EZCORP Inc (EZPW) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EZCORP's Third Quarter 2017 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. Welcome to EZCORP's Third Quarter Fiscal 2017 Earnings Conference Call. 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 as well as the presentation slides contain certain forward-looking statements including 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 good morning, everyone, and thanks very much for joining us this morning, in particular, welcome to Danny Chism, who joined. This is his first results, so if you go easy on the questions, I'm sure he'll appreciate that.

If I turn to Slide 3, the third quarter continued the momentum that we've established from another great result from our Mexican operations as well as a strong contribution from U.S. Pawn. It's been established within the control expense environment related to EPS bringing up 100% in profit before tax up 133% to $8.9 million. Well, Danny will go into more details with pointing out a few notable items. The U.S. recorded seventh consecutive quarter of positive PLO growth of 4%, which compounded from a 10% same time last year and is coupled with a merchandise margin of 37%, which was consistent with same time last year. I'll also note that we've got a market-leading PLO per store of $289,000. And as we've always said, PLO is the lead into how this organization works, so we focus heavily on the PLO growth and it's pleasing to see we continue to exceed in that area. Mexico also recorded 12th consecutive quarter of PLO growth for same store up 13%, supported by merchandise margin of 33%. And you'll see it same time last year Mexico had a 19% PLO growth and the strength of that business continues to please us, and we're very happy with the management team, what they've been able to deliver over the past 3 years. As a result of the initiatives that have been run, U.S.

Pawn net profit before tax was up 18% and Mexico is up a strong 56%. This was all done within the controlled expense environment. If you look across all the businesses, be the corporate, be the operations, we've been able to manage expenses to a very low level of single-digit growth, while being able to drive some very strong PLO growth rates and revenue rates out of the 2 businesses. While we're doing that, we've strengthened the balance sheet. As you will see, the cash balances at $114 million is a very strong position to be in and we also strengthened further post quarter end with a convertible note issuance. You will see that we still continue to invest in the customer experience with product and customer analytics as well as the store environment buying de novos in Mexico with 4 opened last quarter and the store refurb program, which is better experience for our customers as well as our staff.

So turning to Slide 4. We're about 2 years into the 3-year transformation and it's interesting to see the way the activities changed over that period of time. We've spent the first 18 months really fixing the company and getting a solid base from which to grow, and we're now firmly in the building for growth phase. As you'll see through the initiatives we have outlined on the right with, as I mentioned before, the de novo store openings in Mexico, we've opened 6 with the expectation we'll open another 4 in the final quarter of this financial year. The POS system implementation continues to roll forward. Products and customer analytics, the store refurbishment program which we've talked, which we anticipate to do 75 stores per annum. We'll continue to redefine the incentive programs at the store level to drive better execution and alignment.

When we look at the business and how we're moving it forward, we continue to evaluate the organic opportunities we have. And one of the things we're seeing is we still see potential around the in-store execution of the programs we're running. And we'll continue to focus on the operational excellence, which we're developing on a consistent basis as you've seen through the quarterly results. With that quick overview, I'll pass across to Danny.

Thanks, Stewart. Good morning, everyone. It's great to be back with EZCORP, and I'm excited to share with you the results for the third quarter. First I did want to mention I'll be at CL King investor conference in New York City on September 14 with Jeff Christensen. You can contact CL King or Jeff for details..

Now onto the results. I'll start with a consolidated GAAP results on Slide 5 of the deck. As Stuart mentioned, it was another strong quarter. EPS doubled to $0.10 per share and profit before tax more than doubled to $8.9 million on strong growth in both the U.S. and Mexico. The primary driver of the net revenue growth is the increase in pawn loans outstanding or PLO. Both segments delivered market-leading same-store PLO growth, up 4% in the U.S. and 13% in Mexico. On a blended basis, same-store pawn loan growth was 5%. We managed our expense structure to leverage the 5% growth in net revenue into a 133% improvement in profit before tax. Slide 6 presents our results on a normalized basis, adjusting for constant currency and discrete items. These are reconciled at the back of the presentation. As the trends are similar to our U.S. GAAP results, I'll highlight just a few items. On an adjusted basis, net revenue increased 6% with U.S. and Mexico pawn segment net revenue up 5% and 15%, respectively. At 36%, our consolidated merchandise sales margin remained consistent with the prior year quarter and within our range of 35% to 38% target. We again drove significant savings in corporate expenses down 9% this quarter and on track to be under $50 million in fiscal year '18. Net interest expense was slightly improved due to the interest income on promissory notes associated with Grupo Finmart sales. And we expect our effective tax rate in Q4 will continue be in the high 30s similar to our year-to-date rate. Stuart mentioned our track record of execution since the announcement of our 3-year strategic plan in 2015.

