Stuart Grimshaw - Chief Executive Officer Danny Chism - Chief Financial Officer Michael Kim, Investor Relations

Good afternoon, ladies and gentlemen, and welcome to the EZCORP, First Quarter of Fiscal 2020 Earnings 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. As a reminder, this call may be recorded. I would now like to turn the conference over to Michael Kim, Investor Relations. Please go ahead, Michael.

Thank you, and good afternoon, everyone. 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, as well as the presentation slides contain 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. And as noted in the presentation materials, and unless otherwise identified, results are presented on an adjusted basis to remove the effect of foreign currency fluctuations and other discrete items. Now, I’d like to turn the call over to Mr. Stuart Grimshaw. Stuart.

Thanks Michael and good afternoon to everyone. Now turn briefly to page four, I'll summarize the little on the positioning we are coming out of the first quarter for the 2020 financial year. Our clear focus has always been a meeting our customers need for cash, and we haven’t wavered in this intent over many years. While PLO remains relatively flat across the year, we saw a good PSC improvement in Latin America with pawn service charges up 5%, highlighted by monthly yield improvement up 80 basis on an adjusted basis. Merchandise sales were up 18% in Latin America reflecting the strong cash position of our customers. However, merchandise margins were impacted by a movement of aged inventory across the quarter, which Danny will touch on a little later. We will continue to focus our efforts on moving infantry, particularly aged and aging and building cash balances in the company. After a few quarters of negative IT performance, this quarter had uninterrupted service at the stores, and pleasingly all stores in the U.S. and Mexico are now operating on the new point of sale system. We also continue to focus on the de novo expansion of our business in Latin America, with four opened in the first quarter, with a further nine currency under construction. We plan to open approximately 40 for the year. While we continue to see opportunities for acquisitive execution, the prices do not merit the capital being sought by vendors, and we will continue to maintain our discipline in this regard. Lana went live in the first quarter, and we have three pilot stores in Florida currently integrated into the Lana offering. We anticipate having around 140 stores integrated with Lana up and running by the end of this quarter and we currently have 4000 Lana debit accounts with customers have to sign-up in on average of 3.5 minutes. The apple AWScustomers digitally view and extend their pawn loans without having to be in this store. Finally, on the capital management position, we repurchased 142,000 shares in December 2019 and subsequent to that have continued activity with a total of 415,000 shares now repurchased as of the February 3. I’ll now pass it across to Danny for further comments.

Thanks Stuart. Good afternoon everyone. I want to start by providing an update on the share repurchase program the board approved in December of last year. First, we shorten the blackout period from a month to two weeks prior to the quarter end and we established a 10b5-1 plan prior to the window closing in December, which allows the investment bank to repurchase shares on our behalf using predetermined criteria even in blackout periods when we may be in possession of material non-public information. As Stuart mentioned, these actions allowed us to repurchase approximately $1 million of Class A common stock in December. From inception of the program through today, we’ve now repurchased approximately 415,000 shares for $2.7 million retiring approximately three quarters of a percent of our outstanding share count. In future periods we’ll report repurchase activity only through the end of the reporting period. But as we just initiated the repurchase program and 10b5-1 plan in December, I wanted to provide a real time update this quarter. Stepping back we remain focused on allocating capital to what we believe will deliver the highest shareholder returns. While we continue to evaluate acquisition opportunities, potential transactions must meet our strict financial and strategic criteria. Coupled with new store development, we continue to see buybacks as an attractive use of capital to deliver return on investment and return capital to our shareholders in a tax efficient manner. Looking ahead, we remain well positioned to fund new store development, pawn loan growth and investment spending reflecting the strength of our balance sheet combined with a strong free cash flow generation of the business. To that point, we ended the quarter with $143 million in total cash on hand, and the long term trajectory of cash from operating activities continues to be strong.…

Thank you. [Operator Instructions] Your first question comes from John Hecht from Jefferies. Your line is open.

Thanks guys for talking my questions. First, I guess basic modeling questions. Danny, you talked about some labor cost savings going forward. So I’m wondering, you know can you kind of give us a quarter aspect of the details of about, like say on a quarterly basis. Second, will the lease expense account change any of the quarterly lease accruals, and then you mentioned there's going to be an increase in D&A on Lana, maybe you can quantify that?

