EZCORP Inc (EZPW) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to EZCORP First Quarter Fiscal Year 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you, and good morning, everyone. 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 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 risk 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 Stuart Grimshaw. Stuart?

Thanks, Jeff. Good morning, everyone. I'd like to welcome you to the first quarter results presentation.

As some of you have probably flipped through the slides already, it's been an exceptionally pleasing first quarter and really continues the momentum that we've been building on over the past few years. As we go through the slides, you'll also see that we had very strong operating metrics across all lines of business. And as we turn to Slide 3, we can actually see how this has played out.

Firstly with the -- most importantly, we've got adjusted EPS, which is up 73% year-on-year. Now obviously, there's some tax noise that sits around that. But if you go to the profit before tax line, you'll see the adjusted profit before tax is up 59% and 52% on a GAAP basis. That's a very strong performance over that period of time.

It was also highlighted by strong growth in our PLO, which was up 9% and from the PLO rising that much, the PSC was up 11%. There was strong margin improvement, particularly in the U.S., where we saw a very good return on the sales that had occurred.

And as we look through into Latin American pawn business, we can see that the PLO growth story continues with a more than doubling of the effective having some terrific management plus increased store count with profit before taxes doubled with PLO. But even with -- on a same-store basis, in Latin America, you'll see that there was a strong double-digit growth, which we'll come to, which is -- continues the strong compounding effect that we have seen.

The U.S. pawn story is a very good one as well with profit before tax up 4% despite the continuing impacts of hurricanes Harvey and Irma on the PLO, PSC and sales lines. Same-store PLO in those unaffected stores is up 3%, and we see the PLO per store relatively stable at $285,000, which is a very good size portfolio.

A lot of the momentum that's being created has been through the store acquisitions that have driven some strong earnings. And as we've mentioned over -- many times throughout the acquisitions in Latin America, there are 2 of them: 112 with GuatePrenda, and 21 for -- in the Northwest part of Mexico. We also opened 4 stores in Latin America, and we expect to open 8 more in Q2. We now see a mix of 43% of our pawn stores being based in Latin America, which is the high-growth segment for us.

As we turn to Slide 4, we see the continuing [momentum] that has occurred and the chart highlights the sustained and accelerating growth in earnings and the resultant operating leverage as we can see as averaged by the -- as evidenced by the EBITDA to net revenue line.

And you can see the improving ratios. We're at 12% in FY '15. And by the time we've hit the first quarter FY '18, we're at 22%. And underneath that, that's been driven on a reasonably constant store base number until the first quarter with the acquisitions coming in. And so even with the acquisitions, we've been able to increase the operating leverage of the business.

And this is further evidenced on Slide 5, where we can see how that leverage has played through the various segments. And particularly in Latin America, as you see for the '15, '16 and '17 years, without acquisitions, the leverage has improved from 23% to 35%. And recently in this first quarter, we've increased that to 38%. The CAGR growth is very impressive at 49% through those 3 years also.

When we look at the U.S. pawn, which is a much more mature market, we've been able to maintain that operating leverage. And indeed, in the first quarter of this year, we've increased it by 100 basis points, so 32%, in what was a, in some respects, a challenging quarter with the headwinds of the hurricanes and the floods. So the leverage performance has been very strong through that.

When I turn to Slide 6, and when we look at -- and Danny will run through how the pawn cycle works, but we've always said that the PLO is the cornerstone of our business. And we've had some very strong consistent PLO growth over that time on an absolute basis as well as on a comparative basis. And even if you look at the first quarter of '16, we've actually continued to improve that as we go through.

The slide on the right shows that despite the hurricane impact of net revenues being flat, we were able to increase our profit before tax by 4%, and that's been done through obviously the margin improvement as well as some good expense control. And we've got a little box in there that just shows with the hurricane-affected stores, net revenue's up 3%, and the PBT was up 8%, which just gives you an indication of the impact that has been felt through the portfolio.

