EZCORP Inc (EZPW) 2017 Q1 法說會逐字稿

Good morning, my name is Scott, and I will be your conference Operator today. At this time, I would like to welcome everyone to the EZCORP first-quarter FY17 earnings conference call.

(Operator Instructions)

Jeff Christensen, Vice President, Investor Relations, you may begin your conference.

Thank you, Operator 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 viewing or download from 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 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 turn the call over to Mr. Stuart Grimshaw. Stuart.

Thanks, Jeff, good morning and welcome everyone to our first-quarter results.

This quarter has seen a continuation of our focus on meeting our customers' desire for cash, with strong results being posted in the US and continuation of a truly outstanding performance from our Mexico business. As Joe Rotunda would say, it all starts with the PLO. If you turn to slide 3, we can see that we've continued to capture market share and lead the market in PLO growth in both the US and Mexico, with total PLO up 5% to $165 million, US PLO up 4%, and Mexico PLO up 17%.

If that continues, the impressive track record of positive results we've seen with five consecutive quarters in the US of positive PLO growth, with the last quarter being 3% and 10 consecutive double-digit quarters in Mexico with 14% and when you consider that's compounding on double-digits, that really is quite an extraordinary result. This quarter we've continued to deliver profitable growth, total revenues up 6%, profit before tax up 12%. EBITDA was flat, excluding the impact of other international segments.

As we've always said, we will continue to invest into our pawn operations and we have used the corporate expense savings to reinvest into the stores with corporate expense savings of 13% which suggests we're on track for the $50 million we outlined in FY18. And we've had significant investment in field leadership, notably adding 224 new team members during our peak sales season and this will be used to offset some of the staff turnover that we will incur during the course of the year.

We do continue to upgrade the technology and the point-of-sale system which we will start rolling out in March and April of this year.

So with that summary, I'll pass over to Mark Ashby.

Thanks Stuart, and good morning, everybody.

Just turning to page 4 of the presentation, this shows the GAAP results for the first quarter. I will summarize a couple highlights from this and then spend a bit more time on the adjusted results. Overall total revenue was up 3% reflecting, as Stuart mentioned, the focus on serving our customers' need for cash. Total revenue being up 3%, US Pawn up 3% and Mexico up 4%, but on a constant currency basis up 26%.

Net revenue was flat for the quarter, but as you will see it is actually up 2% on an adjusted basis. Corporate expenses on a GAAP basis were down 30%, but on an operational basis were down 13% as Stuart mentioned, really reflecting some restructuring and restatement costs that were incurred in the first quarter of last year.

EBITDA growth of 33% we can see on the chart. And also reduction in interest expense reflecting the interest income from the sale of Grupo. We have the notes receivable where we receive interest income more than offsetting the $50 million facility that we entered into with Fortress last financial year. This all led to an increase in continuing net income of $5 million for the quarter.

If you turn to page 5, this is the adjusted results reflecting constant currency end and other discrete items which are reconciled in the back of the pack. There's a total revenue growth of 6%, US Pawn at 3%, Mexico at 26%, net revenue growth of 2% for the quarter. The gross margin in US Pawn was 36.5%, which is consistent with our target range.

We had a 6% increase in operations expense. As Stuart mentioned earlier reflecting the investment in the store team members and the support structure, as well as the commencement of a preventative maintenance program as part of their reinvestment into stores. This cost increase shall abate over the course of the year.

Other expenses reflect mainly the lower income flow through our equity accounting of the CCB investment, all leading to an EBITDA of -- we're under at minus 3% compared to last year. Depreciation, amortization is down on last year by 14%, giving us EBIT growth of 2% for the quarter. And after interest expense [proper] -- before tax was up 12% to $13.4 million.

If you turn to page 6, looking at the US Pawn business, we have continued growth in total PLO of 4%, driving PSC growth of 4% and the same-store PLO growing 3% and the same-store PSC also up 3%. Sales were up 3% with gross profit at 36.5%, really reflecting a more mature inventory profile and, as I mentioned earlier, within our target range.

The investment in the field team and the commencement of the preventative maintenance program did drive up store expenses for the quarter. Our inventory growth has been consistent with the PLO growth over the last 12 months. And overall, there was reduction in profit before tax for the quarter of 9% to $27 million for US Pawn.

