EZCORP, Inc. (EZPW) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the EZCORP strategic plan update conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Mark Trinske, EZCORP's Vice President of Investor Relations. Sir, please go ahead.

Thank you, Michelle, and good afternoon, everyone. Joining me today are EZCORP's Chief Executive Officer; Stuart Grimshaw, and our Chief Financial Officer; Mark Ashby. On today's call, Mr. Grimshaw will present an overview of our transformational strategic plan, and then we'll open the call to your questions. During his prepared remarks, Mr. Grimshaw will be referring to slides which are now available for download from our website at Investors.ezcorp.com. A complete copy of the slide presentation was also filed as an attachment to our 8- K this afternoon. Before we begin, I'd like to remind everyone that this 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 future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of uncertainties and other factors, including fluctuation in gold prices and the desire of our customers to pawn or sell their gold items, changes in the regulatory environment, changing market conditions in the overall economy and in the industry, and consumer demand for the Company's services and merchandise. For a discussion of these and other factors affecting the Company's business and prospects, please see our annual, quarterly, or other reports filed with the SEC. Now I would like to turn the call over to Mr. Stuart Grimshaw. Stuart?

Thanks, Mark, and welcome, everyone, to the call. This is the first time I've been able to address you, so I'm looking forward to meeting many of you in person and talking to you over the next few days. What I'd like to do is start with and works through the investor pack, as Mark outlined as to where you can download it, and work our way through that pack. And then, Mark Ashby will have a few comments on the way through, and then we'll take questions, as Mark said. So, if we firstly turn to page three, which really sets the scene for why did we want to look at the strategic review, and the real takeaway, as we looked at the performance of the business, is the strategy did not appear to be executed well and wasn't working well, as you can see with the share price performance on the left- hand side of it, which I'm sure many of you are very well acquainted with. But, we've seen a decrease in the market capitalization of EZCORP over that period of time, while our competitors, First Cash and Cash America, have actually been able to accrete their market capitalization. And this is further borne out when we look at the net income and operating income on the right-hand side of that page. And you can see the slide that has occurred. And certainly some of the acquisitions that we undertook in previous years didn't bear the fruit that we thought they would at the time of acquisition. And this has certainly impinged upon the reported net income results, as we turned into a negative $46 million in 2014. Turning to slide four, we undertook quite a deep review of the business, where there are two areas that we looked at quite closely, of strategic success and financial success, and what does it take to succeed on both sides. And certainly looking at markets with attractive competitive dynamics, where there are few large players, reasonably fragmented, low regulation, strong economics, and stable to increasing demand, those sort of markets that we looked closely at and looked at our business within them. Then we looked at what are the core capabilities we have to take advantage of those markets. And principally around customer service and some of the capabilities we have within the pawn businesses came out quite strongly. And then we looked at what are the initiatives to win. And when we looked at competitive advantage, we typically looked at three levers, being cost leadership, innovative, or customer service leadership. And clearly where our skill set lies is in the customer service leadership area and that is an area that we focused heavily on as to where we could leverage that to advantage. But, while leveraging it to advantage can be good, it's not any good unless we have financial success. And one of the things we're focusing clearly on is financial discipline. We're looking at the risk/return. We're looking at generating returns greater than our weighted average cost of capital, greater than our cost of equity. And we're looking to grow sustainable and consistent EPS growth. However, and to do both of those, you need to be able to execute. And we've started developing a very strong management team that has skill and has a really strong background in turnaround stories and restructuring. And this is a very large change project which we'll walk you through. But, without the bench strength it's going to be very difficult to achieve the outcomes, and we believe we have that bench strength. So, turning to page five, we've focused on focus, simplify, and optimize as the three key challenges across the organization. So, when we're looking at focus, we're looking, again, at the strong strategic positions, focus on the customer, and looking at the attractive markets. As we worked through that, it was fairly clear to us that the US financial services business was a difficult one for us to actually achieve market leadership on, which I'll come to later on. So, the decision was made, as from tomorrow, that we will no longer be writing payday, auto title, or installment loans in the US, and we will be closing US financial services. That will mean we'll focus on US pawn, Mexican pawn, and Grupo Finmart as our three key businesses, which we believe have strong growth potential. As we simplify the business model, we simplify the organizational structure and we actually reengineer key processes. That will drive cost savings and efficiency improvements which will lead to enhanced customer experience and enhanced employee satisfaction. And with the optimize, it's going back to the financial discipline that we know in investments and acquisitions, and looking again at ensuring that the returns are greater than our cost of equity and our weighted average cost of capital. If we turn to page six, we're actually looking at the new vision, which is to be the market leader in North America within three years, and responsively and respectfully meeting our customers' desire for access to cash when they need it. And there are four key imperatives which underpin the vision, which is market leading customer satisfaction, exceptional staff engagement, attractive returns to shareholders, and being the most efficient provider of cash to our customers. What we've underlined there is the measures which we are going to hold ourselves accountable to, with the mystery shopper results, which we are piloting the program now, and being number one in the Net Promoter score versus our peers. Under staff engagement, we're looking for a low turnover rate. And by that, when we look at some of our turnover statistics, in US pawn we have a 50% turnover rate for team members and 20% for store managers. In Mexico in Mexican pawn, the story is fairly similar, although at the store manager level it's as high as 37%. And within Grupo Finmart, that is 24%. And we're looking to lower those as we know that the value is at the store level, and