EZCORP, Inc. (EZPW) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Scott and I will be your conference operator today. At this time, I would like to welcome everyone to the EZCORP First Quarter Fiscal 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Jeff Christensen, Vice President Investor Relations, you may begin your conference.

Thank you, Scott, and good morning, everyone. 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 available for viewing or 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 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 risks and other factors that are discussed in our annual, quarterly and other reports filed with the Securities and Exchange Commission. Now, I would like to turn the call over to Mr. Stuart Grimshaw. Stuart?

Thanks, Jeff. Good morning and welcome everyone to our first quarter results. This quarter has seen a continuation of our focus on meeting our customers’ desire for cash with strong results being posted in the U.S. and continuation of a truly outstanding performance from our Mexico business. And as Joe Rotunda would say, it all starts with a PLO. And if we turn to slide three, we can see that we have continued to capture market share and lead the market in PLO growth in both the U.S. and Mexico with total PLO up 5% to $165 million; U.S. PLO up 4% and Mexico PLO up 17%. That continues the impressive track record of positive results we have seen with five consecutive quarters in the U.S. of positive PLO growth, the last quarter being 3%, and 10 consecutive double-digit quarters in Mexico with 14%. And when you consider that that’s compounding on double-digit really is quite an extraordinary result. This quarter, we’ve continued to deliver profitable growth. Total revenue is up 6%; profit before tax up 12%; EBITDA was flat excluding the impact of other international segments. And as we’ve always said, we will continue to invest into our pawn operations, and we’ve used the corporate expense savings to reinvest into the stores with corporate expense savings of 13% which suggests we’re on track for the $15 million we outlined in FY18. And we had significant investment in field leadership, notably adding 224 new team members during the peak sales season, and this will be used to offset some of the staff turnover that we will incur during the course of the year. And we do continue to upgrade the technology and the point of sale system which we will start rolling out in March and April of this year. So, with that summary, I’ll pass it over to Mark Ashby.

Thanks, Stuart, and good morning, everybody. Just turning to page four of the presentation, this shows the GAAP results for the first quarter. I’ll summarize a couple of highlights from this and then spend a bit more time on the adjusted results. Our overall, total revenue was up 3%, reflecting, as Stuart mentioned, the focus on serving our customers’ need for cash. Total revenue being up 3%, U.S. Pawn up 3% and Mexico up 4%, but on a constant currency basis, up 26%. Net revenue was flat for the quarter, but as you’ll see, it’s actually up 2% on an adjusted basis. Corporate expenses on a GAAP basis were down 30% but on an operational basis were down 13%, as Stuart mentioned, really reflecting some restructuring and restatement costs that were incurred in the first quarter of last year. EBITDA growth of 33%, you can see on the chart; and also reduction in interest expense reflecting the interest income from the sale of the Grupo; we have the notes receivable, where we receive interest income more than offsetting $50 million facility that we entered into with Fortress last financial year. This led to an increase in continuing ops net income of $5 million for the quarter. If we turn to page five, this is the adjusted results reflecting constant currency and other discrete items which are reconciled in the back of the pack. You see total revenue growth of 6%, U.S. Pawn 3%; Mexico at 26%. Net revenue growth of 2% for the quarter; the gross margin in U.S. Pawn was 36.5%, which is consistent with our target range. We had a 6% increase in operations expense, as Stuart mentioned earlier, reflecting the investment in the store team members and support structure as well as a commencement of a preventative maintenance program as part of our reinvestment in the stores. This cost increase shall abate over the course of the year. Other expenses, reflects mainly the lower income flow through our equity accounting of the CCV investment, all leading an EBITDA of slightly under at minus 3% compared to last year. Depreciation and amortization is down on last year 14%, giving us EBIT growth of 2% for the quarter. And at the interest expense, profit before tax was up 12% to $13.4 million. If you turn to page six, looking at the U.S. Pawn business, we had continued growth in total PLO of 4%, driving PSC growth rate of 4%, and the same store PLO growing 3% and the same store PSC also up 3%. Sales were up 3% with gross profit of 36.5%, really reflecting a more mature inventory profile, and as I mentioned earlier, within our target range. The investment in the field team and the commencement of the preventative maintenance program did drive up store expenses for the quarter. Our inventory growth has been consistent with the PLO growth over the last 12 months. And overall, there was a reduction in profit before tax for the quarter of 9% to $27 million for U.S. Pawn. If you turn to page seven, the Mexico Pawn business, this continued strength in Mexico with PLO up 17%, 14% on a same-store basis. Pawn service charges up 19%, and 16% on a same store basis. Net revenue was up 18% and leveraging the expense growth of only 2% drove a 76% increase in profit before tax. We continue to invest in the Mexico Pawn business and anticipate opening approximately 10 stores by the end of the fiscal year. Just also broadly just to add, there was some riot that took place in Mexico which affected around 10 of our stores, which [indiscernible] what the net impact will be as we work through with our insurers but we don’t expect it to be material. And based upon that summary, I’ll hand back to Stuart.

