Good day, ladies and gentlemen, and welcome to the EZCORP Fiscal 2016 First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Christensen, Vice President of Investor Relations of EZCORP. Sir, you may begin.

Thank you, Kaylee, and good morning everyone. Welcome to EZCORP's First Quarter Fiscal 2016 Results Conference Call. Joining me today are Stuart Grimshaw, Chief Executive Officer of EZCORP; and Mark Ashby, Chief Financial Officer of EZCORP. During our prepared remarks, we will be referring to slides which are now available for download from our website at investors.ezcorp.com. 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 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 goods, changes to the regulatory environment, changing marketing 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 and other reports filed with the SEC. Now I would like turn the call over to Mr. Grimshaw. Stuart?

Thanks, Jeff, and good morning everyone. I hope it's not too early for you all. I'd like to start probably turning to Page 3 and just bring you up-to-date as to where we are with the strategy we announced in July 2015. And as you recall, there were 3 areas that we said we'd execute on around focusing the organization, simplifying the organization and optimizing the organization. If I turn firstly to the focus, particularly in the pawn business, we have spent a lot of time looking at the service and customer satisfaction recorded in the stores, and in particular, we've initiated both video and phone mystery shopping, which has been quite a proven training tool for us, and we've seen around a 7% to 10% improvement in satisfaction scores over that period of time, and we continue to see benefits from using these measures of satisfaction, particularly for our staff as they learn how to interact with our customers better. We've also invested in talent to support the growth initiatives that we do have, particularly in pawn, in our centralized functions, particularly in accounting and risk, and also in Grupo Finmart where we appointed a new CEO, a new CRO and CFO through that period of time. And overall, when we look at the businesses, we believe we have a very seasoned management team. And Indeed, if we look at the U.S. Pawn business, the average tenure of our senior executives in that business are around 9 years, with experience in the pawn industry specifically. So we believe that with the focus we're bringing in, we'll see that through the pawn results which is bringing in some very outstanding results. In simplifying the organization, we've rolled out a new incentive scheme, particularly for our pawn customers, which do support…

Thanks, Stuart, and good morning everybody. I'll take you through a few charts, showing the consolidated results of the business, which cover the pawn operations and the Canadian operations and then a couple of charts on the Grupo Finmart business. If we start on Page 5, which is the consolidated results for the quarter, total revenues were down 7% on last year, but that core pawn revenue was flat, and we did experience growth in our pawn service charges. As Stuart indicated, there was some significant improvement in our merchandise gross margin, increasing to 39% from 33.9%. Scrap sales reduced as we focused more on pushing the jewelry through the retail method rather than actually just scrapping, and there was a 48% decrement in scrap sales volume for the quarter. Grupo Finmart. When you look at the Grupo Finmart line, you see net interest -- interest income was $11 million compared to $16 million last year, and I'll touch on this in a bit more detail. But on net revenue basis, it was negative $1 million where the reserving was higher -- the bad debt reserving was actually higher than the interest income for the quarter on a comparison to $9 million for the same quarter last year. Other operating expenses. They invested -- so the increase really is a result of investing in our platform for growth. There were new store acquisitions; there were 25 that were added after Q1 last year. Investments in store teams and store structures have delivered the outcomes that you're starting to see in the pawn business. Some run-down costs of CCV in Latin America and some of the investment in the management team in Grupo Finmart, and the commission structure, I'll also touch on a bit later. On the corporate expense side, the…

Thanks, Mark. What we announced in the press release today is that we're going to do a strategic review of the opportunities for Grupo Finmart, and that's being driven by a number of key factors. We've seen some changes in the industry, particularly in terms of delays being experienced in payments as you'll see there under industry dynamics changing. Delays in payment have increased as a percent of outstanding portfolio to 16% in Q1 '16 from 11% in Q4 '15. That's been a fairly major structural shift. And when we look at more of the macro trends that we're seeing, certainly the energy situation being experienced through the markets is playing out in the Mexican economy. And if we look at Pemex, who provides 1/3 of the tax revenues, their revenue stream is reducing substantially, and we're starting to see the flow through that into the delays being experienced in the industry. As a result of that, it's prudent for us to step back and say, well is this a structural shift that's going to be there for a while, and we do think this could be the case. And as a result of that, we need to review exactly how we manage the business going forward and look at all strategic opportunities that are available to us. In the short term, while we do that, we have initiated some steps designed to control the financial performance of the company such as reducing the overall G&A expenses by 20%, and that's under way at the moment. We've actually had to refocus the originations on to the high-quality convenios [ph], those that we haven't experienced delays with over time, initiating shorter-term loans, and we have cut out originating some of the longer tenures that we previously did do. And we're looking at reengineering the collection process such that the collections performance continues to improve so that the cash coming into the business is quite sustainable. With that sort of overall background, I'll pass to Mark just to run through the financials and also just review the accounting policy around the bad debt expenses.