As you can see on Slide 7, we've delivered 7 consecutive quarters of market-leading same-store pawn loan growth in the U.S. We believe we've organically grown our customer base and taken market share. The 4% same-store PLO growth is compounded on top of 10% growth this quarter last year. That's great growth in a mature U.S. market and 27 percentage points higher than the competition's combined results over the same time frame. PLO is the most influential driver of revenue and profitability for the company. It drives both pawn service charges and sales growth profit. Looking at Slide 8, both were up 5% in the U.S. on a same-store basis. In January of this year, we modified our store incentive compensation program to be based on store contribution rather than just net revenue. Along with improved pricing and lending guidance, that change helped deliver improved PLO, net revenue and a renewed focus on store-level expense management. The net effect of those efforts was a 5% increase in net revenue and an 18% increase in profit before tax to $24 million.

Ongoing initiatives to improve the customer experience include enhanced data analytics and an update to our point-of-sale system. These changes will help us streamline the transaction and allocate greater loan values to our better customers, improving our ability to meet their need for cash. We expect rollout of the upgraded POS to be substantially complete by the end of the calendar year. Looking at the chart on Slide 9, U.S. Pawn's operating expenses improved from last quarter, as our investments in the field leadership and customer-facing team have been successfully absorbed driving greater revenues. We expect U.S. and consolidated operations expense in the second half of this fiscal year to be inside the same period of last year. The well-controlled operating expenses and recent enhancements in store-level incentive compensation helped to accelerate profit growth. We've shown consistent improvement during the year with profit before tax moving from a 9% decline in the first quarter to just about flat in the second quarter to an 18% improvement this quarter. The changes management put in place in the first quarter are clearly having the intended effects.

Moving on to the Mexico Pawn segment results on a constant currency basis, you can turn to Slide 10. This segment delivered another outstanding performance in PLO, net revenue and profit. The chart on the left shows the continued same-store pawn loan growth in Mexico. The 12 consecutive quarters of double-digit increases represent a fantastic achievement. Our 13% same-store PLO growth this quarter is compounded on top of 19% this quarter last year as Stuart did mention. Combined that's 10 percentage points higher than the competition's reported results over the same time period. This segment continues to deliver very strong growth and opportunity. This is particularly pleasing as percentage growth rates are calculated on an ever-increasing base and per store loan balances that are approaching parity with our primary competitor.

On Slide 11, you can see a 16% growth in total Mexico PLO drove similar increases in pawn service charges and sales growth profit. Similar to consolidated U.S. segment results, the profit before tax increase was significantly higher in Mexico than its net revenue growth through (inaudible) leverage of the expense structure. The segment delivered a 15% increase in net revenue and a 56% improvement in profit before tax to $6 million. Our Mexico segment is a terrific business with a low-cost base, and we're pleased with the results on new stores. As Stuart mentioned, we've opened 6 new stores year-to-date and expect to open 4 more by the end of September. We believe Latin America provides some attractive opportunities through organic growth, new store development and through acquisition opportunities. The chart on Slide 12 gives a quick visual of the earnings growth in Mexico with profit before tax up from $1.1 million in the same quarter of 2015 to $3.5 million in 2016 and $5.5 million in the current quarter. As you can see on Slide 13, we continue to strengthen our balance sheet and liquidity position providing greater flexibility to seize opportunities as they arise. The unrestricted cash balance of $114 million at quarter end was almost 3x higher than this point last year. We continue to generate cash flow from operations and are receiving regular payments on promissory notes associated with the Grupo Finmart sale, including a $6.1 million payment received in July, $5.2 million of which was an early repayment. Net debt to adjusted EBITDA was 2.5x at June 30. In early July, we issued $143.8 million of convertible notes due 2024 as presented on Slide 14. This further strengthened our balance sheet, significantly extended the debt maturity profile for the company at a very attractive fixed coupon of 2.875% and is unsecured. We received about $140 million net proceeds. We used just under $52 million of that to retire the secured debt facility, which carried a substantially higher cost of funds. $35 million was used to repurchase existing cash convertible notes due 2019 reducing their outstanding balance to $195 million. And the remaining $54 million increased our cash balance providing funding for general corporate purposes and potential acquisitions. We expect to record a debt extinguishment charge of about $5 million in our fourth quarter related to these transactions. We'll pay $4.1 million cash interest annually on the new convertible debt, that's $2.2 million less than the cash interest on just $85 million dollars that was retired, plus it provides $54 million of additional liquidity. With that, I hand the call back over to Stuart.

