EZCORP, Inc.
Q4 2012 Earnings Call Transcript

Published: 7 Nov 2012

[Operator:]

Welcome to the EZCORP Fiscal Year 2012 Fourth Quarter Earnings Release Conference Call. My name is Adrian and I’ll be your operator for today’s call. (Operator Instructions) Please note this conference is being recorded. I will now turn the call over to Mark Kuchenrither. Mark, you may begin.

[Mark Kuchenrither:]

Thank you, Adrian, and good afternoon, everyone. This call will address our fiscal fourth quarter and 2012 year-end results. We issued a press release earlier today with supporting documents that are available on the Investor Relations portion of our website at www.ezcorp.com. I’d like to remind everyone that this conference call will contain certain forward-looking statements, including statements about our expected financial and operating performance in future periods. These statements are based on our current expectations, actual results in future periods may differ material from current expectations, due to a number of risks, uncertainties and other factors, which are discussed in our press release and in our filings with the Securities and Exchange Commission. On the call with me today is Paul Rothamel, our President and Chief Executive Officer. I will review our results for the quarter and fiscal year and will provide our guidance. Paul will then provide some commentary regarding our overall strategy and outlook before providing an opportunity for questions. I want to set the agenda for this and future earnings calls. I will not spend much time reciting financial information that you can retrieve from the financial statement schedules attached to our earnings release. Rather, I will spend my time providing commentary and color around the factors that drive the results that are reflected in those schedules. In addition, we have provided supplemental information on our website to help you better understand our business. I also want to take a few seconds to talk about guidance. We are rightfully proud of our record consolidated results over the past quarter and year, but we are disappointed in our ability over the past year to accurately forecast our operational results. That will change. As you will see in a minute, we are moving to both quarterly and annual guidance. And I will commit to you that I will provide you the most accurate guidance possible based on the circumstances as we see them. Please remember that ours is a dynamic and fluid business, circumstances change, sometimes daily, but we will always try to give you our best view of the future. And with that, I will review our segment performance. We’ll start with U.S. and Canada, which includes our 919 stores in the U.S. offering pawn, buy/sell, and/or financial services, and our 68 cash advance and buy/sell stores in Canada. For the quarter, U.S. and Canada delivered a segment contribution of $55 million, a $9 million decrease compared with prior year’s quarter. The segment is facing two significant challenges that more than account for this decrease, the continued adverse impact of gold related transactions and the decline in consumer loan fees in Texas. The first significant challenge and the greater of the two is the impact that gold had on the U.S. business. We obtain gold in two ways. First, we provide loans where jewelry is used by the consumer as collateral. In dollar terms, jewelry as a percentage of the total U.S. pawn loan balance has remained largely unchanged. In terms of grams, it has declined as gold values have risen. The jewelry redemption rate has, however, increased over time, reaching 84% at quarter end, resulting in less jewelry dropping out of the loan portfolio into inventory for disposition. This happened even as we increased our loan and buy tables multiple times. Second, we purchased gold and jewelry directly from consumers. The volume of jewelry purchases in the quarter decreased 19% in total and 28% on a same-store basis. With less forfeited gold collateral and fewer purchases, jewelry and gold dispositions were also down. As a reminder, we dispose of gold and jewelry in two ways. First, we sell gold and jewelry at retail to our customers. Jewelry sales in the U.S. decreased 17% in total and 24% same-store. Second, we scrap gold and jewelry. For the quarter, jewelry scrapping sales were down 10% from last year, while margin dollars from jewelry scrapping were down 31%. These declines were driven primarily by a 1,000 basis point decline in margin rate with the remainder attributable to reduced gram volumes. The effect of this cost was roughly $11 million in net revenue in the quarter compared to last year’s fourth quarter. I’ll refer you to our website for supplemental information regarding the historical impact by quarter that scrapping has had on our business. Despite the gold challenges, other elements of our U.S. Pawn business showed continued strength, offsetting to a large extent the challenges in the gold and jewelry environment. Sales of general merchandise increased 18% in total and 7% on a same-store basis. This reflects our focused efforts with regards to category management. Pawn service charges increased 10% in total and 4% on a same-store basis, underpinned by a 9% growth in total pawn loan balances or 1% on a same-store basis. With the exception of jewelry sales and scrapping activities, our U.S. Pawn operations are strong and growing. This segment’s second significant challenge is related to our consumer loan business in Texas. Outside