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EZCORP, Inc. (NASDAQ:EZPW)

F4Q08 (Qtr End 9/30/08) Earnings Call Transcript

November 6, 2008, 4:30 pm ET

Executives

Joe Rotunda – President and CEO

Dan Tonissen – SVP and CFO

Analysts

Dennis Telzrow – Stephens Inc.

John Rowan – Sidoti & Company

Charles Ruff – Insight Investments

Alan Brochstein – AB Analytical Services

Elizabeth Pierce – Roth Capital Partners

Ted Helenmeyer [ph] – Lone Star Partners

Jay Rosnehan [ph] – WestPark Capital

Operator

Good afternoon, ladies and gentlemen, and welcome to the EZCORP Fiscal 2008 Fourth Quarter Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Joe Rotunda. Mr. Rotunda, you may begin.

Joe Rotunda

Thank you, Kim. Good afternoon everyone. Thank you for joining us today. With me is Dan Tonissen, our Chief Financial Officer. We’ll be addressing our fourth quarter and fiscal year 2008 results. I will begin with a high level overview of the quarter and the year. Dan will follow with a more in-depth discussion of the financials and will conclude with guidance for 2009.

Before I address this period’s performance, I would like to comment on our results over a longer time horizon. I am pleased to point out that this quarter marks our twenty-fifth consecutive quarter of compounded growth in earnings. It’s also the eighth consecutive fiscal year of earnings growth. I believe this amplifies the strong dynamics within our business. When one component is adversely impacted by an external factor primarily associated with economic conditions, another strengthens and vice versa. This is true both between and within the business segments.

It also reflects the strong management and the competent associate team in our field operations at the point of customer contact that continues to strengthen. I’d also like to note we will shortly be discussing several unusual events that influenced our financial results in the quarter. Some of these were favorable and some not, some recurring and some not. But the good news is that we believe the beneficial elements will continue as we move forward.

For our fourth quarter, we are reporting net income of $16 million. That’s an increase of 44% over last year. Diluted earnings per share were $0.37 compares favorably to $0.26 last year. If you adjust for two unusual elements, which you will be hearing about, the drag of Hurricane Ike and the advantage of a foreign tax benefit related to prior period’s earnings, you will find that there is about $0.03 of cumulative net benefit in this quarter’s $0.37. So if you adjust for that, the resultant earnings per share without these would be approximately $0.34 for the quarter. That $0.34 per share is a 31% increase over last year.

Before I move on to the business segments I’d like to take a moment and address the impact of Hurricane Ike. This is one of those unusual events. Ike’s impact on our Texas stores began September 12th with evacuation and business closure orders in the Houston-Galveston area the day before the storm hit. We had a total of 155 stores impacted. 63 stores were EZPAWN and 92 EZMONEY. This represents approximately 20% of the store locations in each of our two domestic businesses.

During the balance of September, these 155 stores accumulated a combined loss of more than 1000 business days. The majority of this can be directly attributed to power outages at Houston and its surrounding communities experienced after the hurricane. We were fortunate to only sustain significant physical damage in 14 of those 155 locations. All have since returned to normal operations except for our four Galveston stores.

We estimate that the financial impact to our earnings in the quarter was approximately $2.5 million net of insurance recoveries on a pre-tax basis. That’s about a $0.04 negative impact on earnings. Dan will segment these costs in just a few minutes.

In spite of Hurricane Ike, our EZPAWN segment had an excellent performance. We saw a strong demand for pawn loans throughout the period. Our U.S. Pawn loan portfolio ended the quarter up 18% over the same time last year and that’s on a same-store basis. This is particularly positive given that the portfolio growth was accompanied with a 300 basis point improvement in both yield, which increased to 148% and redemption rate, which grew to 78%. These metrics represent quality portfolio growth and they position us well for the upcoming holiday season. I anticipate that the demand for cash via pawn loans will continue given the current economic environment.

The overall net revenue growth for EZPAWN U.S. was 20% in the quarter. This was driven by the strong growth in pawn service charges coupled with increased jewelry scrapping activity and higher margin levels than a year ago. With operating expenses well contained, the flow through of incremental revenues was strong. The resultant operating income in our U.S. Pawn segment was $25 million and it represents growth of $5.8 million, which is 30% over the last year.

The full fiscal year’s performance was equally impressive. Net revenues grew by 21%. Operating income for this segment increased by about $23 million over last year. That’s an increase of 35%. And the resultant operating income margin exceeded 47%. All in all, our pawn operators did a terrific job and delivered an excellent quarter to cap an excellent year for our U.S. EZPAWN operation.