Thanks, Danny. Turning to Slide 15, which is a slide everyone has seen a few times before, but it does represent what we focus on pretty much on a daily basis. And I'll just pull a few things up out of here. We continue to look closely at products and customer data. This provides a lot of historic analysis, but doesn't take away the judgment that happens at the store level, provides more information for the people in the stores who have to deal both with the customers, and if you look at below, the optimizing loan value gives us a better indication of how the pricing of the product should work. Those two we find as being quite critical to as we move into the next generation of how we get the excellence at the store level. Providing relevant information at the time of dealing with the customer we think is quite critical. And both of these will be linked into the point-of-sale system, which we continue to roll out at this point of time. We continue to look at process analysis and improvements. There's still a long way to go in being more efficient at the store level. Even in the pricing, we're finding ways for improving the pricing at store level, and we're rolling out some new programs for both general merchandise and jewelry, which we believe will assist in continuing to deliver the strong margins that we have been seeing. The other thing that we're finding with some of the customer data is how the customer data can be applied to new customers. And as many of you'll know, the risk we run all the time is the customer we don't know. So we're doing a lot of analytics based around many variables to try and better understand whether those transactions should be purchased as (inaudible) loans and certainly in the last month, we've started looking closely and we've seen purchases is up reasonable amount, which is more capital efficient for us in the long term and better for the customer as well. As Danny and I talked about, we're looking at the de novo acquisitions in Mexico with 6 this year, another 4 to come in the final quarter.

So turning to the last page, is really a summary of what happened. The industry continues to be an attractive one. We're -- we've had a number of quarters now, which indicate that the customer leadership focus we have is working. The loan growth has been strong, and as you've heard, the compounding of PLO growth quarter-on-quarter is actually very strong, both in Mexico, which I think anyone would be ecstatic to have those PLO growth numbers and in the U.S., we're in a mature market, given the growth rates we have is a great testament to the leadership we have in place. The disciplined growth we've been consistent with, de novo in Mexico is there. We, obviously, look at all geographies as how competitors do as well, and we do try to ensure the capital is used in the most efficient and effective way as possible. But overall, I'd say this is a quality result. All the metrics prove to us that we're doing the right thing. We're giving solid and stable returns. We will, obviously, look for the growth where we can, but the metrics point to the fact that, I think, management is supremely focused in a very disciplined way in an organization now, which is very streamlined and efficient and providing returns to shareholders that we think quite appropriate. And so with that, I'd like to open up to questions.

(Operator Instructions) Your first question comes from the line of Bill Armstrong with CL King & Associates.

Nice quarter. In the U.S., you've seen, obviously, some nice growth for some time now. In PLO, now First Cash is also showing some better trends as well. Aside from your company-specific improvements that you've implemented at the store level and in your operations, what sort of economic or demographic trends might you be seeing that might be starting to improve overall demand for pawn loan throughout your markets in the U.S.?

Sure, Bill. You must be looking at a different graph. I've got First Cash being down 9% PLO. But I think you're stripping out Cash America, which I think is still under First Cash.

Yes, that's right, that's -- which is the legacy First Cash store.

