EZCORP Inc (EZPW) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EZCORP Fourth Quarter and Fiscal 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. 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 good morning to everyone.

The year has finished strongly with some great Q4 results, as we'll go through today, but the numbers that we're outlining below reflect the continuing drive we have delivered on our vision of serving and satisfying our customers' needs for cash. And as we've always said, that's the driver of everything that happens. And it leads to the great growth we have seen in PLO, which is up 18% to $199 million. And that's driven the adjusted EPS being up 38%, with a diluted EPS of $0.20. We've also excelled on the merchandise margin, moving up 120 basis points to 37%. EBITDA increased 35% to $28 million in the fourth quarter, resulting in adjusted profit before tax increasing 38% to $16.2 million.

These strong results were driven by exceptional growth in Latin America. And you'll see below that the PLO up 110% to $44 million. There's 18 consecutive quarters of same-store PLO growth, with this quarter being up 7%. For PLO per store, we set a high -- a record of $96,000 per store, our highest since 2008. And we've increased our store count by 84% in LatAm, which resulted in a profit before tax increase of 86% to $9.9 million in Q4.

Also pleasing was the growth we saw in the U.S. And you'll recall, in Q3, we said there was an anomaly that we did have negative same-store PLO growth, which did concern us. And we indicated to you at that time that we put all hands on deck to actually get us refocused on our vision of meeting our customers' needs for cash, and this we have done. The reason we have a concern was that typically, if we're losing PLO growth and it goes negative, we're concerned that we're losing customers. And we acted promptly to get it back because it's very difficult, if the customer goes somewhere else, to get them back over time. And we're pleased to see that the U.S. has returned to the same-store PLO growth of 5%; and the highest PLO per store, $305,000, since 2011. Merchandise margin continues to improve to 39%, with unadjusted EBITDA up 15% in Q4.

The balance sheet remained strong, with cash up 74% to $286 million; and provides strategic flexibility with this. And AlphaCredit, the payments from the sale of the Grupo Finmart continues to be received on time in terms of all the schedules that have occurred.

Turn now to Slide 4. What -- we always have this slide, and it's reflects the operating leverage in the business. What you'll see across all -- at the core level, the U.S. Pawn level and Latin America Pawn level, we're continuing to see growth in the operating leverage within the company, which is pleasing. And you'll see that, particularly in Latin America, the numbers there on the efficiency are stellar. And this reflects the great management team we have down there and also the opportunities that we do continue to see in that market where growth is actually coming on the back of the strong management actions we have taken.

On Slide 5. This is a new slide for you, but I think it reflects why we have undertaken the vision of focusing on our customers' need for cash. And you'll see this reflected in the adjusted EBITDA numbers, which in '15 were $47.5 million and going to this year $100.6 million. And this has been driven, I'll say, by 3 levers that have driven this. And that is the customer engagement reflected in the PLO and the PSC increases; some of the work we've done on the customer and product analytics, which have driven a 22% higher annual merchandise gross profit; and at the same time, making sure that we are as lean as we can at the corporate center, which produced 17% in annual corporate expense savings. So those 3 levers have delivered a 28% CAGR over this 3-year period, which we believe is a great result.

Turning now to Slides 6. What -- the reason that Q4, I think, is quite a great result is you see the momentum coming out of this quarter: the PLO growth up 18%, store count up 27%, EBITDA in Q4 growing at 35% versus the 17% annual and the EBITDA margin showing quite a strong increase. So we believe and we continue to believe that successful focus on the customer experience leadership, which we've seen reflected in all these measures, will continue to drive the revenue growth in FY '19.

I'll turn now to Slide 7. We've had an 84% increase in store count in Latin America over the past 12 months. 80% of that is really from acquisitions, with 4% from de novos. And we'll continue to accelerate our de novo strategy in the year ahead. This growth has meant that 28% of total EZCORP pawn profit in Q4 comes from the segment, which was up from 17% same time last year. And as you'll see, that we invested heavily in GPMX, which we acquired in early October. And the first year acquisition of ROIC was around 12%, and we expect that to go through 15%. But as we do these acquisitions, we always talk about the operating model that we bring to these acquisitions. And in the first 12 months of ownership, the EBITDA of that business has increased by around 40%.

So it's been a great, great result. And we think Latin America continues to offer opportunities. However, as you would have seen in the last month, it's not without the political and security risk that sits around the business. The comments recently made by a member of the party coming into power, she spooked the markets and have to do with the ATM fees and transfer fees, none of which actually have any direct correlation to ourselves. And in the Latin American and the Mexican economy, we are not seen as a bank, and the regulations are really based around more of retailing and not on the lending. So we continue to believe that we offer a great service, which is supported by the governments and state governments particularly. And we will continue to operate quite successfully in the region, but as we have seen, there is volatility that does come from being in Latin American countries. But we've got the growth rates coming out of these countries that also suggest that we should continue to reinvest and invest in them.