Moving on to EZMONEY, you will see that the hurricane had a more dramatic impact on this segment than on U.S. Pawn. What made this event even more significant for EZMONEY is the fact that the 92 affected stores in the Houston area represent many of the most mature and profitable in EZMONEY. 35 of these stores were closed eight days or more and we experienced a total loss of 609 business days.

New loans, fee revenue, and default rates were all significantly impacted. Yet for the quarter our fee revenue in EZMONEY grew by 12% over last year. And if you exclude the impact of Hurricane Ike, if you look at our fee growth on a same-store basis, we would have been up approximately 7% over last year.

From a bad debt perspective, we’ve done an excellent job of managing initial defaults through balanced underwriting and an intense focus on getting the customer into the store on the day their loan is due. For this quarter, and as for the year our initial defaults show improvements to last year. However, our net bad debt still increased at a faster rate than fees and we ended the period at 36% of fees versus 31% last year. Without Ike, bad debt would have been within three points of a year ago. The increase, I believe, reflects the difficulty in the current economic environment to collect debt once it’s incurred. It shows what the consumer behaves once they default and it shows in the capital markets that buy bad debt as well. So, regardless, we are committed to continue to address process to improve both.

For the entire year, EZMONEY operating income grew by $4.1 million, which reflects a 12% increase over last year. Bad debt was 28.7% of the fees versus last year’s 26.8%. This is in line with our guidance of 26% to 29% provided at the beginning of the year.

During this year, we opened 66 new EZMONEY stores and we entered one new state, Missouri. We also closed 22 stores throughout the year, resulting in a net EZMONEY store gain of 44 locations. 11 of these closings were related to the discontinuation of CSO operation in Florida that we announced earlier. The other 11 were planned closing or consolidations of underperforming locations that arose from our normal business review process and primarily executed as we reach the end of the lease term.

Moving from new stores to new products, we have expanded our installment loan to 90 stores in Texas. We’ve been cautious with the product because of the size of the loans, from $1525 to $3000, and the length of the term, which is at five months. We believe we have a pretty good handle on the customer, bad debt management, and we plan to expand the installment loan to several additional states beyond Texas during the New Year.

We also recently began offering another new product, auto title loans. We introduced this product last month in all 11 stores in Missouri. We believe this product offers us an incredible opportunity to leverage our store base and drive incremental returns. It also affords us the opportunity to expand our customer base and to diversify our product assortment beyond solely the payday loan product. Our plans are to move judiciously and expand the auto title loan product to additional three to five states and approximately 100 additional stores by the end of the year.

We also continue to be excited about our third business segment, Empeño Fácil. Last year, we shared our view of Mexico as a significant opportunity, expressed our desire to understand their culture, learn the country’s business requirements, validate our model, and then rapidly expand our presence.

We began the year with four pawn shops that we had Greenfield-ed in 2007 along the U.S. border. Then in October, barely a year ago, we acquired 20 pawn shops from Mister Money Mexico located from the Bahia area, south of Veracruz. During the year, we subsequently opened an additional 14 stores. And those 14 stores, new stores compare favorably to the initial guidance that we provided at the beginning of the year of seven to 10 new locations.

Empeño Fácil’s total revenues of $3.6 million for the quarter are the highest recorded to-date as is the operating income for the quarter of $942,000. We are particularly pleased with the operating income margin of 42% even after the drag from the new stores. For the year, Empeño Fácil generated $11.6 million in revenues and contributed operating income of $3.3 million.

Moving from Mexico to the United Kingdom, there is also some excitement with Albemarle and Bond. As a reminder, A&B is the U.K.’s largest pawn operator with 111 locations at June end. As a public company traded on the London Exchange’s Alternative Investment Market, their fiscal year ended in June and they just recently released the results. A&B’s revenues increased 42% with net income growth of 37%.

As their largest shareholder with 29.9% ownership, we report income from their operations based on our equity interest in their business. The resultant income that we reported was $1.2 million for the quarter. This represents growth of 55% over last year.

During this quarter, we identified an opportunity to claim a $3.4 million higher foreign tax credit related to A&B’s current and prior year’s earnings than what we have historically claimed. Dan is going to provide the detail on this, but I want to make the point that the benefit arising from fiscal year 2008 alone was approximately $1 million and that this will one of those positive, recurring benefits as we move forward.

Before I turn it over to Dan, I’d like to summarize how all this comes together for 2008. For the year, our total revenues grew $457 million. That’s a 23% over last year. Net income grew by 38% to $52.4 million. Diluted earnings per share also grew by 38% to $1.21 and that compares favorably to our original guidance of $1.12, our revised guidance of $1.18 and last year’s actual $0.88 a share.