we need to increase the tenure of our store managers. In the returns to shareholders, EPS growth and ROE above the cost of equity. And obviously as the most efficient provider of cash, we're looking at the cost to income ratio as well as time to cash. And we know in Grupo Finmart 55% of loans are actually cash in the hands of the customer within day one. So, how did we look at the businesses? On slide seven, we actually went through a screenshot of what we've sort of tried to compress as our overall strategic assessment. We looked at the demand for products, the competitive dynamics, the regulatory environment, the strength of strategic position, which is being top three player by size, customer satisfaction, and our capabilities. As you look across that chart, the one that does stand out quite notably is US financial services. The competition is very tough. Regulatory impact, as many of you know, is extremely tough, and the regulatory impact is increasing. And our strategic position is quite weak. We don't have the scale in order to compete in what is going to be a scale market, and which a number of our competitors are there already. So, the decision to close USFS and look closely at supporting those three key businesses evolved from the assessment that we're showing on slide seven. On slide eight, we touch on why it was appropriate, in our view, to close the USF business, which was driven by regulation, competitive pressures, and our own capability. If we look at the regulation, there is no doubt that if the CFPB initiate the regulations that they've outlined that it's going to be detrimental to the industry as a whole. In fact, some of the experts have suggested that the revenues in the industry will drop by up to 60%. We're seeing in Texas City ordinances are being introduced quite regularly. We've had five already in 2015 and there's one going to the senate next week. And a number of states have actually introduced regulations which also impinge upon our ability to operate. In terms of competition, we are subscale. We are at number six. The regulation always drives consolidation, from what I've experienced, and you require scale to succeed. And a number of our competitors are better positioned than we are in the space. We would have to invest quite heavily to reestablish capability in this business. And when we looked at the opportunity to deploy capital across all our businesses, the returns were better in the three key businesses that we are focusing on. So, the strategic rationale falling out of that is we knew that the returns will continue to decrease and probably accelerate. The close option was the only optimal option, and will allow us to focus capital into the areas where we get a greater return. Slide nine runs through just how we look at the solid foundations for success in the three areas that we outlined previously. In US pawn, we're number two in terms of stores. We've very well positioned in a market which is very highly fragmented, but we really – we have very strong organic growth opportunities to increase our market share. Customer satisfaction is strong. And now with Joe Rotunda back leading it, we have great experience at the top to actually continue to drive or increase capabilities through our stores. Mexican pawn has been a good story, as many of you are aware. There's strong underlying demand in that market. And there's been a move into a large store format, which we are well positioned to benefit from. Customer satisfaction is also very strong in that market. And we're improving our metrics through all of our stores. Grupo Finmart, again, is an attractive market. We are probably number three, but we're seeing growth in originations of greater than 30% across all our competitors. So, there's still a fair bit of upside in that industry to go. The customer satisfaction they measure regularly and it's quite high, which we'll show you in the next page, and there is strong sales capabilities in that area. However, we do need to invest in the processes and systems to solidify the platform there. Page 10 runs through the customer satisfaction, the Net Promoter scores, of these businesses. There is some work still to do on making sure we have a relative measure rather than an absolute measure in some of these areas. But, it'll give you a sense that, certainly in US pawn, we aren't far away from the leader in that area. Mexico pawn is one where it's difficult to see where we are unless we can actually compare ourselves against the other, which we will continue to report on. And the same holds for the Grupo. Although having said that, a plus 48 Net Promoter score is an extremely strong score in any industry in which we operate. On slide 11 we tried to deconstruct what it will take to win in the customer satisfaction area. So, we look at the marketing and customer area, which is the customer experience and the use of analytics. Systems and processes is just being efficient and effective in the end-to-end experience. The store and field staff is, again, making sure we have tenured people in the stores, because that is where it all happens. And the presentation is such that the clients feel as though they're coming into a welcoming environment, be it physical and also the emotional side with the quality of our staff. On slide 12, we try to outline what does that mean in terms of where our investments go. We've indicated there that we'll invest on average $15 million per annum in CapEx across these four key levers. And what we've done on that slide is outline where some of those investments are, such as the advanced data warehouse where we need to clean our data and get a single view of customers so we can look at customer profitability, products per customer , and the sort of analytics we need to drive the business forward. Under the systems and process, I've touched on the investment we need in Grupo Finmart to stabilize that platform. And the point of sale technology, coupled with broadband, will allow us to access all the information that we have on the customers as well as react very quickly to the way we deal with them. Under the store and field office staff, workforce management is the primary way we can actually manage the timing of staff in the stores to match the demand of our customers. At the moment we haven't got that sophistication. But, with that, we believe that we'll drive strong revenue benefits to the store as we match demand to talent. And just under the store and field is we continue to compete to revitalize the stores. Page 13, I think gives you a sense of the complexity that we have put into our business as we have expanded. Not only have we had administrative costs in the businesses, we have administrative costs at the head office, which is a tremendous amount of duplicative effort and also a very costly way to do business. And we couldn't see how we could be – meet our customers needs under the current operating model. When you look to the future operating model, what we've done is run a highly centralized shared service function where the business is focused solely on the customer, and they're not distracted by dealing with some of the administrative burden that goes with having a head office around you. I'll pass over to Mark Ashby to run through the next two slides and then come back and wrap up. So, across to you, Mark.