of Texas, total loan fees have increased 14% and net fees have increased 25%. But the regulatory environment and increased competition in Texas have more than offset that growth. In addition, bad debt as a percentage of fees increased in the quarter, moving to 26% compared with 24% in the prior-year quarter. This increase is due to change in product mix and the introduction of online lending. The fastest of our growing segments, Latin America, includes our 230 Empeño Fácil Pawn Stores and our strategic partner in Mexico, Crediamigo. Latin America had another outstanding quarter with net revenues up 134% and segment contribution of $20 million for the quarter. Empeño Fácil was strong across the board again with a 51% increase in merchandise sales, a 40% increase in pawn service charges and a 63% improvement in merchandise sales margin. Pawn loan balances were up 54% as well. That combined with the excellent expense management delivered an 87% increase in operating unit contribution, even with the continued drag of new stores opened in the year. This is exceptional performance, despite a 10% devaluation of the Mexican peso relative to the U.S. dollar in the quarter versus last year’s quarter. Our full-service pawn format is working well and our team on the ground is getting stronger every day. Empeño Fácil also continued to execute on its market growth strategy. During the quarter, we opened seven de novo stores, bringing the total number of stores opened during fiscal 2012 to 52. This gives us a total of 230 Empeño Fácil stores at year end. Crediamigo continues to outperform our investment pro forma and contributed net revenues of $27 million and net income attributable to EZCORP of $10 million for the year. $4.5 million of the net income was driven by strong operational performance, including a 22% increase in the loan portfolio during the quarter. At quarter end, Crediamigo’s loan portfolio stood at a record $73 million. The remainder of the net income increase is attributable to purchase accounting adjustments largely related to debt refinancing. This refinancing effort was a key assumption in our investment analysis and will result in significantly reduced interest expenses going forward. We have provided supplemental information regarding Crediamigo on our website. Our Mexican operations have become a very important part of our business over the last 24 months. We expect to continue to grow the Latin America segment, and we will look for additional opportunities there as the marketplace for our services is growing rapidly. The third of our segments, Other International, includes Cash Genie, our online lending business in the U.K., along with the net income we recognized from our two affiliates, Albemarle & Bond and Cash Converters International. Cash Genie contributed net revenues for the quarter of $4 million, inclusive of bad debt as a percentage of fees up 38%. Cash Genie’s loan portfolio grew by $2 million or 105% for the quarter. After administrative, other expenses, tax and non-controlling interest, Cash Genie was profitable for the quarter and within our original investment expectations. Contributions from Albemarle & Bond and Cash Converters were up 9% combined in the quarter. Moving on to the balance sheet, I just want to call out a few things. First, our cash and debt position. We ended the quarter with $54 million of cash on hand and debt outstanding of $220 million. $90 million of this debt is recourse only to Crediamigo, the balance of $130 million was drawn on our revolver. Second, total earning assets, which we define as pawn loans, consumer loans and inventory on our balance sheet, combined with CSO loans not on our balance sheet totaled $279 million at September 30, up from $187 million a year ago, an increase of 49%. And third, inventory. Our inventory at year end is up about $19 million from the prior year end, principally because of our store front growth both in Mexico and the U.S. In the United States, inventory on a per-store basis is down 2%. And now let’s talk about our guidance for the upcoming year. We believe our U.S. and Canada segment will continue to be adversely affected over the short term by the gold marketplace. In addition, our planned investments in store front and online growth will moderate results for the coming year. We also anticipate continued pressure on our signature loan fees due to pending and potential regulatory changes in Texas. Customer demand for our loan products will not be reduced, however, and we have flexible options for our customers. But the financial metrics of this business could be changed in the short term. In our Latin America segment, we expect both Empeño Fácil and Crediamigo to continue to grow rapidly, although the rate of growth in Empeño Fácil will be impacted by our accelerated de novo strategy. In our other International segment, we expect Cash Genie to continue to grow earnings rapidly in 2013. Cash Converters has announced that they expect earnings growth within a year while Albemarle & Bond have announced that they expect earnings to decline due to the gold marketplace in the United Kingdom. When we roll all that together, we expect 2013 earnings per share to be in the range of $2.55 to $2.80. In addition, we expect first quarter earnings per share to be in the range of $0.55 to $0.60. As we stated in our release, we do expect to return to quarter-over-quarter earnings growth in the second half of the year. I’ll now turn the call over to Paul.