Thanks, Stuart. If you look at the Grupo Finmart results on Page 17, we've given some of the highlights, and I'll try to give a little bit of color on how these are constructed. The interest income for the quarter was $13 million compared to the same quarter last year of $16 million. The bad debt expense, as you can see, for the quarter is $15 million versus last year same quarter of $8 million. The industry dynamics that Stuart mentioned really did affect the size of the reserves that were taken during that quarter. The Grupo Finmart's nonperforming loans now represent some 34% of the overall portfolio, which was a 19% increase from last year. The majority of these loans, and I'll cover this a bit more on the next page, represent currently employed individuals that we expect to receive funds from in future periods. So there's a differentiation between the fault and the delay, which is the way we are looking at it internally. The interest expense was down slightly, down to $6 million from $8 million last year. Our total expenses were up, reflecting both an increase in commissions and the investment -- predominantly the investment in the management team, which involves a Chief Financial Officer, new CEO, and Chief Risk Officer and appropriate support that we have invested in over the last 6 months. The profit before tax on a constant currency basis was minus $20 million compared to minus $8 million last year. Originations were down from $22 million to $19 million, reflecting the refocus that Stuart touched on earlier. Our gross loan balances were up, but also the reserves were up. So on a net loan basis the reserves -- the net loan -- net loan balance, sorry, was $119 million compared to $115…

Thanks, Mark. What I'd just like to do is probably summarize with 5 key points and then we'll open it up for questions. So I think as we've been through this, what we're seeing is the concentrated focus on serving and satisfying our customers beyond their expectations is actually starting to work, and we're seeing that coming through in some of the key metrics. We're building a platform for growth in the pawn business. We are investing in talent. We are investing in systems. And as you've seen, we have done a couple of acquisitions to continue to bolster our representation in areas which we want to strengthen. The execution mentioned above is running well. PLO balances are up 6% year-on-year and 3% on a same-store basis. Redemption rate is consistent at 83%. The merchandise margin is up 500 basis points to 38.9%. Return on earning assets is up 900 basis points to 151%, net revenues are up 7%, free cash flow up to $22 million, a 27% increase, and are all strong fundamentals and is tracking well. However, we are in the early stages of our 3-year strategic program, but the indicators we've mentioned are slightly ahead of the expectations we have set internally. And finally, as we've just been through, the recent structural changes to the Mexican economy and the payroll lending industry, is forcing a review of strategic options and opportunities for Grupo Finmart. So with that, I'll open it up for questions.

[Operator Instructions] Our first question comes from the line of John Hecht with Jefferies.

First question, I guess is related to expenses in the quarter and then maybe expenses going forward. I know you highlighted like $1.6 million or $1.7 million of -- kind of nonrecurring expenses this quarter. But I'm wondering if there was anything else elevated just -- whether it's accounting or anything as you kind of work through some of the restructuring that we should think about? So I guess that's the first question, expenses. And the second, Stuart, you mentioned your ongoing cost base, can you just maybe give us a little sense for what the kind of expectations over the course of the next 5 or 6 quarters would be per quarter in terms of cost base? And is that going to come in the admin or the OpEx side?

Well, I'll do mine. What we always work to, John, is we are always working to try and reduce the cost base at each quarter. The procurement savings that we indicated is around $4 million, but probably expect to achieve something around 70% of those savings through the course of this year, with the other 30% being reflected into next year. We've sort of made a commitment that we would try and get $13 million off the expense line within the 3 years, and we think we're on plan to achieve that. I think the way -- obviously, there's a reasonable amount that will come through in the back end from 18 months onwards as we get the full benefit of some of the initiatives that we are saving. So I think you'll see it will be more of a step up than a straight line from here on. On a quarterly basis, we just don't really analyze it on that way, so I'll just give you those indications, and you can work your model through that.