Turning now to Slide 7. I think this is a great slide and one that we're very proud of with the performance that has occurred. The compounding growth that we've seen through this business continues, and that's really pleasing. And if you look over the last 3 quarters, we've got to and -- we've got a 34% in December '15, 14% in '16 and 11%. That's double-digit compounding growth over 3 consecutive years, which is an outstanding result for the team there. And it is same store, so that gives you an indication of just how good the management has been on a same-store basis.

And then when we look at the leverage factor on the right-hand side. It is a very strong continued growth story that we are achieving. And we see this market as very important to us going forward.

With that very high-level summary, I'll pass it over to Danny.

Thanks, Stuart. Good morning, everyone. Let's move to Slide 8. As Stuart mentioned, this is a very good quarter for EZCORP despite lingering effects of the Q4 hurricanes on our U.S. pawn loan balance.

The 53% increase in diluted earnings per share came from several sources. We delivered growth in all areas of the operations and successfully executed the acquisition of 133 pawn stores in Latin America. This represents the eighth consecutive quarter of year-on-year earnings growth. The 9% rise in pawn loans outstanding was a significant accomplishment, delivering a similar increase in net revenue.

We further leveraged this into a 52% improvement in profit before tax to just under $20 million. Included in those results is a healthy improvement in interest income following the September restructuring and the notes receivable related to Grupo Finmart. We continue to receive timely principal and interest payments in accordance with the terms of the notes.

The widely publicized U.S. Tax Reform Act was signed into law December 22 and became effective January 1. At the risk of putting everyone to sleep this early in the morning, I do want to provide some color around this as it will have a material positive impact on our earnings moving forward but does have a onetime impact this quarter and some anomalies later in the year.

Among other things, it changes the maximum federal tax rate from 35% to 21%. As a company with a September 30 fiscal year-end that straddles the effective date, we're required to apply a blended 24.5% rate on -- federal rate to our earnings this entire fiscal year. The 21% federal rate will apply beginning October 1, the first day of our fiscal 2019.

Partially offsetting the benefit of the lower rate is a significant reduction in the deductibility of performance-based compensation, a smaller federal benefit on state taxes and a limitation on the ability to utilize foreign tax carryforwards. As foreign tax rates are now higher than the U.S. rates, their portion of our total expense will increase, limiting the improvement in our overall effective tax rate. Excluding discrete items, I expect our effective tax rate will be in the 32% to 33% range the remainder of this fiscal year and to improve about 200 basis points in future years.

Included in the current quarter are 2 discrete tax items. Upon signing of the new act, we revalued our net deferred tax assets to the lower federal tax rate now in effect, resulting in a $2.8 million charge. Partially offsetting this, we recognized a $1.6 million tax benefit from the expiration of the statute of limitations on some uncertain tax positions from prior years.

In the fourth quarter this year, I expect an additional discrete charge of $2 million to $2.5 million to further revalue certain short-term deferred tax assets that will arise at the 24.5% rate and then reverse at the 21% federal rate applicable in future years.

Now on to Slide 9. This presents our results on a normalized basis after adjusting for discrete items in constant currency. The largest discrete items excluded are the tax items I just discussed. The trends are similar to the U.S. GAAP results. Acquisitions and strong organic growth, drove the 9% net revenue increase improvements we're seeing in pawn service charges and sales grows profit, including a margin expansion on sales. Disciplined expense management and higher interest income magnified the net revenue improvement into a 73% jump in earnings per share to $0.26. This is the highest first quarter net income we've produced in 5 years.

Slide 10 presents U.S. pawn results adjusted for discrete items. As you know, pawn loans outstanding is the most influential driver of revenue and profitability. In U.S. stores unaffected by hurricanes, PLO was up a healthy 3% on same-store basis, as Stuart had mentioned, driving a similar increase in pawn service charges. Actively managing the expense structure enabled us to leverage relatively flat net revenue into higher profit before tax. This reached $28 million for the quarter.