If you exclude the impact of Hurricane Ike, and a portion of the foreign tax credit associated with Albemarle and Bond’s earnings in the prior years, the Company’s diluted earnings per share for the 2008 fiscal year would have been $1.19. That’s an increase of 35% over last year. All in all it was an excellent year for EZCORP.

With that, I will turn it over to Dan for his comments.

Dan Tonissen

Thanks, Joe. And as a backdrop to my review of the financials, I am going to begin by discussing the two unusual items in the quarter, Hurricane Ike and the foreign tax credit.

As Joe mentioned, we closed 154 stores on September 13th with most of them closed on September 12th in advance of the hurricane. During the month, we lost just over a 1000 store days mainly due to power outages following the hurricane. We estimate the lost pre-tax income, including uninsured losses was approximately $2.5 million or $0.04 per share. Our EZPAWN operation accounted for $900,000 of the total, comprised of sales gross profit of $200,000, pawn service charges of $500,000, and an additional $200,000 of operating expense, net of any insurance coverage.

Our EZMONEY operation was more heavily impacted and accounted for $1.4 million. We estimate for EZMONEY we lost about $900,000 of fee revenue and realized higher bad debt levels of approximately $500,000. The impact on fees and bad debt effectively raised our bad debt measured as percent of fees for the quarter and year by 2.46 of percentage point.

Included in the loss on the disposal of assets, Line 23 of our operating statements (inaudible) write off of damaged assets net of the expected insurance recoveries.

Now I am going to elaborate on the foreign tax credit. During the quarter we elected for tax purposes to change from the net method to the gross method for calculating the foreign tax credit on our portion of the income of Albemarle and Bond. This enables us to take advantage of a previously under utilized foreign tax credit. As a result of this election, we realized a benefit included in our tax provision for the quarter, but not related to the quarter, of approximately $3.1 million, or $0.07 per share.

In our 12 months tax provision is a benefit not related to the fiscal year of approximately $2.4 million or $0.06 per share. Prior to the change in this election the earnings of Albemarle and Bond were recognized net of the effective U.K. taxes on their income for both our book and tax records. Electing the gross method is a more advantageous method for both book and tax purposes, which essentially grosses up the earnings of Albemarle and Bond for their U.K. taxes and applies a U.S. statutory rate to our portion of their pre-tax income.

Assuming no material changes to other variables such as A&B’s income, exchange rates or tax rates, this change should reduce our tax provision by approximately $1 million a year, going forward.

There are a couple of less material adjustments in our quarter’s tax provision related to the Texas margin tax and realization of a capital loss carryforward and will lay these out and the foreign tax credit changes in excruciating detail, I am sure, in our 10-K.

The bottom line is that our effective tax rate has been reduced in the current period and in 2009 we estimate it will be around 35.2% of pre-tax income. Excluding these two unusual items, our earnings per share for the quarter and fiscal year would have been $0.34 for the quarter and $1.19 for the year.

Now, I will give you a little more detail on our financials starting with the consolidated statement of operations for the quarter on Page three of our earnings announcement. Our pawn net revenues comprised of sales gross profit, lines two and three, less line 11, pawn service charges, line four, and other revenues, line six, increased $10.9 million or 26% to $52.2 million. As I already mentioned, we estimate we lost approximately $700,000 of pawn net revenue due to Hurricane Ike.

Merchandise sales, line two, increased $1.8 million or 6% to $34.9 million. Same-store sales growth for the quarter was up 1%. With margins up slightly from the prior year period, merchandise gross profit, line two minus line nine, increased $900,000 or 7% to $14.4 million.

Scrap gross profit, lines three less line 10, increased $4.6 million to just under $10 million. Higher gold values net of higher cost and more volume generated the increase in scrap gross profit. During the quarter we scrapped slightly less than 2 million grams gold jewelry, an increase of roughly 12% from the prior year quarter. Proceeds per gram increased 35% to $13.63. Our cost per gram increased 21% to $8.64. That’s primarily due to increases in gold loan values and what we pay to purchase gold.

During the quarter, we realized $400,000 in proceeds on the sale of loose diamonds compared to $450,000 in the prior year quarter. These proceeds are included in the jewelry scrapping sales line, which is line three. We continue to forward contract our gold scrapping and we currently have our estimated December quarter quantities locked at around $867 per ounce. In our guidance for the balance of the year, which Joe will cover in a few minutes, we have assumed a gold price of $775 per ounce.

For the quarter, we turned our inventory 3.5 times and that’s the same as the prior year quarter. Inventory levels per ending store increased to $130,000 at the end of September versus $127,000 a year ago.