Yes. It's like I saying Florida. I think what we're seeing is that we're actually providing a better service to our customers. We're giving market share off. So if you're down 9%, the customers are going somewhere. These customers have an absolute need for cash, that hasn't changed. So we think we're picking up new customers as a result of that. The other thing we're learning is we're learning a lot more about our existing customers. We have a bit of a feeling that we've been a little bit conservative in some areas, and we're understanding which is the right customer to lend to. The interesting thing is just trying to get transaction volumes up in the stores, which we're focused on, but overall, we think with the greater knowledge we have with the customer, better understanding of the product and stability in our stores will actually drive future traffic and future flow than we have and we're seeing that with the PLO growth. If it was 1 quarter, I think, we'd be a little bit hesitant to say that things have changed, but we've now had 7 consecutive quarters in the U.S., which suggest that we're doing things right and customers are coming to us.

Okay, makes sense. Could you comment on your aged inventory, both in U.S. and Mexico currently, any trends to call out there?

No, pretty consistent year-on-year. And certainly, with -- I think with First Cash numbers in the U.S., we're consistent with where they are. We do like to have inventory on hand. We've just come off a -- we did a bit of scrapping as you would have seen during the year, so the Jewelry came down a bit. In Mexico, it's about 6%, that's a pretty healthy number to have there. So we're quite comfortable with those positions, where we are, but like any business, we will continue to optimize, but we don't want so far, to sell our product where we think there's still value with the product. And overall, the levels are consistent with where they've been.

Got it. And then just 1 last quick one. I'm not sure if you can comment on this. But is there any color you can give us around the nonbinding letter of intent that you disclosed to acquire pawn shops in Latin America?

Now as much we'd like to, we're subject to an NDA, Bill, but as soon as something happens, we'll certainly be the first to let you know.

Your next question come from the line of Kyle Joseph with Jefferies.

I just wanted to make sure that -- we're in check with your expense guidance for the quarter. Dan, I think you said, at least operation expenses would be sort of within or inside of last fourth quarter. In terms of the admin expense, I know you talked about FY '18 and that remains consistent, but at least just looking back, and I don't know if there is anything onetime, but Latin picked up last fourth quarter, and I was just wondering if you could give us sort of a sense of what you're anticipating there for the fourth quarter? And I know there are onetime items related to the convertible note as well.

Right. The only future guidance we've given as far as the G&A spend is 2018, that we expect to be under the $50 million. Although we've consistently been driving down the G&A expenditure, I would expect to continue to see that trend as we march towards the $50 million.

Got it. And then you mentioned a $6.1 million repayment in July on the sort of -- on legacy coupon debt. Can you talk about the remaining balance on that? And is all that going to be recognized as income or some of that principal?

No, the majority of that's principal. The figures that I'm talking about there are principal. Those are scheduled to be repaid within the next couple of years. So in the remainder of this year, we expect about $24.4 million to come in, another $24 million-or-so in fiscal '18 and then another $18 million in 2019, which will be the end of that.

Okay. Yes, and then last question. You guys -- you mentioned the scrap activity in the U.S. picked up. Was that inventory management? Is that a good run rate to use as a go-forward basis? Or was there anything onetime in the quarter there?

No. We -- probably about last year I think, we had an active strategy of making sure we had sufficient stock in the store through the peak period. So, for instance, jewelry, we made sure we had sufficient jewelry for Valentine's Day because we know that's a very big mover. In the past quarters going back a few years, you would have seen that scrapping was reasonably consistent across the quarters. You'd have seen quarter 1, quarter 2 were actually reasonably lot on scrapping. So we took the opportunity to scrap some of the older product in the third quarter, but we did move a fair bit of jewelry through the Valentine's Day. And one thing that pushed us into the third quarter was the fact that, as you'll recall, the tax refunds were delayed pretty much just after the Valentine's Day towards the end of February, so we held onto this product a little bit longer than we have in the past due to that delay.

Got it. And then just last question. Any sort of update on cash converters and the outlook for equity income line item?

We just -- we look at the consensus of the analysts and then we run pretty much on that basis, we watch it closely, and we record that as it happens.

Your next question comes from the line of Vincent Caintic with Stephens.

Just 2 questions. First on the Latin America acquisitions. I know you can't speak specifically to this particular NDA, but just kind of broadly, if you maybe could discuss what the opportunities you're seeing in Latin America and Mexico? And is there environments where there is more potential for consolidation where you can participate?

