EZCORP Inc (EZPW) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EZCORP Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call may be recorded.

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

Thank you, Matthew, 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 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 thanks once again for everyone for joining us this morning, particularly from the West where now it's very early.

Second quarter has again provided a terrific bunch of numbers that's really supported by our key strategies. And if you turn to Page 3 on the presentation, I'll quickly run through the 4 -- what are the key issues or the key points that have come out of the quarter.

Firstly, the net income was up 47% to $12.3 million, with basic EPS up 53% to $0.23 a share. And this represented our ninth consecutive quarter of year-on-year earnings growth. PLO importantly was up 11% to $159 million, and PSC up by the same percentage to $74 million. The revenue -- net revenue was strong and was supported by a great merchandise margin of 37%. And importantly, when you look at the balance sheet, you'll see that liquidity of the company has been enhanced over the quarter.

The second point is the U.S. Pawn business continues to operate very strongly. It now represents 80% of all pawn profit and with an adjusted profit before tax up 5%. We continue to grow PLO at a great rate. Certainly, the store level were 243,000, which is quite markedly ahead of the listed competitor, and this is despite the hurricane impacts. These are industry-leading numbers. And when you look at the PSC that we're driving out of the PLO we have, it is quite instructive to see the benefits we're getting from the strong management that is occurring at the store level.

The third point is Latin America continues to grow rapidly. Earnings this quarter more than doubled, and we're getting growth from our new acquisition, GuatePrenda, and also Mexico supporting it strongly. PLO was up 96% to $35 million. Same-store PLO was up 9%, and PLO per store was up to $90,000, which led to the market and is again once -- significantly ahead of where our closest competitor is.

The fourth important point is that we have a platform for growth. With what we have achieved with the recent acquisition of the GuatePrenda business, we now have 387 stores operating in the Latin American region. And in those geographies, we have plenty of ability to expand within the geographies and also into adjacent geographies as well.

And as we've always seen, the return on capital that we can generate from these businesses is very attractive. In this quarter, Latin America contributed about 20% of the pawn profit, but we're seeing that increase as we get more and more comfortable and as management continues to drive synergies through that business.

Behind it all is actually great people. And we're fortunate that the results are being driven by a terrific bunch of people who continue to focus on the customer, and we're seeing those returns coming through those numbers.

On Slide 4, we talk a lot about the operating leverage in the business. And as we've seen there, the leverage from the combined business is being maintained at 21%. The U.S. Pawn has been retained at 34%, and we can see the growth and leverage we are getting out of the Latin American business where this time last year, it was 28%. It's moved to 33%. So there is some great leverage that is coming through the business, and we expect to see this improving in the future.

So that's -- those are a few highlights. I'll pass it over to Danny to go through the financial analysis.

Yes. Thanks, Stuart, and good morning, everyone.

I'll start with the consolidated GAAP results on Slide 5. As Stuart mentioned, this is an excellent quarter. With its scale and operating leverage, the U.S. Pawn segment generated significant cash flow and 80% of our pawn profit even as it continues recovery from the hurricanes last year.

With U.S. Pawn as a sound base, the 47% improvement in net income came primarily from the acquisition of 133 pawn stores in Latin America in Q1, significant organic growth in that region and lower U.S. corporate tax rate. This represents the ninth consecutive quarter of year-over-year earnings growth.

The 11% rise in pawn loans outstanding, or PLO, delivered a similar increase in pawn service charges. This, combined with an increase in merchandise sales and sales margins, drove a strong 10% improvement in net revenues.

Included in our consolidated results was a healthy increase in interest income. This resulted from the September restructuring of the notes receivable related to the Grupo Finmart sale. We continue to receive timely principal and interest payments in accordance with the terms of those notes. In this quarter, we collected $6.3 million principal and $1.5 million interest.

Operations expenses remained about 68% of net revenue but increased in dollar terms, primarily due to acquired stores. Basic earnings per share increased 53% to $0.23. Diluted earnings per share showed a slightly smaller improvement as it assumes the hypothetical conversion of our 2024 convertible notes.