Pawn service charge revenues increased approximately $4.8 million, and you see this line four, or 22% to $26.9 million. The increase is a result of additional pawn service charges from the 34 Mexico locations acquired and developed in the last 12 months, higher loan values on gold jewelry and same-store loan growth. Annualized yields on our pawn loan portfolio were 148% for the quarter and that compares to 145% for the prior year. Our ending pawn loan balance was up 25% from the prior year, 18% on a same-store basis.

For the quarter, our signature loan contribution, line five less line 15, improved 2% to $21.3 million. The benefit of an 11% increase in signature loan fee revenue, line five, was eroded by a 30% increase in signature loan bad debt, line 15. Ike adversely impacted our signature loan contributions by approximately $1.4 million, as I mentioned earlier.

Consolidated signature loan bad debt expense, line 15, measured as a percent of signature loan fee revenues, line 5, increased to 37% from 31% for the prior year. Excluding the impact of Ike, we estimate our bad debt as a percent of fees would have been approximately 34%, about three percentage points above the prior year’s level.

Looking at bad debt levels relative to loans originated in the quarter, our net defaulted principal as a percent of loans originated came in at 6.3% compared to 6% for the prior year quarter. Loan originations for the quarter were up 9% to $170.2 million. After higher levels of operations expense, line 14, administrative expense, line 16, and depreciation and amortization, line 17, operating income increased 13% to just under $19 million.

Increases in operations expense and depreciation and amortization are primarily due to acquisitions and new store openings. The increase in administrative expense is primarily due to higher levels of performance based incentive compensation, staffing increases to support our growth both in the U.S. and Mexico, higher professional fees, and other inflationary increases.

Operating income margins as a percent of net revenues declined one percentage point to 22%. Excluding the impact of Ike, operating income margins would have improved one percentage point to just over 24%. Strong margin improvement in our U.S. Pawn operation, and the addition of high margin operating income in our Mexico Pawn operations more than offset the decrease in margins in our EZMONEY segment, excluding Ike’s impact. After higher levels of equity interest and the income of Albemarle and Bond, higher net interest expense, greater losses on the disposal of assets and an adjusted 18% tax provision, net income increased 44% to $16 million or $0.37 per share.

Now if you turn to Page six of our earnings announcement, I’ll make a couple of comments on our segment results for the quarter starting with our U.S. EZPAWN operation in the left column. Store level operating income, which you see on line 15, increased 30% to approximately $25 million. This strong performance is the net result of a 21% increase in net revenues, line nine, and a 12% increase in EZPAWN operations expense, line 12. Store level operating income margins for our US EZPAWN operations improved four percentage points to roughly 49% of net revenues.

Moving over to the next column to the right, our Mexico pawn operation generated store level operating income of $942,000, you see this on line 15. Store level opera ting income margins in our Mexico stores were a strong 42% of net revenues, an excellent result for an immature store base.

Moving over to the third column, our EZMONEY store level operating income, line 15, decreased $1.2 million to $7.3 million. Hurricane Ike adversely impacted this result, as I mentioned, by approximately $1.4 million. For the quarter, our U.S. and Mexico Pawn segments made up approximately 78% with about 75% and 3% mix between the U.S. and Mexico and the rest of our total consolidated store level operating income. And then with our EZMONEY segment making up the balance of 22%.The total revenue split between pawn and payday would be roughly 73% and 27%.

Now, a few comments on the balance sheet, which you will see on page five of our announcement. You can see that we have approximately $27.4 million of cash on the balance sheet, and you see this on line three. Roughly $4.9 million of this amount is operating and the balance would be non-operating cash. Included in the cash usage in the quarter is $5.1 million of capital expenditure, about half of it would be growth related and the balance would be maintenance CapEx.

For the 12 months, we generated approximately $36 million of free cash flow before $18.1 million of capital expenditure and $15.5 million for the acquisition of the Mister Money Mexico operation. Approximately half of the $18.1 million of capital expenditures would be maintenance CapEx. You can see that our payday loan balance, line five, grew 48% in the last 12 months to $7.1 million. Not included in our payday loan balance is $23.1 million of short-term loans and $500,000 of installment loans, both of which are brokered with unaffiliated lenders. These brokered loans increased 1% in the last 12 months.

Our investment in Albemarle and Bond is carried on our balance sheet as $38.4 million, and you see this on line 13. Assuming a market price of their stock of 190 pence, and an exchange rate of $1.60 per pound, our 16.3 million shares would have a market value of just under $50 million.

Finally, you see on lines 34 and 35 that we ended the quarter with 332 EZPAWN locations, including 38 Empeño Fácil locations in Mexico, and 477 EZMONEY locations, six of which are managed by our EZPAWN operation. During the quarter, we opened eight Empeño Fácil locations, adding 34 during the year, including our 20-store acquisition.

