EZCORP, Inc. (EZPW) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the EZCORP First Quarter of Fiscal Year 2015 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Mark Trinske, EZCORP’s Vice President of Investor Relations and Communications. Sir, please go ahead.

Thank you, operator. I'm Mark Trinske, Vice President of Investor Relations at EZCORP, and I'd like to welcome everyone to our conference call to discuss our results for our first fiscal quarter of 2015. Presenting on the call today is Mark Kuchenrither, our President and Chief Executive Officer. But before we begin, I'd like to note that today’s conference call contains 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 the future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks, uncertainties and other factors that are discussed in our annual, quarterly and other reports filed with the SEC. On today’s call Mr. Kuchenrither will present his comments about the quarter, and then we'll open the call to your questions. Now, I would like to turn the call over to Mark Kuchenrither. Mark?

Thank you, Mark, and good afternoon everyone. I will provide an overview of our first quarter results and trends in each of our businesses within our operating segments. But first I want to recognize that our team delivered a creditable performance in a challenging trading conditions, with our Latin America operating segment delivering a strong performance. Total revenues were $252.6 million, compared to $263 million for the same period last year. Net income from continuing operations attributable to EZCORP was $14.2 million or $0.26 per share, compared to $26.1 million or $0.48 per share in the same period a year earlier. Please turn to the consolidated statements of operations that compare the three months ending December 31st, 2014 to December 31st, 2013. You can see that year-over-year net revenues were down $13.5 million. This was driven primarily from lower merchandise sales gross margin due to inventory velocity disposition initiatives that I will talk about within each pawn business unit and that had approximate impact of $4.3 million; scrimp [ph] gross profit reduction of $3.8 million driven primarily from lower volumes and year-over-year price compression; lower CSO net revenue driven by the impact of Houston and El Paso ordinances; and the higher bad debt experienced primarily in Texas, impacting by $2.6 million. And Grupo Finmart loan fees lower due to lower loan balance entering into the year. This was partially offset by a favorable year-over-year structured loan sale, and that impact was $2 million. This was planned for and expected as the business is transitioning to a mix of portfolio of structured asset sales. Moving to the administrative expenses, you can see the favorable impact of the steps we have taken to improve the efficiency of our operations, $5.6 million favorable. And in addition to that, there is $1.1 million of legal expenses during the quarter that were associated with the lawsuits. We expect this run rate to continue going forward. Please note, on the loss/gain on the sale of disposable assets line, the favorable $6.3 million in the prior-year quarter, this was the result of selling pawn stores, primarily in Louisiana. And the interest expense is approximately $9 million. The convertible bond portion of the interest expense is at our projected run rate. Grupo Finmart interest expense may increase as the business continues to grow over the course of the year, so we should see offsetting revenues. The income tax expense line, while lower in dollars, was higher rate versus last year, 31.1% versus 26.3%. This is due to a higher percentage of profits being derived from the U.S. This is a reasonable run rate to expect moving forward. Now I would like to review the performance of our U.S. and Canada segment. In our U.S. pawn business, we are focused on creating and growing a quality pawn loan portfolio and improving the velocity of inventory disposition. We are lenders and understand the importance of optimizing our loan portfolio. While pawn service charge revenue was flat to last year and up approximately 1% on a same-store basis, our loan portfolio dropped by approximately 2% in total and on a same-store basis. We believe that lower gasoline prices and improving economic conditions created a challenging trading environment for the industry. Merchandise sales increased 1% in total and on a same-store basis. A key call-out is that our sales unit volume increased 7% year over year. Our team focused on improving the velocity of the inventory disposition and drove [ph] actions during this quarter to address inventory balances in order to take advantage of the seasonal sales opportunity afforded by the holidays. We dealt with the disposition challenge in two ways. First, we reviewed and adjusted our price discounting cadence by product category in order to properly price items for sale as they aged. We also reviewed our loan-to-value tables to ensure than an acceptable gross margin