If I turn now to Slide 8, to a new slide. And what I wanted to do here was to show the growth we've had in the operating cash flow from the company. From '17 to '18, we increased net cash from operating activities by 53%. And obviously, this is funding PLO growth. And that's a good cost to have because funding this PLO growth actually ensures that the business continues to grow and delivers cash to us. And if you look at the operating cash flow after that, it's up 65% year-on-year.

What we've shown in the slide below is – sorry, in the chart below we showed receipts from AlphaCredit. We invested about $16 million, as we've told you in a number of calls, into the refurbishment of the stores. So we took the opportunity with the AlphaCredit receipts to actually overinvest in the rehabilitation of our stores, a lot of which hadn't been invested for over 10 years. So this is a one-off catch-up, and we do not expect that to be ongoing. And as you've seen through this, there's the -- we've grown from $25 million to $40 million this year. As we look at the progress ahead of us, we always want to try to keep it in the $25 million to $30 million range. But importantly if you look at the chart on the bottom, you'll see the maintenance CapEx is running around $11 million, which is around 45% of total profit. Now if we can invest greater than 50% of CapEx on growth, that's a pretty good opportunity. And we'll continue to look for those growth opportunities which return positive for us. I'll say that these, the investment activities, are outside of the acquisitions we have made, which are about $93 million; and the investments we've made in Cash Converters.

And as you've seen, we took a write-down of the investment. The main cause for that was an industry-wide cause. And all shares in the subprime market in Australia were affected negatively by the result of the announcement of a senate inquiry following on from a bank commission that has been undertaken in Australia. So the whole market was affected by this. The analysts have an average consensus net profit after tax around $25 million for Cash Converters. And the 12-month price target is between $0.40 and $0.50. So as it trades at $0.27, there is -- as the analysts were looking at, there is upside there, but there is an overhang from the inquiry that is going to be held in the next month or 2.

So I just wanted to sort of clarify some of those issues while I pass over to Danny.

Thanks, Stuart. And good morning, everyone.

I'm excited to share with you the financial results for a very good fourth quarter and fiscal year. First, I did want to mention our Investor Day in New York on December 13, for those of you that can attend. You can get details from Jeff Christensen.

Before we get to the slide on U.S. Pawn, there are a few items worth noting at a consolidated level as well as some expectations for the coming fiscal year. We delivered adjusted diluted EPS of $0.20 in the quarter and $0.79 for the full year. We saw a 9% increase in average consolidated pawn loans outstanding or PLO deliver a 33% increase in adjusted profit before tax to $64 million for the year. We ended the year with PLO 17% above the prior year, setting us up well for a good start to 2019. For the quarter, adjusted profit before tax was up 38% to $16.2 million.

Profit before tax was adjusted for discrete items, including the $11.7 million noncash impairment of our 35% ownership stake in Cash Converters that Stuart just mentioned. This revalued our prior year investments to the value of CCV stock at year-end, equaling the price at which they raised additional equity in June this year. This also incorporates recent movements in foreign currency exchange rates. Consolidated operations expenses returned to 69% of net revenues in the quarter and for the full year, consistent with our expectations and longer-term trend. This reflects the net revenue benefit of some of the investments we made in the third quarter.

As we look towards fiscal 2019, the underlying performance and cash generation of the business as well as comparability to the fiscal 2018 results can be obscured by the noncash interest we will record on a GAAP basis. This relates primarily to 2 items: first, amortization to interest expense of the estimated equity component of our convertible debt; and second, amortization to interest income of the deferred compensation fee and other straight-line interest income on our notes receivable. Adjusting for the noncash portion of each of these items according to their amortization schedules, I expect that adjusted net interest expense I'll use to analyze the business will be about $15 million lower than our fiscal 2019 GAAP interest expense, representing about $0.18 per share.

The adjusted results included in this quarter's slide deck do not reflect such an adjustment for noncash interest. For comparable purposes when evaluating next year's results: The fiscal 2018 full year results included about $8 million of noncash interest expense or $0.11 per share, with $1 million or $0.02 per share of that in the first quarter.

As Stuart mentioned, payments from our notes receivable remain current. In fiscal 2018, we received $38 million in cash from AlphaCredit. In fiscal 2019, we anticipate receiving another $30 million, reflecting the declining principal balance and related cash interest. We expect to collect another $6 million in fiscal 2019 as the first installment of the related deferred compensation fee, with the remaining $8 million due in fiscal 2020.

And a quick comment on taxes. As expected, we recognized the $2 million charge in the fourth quarter to further revalue our short-term deferred tax assets due to the new tax law. If you'll remember, we were subject to a blended tax rate in fiscal 2018 due to our fiscal year straddling the date on which the new law went into effect, though short-term DTAs were previously revalued at the 24.5% federal tax rate applicable to fiscal 2018 but are expected to reverse in future periods at the now applicable 21% federal rate. This is the last such revaluation I expect from the tax law change. Depending on the mixture of our domestic and foreign earnings and an assumed inflation rate that impacts taxes in Mexico, I expect our overall fiscal 2019 effective tax rate to be in the range of 31% to 32% for the full year.

Turning to Slide 9. Let's take a look at the U.S. Pawn results for the quarter.