This was the first full quarter of operations reflecting the impact of Hurricanes Harvey and Irma on PLO pawn service charges and sales. Following the storms, PLO recovery continues, though we still expect it'll be after the tax refund season before the affected areas return to a normal PLO balance.

We significantly increased our sales margins in the quarter to 39% primarily with greater discipline around discounting. However, the offset was a slowdown in inventory turns and an increase in inventory on hand, particularly in jewelry and firearms, which tend to retain their value fairly well. I expect sales margins will return to our typical 35% to 38% range for the full fiscal year as we continue to refine the balance of the margins and sales volume.

Looking at the graph on Page 11, you'll see U.S. Pawn's net revenue was flat to the prior year, reflecting continued effect of last year's hurricanes. Despite that headwind, we still delivered a 4% increase in profit before tax through effective expense control.

Slide 12 shows the accelerating growth in Latin America same-store PLO. Strong execution and a higher yield drove a 17% growth in pawn service charges. Reflecting both organic growth and the significant contribution from acquired stores, the segment delivered 73% higher net revenue on a constant-currency basis and slightly higher than that on a U.S. dollar basis.

Leveraging the expense structure allowed us to more than double profit before tax to $9 million in the quarter. Latin American operations now represent 24% of total pawn profit. The acquired stores added significant net revenue and profit growth and have exceeded our expectations in the short period we've owned them.

We acquired 133 pawn stores and opened 4 stores in Latin America this quarter. This represents a 56% increase in pawn store count in this region. We also plan to open 8 more stores in the second quarter. This market provides many attractive opportunities to grow and diversify our revenue base. The plan is to tap those through continued organic growth, new-store development and acquisitions.

PLO yield, inventory turns and return on earning assets all increased. And merchandise margins were healthy, up 100 basis points from this quarter last year.

Slide 13 shows the story well. PLO more than doubled, driven by strong organic growth, store acquisitions and new stores. That put us in a great position for continued significant growth in net revenue and profit. Latin America pawn segment delivered truly outstanding results. All in all, it was a solid performance for the company this quarter with earnings improvement in U.S. pawn and Latin America driving a 53% improvement in earnings per share.

With that, I'll hand the call back over to Stuart.

Thanks, Danny. Turning to Slide 14. As we discussed at the Investor Day, we continue to work on improving the customer and employee experience, and the 3 boxes on the slide give you insight as to how we look at the operations and, firstly, with the advantage in customer experience leadership and PLO growth. The upgrading of the point-of-sale system continues. We're now in 206 stores with 25 of those being in Mexico. We have an analytic and customer behavior team that actually looks at all the transactions and assists the store in better managing the customer experience with relevant and live data.

We continuously look at customer experience and we provide the feedback to our teams; helps a great learning experience. And we have a lot of training, coaching and mentoring, which we can see through the way that we've organized the pawn business with our district and regional managers and the spans of control, which typically average, for a district manager, around 7 stores.

The second one is transforming the customer and team member experience, particularly with best-in-class systems. And we are currently migrating our legacy environment into the cloud-based infrastructure. That involves moving off servers which are over 12 years old. So that will give us a more efficient platform to work on, which enables us to integrate acquisitions much more smoothly than it would have in the past. Training is actually enhanced. Speed to market is enhanced. And we can plug and play with the various applications that we do want to bring in.

And finally, the acceleration of growth via the disciplined acquisitions and new stores. And as Danny's mentioned, we've seen a shift in the balance of our stores towards Latin America. And the geographic diversification, as you've seen, is enhancing the earnings profile of the company. And we've been fortunate with the acquisitions to actually have acquired a quality management team, and that is going to benefit us very much in the long term.

Turning finally to Slide 15. We've just changed the format of the slides to make sure everyone was awake because, after 15 slides this time in the morning, it's very important that you are because this is actually quite an important slide about why -- what have we done and why. And I think I'll start with the proven management execution.