Although we believe it's highly unlikely any bondholders would actually convert their bonds in the near term with over 6 years left until maturity, the bonds are convertible in the June quarter based on the strong performance of our stock price in the quarter just ended. As a result, we classified the 2024 convertible bonds as a current liability at March 31. I would note we also have the option to settle any converted bonds in cash, minimizing potential share dilution.

Now on to Slide 6. This presents the results on a normalized basis, adjusting for discrete items in constant currency. The trends are similar to the GAAP results. Acquisitions and strong organic growth drove the 9% increase in net revenue. Improvements were seen in pawn service charges and sales gross profit, including higher margins on sales.

Higher interest income and lower U.S. corporate income taxes magnified the net revenue improvement, resulting in a 38% increase in adjusted net income.

Slide 7 presents U.S. Pawn results, our largest segment. You'll see on the left side of this slide that reported net revenue and profit before tax were up 1% and declined 6%, respectively. The 2 yellow bars show second quarter results adjusted for the estimated impact of hurricanes and other discrete items. On an adjusted basis, you can see we leveraged the 4% net revenue increase into a 5% rise in profit before tax. It'll take some time before our hurricane-affected stores return to the same PLO growth rate as our unaffected stores, but we continue to close the gap.

The best historical reference I have is the storms -- stores that were hit by Hurricane Ike in 2008. They took about 13 months to fully come back to the growth trends we saw in the non-impacted stores. The PLO recovery in the stores impacted by Hurricanes Harvey and Irma last year is trending slightly faster than the same period following Hurricane Ike.

At March 31, the same-store loan growth rate was 7 percentage points lower than our unaffected stores, a significant improvement from the 18-percentage point spread at their low point. That's in the face of what we believe were larger relief funds in this fiscal year coming from FEMA and other organizations.

Slide 8 presents U.S. Pawn same-store figures, adjusted for hurricanes and other discrete items. On a slightly higher yield, same-store pawn loans were up 2%, with the same percentage increase in pawn service charges. That's on top of the strong 9% same-store PLO growth in this quarter of the last couple of years.

Sales gross profit increased handsomely. The main reason was 150 basis point expansion in the merchandise margin to 38%, which reflected enhanced discipline around pricing and discounting. Those advances were partially offset by a slowdown in inventory turns and an increase in inventory on hand. We held additional inventory through the tax refund season to maximize the margin realized on sales.

We believe -- we plan to refine the inventory balances through store sales and jewelry scrapping in the second half of the fiscal year. As a result, I expect merchandise margins will be slightly lower but still within the 35% to 38% target range for the remainder of the year.

PLO yield increased 100 basis points, reflecting the quality of the loan portfolio.

On Slide 9, you can see U.S. Pawn delivered its 10th consecutive quarter of market-leading same-store PLO growth. The left side of this slide shows same-store PLO growth by quarter, stacked on the same quarter of the prior year. In virtually every one, EZCORP delivered higher numbers.

If you look at the largest pawn competitor, you see declines over these same periods, suggesting we're taking some market share. The graph on the right side of the slide demonstrates the operating leverage we can deliver, growing profit before tax at a faster clip than net revenues.

Slide 10 shows U.S. Pawn per store metrics relative to our largest pawn competitor for the latest quarter. It's worth noting the segment delivered market-leading returns from the loan portfolio, with industry-highest PLO, PLO yield and pawn service charges per store, driven by disciplined lending practices and a focus on meeting the customers' need for cash.

Our 9% larger scale of PLO per store, combined with a 300-basis point better yield, produced pawn service charges per store 28% higher than our primary competitor. We've delivered 7 consecutive quarters of market-leading PLO per store, reaching $243,000 per store this quarter. Those metrics are a big reason for our success.