With average PLO in the quarter slightly below the prior year, the 3% increase in pawn service charges was driven by an improved yield. This combined with an 8% higher sales gross profit or 9% on a same-store basis and a 210 basis point improvement in merchandise margins to an industry-leading 39%, drove strong results. Overall, we leveraged the 5% bump in net revenues to a 7% increase in adjusted profit before tax. We showed strong year-over-year PLO growth by the end of the period, up 5% in total and up 2% excluding the estimated impact of last year's hurricanes. Inventory was well managed, with an increase of only 2% in relation to the 5% increase in PLO.

Moving now to Slide 10. The left side shows that our disciplined approach and focus on meeting our customers' need for cash delivered an industry-leading PLO, PLO yield and net revenue per store in the U.S. Combining all these factors, we delivered a 15% increase in EBITDA, 3x the growth rate of our public pawn competitor and a very nice sequential improvement from our Q3. The right side of this slide shows same-store PLO growth by quarter stacked on the same quarter for the prior year and the same information for our competitor at the bottom of the chart. You can see our U.S. Pawn operations continue to take market share, adding to its long-term trend of market-leading same-store PLO growth. The ending PLO per store now stands at a 7-year high and 17% higher than the competitor at $305,000 per store.

Let's take a look at our Latin America Pawn operations on Slide 11. PLO here more than doubled, with pawn service charges up 99% on a constant currency basis. Same-store PLO grew 7% with an improved yield, driving an 11% improvement in same-store pawn service charges. In addition, we delivered a 63% increase in sales gross profit, a 100 basis point improvement in merchandise margins to 31% and a higher return on earning assets. The combined effect of these factors was an exceptional 82% jump in net revenues and an 86% improvement in adjusted profit before tax. This includes the results from the 207 net stores added in fiscal 2018 through both acquisitions and opening of new stores.

The left side of Slide 12 shows our industry-leading PLO per store, with monthly yields and net revenues per store roughly equal to our largest competitor. It's worth noting that the GPMX stores we acquired in the first quarter were more jewelry focused. Those stores' net revenue was more concentrated in PSC, with lower in-store merchandise sales than our other Latin American stores. I expect our net revenues per store will continue to improve as we continue to increase these stores' general merchandise lending and in-store sales. That notwithstanding, the acquired stores delivered a robust first year ROIC of 12%, which we expect to exceed 15% by their third full year ownership.

Putting all the pieces together, you see our 86% increase in EBITDA for the quarter compares favorably with the 2% growth for the public pawn competitor.

On the right side of the slide, Latin America Pawn delivered its 18th consecutive quarter of same-store PLO growth. This is compounding on top of an ever-increasing base. The industry-leading 7% same-store PLO increase this quarter was on top of a strong 11% growth we delivered this quarter last year. During this period, we produced much higher compound results than the largest pawn competitor, shown on the bottom of the chart. Year-end PLO per store was the highest in Latin America in a decade and the highest in the U.S. since 2011. Both figures demonstrate solid same-store growth year-over-year. Combined with the contribution from acquired stores, this sets us up well for a solid start to 2019. Although it's still early in the fiscal year, that's exactly what we've seen year-to-date.

Now that you've got a little bit of understanding on financial performance, I'll turn the call back over to Stuart.

Thanks, Danny.

And just turning to Slide 12, I just want to reiterate sort of the sum of the fundamentals we operate on the business, and the chart is quite appropriate because it is centered around the customer. And we've got a lot of levers that we're using, which are driving the results that we're seeing.

We've got the customer experience, and meeting our customers' needs has been the driver of this result. We are close to the customer. We are in the stores all the time, and we have a track record of executing on this vision as well as seeing the market share gains that come with it. We're seeing it through scale; strong margins; and as you've seen, the operating leverage that exists within the company. The industry dynamics remain attractive. While we have seen some recent volatility through Mexico, we believe in the long-term nature of the Latin American growth countries that we are in. We have a very diversified geographic footprint, and with that footprint come opportunities both for de novo and potential acquisitions. And we have the systems, incentives. And we have a great team that are driving the close relationship with the customer.

We're working hard on all these levers to get the share price back to the levels that we've seen in the past. And we continue to focus strongly on meeting the customers' needs at the storefront to drive future profitability in the company.

So with those closing comments, I would like to open it up for questions.

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

The first, gross margins improved about 1%, blended over the year. And what do you guys see in the intermediate term with that? Is this a good range to think about? Are you playing with different loan-to-values and so forth to expand that for next year? How do we think about that in the coming quarters?

Thanks, John. The -- I've always said the range should be around 35% to 38%. What we've said. But what we've seen with the way that we're managing our customers there, understanding the good and the riskier customers, we've been able to actually improve our lending to these customers. As a result of that, the margin has been held up pretty well. It's when the product drop that actually reflects both the customer risk as well as the product risk. So we're seeing some good margin activity as a result of the analytics we bought in. Obviously, we try to keep a healthy margin. And it does get a bit seasonal at times, but if we can keep it towards the top end, we'd be pretty happy.