is available if a collateral item drops into our inventory. Secondly, we focused on properly pricing, displaying and emphasizing the sale of aged items. The effort resulted in improved movement of aged items held for sale, lower sales revenue and lower gross margins due to higher volume with an adverse mix of sales. We expect this sales revenue and gross margin pressure to continue for the next several quarters until we reach an inventory age mix that is acceptable to us. We are committed to growing our U.S. pawn business. We opened five de novo stores during the quarter. In addition, we have signed a definitive agreement to acquire 12 pawn stores. Moving on to financial services, our U.S. financial service business is an area of intense focus for us today. We're taking the necessary actions to create a sustainable, growing business model that provides customers the product that they want, need and can afford. We have initiated organizational changes to improve management and accountability. We have continued to diversify from a geographic and from a product perspective. The customer continues to migrate towards installment loan products which are changing our loan balance mix and yield. As we focus on improving the overall performance of the business, we recognize the need to transition the business model from a primarily short-term loan model to a multi-product lending model, and therefore requires improved underwriting. I want to take a moment to talk about the Texas legislative session that has recently opened, and a few bills affecting our financial service business have already been filed, including a bill that would in effect extend the municipal ordinances to apply across the state. We are very early in the session. We have a new governor and a new lieutenant governor and are likely to have a new committee -- are likely to have new committee structures and new committee memberships. It is too early at this point to determine whether any of the filed bills will gain any traction or whether there will be any other bills that would impact our business. We think there is some sentiment among the policymakers that the state would -- should wait to see what, if any, regulations are proposed and enacted at the federal level. We, along with our industry association, are watching the developments carefully. Now I would like to discuss our Latin American segment which performed very well during the quarter. Empeno Facil, our pawn business in Mexico, exceeded our expectations this quarter. Our pawn loan book was up 15% year over year and 22% on a constant currency basis. Pawn service charges were up 12% and 19% year over year on a constant currency basis. These are all same-store numbers. Merchandise sales were strong at 17% and 25% on a constant currency basis. The same focus was applied to improving the inventory velocity at Empeno. The team did a great job of dispositioning aged items, primarily cell phones, during the quarter. The effort resulted in improved movement of aged items held for sale, lower sales revenue, and lower gross margins, due to higher volume with an adverse mix of sales. We expect the sales revenue and gross margin pressure to continue for the next several quarters, until we reach an inventory aged mix that's acceptable to us. Now I'd like to move to Grupo Finmark, where our team excelled in originating loans during the quarter, setting loan origination records in the months of October and December, and the team was up 28% year over year and 37% on a constant currency basis for the quarter, while effectively managing bad debt. What made this even more impressive is that our first quarter is not our strongest from a seasonality perspective due to Mexican employees receiving Christmas bonuses and not subsequently having a need to borrow. In addition, our team completed a structured asset sale during the quarter with favorable year-over-year results. We sold approximately 1 billion pesos last year as we developed and migrated from a portfolio-only model to a mix of portfolio and distribution model via structured asset sales. We migrated to this model to improve cash flows to fund the growth of the business and allow our team members to focus on the core business activities and not be distracted from the need to continue to finance the business. The result of the migration to this model lowered the initial loan balances entering into the quarter and resulted in interest income year over year being lower. Grupo Finmark paid $17.5 million of debt during the quarter and has approximately $64 million in cash versus approximately $7 million year over year. Now, Suart mentioned during the Investor Day, we're becoming fit, and that's evidenced by our expense management. And we are focused, which is evidenced by our inventory velocity execution and merchandise sales. It's very clear we have got more work to do, and we will continue this effort to become fit and focused in the upcoming quarters. And with that, Michelle [ph], we're ready for questions.