The lower section of the table illustrates what happens with forfeitures and inventory purchases. Similar to what we saw in pawn loans, our 6% higher sales per store, combined with a 300-basis point better margin, drove sales gross profit per store 16% superior to our primary competitor. We do see an opportunity in inventory turns, which is 1.9x compared to their 3x. We plan to refine the inventory balance in the remainder of this year, as I mentioned earlier.

Overall, the U.S. Pawn segment delivered great results. This is our largest segment, contributing 80% of our pawn profits and a significant cash flow base to fuel our continued growth.

Slide 11 shows the Latin America Pawn segment delivered truly outstanding results and was our biggest contributor to the increase in earnings. PLO almost doubled, driven by strong organic growth, store acquisitions and new stores. All these actions put us in a great position for continued significant increase in net revenue and profit.

Building on strong double-digit growth in the prior year, the segment delivered a 69% increase in net revenue this quarter. We further leveraged this into 112% rise in profit before tax to just under $7 million on a constant currency basis and slightly higher than that on a GAAP basis.

Slide 12 shows the significant increase in Latin America PLO, up 96% in total and 9% on a same-store basis. These measures highlight strong organic growth and the large contribution from acquired stores.

Leveraging the expense structure allowed us to more than double profit before tax. Latin American operations represent 20% of total pawn profit. The acquired stores added a significant amount to the net revenue and profit increase and are exceeding our expectations in the short time we've owned them.

This market provides many attractive opportunities to grow and diversify the revenue base. We'll continue executing the plan that has been so successful to date: organic growth, making strategic acquisitions, opening new stores and leveraging the expense structure.

On Slide 13, you can see Latin American Pawn delivered its 16th consecutive quarter of same-store PLO growth year-over-year, compounding on top of an ever-increasing base. You can see this clearly on the left side of the slide. This highlights our substantial growth, 9% same-store PLO increase on top of 10% during the same quarter last year. You can see over the period of time, we produced much higher compounded results than the largest pawn competitor.

The chart on the right side of this slide shows a strong double-digit rise in net revenue and an even greater percentage improvement in profit before tax every quarter.

Slide 14 compares Latin America per store metrics for the most recent quarter. We have 387 versus the largest pawn competitor, with just over 1,100 stores. This is an opportunity for our growth, and we're acting upon it, as you've seen.

Looking at EBITDA. We delivered a 103% increase in the quarter while our competition experienced a respectable but more modest 30% increase. This segment again delivered industry-leading returns from the loan portfolio.

Similar to what we saw with our U.S. Pawn operations, our 18% higher PLO per store compared to the competitor was magnified with a 100-basis point better yield, driving 25% higher pawn service charges per store.

The lower section of the table presents inventory dispositions. As you can see, EZCORP's figures are low by comparison, representing an area of opportunity for further earnings enhancement. When measured on a per-store basis, it's worth noting that the stores acquired in the first quarter substantially diluted EZCORP's sales and merchandise margin. Those stores dealt primarily in jewelry with higher loan redemption rate and lower in-store sales.

We've previously discussed the opportunity to increase general merchandise pawn lending in those stores and related retail sales and are transitioning them in that direction. The net result of all this was an excellent quarter for the company, with a 47% increase in net income and a similar increase in EPS.

And just a quick note on the strength of the balance sheet. Our ending cash balance was up 33% year-over-year, ending the quarter at $160 million.

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

Thanks, Danny, and we turn to Slide 15. The -- we've seen this slide before. One of the things I did want to bring out in this is that a lot of what we're doing here is trying to create the best store experience for our customers and our people. And we've talked a fair bit about the point-of-sale system, and we're currently in 206 stores, of which 184 are in the U.S. We've had a bit of a slowdown in the rollout, mainly due to the cloud migration we did earlier this year where we have migrated completely to the cloud, which has enabled us to have a lot more flexibility in our systems.

We'll be recommitting to the rollout of the POS in the next few weeks. And we've upgraded it to first time include lending analytics to make it easier for our staff to deal with the customers and actually get a better understanding of the historical transactions that have occurred with which we can make some smart lending decisions.