[Paul Rothamel:]

Thank you, Mark, and good afternoon, everyone. Mark has already provided commentary around our performance in the quarter and the full year. Suffice it to say that I’m very proud of the EZCORP team for delivering strong revenue, net income and earnings growth in a challenging marketplace, all while making significant progress on our multi-year growth plan. As gold has impacted our pawn businesses and regulatory changes have impacted our financial services businesses in the short term, it only illustrates our flexible business model is the right strategy for the long term. It allows us to seize various opportunities and reduce the kind of vulnerabilities we are now experiencing. Our customers’ need for cash is growing and the number of disenfranchised people around the world is growing. Those facts are irrefutable, and we intend to be one of the worldwide leaders in satisfying that need for years to come. Our growing multi-product and channel format gives us the products and services our customers want and have asked us for. If they don’t have gold, then they can bring us general merchandise. If they want payroll advance loans, but we can’t provide it due to local regulation, we can offer installment or auto products or direct them to our online capability or to our pawn capability. While some of those options may change the short-term metrics of the business, the relationship with our customers is long-term and our model continues to be a high-return, strong cash flow business. We’re looking to accelerate our investments where they make sense, in areas like de novo stores at 25% plus return on invested capital that we have proven out over the last three years across Mexico and the United States. In fact, for fiscal 2013, we intend to open 70 to 80 full-service Empeño Fácil Pawn Stores in Mexico, 65 to 75 financial service centers in the United States and 25 to 30 U.S. Pawn Stores. Most of these stores will utilize our most successful store model – store within a store – in investments like Crediamigo and Cash Genie where we partner with local experts to drive similar or better returns in businesses and/or geographies that are not yet our core competency. In strategic partnerships like the one with Western Union that we announced today, we selected them as our global payment solutions provider because their proven brand, products and services complement ours very well, and also in our own existing high-return businesses through remodels and improved systems and infrastructure to ensure they continue to deliver the kinds of returns and cash flows that we have become accustomed to. Our cash flow will be used to ensure our balance sheet remains strong and our debt levels and debt ratios remain conservative. With what remains, we will invest in these types of additional earning assets. These investments may be immediately accretive to earnings like a pawn acquisition or they may immediately drag earnings like de novo growth. But over time, we expect the combination of our investments to deliver double-digit growth with very high returns and very strong cash flow. From a strategic standpoint, our diversification strategy will allow us to seize opportunities we may not have otherwise seen and will also reduce our dependency on any one geography, product or revenue stream. As I mentioned earlier, the customers are really driving the marketplace today, just as they have always done. They are smart, sophisticated and know their options well. Our research shows they will continue to frequent those providers that treat them well, give them real choices and are consistent across their interactions. While we always have work to do, we believe that our – we are better positioned today than ever to deliver on that expectation. And with that, we’ll take your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And we have John Rowan online with a question. Please go ahead.

[John Rowan:]

Good afternoon, guys.

[Mark Kuchenrither:]

Hi, John.

[Paul Rothamel:]

Hi, John.

[John Rowan:]

Why is the administrative expense so high at $30 million and is that a new run rate?

[Mark Kuchenrither:]

John, it’s Mark. How you doing?

[John Rowan:]

Got. I’ve been better.

[Mark Kuchenrither:]

Well, John, I think we addressed that in our press release. And what we’ll tell you is that when you look at the administrative expense, the first thing you have to do is adjust it for Crediamigo and Cash Genie businesses, as they’re not store front operations, bulk of their operational expenses are in administration. So when you back that out, you’ll see the adjusted run rate that we have. And we will continue to invest in our infrastructure that we need to ramp up for the de novo store growth that Paul mentioned earlier and for the IT investments that we need to scale our business.

[John Rowan:]

Okay. And then the credit or the interest expense line, can you explain that to me as well?

[Operator:]

And we have John Hecht from Stephens Incorporated on line with a question. Please go ahead.

[John Hecht:]

Part of the question was I think a continuation of the prior John’s question of maybe within the guidance, it seems like your tax rate might be changing because of more profits from international markets on a relative basis. And then maybe if you could talk about within guidance, what kind of run rate account interest expense should we incorporate given the purchase accounting on the debt refinance?

