here to serve the customers. And in some of our stores, we actually have run the staffing down to lower levels so we have already increased this. I don't think we are going to see too many more -- too much more in the way of increases in store operating expenses. So I would expect it to be pretty much flat.

Got it. Thank you.

Chris Smith with GLG Partners.

You talked about your healthy liquidity situation right now. Just wondered if you can maybe highlight how you will be looking to use that cash. Will it be in terms of rolling out new stores? Again, you talked about you've looked at several potentials but not really seen anything that is that attractive. Will you be able to give any guidance on the number of stores that you're looking to add this coming year?

No -- it all depends if the opportunity comes up. That is the advantage of having liquidity is that we have the opportunity to transact in some form of size if something comes in, but having been through two years of, I suppose [tough] liquidity conditions, I am more than happy to actually be in a very liquid position and not transact if something doesn't meet our hurdle.

We want to be fairly conservative, Chris. We don't want to jump just to pursue stores for the sake of pursuing stores, which can get us into trouble and I think we've reiterated many times, you just have to continue to have the discipline that perhaps we haven't had in the past and make sure we have a very liquid balance sheet.

Okay. In terms of cash use, you don't really have anything else in mind in terms of -- you are going to remain focused now on the Pawn business?

Yes, that's correct. (multiple speakers)

It is Mark here. Just in terms of our CapEx spend, coming into the year, we touched on the store refurbishment program. And so we are kicking that off, so in the CapEx expectation over the next three years now, probably about $55 million but that $23 million or so could begin in FY16, just depending upon how quickly we kick the refurb program off. But that's really up from about $13 million or $14 million in the last year.

Okay, great. Thanks and just a follow-up question. Now you've sold the Grupo business and the business overall is a lot cleaner. Are you able to give any guidance on where you see revenue, EBITDA checking out this year?

No, no, we don't give guidance.

Okay. Okay. No problem. That's all I have. Thank you very much.

Gregg Hillman with First Wilshire Securities.

Two questions. First of all, based on some of your recent results, do you have reason to change your three-year plan in any ways in terms of expense reductions or other items in your three-year plan? And then number two, the whole question of the impact of you're taking away much of the payday loan business in the pawn industry. What is the current state of the industry for states that have already shut down payday loan businesses for, like, Maryland in like the last 25 years? Have you reviewed that evidence and what does that tell us what would happen?

On the expense reductions, we are actually -- they're locked, so we're not going to change those. Once we get to the end of the three years, we'll obviously -- well probably at the end of two, we will start reviewing where we hit from there so there is no changes to that.

The number of states that have actually taken payday out, we actually haven't been. Say Maryland, we are not there. We're trying to -- we are looking at it at the moment. We are watching with interest as to what is happening with the transition going through at the moment. Because we're not quite sure how the industry is going to play out so I think everyone on both sides, be it pawn or payday, are watching with interest to see what are the first moves around discussions with the CFPB and how the Republicans look at these industries.

But hasn't this already been played out several times?

Yes, I don't have enough information, Gregg, to be honest to actually answer that with a degree of accuracy.

Okay. And getting back to the three-year plan, so basically the three-year plan is, more or less on track and on time and going as you outlined it when you first came.

Yes, that's correct.

Okay, great. Thanks.

Thanks, Gregg.

Eugene Fox with Cardinal Capital Management.

So just two questions. As it relates to this bonus expense, that we would have seen that in both the corporate line as well as the operation expenses. Would I assume the order of magnitude would have been similar between the two?

No. I think corporate was a bit higher.

Okay. And it would have all been in Q4, but conceptually, we should think about it as spread -- it is for performance over the year.

Correct.

Got it. Second question, the cash converter stock that you took the write-down on, how should we think -- how are you thinking about that strategically?

We are looking at it with interest. We have a much higher entry price. We think the Company has a lot more potential than perhaps where it's reflected in the share price but it's been going through a bit of a tough time. We would like to try and see where value can be restored into the stock price and then consider what should be done there.

So at the moment, it's pretty much, let's see if we can get some of the value back on that stock. It's in a good -- it seems to be in a pretty good industry. It's got a great brand, and we review it every year as to what is happening, but at the moment, it is a watch and [breathe].

Okay, thank you.

Todd Meadow with Nomura.

Congratulations on a great quarter, and continued execution on your plan. Just wanted to ask a question of the notes receivable. So it's at the bottom of Slide 9, down at the footnote. The percentages of notes secured. Can you provide a little bit of detail on that?

Yes. There is -- some of the notes are actually secured against some of the loan portfolio that Grupo did not have. So it's a direct security over those loans.

Got it. Do you have --

(multiple speakers) [Collateral] is a better way to describe it, though.

Is there -- do you have a reserve account for uncollectibility of that at all or --?

It is over collateralized, so by default, the reserve sits within the over collateralization.

Got it. Thank you.

Thank you. I'm showing no further questions. I would now like to turn the call back over to Stuart Grimshaw for any further remarks.

Thanks very much and thanks for dialing in, or if you logged into the webcast, thanks for listening to us. Mark Ashby and Jeff Christensen are available for follow-up questions later this day. So this concludes the call and thanks for everyone dialing in. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.