So the use of data, as we've talked about before, is starting to become more prevalent through our systems. And we're going to make it easier for our team members, and this is going to make it easier for our customers to deal with us. And at the end of the day, if we've got satisfied employees and customers, then we're on a very good recipe for success.

And when we're looking to the -- perhaps the third box on the side, this comes down to the fact that we have got the beachheads in the right place to grow. And as Danny has outlined, the strength of performance from these businesses is actually already pleasing to see, and we've been fortunate in all the businesses we have. We have great management that we have -- that have been acquired through these transactions.

So turning now to final slide on Page 16, I think this is really quite a telling slide. If we start at the top again, with proven management execution, you can see that the results that we continue to put forward are very strong results, and that can only be based with a great management team focused on the execution.

And with the management team, we've been able to accelerate the earnings growth, and this is best seen through the Latin American segment. And we do operate in a very attractive industry. You want to think it's difficult to see how disintermediation will have an impact upon the business. Demand remains there, and it's a very capital-friendly environment, and we're working with strong support from our customers.

We're now diversified across a number of countries in Latin America, which gives us a great degree of insulation from a diversification strategy.

I've just talked on the new technologies we're bringing in to advance the growth and to assist with our customers and our people. And the combination of all of these has led to some very strong market leadership as we look at PLO, PSC store-based metrics. We are performing very strongly in these areas, and we believe that the strategies we have in place will continue to be successful.

So with that, I would just like to turn it over to questions.

(Operator Instructions) Our first question comes from the line of Greg Pendy with Fidelity.

It's Greg Pendy at Sidoti. Just one quick question. I just kind of wanted to understand, inventory, I guess, was a little bit high for the second quarter in a row, but you're putting up really strong margins on that near the upper end of the range. So some of it might be self-inflicted. And I believe you mentioned on the call that going forward, you might be getting a little bit more promotional. Was some of this just related to the hurricane? Or kind of can you just kind of help us out on how you're looking at the inventory and balancing that with your margins?

Yes, sure. The tax credit system probably lasted a lot longer than we thought it would. It was delayed by a couple of weeks and even up until the end of the quarter. We were still seeing cash coming into our customers' pockets. So we held back on perhaps some of the inventory liquidation we might otherwise have done. I mean, on a general merchandise basis, proportionately, we're not as concerned because when you look at the number, a lot of it's actually in jewelry, and we'll probably look to scrap a bit more as we go into the loan season. There is an active program as we go through this to run the inventory down a bit. However, the strength in the margin is actually due to the discipline in pricing we've had in the first 2 age buckets where we've actually got very strong programs at the store level, which means that we're actually extracting very good margins out of those 2 buckets, which has supported the gross margins. So I think your overview comment is actually quite a good one to the extent if you looked us in the cold light of day, you could say that we've held margin up, and that's why our inventory has grown. But that's actually not the case.

(Operator Instructions) And we have a question from [Jonathan Haynes], a private investor.

Could you talk a little more about how you intend to cover the redemption of the '19 converts? I guess in particular, the last time I checked, you did not have any bank credit facilities. Of course, you have quite a bit of cash.

Yes. We've -- if you look at what the Alpha or the Grupo payments that we've got coming in, coupled with the cash, we felt like there's sufficient cash around. But it just -- it depends upon the opportunities that we see at the same time. I think one of the advantages of being a company of our size, [Jonathan], is that we do have opportunities to obtain banking lines should we want to or use the equity markets. At this stage, we'll just see how it goes. As you'll see, the '19s are trading at a premium to par. So we'll watch that and manage it as we go through close to maturity.

There are no further questions at this time. I'll turn the call back over to you.

Okay. Thanks very much. We appreciate the interest you have in the company. Again, I'd like to reiterate, this is a continued trend, we've gone out with very strong results. We'd like to thank everyone who dialed in. Danny and Jeff will be around later this morning for any questions. And this concludes our call. Thanks very much, and have a great day.

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