[Mark Kuchenrither:]

All right. I’m sorry. I appreciate – I’ll answer both those questions. The answer is, we, from a tax perspective, where we forecasted our tax rate will be 33% for this next year, and that’s primarily due to our investments internationally and how that’s being reflected in our go-forward tax rate. To answer the previous question about the interest expense, the interest rate at Crediamigo, when we made the investment, was between 18% and 19% on an average basis, and now it’s just under 11%. So I think it’s around 10.9% today. And there’s still some additional improvement that we expect probably second quarter on. But I think it’s safe to say that you can use around 11% as an average for Crediamigo on a go-forward basis.

[John Hecht:]

Okay. So the next quarter and the following quarters, your interest – your – the total interest expense would be around 11% in the Crediamigo balance and then whatever the revolver rate is for the remaining amount. That would be a charge rather than a credit.

[Mark Kuchenrither:]

Yes.

[John Hecht:]

Okay. And then kind of moving to the business. Redemption rate of 84% – I know that makes it more challenging on the gold front and the volumes – are you guys looking at this as a secular change now or is there something you’d see in the future that would bring this back to the more normal rates, sort of the mid-70s?

[Paul Rothamel:]

I’ll answer that. So yeah, it’s ticked up a little bit. What you’ll find interesting, I think what we certainly have, is that when you segment the pickup rates based on how long somebody had their collateral, those pickup rates are higher, the longer that they’ve had them, meaning if they put that piece of jewelry in six months ago or eight months ago, they’re hanging onto it. Some of our pickup rates, and you see it manifest itself in our scrap margins that declined almost 1,000 basis points, actually are much lower. So their pickup rate’s in the 50% and 60%. So I think certainly, as the marketplace has gotten more aggressive, us included, in giving the customer more over the last 60-90 days for their gold, the pickup rates aren’t 85%, they’re much lower than that. So we’ll see how that shakes out the mix of that over time. We do think – and of course the GM generally runs – right now, it’s been running 3% to 4% below our jewelry pickup rate. And while we’re not seeing a huge shift inside the PLO right now, it’s just a little bit, it’s 1% to 2% a year. So I would expect that they moderate back into the high 70s to low 80s, but I think it’s going to take some time. I don’t think that’s going to happen in the next couple of quarters.

[John Hecht:]

Okay. And the second question, you began to address that in your response to the prior question. Gold seems to be a little bit more in a volatile track than we’re accustomed to historically. How do you manage the loan-to-value in that type of environment?

[Paul Rothamel:]

Well, I will tell you, we study it all the time, Mark referenced that we’ve made changes to our loan tables, we’ve done it by market, we’ve done it literally by store in some cases in this environment. And we gave up, if you remember in the third quarter, we gave up about 300 basis points, I think one of our competitors gave up about 750 basis points in rate, on a scrapping rate. And here, we gave up almost 1,000 basis points in the fourth quarter. So – and we’re still in the 31 range against public competitors I think in the mid 20s. So, we’re not sure. I would not have guessed that I was going to give up 1,000 basis points in the fourth quarter. And that is part of the reason that we delivered $0.75 instead of $0.78 or $0.79 frankly. So, gold is still a huge part of the pawn business. If you step away from gold for a minute, all the metrics on GM for us are very good. Average loan is up – average loan is up, the redemption rate is good, the sales side is all very good, so GM is working very well for us, but the gold side is a challenge right now; have to see where the bottom is on it.

[John Hecht:]

Great. Well, I appreciate the color. Thanks.

[Operator:]

And Bill Carcache from Nomura is online with a question. Please go ahead.

[Bill Carcache:]

Good evening. I think it goes without saying that your guidance for next year is obviously disappointing. Paul, can you talk about, as you look back at where we stood this time last year and you gave guidance for the upcoming year. And now we stand here today and you look out over the course of the next couple years and you talk about your confidence in double-digit revenue and EPS growth in 2014 and beyond, what gives you that kind of confidence in light of the uncertainty that we’re in today and what gives you confidence that we’re not going to find ourselves in the same place next year with another disappointing outlook for 2014?