If you turn to page 7, the Mexico Pawn business. This continued strength in Mexico with PLO up 17%, 14% on a same-store basis. Pawn service charges up 19% and 16% on a same-store basis. Net revenue was up 18% and leveraging the expense growth of only 2% drove a 76% increase in profit before tax. We continue to invest in the Mexico Pawn business and anticipate opening approximately 10 stores by the end of the fiscal year.

Just also broadly just to add, there was some riots that took place in Mexico which affected around 10 of our stores, we are still working through. Understand what the net impact will be as we work through it with our insurers, but we don't expect it to be material.

And based upon that summary, I will hand back to Stuart.

Thanks, Mark. Turning to page 8.

While we remain focused on meeting the customers' desire for cash today, we know that we can improve the [buy], investing in the pawn fundamentals.

What we've outlined with this slide are a number of initiatives that we are undertaking continuously while we support the drive for future growth. In terms of refining the incentives coupled with the training and coaching as Mark has outlined, we've invested quite heavily in running the store staff, but also the coaching and mentoring that sits around the staff with two additional divisional vice presidents, six district managers and nine human resource managers out in the field. We believe with this support, we're able to support the team's growth initiatives that we have.

We are looking at the product and customer data and with the analytics that comes with that to better refine how we understand our customers' desire for cash and when and where they need it. Technology was mentioned with the POS system. Mark has alluded to the store refurbishment program which we will be undertaken over the next three years.

Process analysis and improvements -- we're embarking on a number of programs in that space, which is all designed to try and ensure that we're not distracted at the store level from serving our customers with non-customer facing tasks, which sometimes interfere with the service standards we aspire to.

We are looking at the dynamic pricing mechanism through the inventory that we do hold.

Our liquidity position remains strong with $64 million cash on the balance sheet and $50 million in undrawn credit line. And notwithstanding strong liquidity position, we are quite disciplined the way we will utilize that liquidity and we disciplined in store acquisitions and certainly with the de novo openings as we've seen in Mexico.

Finally, turning to slide 9, which is just a bit of a summary as to where we are. I'm sure a number of you know the attractive industry dynamics, so I won't spend any time with that. But, I will reiterate we have established a strong track record of execution. Five consecutive quarters of same-store PLO growth in the US. 10 consecutive quarters double-digit store -- same-store PLO in Mexico. Corporate expenses as we mentioned are on track for $50 million, and we've completed the sale of Grupo Finmart and closure of US Financial Services Business on time and on budget.

We remain intensely focused on customer leadership. We have a number of initiatives in play, as a mentioned previously, that will assist us to further enhance our capabilities in this area, supplemented with the increase in support numbers around our stores to ensure that we can execute as we do. And while we continue to grow it will be in a disciplined way. Acquisitions will be assessed rigorously and in a disciplined manner. The 10 de novo stores we are opening in Mexico, we believe they will be strong adjuncts to our business down there. And the liquidity position gives us a position of strength from which to operate in.

With that, I would like to pass it back and open it up for questions.

(Operator Instructions)

John Hecht with Jefferies, your line is open.

Hey, guys. Thanks very much for answering my questions. First question, you guys have experienced, over the past few quarters, same-store sale expansion. It's slowing a little bit, industry trends have been challenged.

Maybe, can you give us a little bit more color on what you are seeing in terms of new customer intake? What are you seeing at the recurring customer level? Maybe give us a little bit more color on end-market trends?

Yes, we actually think the -- the market's actually reasonably sound. We're still seeing good growth from our customers, good demand for cash. We are posting positive growth year on year. We've had some strong growth, so I think in this environment getting in that 3% to 5% growth that we've seen in our book, I think that's a pretty good outcome.

I know there has been some comments on a challenging market but we believe that with the processes we have in place and being close to our customer, we are meeting their desire and need for cash and we are seeing that through the results both in Mexico and here. I think in Mexico we have seen an influx of cash from the repatriations that have come across the borders as offered the daily peso. We've seen some strength in sales but with the increased gasoline prices coming in we believe that will actually change we'll see our customers have a desire for cash with the change in their disposable income.

With Mexico, I think we continue with that. And with the US, all the initiatives that we're doing, certainly the training, understanding the customer better, we think we are in a very good position to continue what we have seen in the past.

Okay. And then you discussed a little bit of organic expansion in your valuating acquisition opportunities. There just hasn't been a ton of acquisitions domestically or in Mexico lately. Maybe give us a sense of what you see as market trends and market characteristics for acquisition multiples?

Yes, I think there are always sellers. And there's always buyers. It's just a thing called a gap between expectations which restricts execution. So what we are seeing is we believe that there is, and we are seeing there is an appetite for opportunities to acquire, but as we see, we are disciplined and we want transacted levels which we believe are uneconomic for us to make a return for shareholders.

Mexico is a little bit different as there's a mix between small format and large format stores, so it isn't as cut and dry as perhaps it looks in the US. But we are still looking.

John, we've probably in the past had a track record where capital has not been managed as tightly as we are now and we are very cognizant of ensuring we return shareholder value.

Okay. Then I think you guys mentioned a little bit of disruption impacting Mexico. Could you just give us a little bit more color on that?

Yes, the gasoline prices jumped 20% about three weeks ago and there's a lot of rioting, particularly in District Federale in Mexico City. We had about eight to 10 of our stores impacted as a result of that with substantial looting and I think that was a number of the industry participants had similar experiences.

And that basically -- the people ransacked our stores and took everything out of it. So as Mark said, we are working with the insurers to understand what has been there position on that. It was unfortunate to have such unrest and the gasoline prices went up again but we did not have the same impact on our stores.

Okay. Thank you. And the final is, what's the proper tax rate to account for you guys for this coming year here?

Mid-30%s, John, is what we are expecting to finalize.

Okay. Thanks so much, guys.

Bill Armstrong, with CL King & Associates. Your line is open.

Good morning, gentlemen. Nice job, again, on the top line.

My question is on the retail margins. You had good top-line growth and you've obviously worked hard and had success in reducing your aged inventory, so just curious what drove the 300 to 400 basis point decline in retail margins in the US and Mexico?

Thanks, Bill, it is Mark here.

What we had, I suppose the reference point is really last year where we were at 40% margin and the margin of the first quarter last year was very high, predominantly because we had cleaned out pretty much all the old inventory at that point. So our inventory profile at that point was probably more forward weighted in terms of aging. So we have now, we have a more normalized profile.

If you go back over the last few quarters you will see we've been sitting in a range of around that 35% to 38% and that's where we think that we will settle. So our aged inventory's still pretty tight, I just think we've got a more normalized profile or more mature inventory profile in this particular point in time as compared to where we were 12 months ago.

Okay, I did recall that last year's margins were high, so the levels from last year really were unsustainable and were more, at a more normalized level now, is that fair to say?

Yes, I think that's fair to say. Bill, this business is really about balance.

Sometimes if we try to overshoot on a margin, it can mean that we're under-landing on the PLO, so getting the balance right is very important. That's why we think the margin at 35% to 38% allows us to actually continue with the PLO growth. Whereas if we did not, I think we would struggle to get the growth rates that we could on the PLO.

I see. Okay, thank you.

David Diamond, with Rovida. Your line is open.

Yes, hi, good morning. I was interested in letting us know how investors can gauge the impact of these new self-help measures, the improvements in technology and point of sale.

How should we be -- how should we follow this and what time frame should we expect in terms of improvement? I'm just wondering from our perspective, as we follow the Company, what are some of the goal posts we should look for and what you think the impact can be to your business line?

Well, the point-of-sales system should be fully rolled out by August, September. Like any roll out, you've go to be very careful that we don't go too far to forget the training that's required, so a risk mitigant we have is we're going to parallel park both point-of-sale systems so that we don't put risk into the business.

So on the point of sale, it will probably be -- start emerging towards the next financial year onwards. All the improvements that we are looking for, David, are actually around productivity. Can we actually get better at serving our customers more quickly and understand them better? Which should mean that we should have a much more efficient system, so it is more an operating leverage-type outcome. If we can reduce cost and increase the top line, that's the ultimate goal from any technology solution that would come through and that's what we'd be aiming for.

We know that, for instance, the point-of-sale system, we have not really changed our point-of-sale system for 15 years so we know that it is a non-current type system, which is potentially holding us back with too many clicks to get through to the end of the transaction. So a lot of it is about efficiency and productivity. You will see those appear both through the cost line as well as through the revenue line.