Yeah, so I’ve not quantified or wouldn’t want to put a number on the savings that I expected from some of severance. I wouldn't factor in on a huge change, but would expect some savings going forward, both in the corporate, as well as a little bit in the store expense, particularly in Latin America. On the Lana depreciation, we only had about I think – what, 36,000 or so come through this quarter. We ended up having about $6.5 million, $7 million of capital put into that last year. Over a 5 year term I’d expect that to be about a $1.3 million, $1.4 million per quarter depreciation and that obviously would change if we do further development on that as well based on what we’re putting in there right now. And then on the lease costs, I wouldn't expect that to really change the income pattern going forward. That's more an impact on the balance sheet. There will be a little bit, but that's primarily just grossing up the balance sheet for the asset and liability. Hey, in the other, when you look at the accounts payable and accrued liabilities, you will see also there was a – I think I mentioned there was about a $8.5 million movement out of that account into the – a reduction of the right of use asset and leases.

Okay, that's very helpful, thank you. Again, so a couple of questions. What is – you know and I – forgive me if you had it in the presentation initially, but do you have handy the same store PLO in both U.S. and Latin America?

Yeah, same store PLO in the U.S. was down 1% and adjusted in Latin America was – same store PLO was also down to 1%. That was up a bit in GAAP, but constant currency was down a bit.

Yeah, okay thank you very much. And then you know talking about, so it sounds like you're focused on – there's a few moving parts with respect to your margins. One is your focus on reducing aged inventory, but then also you know some of the ramping up of stores in LatAm and so forth. What do we think about the pace of gross margin this year and you know based on your perspective of you know getting rid of aged inventory and so forth, when might it bottom or have we already bottomed?

We haven’t bottomed yet. It's a mix. We always try to get the margin back to where we indicated we were comfortable, which was the 35% to 38%, but the – we've got a balance selling the fresh buckets of inventory as well and that we can balance the fresh buckets with removing the aged and we will move back towards that ratio. At the moment we're not moving the first buckets as quickly as we'd like and the real focus of management, both in the U.S. and Mexico is giving a balanced approach to the inventory reduction, to maintain the margin as best as we can, but as simple view as we think we've probably got a bit too much inventory, which we want to recycle into cash as soon as we can.

Okay, and then last question is your buy back. I think your shareholders would think any amount of buy back is good. You guys initiated a little bit of the buyback, but it's still a very small component of the overall, a lot of the amount, and I know the change in rules require periods as a portion [ph] or should which we expect a greater focus and greater usage of that or how do you think about your prioritization of that?

Well, we sort of said we’d be doing $20 million a year and we’re pretty much on track with where we thought it would. I mean we’re fortunate to get into the market earlier than we thought we would, but you know we've committed to – subject to anything else coming up, to the $60 million over three years on a pretty much linear pattern on a per annum basis.

Okay, alright thank you guys.

[Operator Instructions] Your next question comes from Greg Pendy from Sidoti. Your line is opened.

Hey guys, thanks for taking my question. Just on the aged inventory, I think you said it went from on a year-over-year basis from 9% to 7%. Can you give us any color on you know what categories are we mainly working through electronics or you know can you just give us a little bit of a breakdown of where I guess the highest portion of the aged inventory is?

Yes, it’s finally in the eligible area where the technological obsolescence is at its highest, particularly the LCDs and the – we have plasmas, which I haven’t seen for quite a while, but we had a few of those that we actually have liquidated and we’re looking at it sort of on a product category basis to actually see where that obsolescence is highest in taking the right price points to move that inventory.

Okay, that’s helpful. And then I just, I guess on the buy back on the changes, Danny I think you mentioned it went from sort of a blackout period of a month window to two weeks. Is it 48 hours – it is 48 hours after reporting?

So for the window to officially open, it would be although we're still under the 10b5-1 trading plan that we put in place in December. So we're still under that plan, assuming it hits the parameters we set up within that. We could still be in the market purchasing currently.

Okay, very helpful. Thank you.

Thanks Greg.

There are no further questions at this time. I’d like to turn the call back over to Stuart Grimshaw for closing remarks.

Thanks very much, and thanks everyone for tuning in. We’ll be around to obviously answer the questions over the next couple of days and we look forward to those conversations. Thanks once again.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.