Thanks, Mark. Turning to page eight, while we remain focused on the meeting the customers’ desire for cash today, we know that we can improve further by investing in the pawn fundamentals. What we’ve outlined with this slide, there are number of initiatives that we’re undertaking continuously while we support the drive for future growth. In terms of refining incentives, coupled with training and coaching, as Mark has outlined, we’ve invested quite heavily in not only the store staff but also the coaching and mentoring that sits around the staff with the two additional divisional vice presidents, six district managers and nine here resource managers out in the field. And we believe with this support, we’ll able to support the team’s growth initiatives that we have. We are looking at the product and customer data, and the analytics that comes with that to better refine how we understand our customers’ desire for cash and when and where they need it. Technology was mentioned with the PoS system; Mark has alluded to the store refurbishment program which we’ll be undertaking over the next three years. Process analysis and improvements, we’re embarking on a number of programs in that space, which is all designed to try and ensure that we are not distracted at the store level from serving our customers with what we call, non-customer-facing tasks which sometime interfere with the service standards we aspire to. We are looking at the dynamic pricing mechanism through the inventory that we do hold. Our liquidity position remains strong with $64 million cash on the balance sheet and $15 million in undrawn credit line. And notwithstanding strong liquidity position, we are quite disciplined the way we will utilize that liquidity. And we are disciplined in store acquisitions and certainly with the de novo openings as we’ve seen in Mexico. Finally and turning on to slide nine, which is just a bit of a summary as to where we are. I am sure a number of you know the attractive industry dynamics. So, I want to spend any time with that. But, I’ll reiterate, we have established a strong track record of execution, five consecutive quarters of same store PLO growth in the U.S., 10 consecutive quarters double-digit same store PLO in Mexico, corporate expenses, as we have mentioned are on track for the $15 million, and we’ve completed the sale of Grupo Finmart and closure of U.S. Financial Services Business on time and on budget. We remain intensely focused on customer leadership. We have a number of initiatives in play, as I mentioned previously that will assist us to further enhance our capabilities in this area supplemented with the increase in support numbers around our stores to ensure that we can execute as we do. And while we continue to grow, it will be in a disciplined way. Acquisitions will be assessed rigorously and a disciplined manner. The 10 de novo stores we are opening in Mexico, we believe that will be strong adjunct to our business down there. And liquidity position gives us position of strength from which to operate in. With that, I’d like to pass it back and open it up for questions.

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

Hey, guys. Thanks very much for answering my questions. First question, you guys have expressed over the past few quarters your same-store sales expansion. I guess it’s slowing a little bit; industry trends have been challenged. I guess, maybe can you give us a little bit more color on what you’re seeing in terms of new customer intake, what are you seeing at the recurring customer level, maybe give us a little bit more on end market trends?

Yes. We actually think the market is actually reasonably sound; we’re still seeing good growth from our customers, good demand for cash. I mean, we’re posting positive growth year-over-year. We’ve had some strong growth. So, I think in this environment, getting that 3% to 5% growth that we’ve seen in our book, I think that’s a pretty good outcome. I know there have been some comments on a sort of a challenging market. but we believe that with the processes we have in place and being close to our customer, we are meeting the desire and need for cash, and we’re seeing that through the results both in Mexico and here. I think in Mexico, we have seen an influx of cash from the repatriations that have come across the borders result, with the value of peso. So, we have seen some strength in sales. With the increased gasoline prices coming in, we believe that will actually change and we’ll see our customers have a desire for cash with the change in their disposable income. So, with Mexico, I think we continue that. And with the U.S., all the initiatives that we’re doing, certainly the training, understanding the customer better, we think we’re in a very good position to continue what we’ve seen in the past.