Thanks, Stuart. If you turn to slide 2014, this gives you an indication of the cost savings that we expect in overhead annualized, within three years from now. The first two [indiscernible] $12 million saving from closing the USF business and the $9 million in net D&A savings, clearly you would expect those to be a bit more front ended than in three years down the track. The USFS closure, and just to emphasize, we're really just talking about direct overhead of that business. Obviously, there's other operating costs in stores and in regional management which we'll close as a result of the closure of the business. But, the direct overhead itself, we expect that to reduce by $12 million very rapidly. The $2 million in D&A savings, that is after allowing for the capital investment that was referred to two slides previous. So, we're anticipating a $15 million CapEx spend. Obviously, a lot of that is IT when you look at the componentry, so the depreciation schedule is relatively short life cycle. So, we will – we expect to see a net improvement over the five years – sorry, three years of $9 million per annum. But, again, that is front ended. The $13 million comes primarily from the previous slide where we look at the way we're running the business maybe to a centralized structure creates opportunities where there's a lot of duplication in the current environment, the opportunity to review all expenses that the Company incurs by introducing a procurement function within the business which has not been there in the past, and to be able to tender a lot of the major services that we have, and also by putting – and to reemphasize what Stuart said – the financial disciplines back in the business to ensure where we're spending money is fruitful and a good investment. So, we expect over the three year period that we're saving $13 million per annum. If I turn to page 15, there's some costs that we're going to need to bear in the short term and also probably over the first quarter or so of the next fiscal year. If we look at the components, we're looking at write-downs and write-offs charges of around $75 million to $85 million. And obviously, that will firm up over the last quarter as we get a better understanding of the success of some of the negotiations where we exit stores and the like. The pre-tax cash impact we estimate at somewhere between $20 million to $25 million of that. And the post-tax cash impact is a lot lower at $5 million to $10 million. And obviously that comes in over a period of time as we can claim the tax deductions on some of these costs. The post-tax cash impact is lower because of the benefits of some of the write-offs that we're putting into place which are non-cash, and we get a tax cash benefit from it. Just for your reference, on pages 16 and 17 is the 8-K. There's a little bit more detail of how that's split across USFS and the rest of the business.