Okay. And you have a lot of a good balance with cash in the balance sheet. You've been acquisitive. Can you maybe give me, give us some color on what the pipeline looks like right now?

Yes. I mean, we continue to have acquisition opportunities before us, but one thing we have said is that while we have cash, we're not going to deploy just for the sake of deploying cash. We've been disciplined. We have let opportunities pass. And for us, it's important to make sure that where we invest the cash, it's invested where the returns are actually very beneficial to shareholders. We still have the 2019 convert, which matures in June, so we're keeping the flexibility of that and making sure that, should opportunities arise, we can meet them as and when they occur. But again, John, I'm happy to hold a healthy balance sheet, and I think that's been the strength of the company over the last few years.

Okay. And then final question is you mentioned some -- I guess, the noise out of the new administration in Mexico. You said it might impact specifically toward retailers. Maybe can you give us color on what specifically that -- the comments were and also maybe remind us of what the kind of fee structure you have in Mexico is?

We don't really -- look, the -- it hasn't affected retailers at all. It was an effect on the banks. The banks in Mexico typically earn about 35% -- 30% to 39% of their revenue from basic ATM and transfer fees. And that's pretty high on a Latin American basis. And one of the members of the incoming party was trying to present a bill which suggests that ATM and transfer fees should be free, which caused the banks' share prices in Mexico to drop by about 10% and the pay schedules blow out. Within 3 hours, that has been revoked. And we're seeing the peso trade back to it. And there was a positive statement that the banking -- basically the banking industry wouldn't be changed for the next 3 years. So there was a short-term volatility. I think there was some contagion risk, particularly here in the U.S., when people went and assumed that we are a bank and not actually a pawn company. And it just shows that there is some nervousness still in the markets both in Mexico and here in the U.S., but we don't see any flow-on into this industry at all because principally we are looked at as a retailer. And there aren't any interest rate caps in Mexico, so we feel relatively comfortable with that position.

(Operator Instructions) Your next question comes from the line of Vincent Caintic from Stephens.

Actually, my question, first question, is going to be in separate geographies. So I just wanted to talk about the -- your investment in Cash Converters and also the regulatory change you had in Canada, so converting the payday loans to installment loans. It seems like there's a -- you have a lot of success from Latin America, and there's a lot more opportunity there. So kind of a 2-part question. If you could talk about your vision for Cash Converters and the Canada business, if you consider these businesses to be core. And then related to that second part, why wouldn't you maybe exit these businesses, harvest the capital and reinvest that more into the Latin America store growth?

Yes. Thanks, Vincent. Cash Converters, I think we own about -- just under 35% of the company. It's not as easy to exit a 35% holding because the market isn't that deep. And so what we're working on was to get the operational performance to a level where share price increase occurs. As I mentioned before, the analyst consensus for the Cash Converters share price is between $0.40 and $0.50. Their net profit after tax is around AUD 25 million, so it trades on about a [6x p] which is very, very low compared to the market, but that industry has been hit quite hard. We think there is still value there. And we're working, obviously, to try and ensure that the profitability of that company continues to increase. So firstly, the exit is very difficult. Secondly, we think there is still upside in the company. And thirdly, we're actually working closely with Cash Converters to see whether there's any value we could help them with in our understanding of the market because they do operate in a very similar market to us. On the Canada, the -- we're moving into installed because that's actually basically where the regulators are moving everyone. We still offer short-term loans, but we're actually moving more into the installment loans. And from memory, I think we have actually -- are writing more installment loans than we are short-term loans. So we're seeing that change. And the interest rate cap came down in around January from 18% to -- no, came down in January. So we're watching that business. We think there's still -- it's a good industry for us. It's not big at all, but we think this -- given the credit culture that sits in Canada, the loss instance in lending is much less than what we have seen in the payday industry in the U.S.

Okay, got it. That's helpful. I guess, switching gears here. I know that the -- that Mexican fee concern has been driving the stock, unfortunately, so I'll just have maybe a couple of questions there. I don't know if you can discuss maybe what the -- I don't know if there's like differences or comparisons on the rate structures of the fees that the different pawn players charge, like for example if you think about the nonprofits versus what you charge. And is there really any difference between what you -- like -- in different geographies, for example if you compare Mexico to the U.S., like what are the differences there?

Well, Mexico for us is a much larger general merchandise business than jewelry. And part of that is some of the security concerns we have in Mexico. We used to -- exhibiting jewelry comes with a lot of risks. So we push pretty hard into the general merchandise, which typically does attract a higher interest rate than jewelry. So there is that anomaly that we do. The not-for-profits, such as Monte de Piedad actually pretty much loan on a very low loan-to-value ratio. And as a result of that their merchandising really isn't that heavy, so there really -- and it's a different customer that goes there. We make sure that when a customer enters the store, we understand what their needs are, we provide them with their cash needs. And that's why we are getting flow, where some of the not-for-profits don't satisfy the customer's need for cash, we'll say, operate in a very low loan-to-value ratio. So there are anomalies in the market. It's not as if there is one type of pawn customer. There are various segments of pawn customers. And for Mexico, typically it has a stronger growth profile as we keep pushing into the general merchandise sector of the market.