It's Mark. John, just to add a little bit to what Stuart was saying. The -- in terms of the quarter, I think we called that normalized view of that number would be if you take out the reinstatement, restructuring costs, the discrete items. Basically, I think if you boil it back down it would be somewhat flattish. Stuart mentioned about procurement savings and certainly some savings. We certainly target to be better each quarter-on-quarter. We're also quite conservative I think in some of our accounting treatment in terms of expensing items that maybe in the past would have been capitalized, and we've changed our internal accounting policies on that, but we expect to absorb that down into the numbers that we're providing.

So you should see the DNA probably go down by year 3 to match some of the potential short-term increases, which might come through. But, obviously, we try to manage the cost base to flat to slightly negative on a quarterly basis.

Okay. And in some of the states, are they spread through OpEx, admin, or are they concentrated in one line item versus the other?

Some will come through the store expenses and some will come through the admin. I'm not sure about the split, what that would be, but it will be a mix.

Okay. And then moving to the strategic review on Grupo Finmart, what -- I'm just trying to understand what the option would be. I mean, it's an ongoing business. Do you have commitments to the unions down there? You're the servicer I assume, so if you were to either dispose of this, I assume you have to dispose of the whole thing. And can you shut it down if that becomes the only option? I'm trying to understand what your range of options are.

The range of options at the moment is to try and get the company back on what we would term as a normal footing where the bad debt expense starts to actually behaving on a flat line basis. So the accounting policy makes that difficult as you originate more and with the delays we're having. All options are open, but there are risks, obviously, in every option you do take. For instance, if shutdown was one of those options, and I don't think that would be an option to follow, but if it was, I think your ability to collect is somewhat limited from thereon as you signify departure from the industry. It's not something we would rapidly entertain because we think there are better options in terms of managing the business and even looking at partnerships. The one thing we've said that, if businesses aren't meeting their cost of capital then we have to be fairly strong about the way we look at the options and move in a way that maximize the shareholder value. So I think if we use the -- we have to convince ourselves that while being in the hole, we can get that cost of capital return, and if not, then we have to move into areas which could be -- I mean, the only other option that I'm sure you're aware of.

Okay. And final question, the equity income line. I know there's -- you've managed some asset sales, and it's been volatile in the recent quarters because of that. How do we think about -- do you guys have -- can you give us a sense of how to think about that equity income line? Whether it's seasonally adjusted or just on a quarterly basis going forward?

I think the major part of it is actually the equity income from cash [indiscernible] into some cash convergence in Australia. They'll be released -- and they're released on a half yearly basis, not a quarterly. So we take an estimate to a degree of what we think that contribution could be and then we firm it up this quarter once they announce their half yearly's, which is in about 3 weeks' time...

And is there -- in your opinion, is that business fairly consistent now, or is there still some volatility in it?

Well, they're undertaking a strategic review. What we do is we look at the analysts' forecasts and take our -- take a line in the sand from what the analysts are projecting for the earnings and then true it up once we get the final results in. They're undertaking a strategic review at this point of time, looking at the options of some of the businesses they have, and we'll see what the outcomes of those are.

And our next question comes from the line of Bill Armstrong with CL King.

I wanted to talk about the retail margins. They were up pretty nicely. And you talked about the lack of aged inventory markdowns being part of that. Were there any other drivers there, maybe mix either between jewelry and general merchandise and what you're seeing within those categories?

There has been a slight shift to jewelry, but what we've found is that we're actually pricing better at the loan. When we are doing the loans we're actually pricing much better, which sets us up for success with the cycle, the pulling cycle that runs from there. So that when the inventory does drop, it's actually at a price that we can achieve the margins on. And as we've mentioned before, that's why we refer to it as a quarterly loan portfolio because we haven't seen an increase in redemptions. Yields have remained the same, the margins have been healthy. So it's actually that discipline that I talked about before and the marking of the product through the product life cycle and the customer metrics that we're seeing is supporting everything we're doing. So there's no simple solution. What we find is getting the discipline right at the start sets us up for the success all the way through.