Turning to slide 16, which is just a summary of really what we are, we think this is a very clear and focused strategy where we are actually focusing on businesses in very attractive markets with strong strategic positions, capabilities, and growth prospects. We're going to change the operating model and the business structures to ensure that it supports the execution of the strategy. We're going to invest in technology. The return on investments are going to be focused upon generating above our cost of equity. And we're going to deliver consistent growth in earnings per share over the long term. In essence, we'll focus on fewer businesses, simplify our structure, reduce costs, and optimize the returns from these businesses. So, that's the summary. I'd like to pass it over now for questions.

Thank you, Mr. Grimshaw. Please now I’d like to open the call for questions. [Operator Instruction] Our first question comes from the line of John Hecht with Jefferies. Your line is open. Please go ahead.

Yes, good afternoon. Just looking at the financial results that you put out and the press release, one quick question that comes is the Latin American consumer finance revenues. It looks like you changed them historically in this quarter. I'm wondering, is that related to the accounting review, or how should we think about that change from a financial reporting perspective?

I don't think there's any actual change. Obviously the TUYO business has been a little bit affected, and also we've put constant currency in there just so you can actually have a reflection of the comparison to how it traded against last year.

Okay. If I look at when they reported last year, the consumer finance revenues in Latin America were much higher than they were this year. They were – consumer loan fees in Latin America were $14.3 million last year, and in the recent report they're $52,000. I'm just wondering, is that related to the accounting review that you're doing before you resolve that?

Yes, it's actually because we're not reporting any of the Grupo Finmart financials.

Okay, that's what I was asking [multiple speakers].

In the time of a two year.

Okay, I see. So, once you get that result, we'll see that.

Yes, correct.

And second question is, the $35 million of cost saves, what do you guys look at as the net revenue you're going to be losing on an annual basis, kind of maybe over the last four quarters, from the disposition of these businesses?

As in the – you're talking about the closure of USFS and the timeline?

Yes, because the US consumer finance business, what was the – were the net revenues – what were the net revenues of that segment? Are the net revenues larger or smaller than the $35 million in cost saves you're looking to get in the next three years?

The net revenues are significantly higher than the $35 million. But, if you take – by the time you take out the store operating costs, cost of regional management and the rest of the structure, it's basically break-even. So, what you'll find is that that $35 million is actually a net benefit as we go forward.

I see. And at what point does that break-even occur? Is that over the next three years, or is it on the frontend or the tail end of that, in your mind?

If I'm understanding your questions correctly, John – it's Mark here. What we expect is we cut and we deal with USFS this year, so financially it's gone. There's a little bit of a tail into next year in terms of some of the restructuring costs, but that's relatively minor. That's a couple of million dollars. So, as we look forward, what we've got is the remaining businesses and the reduction in costs on the remaining businesses. You've got the $30 million in – from the savings from the structural change and from the procurement change, and also the effect of the D&A. We expect that also to be flowing forward, $9 million. So, hopefully that gives you some sort of guidance as to where we're thinking at this point.

Okay, great. Thanks for the clarification and for the color.

Thanks, John.

Thank you. And our next question comes from the line of Henry Coffey with Sterne Agee & Leach. Your line is open. Please go ahead.

Yes. Good afternoon and thank you for taking the time to put all this together. In simplistic terms, can I take the US revenue data that you gave us previously, the US/Latin American revenues that we have here, assume that you don't make any money at Grupo, make some guesses about overhead, take out corporate, and get a sense of what the business looks like today?

Well, Henry, you could do that.

But, would I be – what would be wrong in that approach in terms of just trying to assess what you're looking –?

Well, we don't deconstruct our P&L. So, we actually – your assumption are your assumptions. We don't provide that granularity in the market at this stage. What we'll be doing in the future is obviously reporting by division, which will make it easier to get to that deconstruct model you want. But, at the moment, we're doing it by geography, so that's actually information probably a bit too granular for what we're able to release.