[Paul Rothamel:]

Sure. I would say a couple things. I think you go back a year ago, we just didn’t call – we did not call gold markets well at all. And we struggle with that as of others in the marketplace, there’s no question about it. And it wasn’t a price issue. The price was masking the real issue, which was volume. And so that singularly is the most – had, had just damaging effect on our business from how we saw it in the front. We’ve mitigated it significantly with things like Crediamigo and Empeño Fácil’s growth. That’s what gives me confidence as we go forward. A couple things. Empeño Fácil is a great example. We built models, those models are working. We’re in our third year of that, and that is a GM-driven business. It is not a gold-driven business. It’s a pawn business and we’re good at it. So I have a high confidence that that thing will continue to deliver as it has over the last few years for us beyond our expectations. I also think Crediamigo has been beyond our expectations and not just because of the purchase accounting pieces; that was expected because we fully expected to take their loan costs in half which we’ve essentially done. And I think in the U.S. and in – let’s stay in the U.S. for a second – on both the pawn and the financial services side of the business, the fact of the matter is that even with our gold challenges, the greenfield locations that we’ve opened have performed very well against our performance and are still, as I said, in the 25% return on invested capital side. So we’re going to accelerate that growth in things that we know and that we do well with. And that will help us against some of the large, mature pawn store base that we have today. So we’ve got to get our footprint moving.

[Mark Kuchenrither:]

And then just to give you some sense of scale of that, we opened up 14 stores last year for first quarter, and we’re expecting to open up over 80 stores this year for first quarter. So, the amount of ramp up on de novo store is tremendous and the drag associated with that is built into our guidance.

[Bill Carcache:]

Okay. Moving on to some of your comments on the regulatory pressures that you’re facing, can you give a little bit more color on exactly what those are, the persistence of that to the extent that that can potentially impede the model going forward and to what extent that relates to anything that might have to do with what the Texas Legislature convening in the coming months? Whether it has anything to do with that or whether the Texas Legislature convening in the coming months represents a completely separate set of risks that would potentially introduce additional regulations?

[Paul Rothamel:]

Yeah. So when we reference regulatory, pending and proposed, that’s really – and you’ve seen it – it’s often in Dallas primarily, along with San Antonio that’s pending. And those you’ve seen, I believe, several competitors leave the marketplace. We have not left the marketplace, but it has negatively impacted our performance. We’re going to stay and we’ve got the models that continue to make us profitable, but not nearly as profitable as we were. Similar to – we think we look at it similar to when we had a look at Colorado and Wisconsin about 18 months ago to 24 months ago where we took a hit for 12 months. And now, those are two of our fastest growing states today after 30% to 40% of the store fronts left. So the challenge – so it’s a city-by-city challenge for us and those are significant volumes for us in Austin, Dallas and San Antonio. The Texas Legislature in January last year, two years ago, we thought they passed significant legislation along the lines of transparency, licensing and those types of things. We’re an active participant and we believe those made sense. And we actually believe we’d like the state to supercede the cities come January as well. And so, there’s that angle that we’re working and then of course there are lawsuits out there in both Austin and Dallas and there may be some in San Antonio when that goes into effect later in the year. So those are what we’re dealing with and those are what we’re referencing.

[Bill Carcache:]

And those are essentially what’s being captured in your guidance at this point?

[Paul Rothamel:]

That’s correct.

[Bill Carcache:]

Okay.

[Paul Rothamel:]

Let me, I’d make one other comment, and Mark touched on it. Our growth outside of the State of Texas was actually double digit on both revenue and segment income. And I referenced that we’re actually opening store fronts in our SWS model; so we’re going into states like Nevada where we’re very successful with the pawn business and some counters of non-collateralized business, and in Georgia, we’re going with auto title. Those are some of the very quick store fronts that we’re opening. And some of them are already open and they cross over into profitability in roughly six months, so we’re dragging out and we expect (inaudible) the end of this year.

[Bill Carcache:]

I guess just taking a step back and looking at just the industry in general, if we look at Texas, I guess, I personally kind of felt like it was a little bit of a surprise that the regulatory environment in Texas, I guess now, a couple of years ago became less friendly. And we’re seeing that develop, and of course over time, we’ve seen it happen in other places like Ohio and other states. And so, you referenced some of the positives in other states that are kind of providing some offsets to the headwinds in Texas. But aren’t we kind of – isn’t this always kind of like a repeating process? It seems like eventually, the regulatory headwinds start to pop up and we’re seeing that in Texas. What gives you confidence that we’re not going to see that in some of the other states where you’re getting a bit of a tailwind today?