Thank you, Mr. Kuchenrither. We'd now like to open the call to questions. [Operator Instructions] Our first question comes from the line of Bob Ramsey with FBR Capital Markets. Your line is open, please go ahead.

Hey, good -- or good afternoon, guys. One, appreciate you all providing the earning asset breakout in the supplement this quarter, it's helpful. I guess I was curious sort of at a high level, I know you talked about with Finmark loan sales about bringing the balances down. How are you thinking about consumer loan balances in total as we progress through this fiscal year, whether this is a level that they build from or whether continued loan sales mean that there's a further downward bias on balances?

Hi, Bob. It's good to hear your voice. Thanks for participating in the call. You know, last year we sold 1 billion pesos in loans, and this year we're planning to sell less actually, approximately 700,000 pesos in loans. And what that will have the effect of is that will allow us to gradually over the course of the year build up our loan portfolio on our balance sheet. We'd like to become more balanced over time, between the loan portfolio with more of a traditional structure, and a distribution model.

Okay. And what were the loan sales this quarter?

If you -- I mean in terms of the --

-- loan sales, maybe I could just look at the balances and the originations --

The number -- you're talking about the balance -- the principal balance of originations?

I guess -- I got the originations in the supplement, I'm curious what the dollar amount was that was sold, that generated the gain of roughly $6 million, $7 million, I can't remember the exact number.

Yeah. It's going to be in the 10-Q.

Okay.

I don't have that number in front of me, but we'll put it in the 10-Q.

Twenty-two million.

Okay.

I'm sorry, I'm getting it now. What's it?

Twenty-two million was the sales amount.

The principal amount?

The principal amount we sold was $14 million.

$14 million of loans. So the principal amount was $14 million.

Okay, thank you. That's helpful. Then last question, I'll hop back out, but it seems to me, although I won't -- I'm still sort of looking at [ph] my model, it looks like the consumer loan yield sort of strengthened this quarter. And I would have thought, with the loan shift mix sort of away from the single pay and more the installment sort of stuff, I would have seen it go the other way. I'm just curious if you have any color on sort of the consumer portfolio loan yields and outlook through the rest of the year?

And the -- I think what you're seeing, and I'll go back and verify this, Bob, but I think what you're seeing is the auto title loans are diminishing, that volume has decreased, and that has a lower yield than the installment loan product. And so you're seeing that shift in mix inside the portfolio.

Okay.

The installment loans are growing fast. They're the most robust product that we have.

Okay. Thank you. I'll hop out and hop back in later if I have more questions.

Okay.

Thank you. Our next question comes from the line of John Rowan with Sidoti. Your line is open, please go ahead. John Rowan - Sidoti & Co.: Good afternoon, guys.

Hi, John. John Rowan - Sidoti & Co.: Can you go over and just kind of refresh your comments, I kind of missed them, regarding the impact that you saw from gas prices?

Well, we did a correlation analysis that looked at the loan demand historically relative to gasoline prices, and there's a relationship that points to the fact that we believe our customers, when gasoline prices drop, they have more discretionary income, which reduces their need for immediate cash. John Rowan - Sidoti & Co.: You saw that in both the consumer loan book and the pawn loan book?

I think we would point that more to the pawn loan book. John Rowan - Sidoti & Co.: Okay. And then lastly, can you remind me, so the $6.6 million gain that you reported in that quarter for the Grupo Finmark out, can you remind me, is that a net number, is that fully loaded for expenses --

Yes. It's fully loaded. John Rowan - Sidoti & Co.: That's a $6.6 million gain, and the tax rate you would use, that you were trying to figure out what the [inaudible] impact was, is that still 31%?

No, let me walk through and answer your question very clearly. So the $6.6 million one is fully loaded. The commissions that are accelerated are at the lines below in the expense lines. But when you look at the entire contribution of that segment, everything is fully loaded and all expenses are accelerated. And that was about $5.5 million total net, so the net benefit of the transaction was $5.5 million. So you got to look at the revenue and then the expenses will net that down to $5.5 million, pretax. And the tax effect is 30%. John Rowan - Sidoti & Co.: You said it's 30%?

Yeah. John Rowan - Sidoti & Co.: Okay. And that's the tax rate, is 30%.

Yeah. John Rowan - Sidoti & Co.: Okay. That's all I had. Thank you very much.

Thanks, John.

Thank you. And our next question comes from the line of Vincent Caintic with Macquarie. Your line is open, please go ahead.

Hi, good afternoon, guys. Question on the turnover and the margins. So, the turnover rate improving was pretty -- very good this quarter. And was wondering what your sense is of how much further you can go and what's the timeframe to get there. And then also, conversely, on the margins, is it right to think about it that the margins are compressed while you're I guess improving turnover, and then maybe revert [ph] back once you've stabilized?