And then, in terms of you've got your $35 million of projected cost savings, I assume from that same model, if I just zero out the payday revenues or the loan fees, that I pretty much will get – again, I realize I'm jumping ahead –.

I would probably suggest, subject to what Stuart says, that you probably – I know you need to do some modeling, but when the Grupo numbers come out, that will add a different dimension to this.

Oh, it looks – but are they going to be out before tomorrow morning when we all have to respond to our investors?

No. No, they won't be.

Right. We're not in the reporting – we don't get to wait. So, the next set of issues is you had the buy/sell business that came out of Australia.

Yes.

Is that part – is that surviving this process?

We've shut down the Canadian stores. There are four Canadian stores. There are still seven in the US that are operational, so it's quite minor. And there are four in Mexico. So, it's a very minor investment in the Cash Converters stores, here in North America.

So, you just keep it going or, if you don't, it won't matter that much.

Yes, it's not going to move the dial too much. So, we're just looking at that like we are the others, saying, well, it's interesting. We've just to see whether there is a potential to actually expand it further.

There have been some – the two things that have hurt this stock a lot are some of the issues that you've described the ineffectiveness of the acquisitions and some other things, the shrinking of the pawn – of the payday business. And then, the other – and the turnover, etc., etc. Also, the behavior of your control shareholder has weighed heavily on people, even some recent items that we highlighted in a note. I was wondering what you could comment on regarding that.

Well, any comment about the controlling shareholder you'd probably have to ask him. But, we believe that the strategy that we've outlined will actually deliver value to the shareholders. And I think [multiple speakers]

Right. No, I think you're heading down the right path. There's not question about that.

And I don’t – if I don’t…

Would you be able –?

See the – I certainly don't see the controlling shareholder being an issue here, because the strategy we've got I think is a very logical one and easily understood.

No, no question at all. What about buyback, buying back stock, etc.? Your stock's way below book value.

Yes. No, it's – we look at all capital management opportunities, but we also look at ways that we can actually enhance the value of the business as well. And buying back shares is certainly one option. But, also looking at growing potential in our core key businesses where we think we can grow at a faster rate and generate great returns is the tradeoff, actually, Henry. So, we're not saying never, but we actually look at those tradeoffs quite regularly.

And I got on the call a couple minutes late. Did you give us any sense of when to expect the – your Q's coming out?

No, we didn't give a sense. But, in the 8-K we did reference the fact that we're confident it'll be done before we get into any default on any loan structures or any NASDAQ compliance issues are faced.

And you may not be able to ask this, but I've had a couple of investors ask for help in quantifying, even if on a historical basis, what was the balance sheet investment in Grupo that could be at risk? Can you give us some numbers? It's hard to find stuff in the Q's and K's that give you good guidance.

I don't think the investment would be at risk. And just to reiterate, these are actually non-cash issues as well. They're accounting issues that –.

Oh, we know all that stuff.

Yes. But, no, we don't believe there'd be an investment issue in investment in Grupo total.

So, the carrying value of Grupo and the balance sheet value of those assets you don't think is at risk?

It shouldn't be.

Okay, that's helpful. Thank you very much for taking the time.

Thanks, Henry.

I know we're going to talk later. Bye-bye.

Thank you. And our next question comes from the line of Bob Ramsey with FBR Capital Markets. Your line is open. Please go ahead.

Hey, good afternoon.

Hey, Bob.

I appreciate the color on the Cash Converters stores. I'm curious, though, what the view is on the Australian Cash Converters stock that you all own, particularly in the view of simplifying organizational structure and exiting regulatory risk related businesses.

No, it's a good question. It's one that we do look at. As you're more than aware, Bob, the currency has impacted on that investment as well. And certainly some of the most recent litigation cases have played on the value. But, we still think there is value in that stock. We actually do learn a lot through both their technology and marketing, so there is a sort of a knowledge sharing going on. But, we're also very much aware that, as an asset on the balance sheet, that it has lost some value over the past 12 months. And we are looking at it, but in terms – are we going to do anything about it? Not at this point of time.

Okay. And then, sort of circling back to the US financial services business, if I understood your answer to John Hecht's question correctly, you basically are saying that that business today operates break-even and that the loss in net revenues will be offset by the costs that come out of it. Is that correct?