[Paul Rothamel:]

Well, I think – I guess what gives me confidence is we have flexible models. So – but it won’t be smooth, let’s just be clear on that. Colorado and Wisconsin were not smooth. The Legislature – the fact of the matter is, and we’ve proven it in those two states, that’s what I talk of all the time – the customer didn’t go away. The customers’ need did not go away. They were not satisfied at all and we stayed and now they’re growing, but it was a tough nine to 12 months. We went from very positive earnings to negative earnings. And then we worked with legislators in Wisconsin, as an example, and got some relief from that regulatory environment because we realized the customers’ needs weren’t being satisfied. So we just keep working. You’re always going to have the regulatory challenges and we’re just going to keep working on it. If we think we can’t make it, we’ll exit. But so far, we’ve been able to take our lumps and then come back strong. I think in Texas, I don’t think there’s any question that the customer – we talked about it. The number of people disenfranchised today is staggering and it’s getting larger and larger every day. And we have to find ways constantly to take care of that need because it’s not going to get taken care of in any other way.

[Bill Carcache:]

Okay. And if I can squeeze in one last one. If we look at your allowance as a percentage of gross inventory, it’s basically got a six handle on it, it’s about 6.5% in the first quarter and the second quarter, and that’s the first time we’ve seen a six handle on it really going back to 2008. It’s always been 7%, 8%, 9% plus. And so, I just wonder if you can tell us, one, what’s the allowance in the third quarter as a percentage of the gross inventory? And certainly, that reduction has fueled a little bit of, I guess, EPS tailwind from the release of those reserves. What’s kind of giving you confidence in releasing those reserves? And I guess if you could tell us where they stand right now. And I guess just give us a little comfort that that release in the allowance isn’t going to be something that’s just going to have to come back later and be taken up again. Thanks and that’s it.

[Paul Rothamel:]

Yeah. That’s a good question. I don’t have the exact percentage in front of me, but what I will tell you is, is that on an annual basis, we review all of our reserves and all of our accruals. And this was a case of not changing our methodology or making a policy change as a company, it was just taking a, drilling down and taking a look at our reserves from a monthly basis perspective and making those more accurate based on the changing mix environment of our inventory from general merchandise, from more jewelry, and to more general merchandise. And those things are evaluated on a monthly basis, it’s reviewed by our audit committee, and again, we didn’t make a change to the policy or methodology. We just timed up the calculations, and so we don’t expect those to come back later.

[Bill Carcache:]

Okay.

[Operator:]

And we have Bill Armstrong from CL King & Associates on line with a question. Please go ahead.

[Bill Armstrong:]

Good afternoon. I’m not sure if you told us this before, I might have missed it. But could you give us the same-store sales change in the U.S. Pawn balance and the pawn service fees on a same-store basis?

[Paul Rothamel:]

Same-store PLO growth was plus 1%, same-store PSC was plus 4% and same-store sales growth, I believe in the quarter was down 3%. And GM actually was up about 9% same-store, and jewelry, Mark mentioned earlier was down 24%.

[Bill Armstrong:]

So, with the higher redemption rates, wouldn’t we expect pawn balances and then service fees to be a little strong or maybe make up some of the slack that we’re losing on the gold side?

[Paul Rothamel:]

I’m not sure. Give me that one more time, Bill, trying to do the...

[Bill Armstrong:]

Well, if the redemption rates are up, so people are taking their collateral back, shouldn’t we see more of an increase in the pawn loan fees?

[Paul Rothamel:]

Yeah. I think if you look, believe me we’d like that, the challenge today is our average loan is actually up as well, but the transactions are down slightly on a same-store basis, so that is the challenge. And I’m not sure, our date – that’s what the data tells us, right, we’re down a bit in transaction. So, is the consumer hunkering down? Are they going to other avenues? Maybe.

[Mark Kuchenrither:]

But I would tell you our fees are up, right, our fees were up 12.6% on the quarter. And so, we are seeing an increase in dollars, but the scrapping margin alone for jewelry was – more than offset that increase.

[Bill Armstrong:]

Got it. And wouldn’t a lower LTV help that?

[Paul Rothamel:]

Lower LTV.

[Mark Kuchenrither:]

Loan to value?

[Bill Armstrong:]

Yes, in your offers to consumers.

[Mark Kuchenrither:]

That’s kind of the opposite of how we think about things. What we try to do is loan as much as possible to the customer without forcing them to drop their item. We want them to keep their collateral, but we want to loan as much as possible to them to drive the fees up and it’s a balancing game, right? So we’re trying to – that’s why we mentioned earlier – we raised our tables multiple times because we wanted to be competitive in the marketplace and give the customer the most value as possible for their gold without them having to walk away from their item because once they walk away and we disposition it, if we end up choosing to scrap that item, we take that item out of the pawn cycle for good.