Hi, Vincent. Thanks for the question, and thanks for joining the call. We've got about another three quarters or so of work to do to balance our inventory at levels that we will feel are acceptable, and based on our historical -- taken a historical view of what our rates will be in moving out the inventory. The effect of the change in mix of the volume of the aged inventory is that we have lower margin recognition on that lower inventory sales. As that inventory, as the mix reduces, over time we should see margins lift over time and call back to what we think is an acceptable margin, because our -- as our new inventory sells, because we have the right discount cadence in place and we have the right loan-to-value tables in place, with customer grading and dynamic pricing in place, we should be getting good margins on selling our new inventory items. So, over time, as the old inventory -- older inventory reduces in total volume and mix, we should see a better gross margins over time. And then once we get through this next three quarters or so of working through this, then we should, moving forward, have acceptable margins.

Got it. That makes sense. And just one more for me. As you're moving to a multi-product offering, how should we think about, first, growing over time the margins? And then you had a lower administrative expense this quarter. Does that continue to improve or does -- are you at the level that you think you can sustain going forward? Thanks.

Well, I'll answer the questions, both questions. I think the first question is -- would you repeat the first question? On the multi --

Yes, so just as you're getting into -- yeah, as you're getting into broadening your product offerings, just trying to get a sense of how that grows over time, and then the margins on those new product offerings. And then what -- how that will affect expenses as you're growing those product offerings. Thanks.

Yeah, I got [ph] that, appreciate it now. I think the first question is I think the consumer is telling us that they are, you know, by migrating more to installment loan products, that's the type of product that they would prefer. We believe that we need to become more proactive in our new product development and develop products with the consumer, obviously our profitability and the regulators in mind. And so I think what you'll see us do is start to run that business and think differently about that business going forward. And what that looks like in our -- what that will require is better underwriting, improved underwriting, and better product development work inside our organization, because the product development work crosses over different department or functions, and IT is a big part of that, along with the operators. And so I think that you'll see us migrate over time very carefully with that. And so as the margins, for example, if we end up with a lower margin product on a per-unit basis, there's a volume offset that we would expect. And so you're trading margin -- you're trading unit margin for volume increase as you're making yourself more available to a broader consumer base. And then your second question, in terms of our administrative expenses, we are focused on continuing to reduce and become more efficient in our operations. We are migrating toward more of a shared service model. We've done what I would consider the easy work now, but there is more work to be done, but that is going to require some step [ph] function type of activities in order to get -- to reap the benefits that we can achieve in the long run. And so I think you'll see that happen over time. But it's not -- it's going to be kind of lumpy as we work through some operating efficiency issue that we've got to work through.

Got it. Thanks very much.

Thank you. And our next question comes from the line of John Hecht with Jefferies. Your line is open, please go ahead.

Thanks a lot and afternoon, guys. Just real quick, first one, did I hear -- is 30% the right tax rate to use on a consolidated basis for modeling going forward?

No, no, no. Thirty percent was -- I was answering John Rowan's question about the Mexican Grupo Finmark rate --

Yeah, that's what I thought. So what would -- on that note, what's a good consolidated estimate for tax rate?

Thirty-one percent.

Okay. And then on Finmark, because it's done so well, it's becoming an increasing component of the overall business, can you just remind us kind of the seasonality there, the consumer behavior there? And then, any comment on what the energy trends are going to do and fuel costs are going to do with respect to the Mexican consumer?

I'll be happy to, John. The second and third quarter -- our second and third quarter is Grupo Finmark's strongest quarters. Customers tend to borrow money around Easter. That's a big holiday for our customer, and they tend to borrow money around the Easter holiday. And they start to borrow money as spring and the spring season and weather starts to warm up, so they can start to do home improvements. Because these loans are larger in nature and longer in period of time, many of our customers use these loans for home improvement type of activities. And so, second and third quarter are our strongest quarters. Because we have a large percentage of our customers are teachers, our fourth quarter is a little bit softer because the teachers aren't paid during their months off, and therefore they don't borrow money during their months off, and so that affects our fourth quarter. And usually September, October are pretty strong months, but the fourth quarter and first quarter are softer than second and third. And in terms of how it's -- how the energy reform will affect us and the lower fuel prices will affect us in Mexico, I think for this segment of the population, we don't perceive for it to have any real effect for our customer.

Okay. And then moving to the domestic process [ph], because Finmark seemed to be doing okay, but domestic pawn, you mentioned all the way back to the Analyst Day that you'd given some of the restructuring and refocused on the inventory turns and so forth that you got to think this year may buck the trend, the seasonality, and you reiterated that again earlier in this call. At what point should we start thinking, based on your model and expectations, at what point would we start taking that normal seasonality would start to take hold?

I think I just said earlier on the call, John, I think it's going to, you know, we're going to be working through this and ramping up over the course of this year -- course of the fiscal year.

Okay. So, do you think, as we get into next fiscal year, normal seasonality, that's kind of basis we should think about modeling it?

Absolutely.

Okay.

John, I just want to go back. The question you had, I didn't really address it relative to Empeno, on the fuel and energy. And our customer -- unlike our customer in the U.S., our customer in Mexico, a lot of our customers don't drive and they use public transportation and things like that, and their average annual salary is much less than what we have in the U.S. And so I think that fuel, in terms of giving them incremental, you know, money to spend, I think it's less impactful to them than what we see here in the U.S.

Yup. And then final question is, just because some of the mix results had -- the domestic pawn saying what we're seeing, I mean it -- are you seeing any visibility with respect to the customer behavior, you know, well [ph] in demand, retail activity, or is it all kind of new at this point in time that you're really just executing through the challenging environment?

What I'll say, I mean based on what we're seeing from the early results from our industry peers, I think we've fared fairly well this quarter. I think it was tough environment for the industry as a whole, but our merchandise sales on a unit basis were up, 7%, that was pretty strong. And I think our pawn loan balance, while it's always disappointing not to have a pawn loan balance grow, it appears like we've performed fairly well relative to our peers. And so that's a good sign. I think ultimately what we're focused on is serving our customer and trying to get as much wallet share as possible from our customer, which means we've got to do a really, really good job of taking care of their needs. And that's our primary focus.

Got it. I appreciate the color.

Thank you. And our next question comes from the line of Bill Armstrong with CL King & Associates. Your line is open, please go ahead. Mr. Armstrong, your phone could be on mute. Bill Armstrong - CL King & Associates: Sorry. Can you hear me now?

Yeah, we can hear you.

Yeah, Bill. Bill Armstrong - CL King & Associates: Okay. So you mentioned your inventory turns -- sorry, your aged inventory 361 days plus. Could you tell us how much of your inventory is over 361 days and what your objective is in terms of how far down do you want to get that before you think that you're at a normalized level that you're comfortable with?

Yeah. We'd really need to look at it in a couple of different buckets. Our general merchandise inventory is about 7-1/2% right now from a GM standpoint. And I think, if you compare us to First Cash, I think First Cash states their inventory is about 5%. So it shows us that we've got a little bit of lifting to go yet. And we've got a much larger jewelry exposure than they do in the U.S. And so while that's a little bit higher than our GM, it's, you know, it has a stronger cost basis associated with it because it's not necessarily driven by aged. But we do expect -- yeah. So we do expect -- hold on one second, guys. Yeah. So we do -- I'm sorry, Bill -- so we do -- while jewelry is a little bit higher, our goal was to have slightly over one inventory turn per year and -- prior to scrapping. And we continue to expect that to be our standard in terms of jewelry. And that we expect that to be across all aged buckets of jewelry. Bill Armstrong - CL King & Associates: And with that general merchandise about 7-1/2% of your inventory is over 361 days, where would you like to get that down to?

Well, like I said, First Cash is at 5%, and so we'd like to have it approaching 5% if not better. Bill Armstrong - CL King & Associates: Got it. Okay. And so one other clarification from -- I think a comment you made earlier in the call, and that was administrative expenses. I think you said that they included $1.1 million in legal fees. And so if we take the 10.2 and subtract the 1.1, that would be a good quarterly run rate, did I get that right?

Yeah. But with the exception of that the legal fees -- the legal fees, I'm not sure how long they're going to continue and what that will be. I just wanted to call that out because they're what I would call kind of a non-operational run rate type of expense. Bill Armstrong - CL King & Associates: Okay. But they may keep going for a while though?

Yeah, I think so. Bill Armstrong - CL King & Associates: Sort of that 10-ish, 10 million neighborhood, is that something we should kind of be looking at modeling for a quarterly admin expense?

Yeah, I think so. I think by and large, most of the expenses in there are fixed in nature or relatively fixed in nature, and so I don't think there's a lot of variability. And so I think you can model that. Bill Armstrong - CL King & Associates: Okay. Great. Thank you very much.

Thank you. And our next question comes from the line of Greg Hillman with First Wilshire. Your line is open, please go ahead.