In the last quarter it has been break-even, and it was profitable in the first half. So, the second half of this year would be – is a break-even to a loss result, in that area if we project it forward. And that is principally driven by the ordinance structures that have been coming in through Texas, where we are – 70% of our stores are. And that has caused a decrement in the revenue as the ordinances come in. We actually start to see an increase in bad debts as well. So, that played against us in those market.

Okay. And when you think about the costs that come out by closing the stores, are you all then putting the full allocation of the real estate occupancy expense in your store within a stores onto the pawn shop and not sort of looking at cost allocation accounting? Because I guess you don't save anything in the pawn shop rent if you close the store within a store.

The pawn shops will assume the space in the store within a store. So, that'll be fully costed into the pawn. And then we're going through the stores outside of that. We'll be going through each individual lease looking at what that actually means and whether there is a long tail or a short tail that we can utilize.

Okay. And then, I guess I can understand the markets that have been hit by the city ordinances. They're not making money. It doesn't make sense to stick there. But, in other markets, which you've got a lot of stores that are outside of those city ordinances, EZ's management historically has always talked about how these stores had the highest returns on equity, returns on invested capital, of any business that EZCORP was in. And so, I'm curious if the decision to exit even in other markets where you're not at risk today, is that a reflection of the outlined rules from the CFPB? Is that a reflection of the negotiation process with the CFPB with the CID, or what has changed outside of those ordinance markets?

I mean, most financial services firms do have high ROEs where you can use a bit of leverage and the returns are good. What we've done is we've looked for – we don't substantial scale. To win in this business, you need a lot more scale than what we have now, particularly when we have the regulatory impact coming at us. And the ROE on this business has been declining quite steadily. So, if you look to the ROE, if you took it pre corporate overheads, it's probably a reasonably attractive ROE business. But, I can shrink profit and shrink my E and still get a good ROE, but I've got a shrinking business. So, you've got to look at a number of measures rather than just an ROE measure to make the determination of this is a business we want or we don't want. But, having said that, once you overlay your corporate overhead structure into that business, it actually gets down to very low – particularly in this current format, very low single digit ROE numbers. So, we looked at multiple things, not just ROE, Bob, to come to this conclusion, as we tried to outline on the way through. And certainly the headwinds of CFPB is one of the issues that comes into it, but there are a number of other issues around scale and capability as well.

Okay. And I guess as I understand it, you all said effective tomorrow there will be no more consumer loans made out of your consumer loan stores, your pawn – I mean, obviously you make pawn loans, but not consumer loans out of your pawn stores anywhere. Is that correct?

Correct. We'll be a pure pawn play in the U.S as opposed to some of our competitors

Okay. Do you have any thoughts on the CID and the status of where you guys stand with that?

No. At this stage, we will obviously be talking to them. But, we don't have any clarity on that at the moment.

Okay. And as you – I know you highlighted you guys really are focused on earning a return on capital that exceeds your cost of equity. In the past, EZ has talked about a 15% hurdle. Is that still the right number, or have you all sort of reassessed what that line is?

When we've just had a look at it, it's around 39%.

Okay. And then last thing and I'll hop back out, but just sort of on the subject of corporate governance, to follow up on Henry's questions, last, I guess, April the Company announced that it had formed a corporate governance committee of independent directors. With the changes in the Board, I think that sort of fell by the wayside. But, in July, the former management team said that a permanent corporate governance committee was still absolutely a goal of the Board. Could you tell me where we stand with that today?

Yes. We'll be reconstituting that. I think it'd be fair to say that, with the noise, we haven't actually had a meeting of the governance committee, but we were actually only talking about it two days ago. So, that will be probably initiated in the next week, actually. So, your question is very timely

Great. No, glad to hear that. And then, I guess sort of along that line, the consulting agreement with Selene Partners. While it's not exactly a related party transaction, it still sort of seemed familiar, if you will. I guess what was sort of the Board's view in reviewing that without a corporate governance committee, but the Board overall sort of saying, look, this is something that we're comfortable doing, knowing that it's sort of a sensitive area for many investors?