Yes. To add on, our focus on customer service and the customer relationship as well is a key differentiator between us and a lot of the non-profits that really don't mind their customers queuing up in a long line, yes.

Your next question comes from the line of Greg Pendy from Sidoti.

Can you just tell us kind of where we're at right now in the IT rollout? And how is that playing a role, if any, in sort of the merchandise margins that you're seeing? And is it something that could potentially help you on the pawn yield side as well?

Greg, yes, we've got about 50 stores operational and fully operational on the pawn system in the U.S. And we've got a small number in Mexico, but we're going to accelerate that rollout such that we anticipate virtually all the U.S. to be pretty much on stream by the second quarter of the calendar year of next year. What we're seeing in Mexico will be pretty close behind that. And obviously, we don't -- we won't be rolling out through Christmas and the tax refund season, which is where the stores are the busiest. So it all becomes the window of opportunities as to when we can insert it. What we're seeing is the actual ability to serves the -- serve the customer much quicker. The click-throughs for loan applications is substantially quicker. We've put in some basic analytics of customer grading into the pawn system, which will enable us to make better decisioning at the front, and hopefully that will exhibit itself in both inventory yield and pawn yield improvements. I don't think it will be dramatic, but over time we'll, hopefully, see some improvements in that area.

Okay, great. And then can you just kind of -- I know there's been a lot of acquisitions, but now inventory, it's come down sequentially, I think, for 2 quarters straight. How comfortable are you at that at current inventory levels? It seems like the demand for the merchandise is solid, but we're heading into the holidays, so is that something that will continue, you think, to come down? Or is this a stable level?

Look, I think we can -- it can still come down, but we're coming into the sale season at the moment, so we'll typically hold a higher inventory balance coming into the Christmas and the tax refund regions. So I wouldn't -- my preference is to see that come down, and I think we will see it come down. We're actually getting better at moving product through with the systems we do have, but inventory is a capital cost and we need to keep moving it so we can get the returns back. So yes, we'd like to see the inventories continue to come down. I think we're getting there with the PLO growing quicker than inventory, so we're getting the positioning right, but I think there's still more we can do to move it.

(Operator Instructions) Your next question comes from the line of Chris Colvin from Breach Inlet Capital.

You continue to grow faster than First Cash and outperform them on multiple metrics, yet you traded more than a 60% discount. And historically, this discount has been far lower, so given this, can you please articulate your strategy for closing the valuation discount? Because it would clearly create tremendous shareholder value.

Thanks, Chris. I think we're frustrated as well. Our operating performance and focusing on the customer, we still believe, is the right thing to do by growing geographically and keeping the relevance and operating much more efficiently. I think there's probably some disadvantages working to us on share buyback, dividends, which I think is just an inherent structural issue that is closest to trading at a discount. I believe the mix again overlay that has just happened caused about a 4% drop in the share price, which didn't come back notwithstanding the clarification of the events. So I think there are some structural issues that work against us, but we still believe that by executing on the relevance of the key drivers that we've outlined on Slide 12 we'll continue to grow: that we have the best systems, we have the best teams and we have the capital to deploy into accretive acquisitions. And we have -- are getting the scale and the margin driver. This -- the interesting thing about this business and this industry is that it all happens at the store level to get operating performance. And we spend a lot of time ensuring that we're assisting our team members to get the best out of it, so the strategy of investing to the systems, investing to coaching, expanding the geographies so that we can use our proven systems to continue to drive growth, we believe, is the right one. But Chris, as we have discussed, I think there still are some structural headwinds that we're hitting. We'd like nothing more to see the share price get back to the levels that we've seen, and that's the objective of management. It's to execute better than anyone else, put runs on the board and get the market to support us as we go through it. And we're just supportive of where the share price is. We think it should be higher, but we will continue to speak to shareholders to drive that performance and work towards getting it back.

Your next question comes from the line of Jordan Hymowitz from Philadelphia Financial.

What is the average rate you charge in Mexico versus the U.S. on a blended basis? Because I know you import taxes rates down there generally.

On the U.S., we're averaging 15%. In Mexico, it's averaging around 18% -- oops, it's got...

(inaudible).

Yes. It's about 16%. So in the U.S. it varies by state, so it all messes around. And in Mexico, it depends on jewelry and GM as to where you sit, but typically in Mexico we'll get a high yield on the loan portfolio.

Okay. And you said [on Mexico] it's higher by 200 basis points, you said.

In Latin America, we averaged 16% for this quarter. In the U.S., I think we're 15% -- 14% in yield. That's an average rate, so about 200 difference between Latin America and the U.S.

Yes. I'd point out, Jordan, that's not the statutory rate. That is taking into account forfeitures as well, all right? So that's calculated on the average

Yes, but on average it's looking at 200.

Perfect. And second, regarding the proposals in Mexico. Right now they're only discussed enjoining the banking industry, but several of the retailers and retail analysts down there have come out saying it could affect FEMSA or Elektra or Gentera or other consumer lenders. Why would the retailers be concerned that it could affect them if they're not banks, and you're not concerned? Because if it's through fee cap or a rate cap, wouldn't it be across the board?

Yes. The -- I mean Elektra is an unsecured lender, so they're a bit different to us. While they're a retailer, they're also an unsecured lender, so they would be caught that way and not -- that way. Typically, if it's going to move, it will be an industry move, not a particular company move. There was a statement that analyst party came out that's saying that they wouldn't basically change the banking structure for 3 years, seeing the reaction that was taken. And that's why we have a degree of comfort, but I'd also say that, as one of my friends said, it is Mexico and things can change quite rapidly. So while we're comfortable today, we believe that things can change...

And I think that's correct, the analysts' statement. It says that, but Moreno (sic) [MORENA] a Senior Senator, Montréal (sic) [Monreal] has said that he will ignore what analysts says and proceed with legislation. So it's kind of like in the U.S., namely AMLO may not be pushing it, but his party is pushing it. And if they pass something, he may end up signing it.

The Ministry of Finance has said that they would actually have to look at any proposal and would have to approve it before it gets anywhere as well. So it's still a lot of moving parts, Jordan. And we are obviously the recipient of the news rather being in it, but there is uncertainty. And I don't disagree with you there, but there seem to be some checks there. But like you will have to see how it plays out, but at this stage it -- we see it as a banking issue; and with my previous comments that the banks make around 35 -- on average about 35% of their revenue comes from these fees, which is extraordinarily high in Latin America. And I think that brought about the comments from the MORENA party about why these fees should be regulated.

(Operator Instructions) Your next question comes from the line of Brad Hathaway from Far View.

Two questions for you. One, I guess, I just want you -- wanted to clarify on the Mexico issue that there's a difference between how you're viewed as a kind of secured pawn lender versus these kind of unsecured lenders in the country. And then the second question was I was pleased to see the move to a per share-based compensation in this year's 10-K, and I was curious if you could give a little more background as to how that came about.

Okay, the -- I'll deal with the first one. Typically, the pawn shops are seen more as retailers than lenders. While we do lend in the -- it is, first, it's -- the way it's viewed is pretty much -- I think it's with (inaudible) who sit over the top of it, who are actually more of the retail side than the lending side. So having a blended operation means that we're actually looked more as a retailer than a lender and sit under that versus unsecured lending, which is pure outright unsecured lending. So that's just the way it's looked at in Mexico. On to the EPS: Well, we have a compensation committee which has compensation consultants. They look at the structure of the long-term incentive. They were -- obviously we've been discussing with shareholders. Their view was that the EBITDA for both short term and long term didn't seem to -- doesn't seem to make a lot of sense. And we actually took that on board, and the compensation committee took the guidance from the consultants. And the EPS number, which we as management is very supportive of, is in the long-term incentive program.

And the other I'd tack on, on the secured versus unsecured. Much like we saw in the U.S. with pawn lending versus payday landing, there was a lot of concern around cycle of debt, with payday loans kind of the historical regulatory overhang, where the pawn industry has been viewed much more favorably, largely because a customer can fully satisfy their debt just by forfeiting the collateral. And I think politically that's likely to be viewed very similarly in Mexico as well.

Your next question comes from the line of Matt Sweeney from Laughing Water Capital.

Can we just kind of step back and revisit the question a couple questions ago asking about the potential for share buybacks and what those structural issues might be? And basically, the way I'm thinking is, in the past, you said you can make acquisitions in the 4 to 5x EBITDA range and maybe 6x for really good assets. And looking at the stock now, it's trading below our estimations of liquidation value, that you're going to just sell off all the stores piecemeal. And assuming you believe in the value of Cash Converters and the likelihood of collecting the Grupo Finmart receivable, the stock is trading in that range where you would make an acquisition. So my question is, why would you not execute a tender offer here, essentially making a large acquisition in your own stock, which would remove all the operational risk?

Well, it's I think we're asked that question in the third quarter. If we'd done before, we would have lost a bit of money. We have the cash there for a number of reasons. One is that we do have a convertible coming up, which is a commitment that we do have. Two is we have a number of opportunities from acquisition that we believe are a value to the company in the long term. And if you look at the return, the ROIC, is it's not a 6 months or 9 months that we look at, but we look at a 3- to 5-year period. Typically, the share buybacks occur when we have surplus cash that is above our commitments as well as our acquisition opportunities. When we did the convertible earlier this year, we actually raised cash, and we were at a 9.5x EBITDA. So on a marginal basis, there are plenty of opportunities which are accretive on the basis of the marginal cost of funding that we raised at that time. We continue to see the operations. We -- I hear when we have discussions with shareholders all the time, but on a marginal basis, there are a lot of accretion that can occur with the investment and to the opportunities we're seeing.

Okay. And then another question and just for some context. We have owned shares for about 3 years. The initial investment was very much a special situation where, we believe, the stock was trading below asset value. And that obviously worked out very well, but the investment has kind of involved -- evolved into the belief that EZCORP has the potential to be a multidecade growth story, which we know from reading some of the legal documents that are out there that's a view that Mr. Cohen agrees with. The question is, is there a realization that over time the amount of value that is ultimately created through growth is going to be directly tied to the cost of capital? In other words, if your stock is trading at 10x EBITDA and you make an acquisition at 5x EBITDA, that's great, but if the stock is trading at 6x EBITDA and you make an acquisition at 5x EBITDA, you're really just -- we're really just pushing paper around and not really creating any value. So what's your view on the importance of the cost of capital? And what are the levers that can be pulled?

Yes, we look at the return on capital of all the investments that we are looking at over the 3- to 5-year period. So we're not immune to wasting capital. We're trying to understand. And we have not backed acquisitions where it hasn't worked out, but as you saw with the GuatePrenda acquisition, that's been a very lucrative transaction where we've been out to use our skills to grow it such that it has reduced the EBITDA multiple that we paid very quickly in a short period of time. We think the acquisitions to grow, and we look at what is the long-term value. We also believe that we're undervalued, but we think that the growth opportunities we have will retrieve that value very quickly.

So I guess -- and I guess the question is, looking back over the last 30 years, there has been 0 value created essentially. I mean the stock has compounded at 4% a year since the IPO in 1991. And First Cash came public within 2.5 months of that and has compounded at about 16% over that time. It seems like the board, which has been historically making the decisions around this kind of stuff, does not have a strong track record of actually understanding how value is created. Is it your position that, that has changed and that the board has found religion under your leadership or under you as CEO and we can expect improvements going forward?

Yes. I think the board are actually fairly attuned to the use of capital all the time. It has over that...

How do you...

Sorry. I have -- Sorry, Matt. Over the period of time, we've mentioned share prices swung to very high and very low in that period of time. We haven't consistently taken point to point very hard. 2011 to 2014, we made a number of acquisitions, which actually affected I think the trust in the company, the trust in the board. And that was reflected in the share price decretion. So we're on a rebuild strategy. We had a restatement as a result of some of the accounting actions that were undertaken at that time. We're only a couple years out into the profitability after that, and we are on a path to continue to grow. So I think there have been some issues at both management level and potentially at board level. I think, given the -- some of the acquisitions we've seen we've come out of hasn't been assessed on a capital efficiency basis. So I think some of your comments are correct, and I think some of them aren't. The board does have a strong handle on how to utilize cash, has a strong look at how it's being done. And as you've seen with some of the incentive programs they're focusing on getting back to the EPS-type basis where there's an alignment with the shareholders. And as I said before, we're going to get the share price up and see it come up because we also believe that this is a great growth opportunity and is an international growth opportunity.

And then the add-on. We've been looking at acquisition opportunities or investment opportunities. We remain very disciplined at making sure that the expected ROIC on that exceeds our weighted average cost of capital because, to your point, Matt, that's the only way you're going to create long-term value, yes. So we're pretty disciplined around that. And actually, it's some of the reasons we will walk away periodically from deals that don't meet that threshold.

And so you referred to some of the acquisitions in the 2011 to 2014 time period. And I guess, how as investors should we have confidence that things have changed, when the consultant that oversaw those acquisitions is now the Executive Chairman of the Board getting paid 10x more than the Chairman of the Board at First Cash? Because in my experience -- maybe there's exceptions in Australia, but in my experience I've never seen a situation where a consultant destroyed massive amounts of value and then was made Executive Chairman. So how as investors do we have confidence that something has changed given that setup?

Yes. Well, I wasn't here at the time, but I would have to ask him. I don't think he was involved in those acquisitions, but I'm not here [to provide guidance.]

According to the filings.

Yes. All I can say is that there's a strong -- the board have taken a strong look at everything, and we believe we're on the right path. The discipline is in place to go there. No one individual actually has an ability to make a decision without the consensus and agreement of the board, so the ability to have any individual make a carte blanche decision in the management team and the board is actually quite well insulated by the processes we have in place.

I would just like to add that the optics of that are just terrible. And it would be a very easy way to improve optics, which would likely improve your cost of capital, to address that discrepancy between someone who had a record of being -- participating in destroying value now being the Executive Chairman.

Thanks, Matt. Well, I would add he's been involved in the acquisitions that we've done which have become very accretive and very positive. So we -- I certainly don't have that experience at all. And he's a valued member of what we're doing. But thanks for your call, Matt. And thanks for your support.

Your next question comes from the line of Sam Chase from Stephens Investment.

I have a quick question that follows up on some of these questions this morning regarding capital allocation. Stuart, when you have investments in Latin America that you guys are deeming to be ROI positive to the firm and shareholders, why double up -- or I guess it's not double up, but why put capital into Australia again into a company we don't control as shareholders, no matter what the price you deem to be fair value with that company? I mean EZCORP isn't an investment holding company. It runs pawn stores. And you guys, I would think, would want to put your capital into investments where you control 100% of the assets instead of an asset you control 30% of the assets and have no management. You don't run the company on a daily basis. So can you just walk through that? And it said in the K that, since September 30, the share price has declined again. We may be revaluing that asset again. I mean it looks like, if you go back and we're talking about First Cash, which I know very well as well, I haven't been on a conference call ever with First Cash where we're talking about investments of minority positions in foreign countries a long way away. And if you want to collapse the multiple, I think the first way to do it is to be to own the assets that we're putting our capital into. So could we -- can we talk about that a little bit?