[Bill Armstrong:]

Understood. Okay, thanks.

[Operator:]

And John Rowan from Sidoti & Company is on line with a question. Please go ahead.

[John Rowan:]

Can you guys break down the de novo growth for next year? It’s 175 stores. Can you give us an idea of what’s U.S., what’s Mexico, what’s pawn, what’s in Canada?

[Paul Rothamel:]

Yeah. I think I mentioned it was 70 to 80 Empeño Fácil stores and it’s – U.S. de novo is 90 to 105, which includes 65 to 70 financial service, so it’s about 25 to 30 pawn stores in the U.S. The one thing – and I that echoes back to Bill’s question, it’s a good question. So think of these terms. We’re running over 900 locations in the United States today. We look at, we cut obviously all of our stores across multiple ways to look at it. But one of them is just the age of store. And the fact of the matter is we have an aging store base and because for so many years, we didn’t invest in de novo, really over 90% of our stores are over three years old even with the acquisition activity that we’ve done recently and the de novo stores that we’ve opened. So what it essentially tells you is when business gets a little tough, we’re relying on old, obtainable stores that are very mature inside of our biggest business, hence the reason we’re pushing the de novo quicker. And we know that has short term drag, but the fact of the matter is – and we see it in Mexico – all the metrics inside of one year old stores is better than two year old stores is better than three year old stores is better than four year old stores and five year old stores and beyond. So – and there’s no doubt in my mind that that will happen for us in the United States. So the fact that we are going to push out over 100 locations for the first time in the United States, they will not only benefit – they will hurt us in the next six months, there’s no question. They will benefit us six months after that and they will benefit us three years to come. And that’s just the facts of how store front operators work. So we’ve got to get moving on the de novo, and these kind of discussions we’re having right now, which you never ask me these kind of questions in Mexico because the numbers are all so fabulous. And there’s a reason for that.

[John Rowan:]

Well, I’m trying to understand right. There’s been a lot of talk about gold scrapping being down, but at the end of the day, your total revenue was still up 10% year-over-year. So the Pawn business is still functioning outside of gold, right? General merchandise is up, you’re selling more general merchandise. I assume the pawn loan balances against general merchandise were up, but yet balance for the first quarter is horrible. And I would say guidance rather for the first quarter is horrible and guidance for 2013 is horrible. Is this more just a shift of operating strategy away from acquisitions into de novo growth and now all of a sudden, we’ve got this lag of earnings? I’m just trying to understand it because again, a lot of chatter about gold, but your revenue’s still up year-over-year and we’re looking at now declining EPS in the first half of the year.

[Mark Kuchenrither:]

Yeah. I think it is. Let me answer that question this way. When we look at our overall objectives in terms of keeping a conservative balance sheet from a cash position, we wanted to invest in the lowest-risk, highest-return investment that we have. And that’s been proven to be our de novo stores. And you heard Paul say that, and regardless of whether it’s U.S. or Mexico, the format is a – consistently delivers in a three-year period a 25% plus return on invested capital rate. And so, that represents a low-risk investment because it’s proven, we know how to do that, we know how to execute to that. The acquisitions, we still remain opportunistic for acquisitions. We still remain active in that market, but what we’re seeing in the U.S. is a couple things. One is, it’s a very competitive situation. As you’ve seen, our competitors are out actively looking in the marketplace as well for acquisitions. And we believe that sellers in general have not marked to market the values of their businesses to account for what’s happening in the gold marketplace today. They are still looking at per multiples that we were willing to pay maybe two years ago. And when you look at the values of their businesses today, we’re trying to be very disciplined on what we’re, on how we value businesses. And so, we’re not betting the farm on those acquisitions. If they happen, it’s great. If they don’t, I think our de novo strategy is our primary strategy. We’ll continue to look opportunistically international as well.

[John Rowan:]

Okay. The Crediamigo and Cash Genie, are those still panning out as far as your plans go? Obviously, you’ve said that you had a historical 20% ROIC on acquisitions and that’s held true over, 80%, 90% of the four-wall ROIC is, gets to that 20% hurdle rate. What I’m seeing, there’s a 25% ROIC as far as de novo growth goes. I’m just curious as to why there’s been such a focus on M&A in the past and you have what you’re saying now is a better ROIC on de novo growth. And quite frankly, if you’re stepping away from M&A, why are you increasing the fee to the controlled shareholder who largely provides M&A services?