And even with that more disciplined pricing, your same-store balances in the U.S. were up a little bit year-over-year. Do you see that continuing to stay in positive territory as we move forward?

Is this the PLO you're talking about?

Yes, yes, the same-store for U.S.

Well, if you look at the last couple of quarters we've had some very good momentum coming through, and obviously, as management, it's our intention to continue to grow those balances. However, in this quarter, we'll probably see them come off due to the large retail and tax refunds coming through. But on an average basis, our intention is to continue that trajectory.

Our next question comes from the line of Vincent Caintic with Macquarie.

Question on pawn loan growth. You had demonstrated strong growth in both the U.S. and Mexico, and I was wondering if you could give us a view on how that's going to shape up for 2016, particularly I think some investors are concerned about energy prices and how that might impact loan growth?

Yes. One of the things obviously, we mentioned saying this, is to continue to improve the pawn loan balances, which means that we've got to keep focused on the customer at the storefront level. So we're committed to that. We haven't put any growth targets out there, Vincent, but I'll give you a bit of a sense. Most of our customers actually adjust quite rapidly to what's happening to their hip pocket, and we find that they can adjust pretty much within a 45- to 60-day period. So while we get this initial sticker shock, or whatever it is, they actually adjust their whole patterns to that. And typically the energy prices may provide a bit more cash in their pocket, but their underlying behavior or the need for cash is still there. And what we find with our customers is that by staying close to them, they actually still come back via retail or via pawn. But we don't expect that to be a major driver of any change in our approach to running the business. We believe that the management initiatives we're taking at the store level, focusing on the customer, sort of removes some of the macro impacts from what we see over time. And the role we have is to ensure we grow the business at a rate which is sustainable and takes account of the macro impacts.

Got it. Great. And then touching on that, you've grown stores this year as well, and I was wondering what your appetite is for opening more stores or buying more stores?

As we fly out to Mexico, we're going to do 4 de novo stores. In the U.S. we might do some -- we might just do some if the opportunity is right. We don't want to pursue acquisitions for the sake of it, but where it makes sense, we will do it. But really, as you'll see it would be nice to sort of do bolt-ons where it makes sense, but really the focus of investing our money really has to be back into the talent we have at the store level and at the district manager level. We know that we can get some really immediate returns by investing smartly there. So most of the money will be invested back into the store level, and there will be some opportunistic acquisitions if they do come up.

Our next question comes from the line of Jon Segal with Highbridge.

Quick question for you. Going through the queue this morning, saw there was substantial repayment of indebtedness, $29 million or so. Just curious what that relates to? And if holding company capital is going down to the Grupo Finmart entities?

It's actually the net for amortization of the loan portfolio in Grupo. So you'll see for the variable trust [indiscernible], I think there's about $12 million drop in that one and then there's the [indiscernible]. So that's just a natural amortization of those facilities.

[Operator Instructions] Our next question comes from the line of Alex Lach with Camden Asset Management.

One of my questions has already been answered, but if you could just talk about general liquidity management going forward. Again, you mentioned potential opportunistic acquisitions, but if you can talk about how low you're comfortable with your cash balance et cetera, that would be great.

Yes. I mean, we watch liquidity on a daily basis. At the moment, we're coming into probably our peak liquidity season whereas the tax refund checks do start hitting our customer's accounts, and they do hit our stores, they pay-down the loans and purchase stock. So we're in the peak liquidity. So we do set internal buffers which we don't disclose to market. But what we do do is look at -- just to give you a sense of how we look at it, we do look at the loan growth out for the next 12 months, and we look at the intended sales, and we actually probably vary those on a daily basis based upon the feedbacks from the stores. So if it's -- the comfort you need around liquidity, we do watch it very seriously, and we continue to retain the conservatism around that. So if an acquisition did arise, which would breach one of the buffers that we do set, we wouldn't undertake that acquisition.

And I'm showing no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Thanks very much for your time, and we once again apologize for the early hour of the morning, particularly if you're on the West Coast. We will be available for calls through this weekend. We will be visiting a number of cities next week, so we look forward to meeting with you and discussing the results. And thanks again for listening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.

Thank you.