Sure, Sam. And thanks for the call. The investment in Cash Converters is actually in a similar business that we do have. They actually run a very similar-type structure. They have home operations in Australia and franchise globally. There is an overlap in the way they do develop their business and their opportunities, and we do like what they do. Your point about should we put more money in or not, I think, is an irrelevant one. At the time, they needed capital to pay off an unsecured debt line, and we saw the support with them. We see the growth, and we believe that it is a good investment. Owning 100% of everything isn't necessarily the right way to go when you can partner and get good returns. Unfortunately, as you've correctly pointed out, the Cash Converters share price hasn't reflected some of the growth in their profit. And that is due to, for instance, the senate inquiry which I mentioned previously, which is an industry overhang and not a specific Cash Converters overhang. It's disappointing. And I hear what you say, and we will be deploying capital into Latin America and will continue to do so. At this point of time, there are no plans to put any more capital into Cash Converters, as your point is a very valid one.

Okay, so it's fair to say that going forward no capital into Cash Converters. At this point, they got to sink or swim on their own. And from my standpoint, it's just on we're trying to raise capital of the firm. And mostly, at this point, that's been on the convertible debt market because that's what's available to you guys. I just would hate to see that capital go to an entity that we don't control as shareholders. It just seems a -- to make a lot more sense to me to put it towards assets that you guys control.

Yes. At this point of time, I don't have any plans, we don't have any plans to put any more capital into Cash Converters.

Your next question comes from the line of Chris Colvin from Breach Inlet Capital.

Two follow-ups. I guess, before my questions, I understand and share in some of the callers' frustration. I think the reality is, some of those structural things, we may not be able to fix near term. However, as I mentioned in my prior question, you guys historically traded a much smaller discount. In fact, I think we calculated 15% for the first decade -- or the prior decade Joe was there. So -- and today, it's 60% plus. So I think, even with those structural issues, you can start to close the gap. And I know we were pleased to see, as another caller mentioned, that EPS was added to your long-term incentive plan. I would also echo another caller's comments that we would love to see a buyback here. I can appreciate the reasons, and you've already addressed it, but I just would want to echo that. To get to my 2 questions, I guess, great to see U.S. PLO store growth now back above $300,000. I think it's the first time since 2011. Can you talk about how you're able to drive that? And then my second question would be do you feel like you're still well positioned to do well during tighter credit environments. I mean, obviously, everyone is starting to get concerned or worry about to hit kind of an economic slowdown. So if you can touch on how you expect your business to perform in that type of environment, because I imagine it would do pretty well.

Yes, thanks, Chris. The -- as I mentioned previously regarding the PLO in store, everything happens at the store. It doesn't happen by remote management. We've spent a lot of time investing and getting the right compensation platforms for our teams, so that they're aligned to the outcomes that you're seeing today. By getting great people, which we're doing -- we're trying to increase the tenure of these people because we know that when we have store managers with tenures between 5 and 7 years, we have a very successful store business. And we're starting to see the value of the work of -- around the compensation to increase the tenure. We've focused on the activity on a per-day basis as well and by focusing on the daily outcomes. And it's a focus that goes through myself, through Joe, all the way down the organization to the team members. It works on the basis that we know exactly what activity is being undertaken in each store on each day. And the businesses are micromanagement business. You do have to be over the top of it. It's not remote management. And by having those -- by having the positive PLO experiences that we've had over the past 2 or 3 years means that we're getting more customers. And we know that, by getting more customers and satisfying their needs, they talk to their friends about it and we get an enhanced return. So I wish there was a magic wand and I could say that you run over the top of it, and by adding water, you can make a lot of money, but it's actually the hard work that's going on over a long period of time to achieve it, to get it to this level. I think it's going to be supported more with the systems we've put in place. That will help us as well, but unfortunately the answer to the questions is just this is more with hard work at the store level and that we've got great people.

Yes. Chris, you'd asked also about, in an environment of an economic slowdown, how the company would -- how we'd expect it to respond. I'd say a couple things there. With the extremely low unemployment that we've seen in the U.S., that does -- is a bit of a headwind for pawn lending. Obviously, that provides our customer with a bit more cash, where in a slowdown I think that would probably increase demand a bit for our product. And then the gold prices as well, all right? So that's obviously been a little depressed lately. With an economic pull-down, I think you would probably see gold prices go up a bit, which is a net positive for the company.

There are no further questions at this time. Mr. Grimshaw, I turn the call back over to you.

Thanks very much. And thanks, everyone, for their interest. It's been a good, robust session. We appreciate your support and the questions that were asked. We'd like to thank you for dialing in or if you've logged into the webcast. Both Danny and Jeff will be available for questions later this morning.

That concludes the call. Thanks very much, and have a great day.

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