Yes, I mean the contact actually involves one individual who actually has very strong actuarial and financial skills who helps us with – particularly when we're looking at our pawn business. And it's really – and to be honest, Bob, it's not a lot of money, but I understand the question, the nature of the question. But, I'd say the Board is very strong on acknowledging that potential conflict, as you have looked at. And the audit committee actually did the full signoff on that prior to getting Board approval. So, it went through quite a rigorous review process for a contract which is quite minor. Just to give you some comfort, it wasn't just passed through. The other thing that we're looking at as well which I should have mentioned is that we have a CRO, Chief Risk Officer, and the audit committee will be expanded to an audit and risk committee for further governance over the business. So, I'm trying to give you a bit of comfort that there is a strong governance process that does exist through the business, and we're adding more stringency into that.

Okay. All right. I'll hop out. Thank you.

Thanks, Bob.

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

Hi. Good afternoon, guys. Thank you.

Hi, Vincent.

Thank you. Just a couple of questions on my end. With this being a far-ranging strategic update, wanted to get a sense of if anything in the funding structure is changing and if you have the buy-in of the revolver and debt guys

No, nothing. It all remains the same.

Okay, great. And then, on the sale of the U.S financial services business, or actually the shutdown, is this going to be a sale? So, can you get proceeds out of this, or is it you're just kind of shutting down operations?

We are shutting down operations. Obviously we're going to be collecting the book on the way through. There's cash sitting in all the branch structures as well. And there are a few opportunities that we believe will come up once we've done the announcement. We are aware that the CFPB uncertainty actually does hinder a sale process due to – purely due to the uncertainty that people will be prepared to go in this. So, at this stage, we're working to – we're doing a wind down, as you can see on that Slide 15. And the post-tax cash impact is actually reasonably light for a business of this size.

Great, got it. Okay. And then, in terms of your perspective of the pawn industry generally, could you describe how the competition is, how the opportunity set is just industry wide? And in particular, I've been getting questions about gold price impact on the pawn business, and if you could give some color there. Thanks.

Yes. No, I mean, the gold price is a big determinant, with jewelry being such a – it's a large component of our business. I mean, the pawn business is an interesting one because there really are only three listed companies in there. And there're close to 12,000 close to pawn stores, of which the three listed companies account for around 1,500 stores. So, it's a very fragmented industry which in itself is an interesting business to play in. We believe that obviously when you have scale in this business, you have capital benefit as well as I suppose pricing benefit, due to the doors that you do have in certain areas. We like the fact that it's a customer business and it's a local business. Most of the pawn stores capture within three miles of the store, and the store manager really is the hero and the one who makes it. So, the dynamics are really good for us, and we do like it. In terms of the gold, obviously what it does do is it's impacted on the scrapping as well as the loan values that we'd principally have. So, you'll see some natural shifts in the income line as a result of the shift in the gold price. Having said that, it's just as – I've seen reports pricing gold down a long way further and I've seen some reports have it stabilizing. We know gold has traditionally been a cyclical business, so what you're seeing is a lot of focus on us as how do we look at our general merchandise in terms of pawn lending. And you'll see that some of our transactional volumes will start to improve as general merchandise becomes a larger part of the business. But, we still think that pawn is a very good business to be in. And gold is just a part and parcel of existing in this business.

Got it. Great. Thanks much, sir.

Thanks, Vincent.

Thank you. And our next question comes from the line of Gregg Hillman of First Wilshire Securities Management. Your line is open. Please go ahead.

Hi, Yes. Good afternoon. Stuart, in your strategic review, what was your sense of what the long term organic growth would be for pawn in terms of like pawn books?

Yes, Thanks, Gregg. Look, I think what we've said in there is – and you can read it pretty well. Most of the people in this market think that pawn is like a 0% to 2% to 3% growth business sort of in the short/medium term. We believe that with what we're doing we will outperform that. And we've said that's how we will sort of improve and increase our market share, through organic opportunities which we've outlined around point of sale technology, well we of course planning and trying to drive the market growth.

Okay. And then, for the – thank you. For the cost of – how much has the cost of the restatement been to date for both the outside consultants and outside accounting firms?

Well, we haven't disclosed it, nor we will. But, I know it won't surprise you, but it changes and increases every day. And we haven't disclosed that, but we will. By the time we get through it, we'll actually clearly indicate that outcome. So that you can put three model.