Yeah, good afternoon, Mark. First of all, could you talk about the distribution partners for Grupo Finmark? How are you -- basically what kind of success have you had in adding distribution partners? And also, what are you doing with your direct salesforce effort in that area?

Greg, I want to make sure I understand the second part of your question. But the first part is, we have a tremendous partner that we've done five, four transactions since inception, and we've had three different business partners in those -- to execute those four transactions, two in Mexico and one here in the U.S. And we are -- all three of those business partners have continued to express a willingness to continue to participate and a desire to participate in future transactions. And in addition to that, we are talking to additional buyer. Ultimately what we'd like to do is to find a buyer that is willing to transact in pesos, and with the volatility of the peso versus the dollar, that's an important goal for us to achieve.

And then for distribution partners for the origination of the loans themselves.

I'm sorry, I didn't understand the question. Can you ask me the question again?

Sure. In terms of -- first of all, for the loans that you generate for Grupo Finmark, the relationships with the various incumbent agencies and pension plans, convenio and whatnot, what percentage of those are originated by your direct salesforce versus what percent are originated by your distribution partners? And also, have you added any new distribution partners lately that might tend to accelerate the relationship -- the relationships you have?

Greg, that's a great question, I don't have an answer for that. I'll have to go back and talk to the team and get answers for that. Typically what happens is the convenio -- the convenios are actually forced and signed [ph] from a centralized department at Grupo. And then once those are signed, then it's determined that whether or not the direct salesforce or the distributor or both in concert should approach the government agency, and we sign multiple convenios. Sometimes distributors bring convenios to us, we sign a new agreement, which I think is your point, and I don't know what that number is in the quarter.

What's a convenio?

A contract.

Okay, got you. And then, Mark, just another question about just the U.S. In terms of your store [ph] managers and the IT system for U.S. pawn -- system, for the store managers to increase them, you know, to get them to do what you want them to do, and also how's your IT system been changed to reinforce your new strategy and whether that's being rolled out in all the stores?

Well, we have actually four different incentive plans. It's a layering incentive plan that is being rolled out this quarter. There are a monthly contest at the store level for the store team. There are weekly contests for the store team and individuals. And then there are daily incentives as well that could be -- that are driven by the store manager so that the store managers have economy to drive store-specific type of activities. All these -- I shouldn't call them contests. All these kind of incentives that we're pushing are to drive the KPIs that we want and incentive the team members to focus on the right type of activities that we want them to focus in on. So again we want to drive excitement in our stores, we want an exciting environment. We want our customers to feel that energy when they come in to our store and transact with us. We want our store managers to feel like they have the autonomy they need to run their business at the store level, and that they're incentivized and their team is incentivized to do so. We want to create a competitive landscape so that we have pure pressure and pure accountability beyond just management accountability at the store level. And we want people to be really excited. We -- Stuart and I had a conversation that we would love one of our store managers to become a millionaire. That would be a great situation for us to have. So we want to incentivize our store teams to really drive performance.

Okay, that's great.

And in terms of the IT, IT is constantly evolving and improving. We have Bill Wither, our CIO, is constantly working with our providence and our businesses. They have prioritized work plans to improve the system support at the store level. So for example, we now have dynamic pricing in our stores, in 300 of our locations. That's midway through testing and as that is finalized, that will roll out. We have customer grading in our pawn system as well. And there's continual improvements that are being made around those areas to help our pawn brokers make better decisions.

Okay, that's great. And Mark, just one other thing. The EPS on a year-over-year, on a peso, you know, dollar constant basis, the exchange rate was the same today as it was a year ago, what would have EPS been?

I think our total EPS impact, when you look at peso, Canadian and Australian dollar impact, is 1 penny.

One penny year over year.

Yeah.

Okay.

That has a much bigger impact on the balance sheet on earning assets.

Okay. Got it. Okay. Thank you for your comments.

Thank you. [Operator Instructions] We have a follow-up question from the line of Bob Ramsey with FBR Capital Markets. Your line is open, please go ahead.

Thanks for taking the follow-up. Just wanted to touch on operating expenses. I know you already sort of hit on admin, and both operating and admin expenses looks good this quarter. I think last quarter when we talked, you had talked about operating expenses running about 42% of revenues, you came in under that level this quarter. Does it suggest maybe you'll come in under for the year, or is it more timing in the quarter? I was just kind of curious how you're thinking about that salary -- sorry, yeah, that brand of the [ph] operating expense line.