During the quarter, we opened 19 EZMONEY locations and closed three stores in Colorado. For the year, we opened 66 EZMONEY locations and we closed 22, including the 11 in Florida that Joe mentioned.

Now, let me turn the call back over to Joe.

Joe Rotunda

Thank you, Dan. 2008 was a busy year for us. During the period we made, brokered, extended, and renewed approximately $1.4 billion in loans. That’s 30% more than in 2007. It was also a busy year from an acquisition perspective, which will help fuel that loan growth even more in 2009. As I commented earlier, we completed the strategic acquisition of 25 shops in Mexico during our first quarter.

This was followed in our fourth quarter with two additional announcements. The first was Pawn Plus, the Las Vegas acquisition of 11 pawn shops with a loan portfolio of approximately $8 million and $5.5 million in EBITDA. We are on track, pending final license transfers to close this transaction next Thursday.

Pawn Plus was followed mid-September by our announcement of a new agreement to acquire Value Financial Services, which 67 pawn shops located primarily in Florida and several stores also in Georgia and Tennessee. At June end, Value Pawn’s loan portfolio was $18 million and their trailing 12 months EBITDA was $15.8 million. We are on track, we believe, to close this deal sometime in December. We expect both of these pawn transactions to be immediately accretive and to make a significant contribution to our ongoing performance.

Looking forward, here’s our guidance for fiscal year 2009. In our U.S. EZPAWN operation, our guidance incorporates same-store growth in net revenues in the mid-to-high single digit range. Dan has already addressed our perspective on the impact of the gold markets, which are incorporated into the forecast. I will address the impact of Pawn Plus and Value Pawn in just a moment.

In our EZMONEY loan segment, we are evolving the focus of our gross strategy to a two-pronged approach. Our primary driver will be new product expansion within our existing store base. This will allow us to more fully leverage the capital investment we’ve made in our existing store fronts.

Secondly, we will continue with new store expansion that’s focused on strategic in-fill opportunities in key states in which we currently operate. We still have substantial amount of new store development in our plans. We’ll open 30 to 35 new EZMONEY stores, all again in existing states. We will also selectively incorporate a larger footprint in both the new store openings and existing store models. This is to accommodate larger volumes associated with multiple products.

Within the U.S. we were tempted the states for our EZMONEY business with significant attention to the regulatory environment and the financial opportunity within each individual state. We are cautiously optimistic regarding the current regulatory environment in all the states in which we operate.

We also plan to enter Canada in 2009. We’ll continue to monitor the regulatory process by province and we will pursue entry into those provinces that pass favorable regulatory and licensing provisions. Given the passage of favorable legislation, we expect to open our initial stores in Canada during the second half of the fiscal year. These will be in addition to the store plan of 30 to 35 in the U.S.

From a bad debt perspective, we expect to be in a range of 27% to 295 as a percentage of fees for the year, fluctuating seasonally by quarter.

In Empeño Fácil, we will focus on fine tuning our model and continuing with our new store expansion strategy. We plant to open 30 to 35 new stores during 2009. Even with the drag associated with these new stores, we expect significant double digit growth in operating income. We also continue to be interested in any potential pawn acquisitions in Mexico that make good economic sense to both us and the sellers.

All in all, considering what I have just covered, we expect fiscal year 2009 earnings per share of approximately $1.45 before the benefit of either of the pending acquisitions. That’s an improvement of approximately 20% over this year’s $1.21 in earnings per share or approximately 22% on the adjusted earnings per share of $1.19 that both Dan and I described earlier. We expect our first quarter earnings per share of $0.35 as compared to last year’s $0.29, an improvement of just over 20%.

The benefit of Pawn Plus and Value Pawn will need to be layered on to this forecast for the final three quarters of the year, quarters two, three, and four. We anticipate little or no benefit in the first quarter. With Pawn Plus we expect a benefit of approximately of $0.04 per share during the final three quarter and with Value Pawn to receive a benefit in a range of $0.04 to $0.05 per share for that same period. With these acquisitions included, we expect our earnings per share for the year to be between $1.53 and $1.54 a share.

Now, while we are pleased with what we have accomplished over the past several years and this year in particular, our excitement continues to grow as we contemplate the potential that we have in front of us. I know I’ve said that before, probably several times, but ‘it just keeps getting better.’

So that concludes our prepared remarks for today. Dan, if you will read the Safe Harbor, we will go into Q&As.

Dan Tonissen

This conference call and earnings announcement contains certain forward-looking statements regarding EZCORP’s expected performance for future periods, including, but not limited to, new store expansion, anticipated benefits of acquisitions, and expected future earnings. Actual results for these periods may materially differ from these statements. Such forward-looking statements involve risks and uncertainties such as changing market conditions in the overall economy and the industry, consumer demand for the Company’s products and services, actions of third parties who offer services and products in the Company’s locations, changes in the regulatory environment, and other factors periodically discussed in the Company’s annual, quarterly, and other reports filed with the Securities and Exchange Commission.