Because over the past 3 years, we've been on a journey. And as we've seen in Slide 4, we moved the company through many iterations to be in the growth phase of its operation. And that has resulted in accelerating -- accelerated earnings growth in a market that is very attractive on a regulatory basis as well as a pure business model basis, where the capacity for internet disintermediation is very low.

Coupled with the increased desire for cash from the credit-constrained customer, this industry is a very attractive one for us to be in. We're now in 7 countries, and expansion has been into the high-growth Latin American markets, and we're using new technologies to enable and enhance the customer experience. And all of this has resulted in the market leadership in the key drivers of growth and particularly in the PLO as we've spent probably over the last 3 years emphasizing that is the cornerstone that we've consistently been able to be the market leader in achieving those growth targets.

So with those comments, I'd just like to close out that I think it has been a great quarter for us. We're very pleased, and now we'll open up for questions.

(Operator Instructions) Your first question comes from the line of John Hecht with Jefferies.

First one, Danny, you talked about sort of consolidated retail margin trends or gross margin trends. I'm wondering, can you give us your trends by channel as you think -- we should think about them in the next 3 or 4 quarters? What I mean by that is U.S. retail versus Mexico retail and then the wholesale margins as well.

Yes. I wouldn't put a whole lot on the wholesale margins or the scrap margins. That's more just kind of run-of-the-mill activity, and we don't typically hedge that position. So that's just moving through as that comes in, but the larger driver are the retail margins. In the U.S., I do expect those margins to revert back into probably the 35% to 38% range that we typically target. I think we probably got a little overly disciplined in our discounting in this quarter, and that slowed the inventory turns a little bit. I do expect that to moderate back into that 35% or 38% range in the remainder of the year in the U.S. We're at 39% this quarter. In Mexico, I'd expect -- or Latin America, I'd expect similar margins to what we saw this quarter. Obviously, that will change a little bit over time as we introduce more and more general merchandise in the acquired stores in GuatePrenda, but I wouldn't expect substantial movement in those margins beyond that.

Okay. And then maybe for Stuart, any customer trends domestically that -- Mexico is obviously very strong but domestic customer trends worth pointing out? Or is -- if U.S. customer now that we've had changing gold prices a little bit, but we've also had some wage inflation potentially in this segment, you guys seeing any different in terms of new customer or returning customer trends?

No, I think, John, the biggest trend we've probably seen is still those hurricane-affected areas where the government payouts have continued longer than we have ... I think we'll see a return to normality once the tax credits start coming through. And it's still a bit early to see, but the indications are it is going to be delayed beyond last year. So far not so -- a lot of days, but any delay that will change those trends. For instance, our customers used to have cash for Valentine's Day. They don't have the cash anymore. So that is a -- that's changed fundamentally from the sales profiles we've had over the last 12 months. But typically, our customers react to cash on hand pretty quickly, and they spend it and readjust their patterns, so there's nothing macro coming through that we've seen that's impacting the business.

Okay. And then final question is, Danny you did give some specific details around the tax rate but, clearly, a big savings for you guys this year overall. How do you guys see that rolling through? Do you see -- is that mostly going to flow to the bottom line? Do you anticipate using some of those savings to further invest in the business more rapidly? Anything worth noting there?

I'm not sure I'd say that would change the strategy in investing. Obviously, we'll always look at our capital structure and make sure we're putting in place what we need to continue to fuel growth. I don't think that's dependent upon the taxes. It will have a net positive impact on us moving forward. If you look historically that the effective tax rate has been more in the kind of 36% to 38% range. I expect this year to be again, excluding the discrete items that introduced a little bit of noise, I'd expect it to be in probably that 32% to 33% range and then 30% to 31% moving forward. So pretty substantial improvement in the overall rate. And the reason that doesn't go all the way down to the federal rate, obviously, you've got the impact of state taxes, foreign taxes, nondeductible items, those types of things.