Okay. And then, you discussed a little bit of organic expansion in your value adding acquisition opportunities. What -- there just hasn’t been a ton of acquisitions domestically or Mexico. Maybe give us a sense of what you see is market trends and market characteristics for acquisition multiples?

Yes. I think, there are always sales and always buys, so, just think what I get between expectations, which restricts execution. And so, what we’re seeing is -- we believe that there is -- and we’ve seen there is an appetite for opportunities to acquire. But, as we see, we’re disciplined and we want to transact at labels which we believe are uneconomic for us to make return for our shareholders. Mexico is a little bit different, as there is a mix between small format and large format stores. So, it isn’t as cut and dried, perhaps it looks in the U.S. But we are still looking. John, we’ve probably in the past had a track record where capital hasn’t been managed as [ph] we are now. And we are very cognizant of ensuring we return shareholder value.

Okay. And then, I think you guys mentioned a little bit of disruption impacting Mexico. Could you just give us a little bit more color on that?

Yes. Gasoline prices jumped 20% about three weeks ago and there is a lot of rioting, particularly in District Federal and Mexico City. We had about 8 to 10 of our stores impacted as a result of that with substantially looting. And I think that was a number of industry participants had similar experiences. And that basically meant that people ransacked our stores and took everything out of it. So, as Mark said, we are working with the insurers to understand what is the net position on that. It was unfortunate to have such unrest, and the gasoline prices went up again but we didn’t have the same impact on our stores.

Okay, thank you. And then, final, what’s the proper tax rate to account for you guys for I guess this coming year here?

Mid-30s, John, is where we’re expecting at this time.

Your next question comes from the line of Bill Armstrong with CL King & Associates. Your line is open.

Good morning, gentlemen. Nice job again on the top line. My question is on the retail margins. You had good top line growth, and you’ve obviously worked hard and had success in reducing your aged inventory. So, I was just curious what drove the 300 to 400 basis-point declines in retail margins in the U.S. and Mexico?

Yes. Thanks, Phil; it’s Mark here. What we had -- the reference point is really last year where we were at 40% margin. And the margin in the first quarter last year was very high, predominantly because we had cleaned out pretty much all the old inventory at that point. So, our inventory profile that point was probably more forward weighted in terms of aging. So, now, we have a more normalized profile. And if you go back over the last few quarters, you’ll see we’ve been sitting in a range of around that 35% to 38%. And that’s where we think it will settle. So, our aged inventory is still pretty tight. I just think we’ve got a more normalized profile or more mature inventory profile at this particular point in time as compared to where we were 12 months ago.

Okay. I did recall that the last year’s margins were high. So, I guess the levels from last year really were kind of unsustainable and were more at a more normalized level now; is that fair to say?

Yes. I think that’s fair to say, Bill. This business is really about balance. Sometimes if we try to overshoot on a margin, can’t mean that we are under lending on the PLO. So, getting the balance right is very important. That’s why we think the margin at 35 to 38 allows us to actually continue with the PLO growth whereas if we didn’t, I think we would struggle to get the growth rates that we could on the PLO.

Our next question comes from the line of David Diamond with Rovida. [Ph] Your line is open.

I was interested in letting us know how investors can gauge the impact of these new self help measures, the improvements in technology and point of sale. How should we follow this, and what sort of timeframe should we expect in terms of improvements. So, I am just wondering, from our perspective as we follow the Company, what are some of the goalposts we should look for and what do you think the impact can be?

Well, the point of sale system should be fully rolled out by over September. And like any rollout, you’ve got to be very careful that we don’t go too fast to forget the training that’s required. So, risk mitigant we have is we’re going to parallel path both point of sale systems, so that we don’t put a risk into the business. So, on the point of sale, it will probably be start emerging towards the next financial year onwards. All the improvements that we’re looking for, David, are actually around productivity, can we actually get better at serving our customers more quickly and understand them better which should mean that we should have a much more efficient system. So, it’s more of an operating leverage type outcome. If we can reduce cost and increase the topline, I mean that’s the ultimate goal from any technology solution that would come through. And that’s what we’d be aiming for. We know that for instance the point of sale system, we haven’t really changed that point of sale system for 15 years. So, we know that it’s sort of a non-current type system which is potentially holding us back with too many clicks to get through at the end of the transaction. So, a lot of it’s about efficiency and productivity. And you will see those appear hopefully through the cost line as well as through the revenue line.