Kim, we’ll now open the conference call to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Dennis Telzrow from Stephens Inc. Please go ahead.

Dennis Telzrow – Stephens Inc.

Good morning, I mean afternoon, Joe and Dan, great quarter and year.

Joe Rotunda

Thank you.

Dennis Telzrow – Stephens Inc.

Joe, any comment – I know you’ve mentioned that the stores you opened in the payday area would be in existing states. Would I assume most of those are outside of Texas or will Texas still see some fill-ins?

Joe Rotunda

There will be a couple of them in Texas, but there are four or five other states we’ll have also have the additional development. And these will back door our existing stores but they will also include a new store models that has a larger square footage in order to accommodate what we believe to be greater volume potential with the expansion of the product assortment.

Dennis Telzrow – Stephens Inc.

And you mentioned title loans in Missouri. What other states would be eligible based on I guess on obviously the laws in those states?

Joe Rotunda

I don’t want to reveal the actual states from a competitive perspective at this point, but we’ve done enough research that we have five states that we believe have favorable regulatory environments for the title loans. And I know – we’ve looked at title loans in the past. We can go – I can go back to a previous career before I joined this Company and even earlier after I came on board where title loans were very risky and the regulatory was very unfriendly. But there has been a number of changes that have really been enhanced with consumer protection as it relates to the transaction and excess funds that are collected when the collateral is forfeited and sold. And we feel much more comfortable in moving forward with it now than we would have in the past.

Dennis Telzrow – Stephens Inc.

My last question obviously you asset mix looks great. Pawn loan growth is very strong and inventories look under control, so assume you feel pretty good going into the whatever challenging environment we’ve got here fourth quarter retail.

Joe Rotunda

We feel great. Our inventory – our portfolio is up on a same-store basis by 18%, give us potential to generate some additional inventories going into the holiday season. And you heard our turnover number, I think 3.5 times for the quarter, and our inventory is about flat with last year. So we feel we are well positioned going into the season.

Dennis Telzrow – Stephens Inc.

Okay. Thanks a lot. Appreciate it.

Joe Rotunda

Sure.

Operator

Our next question comes from John Rowan from Sidoti and Company. Please go ahead.

John Rowan – Sidoti & Company

Good afternoon.

Joe Rotunda

Hi, John.

Dan Tonissen

Hi, John, how are you doing?

John Rowan – Sidoti & Company

Dan, can you just talk about how the financing is coming along for the acquisitions?

Dan Tonissen

Yes, really no changes in there since our last update. We have the credit facility in place and it will be in place up to December 31st, and it’s contingent on the close of the Value transaction. Just to refresh everybody’s memory, it’s basically a $120 million facility split between a $40 million term and an $80 million revolver. And again as I said, it would be contingent on the closing and obviously without that – without closing on the value, we would not need the credit facility.

John Rowan – Sidoti & Company

Okay. What – can you remind me what the covenants are on those – on these (inaudible)?

Dan Tonissen

Yes, the – and probably the key thing which you are asking about is the pricing. The first two quarters out of the gate and we conceded this as part of the extension of the credit facility, we agreed to 150 basis – 250 basis points over LIBOR for the first two quarters and then it would drop down based on our funded debt to EBITDA to 175 basis points over LIBOR. In this market it’s good pricing.

John Rowan – Sidoti & Company

Okay. But is there a limit as to your trailing 12 months as far as how high you can take the debt?

Dan Tonissen

Yes, there is a limitation here, but we are so far below that, that would not be an issue.

John Rowan – Sidoti & Company

Okay. And just the tax rate for the quarter, I know you said the number of what was in there in terms of the non-recurring, could you just tell me what the tax rate was for the quarter?

Dan Tonissen

For the quarter, it works out to – just take our tax provision as a percent of pre-tax income, it’s about 18%. I think for the year it works out to be just over 34%. And then as I mentioned, going forward in 2009 at least at this point in time we would expect it to be about 35.2%.

John Rowan – Sidoti & Company

You said there was a $3.1 million benefit in this quarter alone though from the change in the tax accounting?

Dan Tonissen

That is correct and that’s what pulls it down to the 18% effective tax rate.

John Rowan – Sidoti & Company

Okay. And then on the installment loan product, can you just – I guess kind of talk about the pricing on the installment product, how much of it you currently have, and if that falls under kind of the small loan laws that are little different payday loan laws.