(Operator Instructions) Your next question comes from the line of Michael Cohen with Opportunistic.

Quickly, just an update. I noted you guys noted I think around 206 stores on the new POS. Just maybe if you could provide a little more color commentary on how some of the stores who had it longer -- longest are performing and the lift that it's providing you and the learnings that you've had so far.

In the -- we probably introduced the majority of it in about October. We had a big download on it. Still pretty early, but the -- what we're finding is the transaction times are improving. The ability to process loans is improving. So on a productivity basis it's working. It's still too early, given the noise around the hurricanes and the lot, to draw any conclusions as to how that works because most of the rollout occurred in the Texas and Florida stores who were impacted by the natural disasters that did occur. So I think by the end of this quarter, we'll have -- be in a better position to get some learnings. The one thing I would say is that we probably overestimated the amount of time it takes to train people on the system. It's quite intuitive, so we've been able to pretty much half the time to train these people. So we'll probably have to report a bit more by the end of this quarter.

Great. And then just back to the tax not to sort of beat a dead horse. Is there anything that you guys could do potentially to strategies that you can employ to minimize the leakage in terms of things that are nondeductible? I mean, I think you have sort of implied certain types of employee compensation. Is there a way to structure that differently such that you capture the tax benefit?

Yes. We're looking at everything. It's still pretty early. I think in this space, it's probably good to be a fast follower than a market leader, so we'll probably watch what's happening across the board and see how it works to us. Because everyone's doing the same thing, is trying to understand how you can actually get the best advantage from the act that's been passed. So we'll be watching it very closely.

(Operator Instructions) Your next question comes from the line of Henry Coffey with Wedbush.

I've sort have been watching this from the sidelines, and the developments have been extremely impressive. So one of your competitors reported this morning their legacy stores and same-store sales up 3 in the U.S. You're talking about 3% same-store sales. I know world had a kind of much higher revenue quarter after a whole progression of difficult quarters. Is there something going on in the alternative loan market that's putting a little more life into it? Is it easy comps from prior periods or just really hard work at the store level?

Thanks, Henry. Long time no hear. Welcome back. We actually -- we're a bit different. We don't look at our competitors on a legacy. We look at an overall basis, and our numbers are much stronger. What we're seeing is that I think the consumers had choice with cash in their hands. And I think -- but ourselves and I'm sure First Cash will start seeing some more positive numbers coming through as the customer starts to want the cash leading up to the tax credit system. So I think it's a mature market, and as such, you're not going to experience the same growth rates we're seeing in the Latin American areas. We always -- I think if you look at our performance over the last 3 years, we've outperformed substantially on a comparative basis to what we're doing. And I don't think you're going to get super strong growth numbers out of the U.S. in the short term, but the budgets we set we try to stretch management to achieve it. But it is a mature market, and as such, we've got to be close to a customer and watch our expenses.

I guess, I'm looking at it differently in saying 2% or 3% same-store sales growth or even 1% or 2% same-store sales growth in the U.S. in the alternative loan market would be a huge improvement over what we've seen, so...

Yes, but where we -- what we're trying to do is use the leverage because the -- we've got a high fixed cost base. Some of the alternative loan market's running on a much lower fixed cost high variable cost basis, particularly online lenders, for example. Their debt positions are probably a little bit different. So when you look at the alternative loan market and particularly in the unsecured, I don't know enough about, exactly, to talk about the unsecured. The charge-off ratio is what you want to look at while it falls through the bottom line. Our bad debts are what we sell in the store, and we're getting some pretty good margin on that. So I think our business model is actually very sustainable compared to some of the others.

And I am showing no further questions at this time. I would now like to turn the conference back to Mr. Grimshaw for his closing comments.

Thanks very much, and thank you for everyone who's on the line. We appreciate the interest in the -- in our company. We thank you for your support. We've had a very strong quarter. We started to drive the earnings really well. But Danny and Jeff are available for questions later on this morning. But once again, thank you, and have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.