Okay, great and one last question on Mexico. How is the new -- you mentioned the gasoline price hikes causing some rioting, but what is your assessment as you think of this new Trump craziness that's going on in terms of your consumer in Mexico and their demand for cash? What trends have you have seen in the last couple of months as the political situation unfolds over here?

There's a lot of uncertainty down in Mexico, and it was in the run-up to the elections as well with some of the rhetoric that was going on.

As I mentioned previously with the rhetoric cause -- it's the valuation of the peso and that increased the repatriations into Mexico. So we saw a number of our consumers have more cash in their hand than we have seen for a while so the sales were relatively strong.

We think the increase in the gasoline prices will probably take some of the cash out of the hand of the consumer and provide opportunities for us to link to the consumer. It is it still a bit early to see. There's another hike that's just come through. So we will probably know more in the next 30 or 60 days as our customers typically take that period of time to adjust to such pricing changes that affect their wallet. So we think there's some mildly positive attributes to what is happening, but it's a fairly uncertain market down there at the moment. We will just have to play a wait and see game, but we think there might be some positives out of it.

Great, thanks very much. Have a good day.

(Operator Instructions)

Gregg Hillman, with First Wilshire Securities. Your line is open.

Yes, good morning. Could you talk about the payments from Grupo? They are supposed to be due in 2017. Is there any schedule or is any additional cash coming in on that? Could you talk about that a little bit, please?

Hi, Gregg, it is Stuart here. We are expecting through the 2017 year, expecting about $42.5 million in principal payments to come in and $3.2 million in interest payments over the next 12 months.

Okay. And how much is actually - how much has come in so far since the last time we talked?

In the last quarter?

Okay. Great, in the quarter that you are reporting today?

Yes.

Okay. Then you expect that $42 million (inaudible) and 3.4% in interest over the next 12 months?

Yes, that's correct, Gregg.

Okay. Got it, thanks.

Christian Hoffman with Thornburg. Your line is open.

Good morning. Just a clarification for me on the EBITDA flags, including the impact of other Internationals. Can you remind me what business that refers to and how that impacts results going forward?

We've got a 32% equity hold in Cash Converters International in Australia, and we equity account their profit. And the equity account of profit this year was down on last year for the first quarter. So that's what flows through in that line. That's the bulk of it.

Is that likely (inaudible) going forward or is it just, who knows? It depends on the results?

It depends on their results, Christian. We are more a recipient of that outcome.

Got it. And can you remind me of seasonality in the business? Particularly what I want to back into is, there's a lot of moving parts in the financials over the last couple years. If I take one key results and annualize them, is that a decent snapshot of the business?

No, because you have currency impact in there as well. So it's not only the business but the currency impact.

So for this year, it will be probably more towards -- the first half will probably have a higher run rate than the second half. So you will see a gradual slide. And some of the regulatory impacts that have occurred in Australia will actually slow the earnings stream more towards the second half of the year.

I see. If we annualize, we're at [80/80] EBITDA. I think last year, you reported 65? Is that? Did I remember that?

Are you talking about cash converters are you talking about -- ?

I'm talking about the whole business now.

Typically, the first half of the year is sales season and the second half is the loan. We pick up on the loan, so you will have a bit more of a skew towards the first half with a bit more of a slowing in the second half.

Is 60 to 100 EBITDA a very wide bandwidth for that now?

Christian, all we can do is point you to consensus, we don't give guidance in these -- you can pick up the analyst results and you can average that out. And that's the consensus and we don't comment any further than that.

Okay, thank you.

Gregg Hillman, with First Wilshire. Your line is open.

Yes, just a question about cash converters. Basically, the question is, are things getting better there? And are you currently the Chairman of that organization? Chairman of the Board?

Gregg, thanks for reinforcing that with me, but yes, I am the Chairman of that. It is -- what's happening in Australia with -- like the payday lendings not too similar to what's happening in all developed countries. They are they putting some constraints on that which we will see a slowing in the income as they move away from the short-term lending more into the medium-term lending. So, I think over the period of time it should improve, but in the short term they will have a slowdown while they transition their book.

Okay. Okay. Thank you.

There are no further questions at this time. I will turn the call back over to the presenters.

Thanks, operator. I would like to thank everyone who dialed in or logged into the webcast for their participation today. Mark and Jeff are around for questions later on, so this concludes our call. Thanks for dialing in for the interest in the Company and have a great day.

This concludes today's conference call. You may now disconnect.