Joe Rotunda

We are doing installment loans today in Texas and we are doing them under the CSS statutes. We’ve developed the loans so it’s a five-month period, which is as far out as we want to go and the pricing to the customer is approximately 10% of the principal of the loan paid every – twice a month as they go through the period. The rate, if you calculate an APR on it, the APR is somewhat lower for an installment loan than it is for a typical or a traditional payday loan.

John Rowan – Sidoti & Company

Okay. But this will then fall under most of the payday loan laws, right?

Joe Rotunda

It depends on the state. In Texas it will. As we move this through some additional states it will fall under different financial regulations in those states.

John Rowan – Sidoti & Company

Does this put you in with any regulations, any banking regulators?

Joe Rotunda

I don’t believe so.

John Rowan – Sidoti & Company

Okay. Alright, thank you very much.

Operator

Our next question comes from the line of Chuck Ruff from Insight Investments.

Charles Ruff – Insight Investments

Hi, very good quarter and year, and the outlook is certainly bright also. I had a few questions for you. You – I think have – can you talk a little bit about the regulatory outlook for payday loan? I am surprised you are still expanding that as much as you are here in the U.S.

Joe Rotunda

We are in 11 states with payday loans and one of the benefits of being relatively late to market as we were is that you are able to get a better view of the landscape. We didn’t open our first payday loan store until 2003 when we were in Texas. And we didn’t expand beyond Texas until like a year after that. So we – it gave us a pretty good view and we were very careful in the states we went into. And we look for what we felt were favorable and more stable environments. The states that we are in today, the 11 states, we are relatively comfortable with. The only one of the 11 that we’ve had an issue with has been Colorado. And that was during the last session where there was legislation adverse to the industry that was introduced, passed through the house by one vote, went to the Senate, and it was sponsored by the – and the bill was co-sponsored by the President of the Senate, and the bill never reached its third reading, and was sent back with modifications to the house and withdrawn. And the industry was relative – caught relatively off guard at that time. And I think with the opportunity, what we learnt in Colorado was with the appropriate opportunity to explain the trends, action and the benefit and the alternatives and a contribution to the economic environment that the legislators were very receptive to not doing something that wouldn’t affect what the industry out of business in the state.

Charles Ruff – Insight Investments

Okay.

Joe Rotunda

You get beyond Colorado and again the states that we are in today are relatively stable. We are relatively comfortable with. I say cautiously optimistic. And Texas is where we have a lot of stores and Texas is CSO model. The legislature only meets every other year and they meet – they convene in January of 2009 and they go through May of the year. And just had the election results posted yesterday in Texas and the Republican Party lost three of the seats in the house, but still has a majority of two in the house. And it’s a very business-friendly state. And I don’t think that you find this state going purely along party lines. So, we’re relatively comfortable here as well where we have our largest presence.

Charles Ruff – Insight Investments

Do you worry at all about federal regulation now with Democratic control of the White House and Congress.?

Joe Rotunda

Well, I think anything that would be done from a federal perspective would be inconsistent with their responsibilities and practices. If you look at insurance, usury rates, rent down, bank fees, and a lot of other things, utilities, even pawn, they are all regulated at the state level. And I think if at a federal level if they were to enter that arena it would be a whole new frontier and I would certainly hope the good judgment prevails. Particularly in the economic time that we are in today, I think the need for the – by the consumer for access to credit should be expanding and I just can't imagine they take any actions that would shrink that.

Charles Ruff – Insight Investments

Yes, I am with you. What is the number of shares that you are assuming for fully diluted in you earnings guidance for fiscal ’09.

Dan Tonissen

It’s right around 43.6 million for the guidance excluding the two acquisitions.

Charles Ruff – Insight Investments

Well, that – yes, that’s kind of the more interesting number that I was trying to get to. When you talk about the earnings accretion what kind of – we are all believing these acquisitions are going to get done, so we are trying to figure out what the number of shares would be.

Dan Tonissen

Yes, I don’t have a number exactly for you. The – Chuck, let me – maybe we can take another question. Let me see if I can get you the actual number. I’ve got it here.

Charles Ruff – Insight Investments

Okay. I’ve got one more and then I will let other people get in. I’ve heard from different industry sources that Value Financial has some very healthy pay scales and I don’t know if that’s true or not, but maybe you could talk about that and how that would integrate with the rest of your business. If that’s any sort of issue or not?

Dan Tonissen

Value Financial has a philosophy of really focusing on the human resource aspect of the business developing talent and they’ve developed in conjunction with that quite a bit. Their pay scales are somewhat higher than the norm. They are higher than the norm and the industry. And we anticipate that the pay scales with the Value Pawn brand won't change. We will most likely run this as a separate division and maintain the Value brand because it’s so well recognized in the markets that they operate – and pretty much keep it isolated or manage separately from the balance of the organization.