I think it's south of the border in the Latin America, the growth rates that we're seeing are very attractive. And some of the processes we're seeing are reasonably attractive as well. The cost of de novo is much lower than the U.S. So the supplementing of de novos with acquisition makes a lot of sense for us with the deployment of capital. What we've seen is that a number of regions and areas in Latin America are very strong in jewelry, but very underdeveloped in general merchandise. And we have a lot of expertise and ability to bring knowledge into those regions. So where we can see high growth with good returns, we'll look closely at and we see certainly more of those opportunities coming up before us than we certainly do in the U.S. So our focus is looking closely at these to see whether there are opportunities, and obviously, with 1 NDA there, we're looking closely at those, but the attributes are very attractive to us and as we've seen with our competitors and First Cash who are continuing to invest down there, they're getting some very good returns from the businesses.

Great. Makes sense. That's helpful. On the separate question just on the technology front, if you could update us on how is the rollout of the new point-of-sale systems going in? Any other initiatives for efficiencies and productivity growth?

Yes. Now look the point-of-sale system, it's being rolled out. What we're -- we're rolling out carefully. As we move into each state, each state is like moving into a different country with different regulations you have. And so while the DNA of the POS system is very robust, we do still have to change it each time we go into a new state. What we've always said is we're not going to risk the business and being held in rolling out a POS system at the expense of looking after our customers, so will substantially complete by the end of 2018 -- 2017 calendar year, and there will be a bit of a carryover. But for instance, we don't want to be implementing a new POS system during our peak's sale periods of November into December because that's just detrimental to how we operate, but we're very comfortable with the way it's proceeding. In the stores, we've got out to, they're running it very well. And we're trying to -- we'll be implementing and integrating the customer analytics data into that module as well and will be rolling out into Mexico, probably close to the end of this financial year into Mexico.

Okay. Great. And just one last one from me. So you spoke about taking market share from your competitors and certainly seeing a good growth there. Is there maybe beyond taking share, do you see, I don't know, is the pie growing, perhaps where there is a more of an adjustable market for you? Or is it really just kind of taking share that used to be yours and kind of optimizing the business?

Yes. It's -- relevance is very hard thing to get dotted to, to look at the size of the pie. I mean, First Cash now sells really at 13% of market, which is dominated by moms and dads. So getting hold of the data to see whether it's increasing or not is difficult to understand. But what we do know is that the customers who have been with us, they actually talk to a lot of people and the referral programs work well. We know the -- we know the demographics of the people to use us. I think the uncertainty for me is -- I think the segment is growing because the credit accessibility for this customer group is getting harder to get hold of. So I couldn't give you a hard fact to say it is, but I think with the environment we've got, I think we're starting to believe that this is a growing market.

(Operator Instructions) And your next question comes from the line of (inaudible)

I noticed that compared to First Cash financial average, U.S. store-level operating expenses are somewhat higher for EZCORP. Do you have thoughts on the source as a difference? Is there actually a real difference in operating expense? Or is this just an accounting issue?

There is -- it's hard to get like-for-like to understand what's included in the store expense versus ours that does make it harder. I believe that we probably have a bit more labor in our stores than our competitors. But we actually do that because we're generating a much better PLO growth to store than our competitors. So if -- the way I would look at it is if we were not giving the growth out of PLO and the metrics we're seeing at store level, then you'd look at the expenses and say maybe we should be doing something there. We've always had the view that investing in customer-facing activities is the best way to drive growth in our business. So we actually look at both revenue, PLO growth which starts the revenue as well as the expenses to understand that. We have a smaller span of control as well than probably our competitors. So we're investing heavily in the fabric of the customer and believe it's still the right thing to do. So while it's not apples for apples, we probably do have a slightly higher store expense, but I believe we're actually gaining a much better revenue stream from that investment than where perhaps our competitors are.

And there are no further questions at this time. I'll turn the call back over to the presenter.

Thanks very much, and I'd like to thank everyone who dialed or logged into the webcast. I'd certainly like to thank the team at EZCORP for a great quarter. And I know that Danny and Jeff are available for questions later this morning. So this concludes our call. Thanks for those for getting up early to listen to it, and have a great day.

And this concludes today's conference call. You may now disconnect.