Okay, great. And one last question on Mexico; how is the new -- you mentioned the gasoline price hikes and causing some rioting. But what is your assessment you think of this new Trump craziness that’s going on in terms of your consumer in Mexico and their demand for cash? What sort of trends have you seen in the last couple of months, as the political situation unfolds over here?

Yes. I mean, there is a lot of uncertainty down in Mexico and it was in the run up to the elections as well with some of the rhetoric that was going on. As I mentioned previously, with the rhetoric cause, the devaluation in the peso and that increased the repatriations into Mexico. So, we saw a number of our consumers have more cash in their hand than we have seen for a while. So, the sales were relatively strong. We think the increase in the gasoline prices will probably take some of that cash out of the hand of the consumer and provide opportunities for us to lean to the consumer. It’s still a bit early to see. There is another hike that’s just come through. So, we’ll probably know more in the next 30 or 60 days as our customers typically take that period of time to adjust to such pricing changes that affect their wallet. So, we think there is some mildly positive attributes to what is happening, but it’s a fairly uncertain market down there at the moment. And we’ll just have to play a wait and see game. But, we think the market has some positives out of it.

[Operator Instructions] Your next question comes from the line of Gregg Hillman with First Wilshire Securities. Your line is open.

Yes, good morning. Could you talk about the payments from Grupo; they are supposed to due in 2017 or is there any schedule or is there any additional cash coming in on that; could you talk about that a little bit please?

Yes. Hi, Gregg, it’s Stuart here. We’re expecting -- through the 2017 year, we’re expecting about $42.5 million in principal payments to come in and $3.2 million interest payments over the next 12 months.

Okay. And how much is actually -- I mean, how much has come in so far since the last time we talked?

In the last quarter, [multiple speakers].

Okay, great. And the quarter that you’re reporting, you are just reporting today?

Yes.

Okay. And then, you expect that 42.5, and 3.4 interest over the next 12 months?

Yes. That’s correct, Gregg.

Your next question comes from the line of Christian Hoffmann with Thornburg. Your line is open.

Good morning. Just a clarification from me on the EBITDA flat, excluding the impact of other international. Could you just remind me what business that refers to and how that impacts results forward?

We’ve got a 32% equity hold in cash converts international in Australia. And we equity account their profit. And equity accounted profit this year was down on last year for the first quarter. So, that’s what flows through in that line; that’s the bulk of it.

Is that maybe we have going forward or is just who knows, depends on their results.

It depends on their results, Christian. We are more a recipient of that outcome.

Got it. And could you remind me of seasonality in the business, particularly kind of what I want to back into is there is lot of moving parts in the financials for the last couple of years. If I take 1Q results and annualize them, is that a decent snapshot of the business?

No, because you’ve got currency impact in there as well. So, it’s not only the business, but the currency impact. So, for this year, it will be probably more towards the first half or probably have a higher run rate than the second half. So, you’ll see a gradual slowdown; some of the regulatory impacts that have occurred in Australia will actually slow the earnings stream more towards the second half of the year.

I see. If we annualize, we’re at kind of 88 EBITDA; I think it’s 65, is that…?

You’re talking about cash conversions or you’re talking about…

I’m talking about the whole business now.

Well, typically, the first half of the year is sales season and the second half is the loan, we pick up in loan. So, you’ll have it bit more of a skew towards the first half, a bit more of a slowing in the second half.

I mean, is EBITDA [ph] kind of a very wide the bandwidth to look at that now?

All we can do is point you to consensus. We don’t give guidance and you just pick up the analyst results and you can average that out. And that’s consensus, and we don’t comment any further than that.

Your next question comes from the line of Gregg Hillman with First Wilshire. Your line is open.

Yes. Stu, just a question on cash converters; basically the question is, are things getting better there? And are you currently the Chairman to that organization, Chairman of the Board.

Yes. Gregg, thanks for reinforcing that with me. But, yes, I am the Chairman of that. And what’s happening in Australia [indiscernible] it’s not too similar to what’s happening in all developed countries. So, they are putting some constraints on that, which we’ll see a slowing in the income as they move away from short-term lending more into the medium term lending. So, I think over the period of time, it should improve but in the short-term, they will have a slowdown while they transition their book.

There are no further questions at this time. I will turn the call back over to the presenters

Thanks. I would like to thank everyone who dialed in or logged into the webcast for their participation today. Mark and Jeff are around for questions later on. So, this concludes our call. Thanks for dialing in and for the interest in the Company, and have a great day.

This concludes today’s conference call. You may now disconnect.