Okay. And in terms of winding that down, I take it that that outside cost should wind down in the December quarter, the fourth quarter of this calendar year. Is that correct? Like, this should be like high in this quarter that we're in right now, but it should wind down the following quarter?

Yes.

Is that a good assumption?

That's a good assumption.

Okay. And then, in your recent 8-K on that subject, you indicated that you might have to go back and take more allowances for Grupo Finmart, and that might cause you to restate 2013 or other past years. Is that going to be a serious item? Is that a big deal, or do you consider that would be like a relatively minor impact when it finally comes in?

We're still working through it. But, we're just being conservative in putting it out there that this could occur. But, at this stage, we're not advanced enough to actually fully answer that question.

Okay. But, you made major progress in terms of you settled the major theoretical accounting issues, and what's left is bookkeeping and auditing. Is that correct?

Right. That's correct. So, now it's getting to do the hard yard of reallocating and realigning

Okay. And then finally, moving to Grupo Finmart, could you describe the current marketing efforts going on in Grupo Finmart and whether – and also how you're going to fund growth in that division? Are you going to fund growth through securitizations on a go-forward basis, or how would you fund growth?

The moment, Gregg, most it's done by securitizations. That's the easiest and cleanest way to do it. It's quite an accepted model of funding in that market. But, we are actually looking at other opportunities, so that we can diversify our funding source. And obviously the strength of – we are still originating quite strongly and also increasing our penetration into [indiscernible]. Diversifying the funding sources is actually quite a critical success factor for us so that we don’t get some [indiscernible] on one particular source.

Okay. And so, securitizations will be part of the future for that business?

Yes, that’s right.

Okay. And I take it the – so the book is still growing in that business

Yes, that’s correct

And you are adding headcount for the marketing department? Are you increasing your marketing efforts?

No, not at the moment. And we're still originating close to 30% per annum in originations this year, so it's still a firm growth. But, we haven't increased staffing in that area. And we do go through brokers and distributors as well as our own direct force. So there are three channels, and we are the only vertically integrated operator in that market.

And are you doing efforts to improve collections for that business?

Yes, we're looking at all those areas, Gregg. As we outlined, the full automation of that process and enhancing the skill base in there is very much on the agenda, as we want to make sure that as the market grows we have the most solid platform to take advantage of that.

Okay. And to date, do you have the address, the proper address, for all the people that you have loans out to right now?

[Indiscernible]

I couldn't answer that question. I going to ask that – we know where they work, but I'm sure the address would be in there. But, it's probably a little bit too much detail for me, but I can certainly get back to you on that.

Yes, their home address. Okay.

No, no

Okay, fine.

We've got their employment address. I know that. But, I'll confirm the other one for you, Gregg

Okay. Thanks very much for your comments.

Thanks, Gregg.

Thank you. And I’m the showing the follow-up question from the line of Henry Coffey with Sterne Agee & Leach. Your line is open. Please go ahead.

Yes, just real quickly, obviously you shut down the payday loan business. You're going to see higher losses, etc. I mean, that's sort of a given. But, in the $75 million to $85 million of expected charges and costs, is any of that in there, or is that just the cost of putting on the brakes and shutting down the doors, etc.?

There's a couple of things in there that – we've got a number of action items that we are trying to use to ensure that those collections are reasonably high. And obviously, I don't disagree that the risk of leakage in that is quite high. But, yes, those numbers are in the $75 million to $85 million. But, we're looking at issues such as seeing whether we can convert some of these clients across to our pawn business. There was survey done in 2012 by Pew which suggests that close to 60% of people would look at pawn if payday didn't exist. However, it’s obviously other competitors in that market where they would completely have to refinance. So, we're not being reactive to the situation. We're actually being quite proactive to the situation to ensure that collection rate is as high as we can get.

Great. Thank you. I look forward to learning more.

Thanks very much.

Thank you. And I’m showing no further questions at this time and I would now like the turn the conference back to Mr., Grimshaw, for any closing remarks.

Thanks very much. I didn't know my name was that hard to get out, but appreciate the interest? And we'll be around for quite a while, so please contact us should you require any one on ones above and beyond this call. And we're fully available for that and appreciate your interest in the stock, and we'll look forward to talking. Thank you.

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