Well, we're trying to add more employees into our stores. We hired more employees during the quarter, I think approximately 180 or so, incremental employees, store [ph] employees to make sure that we could service our customer. And so the focus is really to ensure we have the right number of customer-facing employees at our store level. But then we have taken steps to reorganize our supporting field structure to make it more efficient and make sure that we are aligned as closely as possible to our stores so we can communicate as clearly as possible with them. I think you'll see as we add more stores, either through additional de novo and acquisition activity, that expenses may increase. But as a percentage of revenue, should increase at a faster rate, so we should have quality growth.

Okay. Okay, that's helpful. And then I guess let's shift gears a little bit to the scrap line. I mean it looks like the jewelry scrapping sales just continues to kind of trickle lower. Do you think that, sort of putting margin aside, but just gross revenues, do you think that we are -- we've hit or we're near sort of a trough on that line, or do you expect to continue the sort of downward pressure?

You know, I don't see -- our inflow -- direct purchase inflow this quarter was down 19% year over year. And that's, you know, customers coming in and just wanting to sell their gold line [ph] directly to us. And so from -- and that's the number of amount of grams that we took in in the U.S. Our redemption rates are holding pretty steady in our jewelry, but we're loaning less grams of gold. And so I haven't seen -- we haven't seem a bottom yet. I think if gold increases and becomes more valuable, then it becomes a more valuable item of collateral, then maybe we'll see a shift in the market, but -- and shift in customer behavior. But we're not seeing that today. A bigger and bigger portion of our scrap number that you see is our stones. And we sold less carriage this year than we sold last year during the first quarter. We had a better price per carat, so we did a better job of selling the carats that we had with stones. We had a smaller number of carats that we sold. Our focus in the first quarter was not to empty out our cases at the end of the quarter, because we know that tax season combined with Valentine's is going to give us a tremendous opportunity to sell more jewelry and at a better margin than what we can sell either wholesale or through our scrap distribution. And so we didn't want to short term optimize for first quarter. We wanted to give ourselves every opportunity to sell these items back to our customers and ensure that they're back in the pawn cycle.

Okay. All right, that's helpful. Thank you for taking the follow-ups.

Thank you. And we have a follow-up question from the line of Greg Hillman with First Wilshire. Sir, go ahead.

Yeah, Mark. Just a question about your exposure to payday loans. I think last quarter, single-pay assets were like 9.2. And you have some bar charts or some pie charts on your webpage right now and I can't quite figure it out. What's the single-pay assets right now?

The cash advance loans including CSO, if you look to the big pie at the far right, upper right-hand corner, you'll see cash advance loans including CSO is 5%. And --

Five percent of the pie.

Pardon me?

Of the pie, okay.

Of the pie, right.

Okay. And how much of that exposure is just in Texas for the payday loans?

You know, I don't -- you know what, if we go to the earning asset table in the back, what you'll see is you'll see the CSO and the cash advance loans is $12.8 million and you'll see cash advance loans in non-state, so that's our loan balance, okay?

-- Texas.

That's Texas. And then the cash advance loans above that, the $9.378 million, that's our cash advance loans outside of the State of Texas.

Okay.

Does that help you?

Yeah. I -- yeah. That's good enough. And also, is there any other pending regulatory action on auto title loans that you're aware of?

No. I think what I said in the, you know, earlier is what I know.

Okay. Okay, that's fine. Thank you.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back to Mr. Kuchenrither for his closing remarks.

Thank you, Michelle. I appreciate you turning back over to me. For all of you that asked me questions, I really appreciate your participation in today's call. And for everybody that's listening, I appreciate you taking the time out of your day to listen to today's call. You know, we think we had a creditable performance in the first quarter. We're not satisfied by any stretch of the imagination and we certainly want to make sure that that's clear to everybody, that there's a lot of work to be done. As Stuart said at the Investor Day, we've got to get fit and focused as an organization, and then we can worry about being strategic and add flexibility to our business. And we're still working on getting fit, and so there's more work to be done. So, thank you for your participation. I look forward to talking to you next quarter.