[Paul Rothamel:]

I’ll answer your first question. So the reason that we did M&A, frankly, as hard as we did is because the marketplace was there and we were able to get good deals and get the kind of returns that we’re talking about, 20 plus percent. Also, the de novo side of it is – the company just didn’t have any history of doing it. In fact the only time they stepped out many years ago didn’t work very well. And so they hadn’t de novo’d for a while, so we started testing. And it takes a while. So when I can say we’re – I’m quite confident we’re going to deliver three-year ROIC, well, that’s because the stores had opened three years ago when I first got here. So – and those are – to your point, John – those are 25% plus versus the acquisitions that are in the 20% plus, right? So it drags a little upfront, but it costs you a lot less money and the returns are actually slightly higher than your – than the M&A. So that’s why we’re doing what we’re doing.

[John Rowan:]

Okay. Does this get you back – long term, switching, or de-emphasizing M&A and emphasizing de novo growth – how long does it take you guys to get back to that historical, high teen, low 20% unlevered return on equity? Because clearly, you’re not there at this point and that’s kind of been I think almost a hallmark of EZCORP for many years, and it just seems like we’re drifting further and further away from that.

[Paul Rothamel:]

I would disagree with you. But the answer to your question is 2014.

[John Rowan:]

Okay. All right. Thank you.

[Operator:]

And we have Bob Ramsey from FBR Capital on line with a question. Please go ahead.

[Bob Ramsey:]

Hey. Good afternoon. I know you mentioned that you didn’t expect the scrapping margins to be down 1,000 basis points year-over-year this quarter, but they really were down less than 100 basis points from last quarter. I’m just curious, were you all expecting the margin to expand this quarter instead and what is the expectation for the scrapping margin in the 2013 guidance? As you mentioned, you guys are still kind of at the high end of peers.

[Mark Kuchenrither:]

Well, I think our guidance, if you look at the supplemental information, you’ll see the impact of our guidance and why we’re guiding what we are. In terms of what we have, our assumptions, we’re assuming really three things. We’re assuming – there are three variables. The market price of gold which we’re assuming is going to be $16.35 for the year and our cost basis is going to continue to be running the way it’s running today. We don’t expect there to be any changes. In volumes, we’re forecasting to be down from prior year for the first half and you can see in the supplemental information why that is.

[Bob Ramsey:]

Okay. And with the cost around where it is today and that sales price, does that imply again a scrapping margin that’s up, down or flat from the 31.4% that you all reported this quarter?

[Paul Rothamel:]

Again, we do it in – we don’t just look at margin, we look at volumes and those kind of things. So I think I’m going off memory of how we built the models. We ran sensitivities around it, but it’s down. We have it in the upper 20’s with volume. It’s in the supplemental information. You can look there, and if you still have questions, Mark can answer them for you.

[Bob Ramsey:]

Okay. All right. I’ll take a look at that. That’s helpful. And then I wanted to circle back too to the question that was asked about the administrative expenses. It sounds like that $30 million number is a good run rate going forward. And now on top of that, you will have the increase in the Madison Park fees starting this next quarter. Is that the right way to think about the administrative line?

[Mark Kuchenrither:]

Yes.

[Bob Ramsey:]

Okay, okay. And then on the Crediamigo debt, I wanted to ask too, I know you highlighted to use a $10.95 cost on the debt and thinking about its cost. It does look like some of the more recent pieces of debt where you all have refinanced in that business are a lot lower and you mentioned there are still some opportunities. Is 730, which looks like more recent securitizations, is that kind of where you’re hoping to drive the all-in cost over time at Crediamigo?

[Mark Kuchenrither:]

Well, the Crediamigo is made up of several different pieces of debt, right. We have institutional debt, we have private debt, private party debt and then we have the securitization. And on a blended basis, we’re at $10.95. I think we can drive that down a little bit further. But I really think that right now, between 10% and 11%, I think probably 10% is the low end of where we’ll be able to get to in the near future. But right now, again, we’re at the 10.95%, which is ahead of our pro forma by the way. We – when we looked at the investment, we thought there was a real opportunity to drive down the interest rates. It’s happened quicker than we’ve anticipated. And from a market standpoint, in Mexico, we’re really happy with where we’re at today, so we do think there’s some more opportunity.

[Bob Ramsey:]

Okay. All right. Thank you, guys.

[Operator:]

And we have no further questions at this time. Thank you, ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect.