EZCORP, Inc.
Q4 2007 Earnings Call Transcript

Published: 9 Nov 2007

[Operator:]

Good afternoon, and welcome to the Quarter Four and Fiscal2007 EZCORP Conference Call. At this time, I would like to introduce your host,Joe Rotunda. Thank you, and have a great conference. Go ahead, Mr. Rotunda.

[Joe Rotunda:]

Thank you, Lisa. Good afternoon, thank you for joining ustoday. With me is Dan Tonissen, our Chief Financial Officer. We'll beaddressing our fourth quarter and fiscal year 2007 results. I am going to begin with a high level overview of thequarter and the year; Dan will follow with a more in-depth review of thefinancials; and we'll conclude with guidance for the new fiscal year. 2007 has been a busy and productive year for us. In June, wecompleted the largest acquisition in our history

[Dan Tonissen:]

Thanks Joe. Joe gave you an overview of some of the numbers,and I'll give you a little more detail, starting with our statement ofoperations, on page 3 of the earnings announcements. Now, I will start with thefew comments on pawn net revenue. For the quarter our pawn net revenues comprised of salesgross profit, which is lines 2 plus 3, less line 11. Pawn service charges,which you see on line 4 and other revenues on line 6, increased $5 million or14% to $41.3 million. Merchandise sales, line 2, increased $3.1 million or justover 10% to $33.1 million. Same-store sales growth for the quarter wasapproximately 3%. After a 1 percentage point margin improvement, merchandisegross profit. Line 2 minus line 9 increased $1.5 million or just under 13% to$13.5 million. Scrap gross profit, line 3 less line 10, decreased $264,000or roughly 5% to $5.4 million. During the quarter, we scrapped approximately$1.7 million grams of gold jewelry, a decrease of roughly 2% from the prioryear quarter. Our proceeds per gram increased 7% to $10.08, while our cost pergram increased 13% to $7.16. Included in jewelry scrapping sales is approximately$460,000 from the sale of loose diamonds. This is comparable to the proceedsfrom the sale of loose diamonds in the prior year quarter. We typically forward contract our gold scraping, 30 to 90days in advance, and as a result we only realized benefit from the run up inthe gold market that we experience starting in September. For the quarter we turned our inventory 3.5 times, and thatcompares to 3.3 times a year ago. Inventory levels per ending store at the endof the quarter were flat with prior year quarter at a $127,000. Fund service charge revenues, line 4, increasedapproximately $3.7 million or 20% to just under $22.1 million. Same-store pawnservice charge revenue increased 9%. Our annualized yield and our pawn loanbalance improved one percentage points to a 145%, and our ending pawn loanbalance was up 21% from the prior, 13% on a same-store basis. Now let me just talk about the signature loan side of ourbusiness. For the quarter our signature loan contribution which line 5 lessline 15 improved 30% to $20.8 million. The benefit of a 38% increase in oursignature loan fee revenue line 5 was partially reduced by higher levels ofsignature loan bad debt related fees. Signature loan bad debt expense which you see in line 15,measure as a percent of signature of loan fee revenues, line 5, increased to31% compared to 27% for the prior year quarter. However this is 7 percentagepoints lower than the June quarter. Looking at bad debt levels relative to loans originated inthe quarter, our net defaulted principal as a percent loans originated came inat approximately 6% and this compares to 5.2% for the prior quarter. Loanoriginations for the quarter were up approximately 40% to $155.7 million. Afterhigher levels of operation expense, line 14 administrative expense line 16, anddepreciation and amortization line 17, operating income increased 28% to $16.7million. Increases in operations expense and depreciation andamortization are primarily due to new stores. The increase in administrativeexpense is primarily due to stock compensation, additional administrativestaffing to support our growth, and inflationary increases. Included in operating expense is an out-of-period charge, astore rent expense of $349,000 due to an error we discovered during the quarterin our lease accounting. Most of this out of period run expense is in ourEZMONEY segment and $284,000 of that should have been applied to an earlierfiscal year. These amounts were not material in the current quarter orany of the prior periods that would have been impacted. Operating incomemargins as percent of net revenues improved 1 percentage points, 1 point to23.4% due to our pawn operations performance and lower levels of administrativeexpense relative to our net revenues. Now, if you turn to page 6 of our earnings announcement fora couple of comments on our segment reporting, the EZPAWN operations segmentand the EZMONEY operations segment. Starting with the EZPAWN; after a 13% increase in our EZPAWNnet revenues and a 6% increase in EZPAWN operations expense, our EZPAWN storelevel operating income which you see on line 15 increased 24% to $19.1 million. Our operating income margins for our EZPAWN operationsimproved almost 4% points to just over 45% of net revenues. The 15 formerJumping Jack stores generated operating income of just over $800,000. Aftersome incremental administrative expense and depreciation and amortization, wehave realized an approximate $0.01 per share benefit from this acquisition inthe quarter. After a 31% increase in our EZMONEY signature loancontribution, which is line 4 less line 13, and increases in our EZMONEYoperating expense line 12. Our EZMONEY store level operating income line 35,improved 29% to $8.5 million. The primary reason for the increase in EZMONEYoperations expense is the 99 net new locations. This is EZMONEY result, include an approximate $1.4 milliondrag from new stores, which was flat with the prior year quarters' new storedrag. Operating income margins for EZMONEY operations decreased 6percentage points to just under 29% of EZMONEY net revenues, line 9. That'sprimarily due to the higher levels of bad debt, compared to the prior yearperiod and the auto period run charge that I mentioned. For the quarter, ourEZPAWN segment made up approximately 69% of our store level operating income. Now a few comments on the balance sheet on page five, theearnings announcement. You can see that we have approximately $22.5 million ofcash which you see on line 3, on our balance sheet. Roughly, $17.2 million ofthis amount is non-operating. You can see that our payday loan balance on line 5, almostdoubled in the last 12 months to $4.8 million. Not included on our balancesheet is $23.3 million of loans brokered with an unaffiliated lender. These brokered loans increased 28% in the last 12 months.Our investment in Albemarleand Bond or A&B is carried on our September 30 balance sheet that's justunder $35.7 million and you see this on line 14. This includes our additionalinvestment of $13.4 million, which we announced on July 11. Using September's ending closing price on Albemarle and Bond'sstock of 2.68 pounds, and an exchange rate of $2.05 per pound, our 16.3 millionshares, including the shares acquired in July, would have a market value ofjust under $89.6 million. This represents approximately a $1.31 on a reportedbook value per share. You see on lines 35 and 36 that we ended the quarter with298 pawn locations and 433 signature loan locations. Now let me give you alittle bit more, a couple more data points on the Mexico acquisition. You know, as Joe mentioned we closed on the acquisition onMonday, October 22nd. We acquired 20 operating locations which were located inCentral Mexico, as well as the headquarters which is in Queretaro. The transaction was an assetpurchase and we acquired $3.2 million of pawn loans, roughly a $160,000 perstore and about $1.2 million in inventory, including the inventory which isinlay it was. The total consideration in closing cost was expected to beapproximately $15.4 million, including just over $1 million in non-recoverable [EVA]or bad tax on a portion of the transaction. In the next 12 months, we expect these stores to generateapproximately $3.5 million of store level operating income before depreciationand amortization and approximately $2.2 million after administrative expense.This would represent approximately $0.03 per share. As Joe mentioned, we view this as a strategic investment,which will give us the infrastructure and scale to accelerate our growth in Mexico. Now, let me turn the call back over to Joe.

[Joe Rotunda:]

Thank you, Dan. Looking forward, we will maintain the sameintensity on growing the business, improving profitability, and strengtheningour balance sheet as we have over the past seven years, and we continue toexpect all business segments to contribute with year-on-year growth andimprovements in earnings contribution. In our EZPAWN Operations, our guidance incorporatessame-store mid-to-high single-digit growth in net revenues. Included in this isan average market price of gold at $750 an ounce for the year. In addition, theJumping Jack Cash acquisition's layered in incrementally for the first threequarters of the year. For our EZMONEY signature loan segment, we are planning tocontinue our strong growth trend. Organically, we'd expect significantdouble-digit same-store loan growth. We expect our bad debt to be in the rangeof 26% to 29% for the new year, fluctuating seasonally by quarter. Our guidance on store growth is to add approximately 100 newEZMONEY stores. The new store builds will be in our existing 11 states plus theaddition of Missouriduring 2008. In our Mexicopawn segment, we're going to focus on assimilating the 20 acquired stores in toour infrastructure during the first quarter. We will follow this immediatelywith the integration of our four existing Mexican stores in to theiroperations. During the new year, we plan to add between seven and 10 newpawnshops in Mexico,and in 2008 with a store count in the range of 31 to 34 locations. All-in-all, we're providing guidance for fiscal 2008 of $1.12in diluted earnings per share versus 2007s $0.88, an improvement of 27%. Weexpect first quarter EPS of $0.28 as compared to last years' $0.23, animprovement of 22%. While we were pleased with what we've accomplished over thepast several years, and this past year in particular, our excitement grows aswe contemplate the potential we still have in front of us. That concludes our prepared comments for today. Dan, ifyou'll read the safe harbor, we'll go on to questions.

[Dan Tonissen:]

This conference call and earnings announcement containscertain forward-looking statements regarding EZCORP's expected performance forfuture periods, including but not limited to new store expansion, expectedfuture benefits of acquisitions and investments, and expected future earnings. Actual results for these periods may materially differ fromthese statements. Such forward-looking statements involve risk anduncertainties, such as changing market conditions in the overall economy andthe industry, consumer demands for the company's products and services, actionsof third parties who offer services and products in the company's locations,changes in the regulatory environment, and other factors periodically discussedin the company's annual, quarterly, and other reports filed with Securities AndExchange Commission. Lisa we'll now open up the call to questions

[Operator:]

(Operator Instructions). Our first question comes from theline of Daniel O'Sullivan of Utendahl Capital Management. Please proceed

[Daniel O'Sullivan -Utendahl Capital Management:]

Yes. Hi Joe and Dan, thanks for taking my questions. Greatquarter guys.

[Joe Rotunda:]

Thanks Dan.

[Daniel O'Sullivan -Utendahl Capital Management:]

Quick question. Out of the entire group, I have to say youguys actually came right in line with my last expectations. Most othercompanies are little bit higher. May you can expand ….

[Joe Rotunda:]

We lost you, Dan. Lisa

[Operator:]

One moment, his line did [drown]. Please proceed Mr.O'Sullivan

[Daniel O'Sullivan -Utendahl Capital Management:]

Can you guys hear me now?

[Joe Rotunda:]

Yeah

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay, great, sorry about that. Yeah I was asking about loanlosses. I made a comment that you guys came in right in line with what I waslooking for during the quarter as opposed to some others in this space, whichwere higher. So wondering, if you guys may be have tweaked the underwriting oryour collections, what are your thoughts on loan losses for the quarter?

[Joe Rotunda:]

We did basically what we talked about last quarter. And, ifyou recall, in quarter three we saw that is an opportunity to expand marketshare and we reduced, we adjusted some of our underwriting. We were veryaggressive at the beginning of the quarter, and as we saw our losses, our baddebt, began to increase, all we did was adjust our underwriting. We thought we brought it back in line as we moved throughthe end of the June quarter, and it was pretty much on projection with in apoint or so of where we thought it would be this quarter.

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay.

[Joe Rotunda:]

Basically we just followed it through with what we said wewere doing.

[Daniel O'Sullivan -Utendahl Capital Management:]

Great. Do you guys feels like you picked up some marketshare in Texas?

[Joe Rotunda:]

Texasperformance has been good. What was really encouraging for us in the quarterwas the growth that we had in fees was actually higher than the same growth wehad in this quarter a year ago, we were a couple of points higher. And when you consider the fact that we added about the samenumber of stores through the quarter end and through the year, a 100 stores onthe basis today of 400 stores that will give you the same lift that a 100 storesdoes on a basis of 300 a year ago or 200 a year before that. So, we werepleased with the performance we had in the growth of business now. As far as taking away from our competitors or peers, I amnot sure about that. I believe, as I stated so many times before, this isprobably $100 billion marketplace, and our industry is only scratching thesurface. We still have (inaudible).

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay. Well, I mean, if we take a look at the Texas market,in particular, there is a lot of focus out there that as of way I have beenmentioning more competition and saturation in that market. What your thoughtsthere?

[Joe Rotunda:]

Basically, as I said in past I don't know believe we areanywhere near saturation and I think, I said on the last earnings call or theone before that, we could probably add another a couple 100 stores in Texas andcontinue to grow the marketplace.

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay. And Joe, I am sorry, there is (inaudible) just a fewcouple of minutes of the conference call at beginning. Did you talk about yourconsumer loan product and how that's ramping up?

[Joe Rotunda:]

I talked about the installment loan.

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay.

[Joe Rotunda:]

We are quite pleased with that and we believe we have armsaround the underwriting and managing the bad debt and we are continuing toexpand it. We will throughout Texas and windupwith 125 stores by the end of fiscal year '08 in Texas and we will take it outside of thatstate as well. And the debit card with overdraft protection, the customertake up hasn't been near where we thought it would be and I believe that theprimary obstacle or issue we have there is that requires the customer to committhe direct deposit of their income into the debit card account and that seemsto be some what of the hindrance on growing it as we thought we would but we'recontinuing to watch it.

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay. And one last question just given where we think goldprices over the last few weeks have you guys been opportunistic and maybe scrapit little more than you normally would?

[Joe Rotunda:]

Yeah that scrapping more we have sort of locking in someprices, so we would get out in November, December.

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay. And how does that impact the loan to value ratio? Haveyou yet to move that up, I mean, there has been competition in that area?

[Joe Rotunda:]

We haven't, we are still watching that we haven't made anychanges in the last 30 days, we've made several changes, as you know, duringthis past, latter half of this past fiscal year and with that we've been quitepleased because we build our portfolio nicely and our redemptions have beengood and the yield's been very good. We haven't had the forfeitures that we've had in the pastand we haven't been scrapping with the kind of growth that we've had inscrapping in the past. We are continuing to watch it, we haven't been much moreaggressive with pricing at loan [value share].

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay. And one last quick one, given where the stock has beenand you guys are sitting at almost $23 million in cash down in September, if youguys can give any consideration through a buyback, has the Board discussed thata lot?

[Joe Rotunda:]

We've discussed a lot of different alternatives, Dan and westill believe that the long-term benefit to our shareholders is best served bycontinuing to invest in earning assets and that's what we are continuing tolook for.

[Daniel O'Sullivan -Utendahl Capital Management:]

Okay. So, that wouldn't preclude acquisitions in 08 then?

[Joe Rotunda:]

No, we are very interested in acquisitions that make goodeconomic sense.

[Daniel O'Sullivan:]

Okay, great. Again nice performance this quarter guys,thanks.

[Joe Rotunda:]

Thank you.

[Operator:]

Thank you Mr. Sullivan. Our next question comes from theline of Dennis Telzrow of Stephens Inc. Please proceed.

[Dennis Telzrow -Stephen Inc.:]

Good afternoon, Joe and Dan.

[Joe Rotunda:]

Hi Dennis.

[Dennis Telzrow –Stephen Inc.:]

Joe on installment loan product, refresh my memory on whatright were charging there and how's that structured?

[Joe Rotunda:]

It's a five-month product, if you use an APR to calculatethe type of rate that's associated with it. It's about 70% or 75% of the rateson a traditional payday loan.

[Dennis Telzrow -Stephen Inc.:]

Okay. And the [pawn] rate there is too soon to tell wherethey sort of go out, I guess, you haven't had it out there long enough?

[Joe Rotunda:]

We have quite a few loans that are out there, but they arelayered with the different levels of underwriting we had, because again it's afive-month loan and as we measured the customers' behavior. In last quarter I actually covered with you all two thingsthat we did to adjust the underwriting and one of which was going to adifferent type of evaluation, a more thorough evaluation of the customer witheven quasi scoring model, and then moving in to direct ACH debit as a convenienceto the customer on their payday or the installment payments, and those are thetwo of the major tweaks that we made in that. We have with those three layers of different types ofunderwriting that we were watching, and that's what's given us the confidenceas we have seen the evolution of the customer's behavior, as those changes thathave been made to move forward with the product now. And it probably would be slightlyhigher than the typical payday loan. Loss rate would be as a percent of these.

[Dennis Telzrow -Stephen Inc.:]

And you mentioned possibly going to other states, obviouslythose would have to be states that have an appropriate law or I guess or has aCSO is that correct?

[Joe Rotunda:]

That is correct. We would certainly do it under the auspicesof the appropriate regulations that will allow us to do it.

[Dennis Telzrow -Stephens Inc.:]

And Dan, from a cash flow standpoint, how much free cashflow do you think you throw off in '08 excluding any acquisitions obviously?

[Dan Tonissen:]

Well, if you look at the trailing EBITDA, probably about $65million, maintenance CapEx is going to be at the probably around $5 million to$6 million, and then the growth in 100 stores that's roughly $50,000 to $60,000each, and then limited expansions, limited capital used in Mexico. It will besubstantial; I would say in excess of $40 million.

[Dennis Telzrow -Stephens Inc.:]

$40 million in excess in free cash flow

[Dan Tonissen:]

Yeah.

[Dennis Telzrow -Stephens Inc.:]

Right. Okay. And Joe obviously the challenge in Mexico isbuilding inventories, it just takes maturity to stores for that to happen Iguess?

[Joe Rotunda:]

It does. And I think that we could probably expand a littlefaster to first year, except we are going to go through the pain ofassimilation of the business. We are going to change the operating systems inthe stores that are in Mexicoto our EZ system here. There are a lot of features that [Jose Manuel Fernandez]who runs the business there has found very attractive that will enhance theperformance of the stores there. When you will change the operating system and you have to gothrough the entire organization and teach them how to use it, a littledifferent approach to loan values and so forth. It's going to command a lot ofattention for the first three or four months, and we are going to begin slowlythen after that to expand. We think there will probably be enough inventory to do whatwe need to do, because most of the stores, most of the inventory there isgeneral merchandise, and jewelry is the one category of goods that we can movein as long as it's NAFTA identified product, we can move into Mexico. We think that the first year we will start a little slow andthen we will accelerate it after there, and we think the inventory issue willbe taken care of.

[Dennis Telzrow -Stephens Inc.:]

Okay. Thank you very much.

[Operator:]

Thank you, Mr. Telzrow. And there are probably no questionswaiting from the phone.

[Joe Rotunda:]

Okay. Well, thank you all. We really appreciate your timeand your continued interest in EZCORP.