Charles Ruff – Insight Investments

Okay.

Joe Rotunda

Until we can better understand it and understand its implications.

Charles Ruff – Insight Investments

Okay. I’ll – yes.

Dan Tonissen

Chuck, let me give you the shares.

Charles Ruff – Insight Investments

Great.

Joe Rotunda

I was understating the base. Basically the EZCORP it’s – it would average out to be about $43.9 million excluding the two acquisitions. Including the two acquisitions – and again these are partial years, so this is weighted average number of shares assuming those partial yeas, assuming that 100% of the Value shareholders took EZCORP stock, $17 share price, we would be at about 48.6 million. And assuming that 20% of the Value shareholders took cash, it would bring that down to about $47.8 million.

Charles Ruff – Insight Investments

Okay. Great. I’ll get back in line. Thanks.

Operator

Thank you. Our next question comes from Alan Brochstein from AB Analytical Services. Please go ahead.

Alan Brochstein – AB Analytical Services

First of all, congratulations because I know it’s a tough environment. Not too many companies are giving guidance that’s showing growth, so I am appreciative of that.

Joe Rotunda

Good.

Alan Brochstein – AB Analytical Services

I had a question regarding, if one were to break apart your two businesses, (inaudible) earlier asked about the regulatory environment, but for whatever reason you guys decided to exit the lending business and focus strictly on pawn. What will the cost be approximately to do that? If you all given that thought (inaudible) it can be quantified?

Dan Tonissen

Was it Alan.

Alan Brochstein – AB Analytical Services

Yes.

Dan Tonissen

We haven’t looked at the cost of doing that, but if you are trying to – what we basically split out the two incomes, and again this is a bit unusual this quarter with Ike, but pawn represented about 78% of operating income versus 22% for the EZMONEY operation, and I think a fairly safe assumption is as you cross (inaudible) that on down, the split’s probably going to be about two-thirds pawn and about one-third payday. And that’s very general.

Alan Brochstein – AB Analytical Services

I guess I am also getting at – just in terms of trying to figure out what the closing cost would be. Those are all C type properties. I imagine that it would be very inexpensive to exit those businesses should you ever need to, right?

Dan Tonissen

Generally, I mean we are talking about stores that have a 1000 or 1500 square feet, so the rent typically is going to be $2000 to $3000 a month. The lease term is going to be three to five years. Say you know our average term, I would guess in the portfolio today would be probably less than two years and the other thing to keep in mind is that about 165 of our 477 EZMONEY stores actually adjoin a pawn shop, so there is no incremental rent associated with that.

Alan Brochstein – AB Analytical Services

Right. I drive by those all the time, actually, here in Houston.

Joe Rotunda

And we also have clauses in many – in the majority of our leases for change of law that will allow us then to exit the lease responsibility.

Alan Brochstein – AB Analytical Services

Okay. Understanding – I mean just – where I am coming from is, it seems like I know a lot of people are afraid of the payday lending and now obviously they are expanding some of the products. And I agree; this is a time where credit is still constrained. It makes no sense at all you guys not to be able to be in this business, you and your competitors, but one never knows – I guess I just want to see what the total cost, if you decided to just be a pawn shop because it seems to me that your stock price pretty much assumes you are just a pawn shop. Perhaps it’s my perspective.

And another question. Last quarter, I believe it was, may be the quarter before, you guys were talking about some of the changes in your customers on the payday lending side and in terms of – you hadn’t really changed your credit requirements or your requirements, if things got worse you could. Can you update us as far as any changes you are seeing in your customers in that business?

Joe Rotunda

I think probably the comment on the customer related to the demographics that we were seeing with the installment loan because the installment loan, because of the threshold principle it – over $1500, has a requirement that the consumers personal income, not household income, is well beyond $40,000 a year. And we’ve seen customers apply for the installment loan, actually not just the installment loan, they make over $100,000 a year. And maybe in those demographics it related to the installment loan customer that you are referring to.

Secondly, on the underwriting requirements, we have the ability to adjust, modify, the underwriting as it relates to any particular time. So we have done that over the years where in some cases we’ve relaxed the underwriting requirements in order to attempt to increase our market share vis-à-vis our competition, our competitors. And we’ve tried to do that at the opportune times, peak periods of natural demand and the like. And we did it last year and I think it was the third quarter and as I recall the number we had a 52% increase in fees during that period. Our bad debt went up and our net revenues had a substantial increase over the prior year. We can do those types of things. We can also pull I back. As I commented earlier during my remarks, the thing we have attempted to do is focus on that initial default with the customer on that and we’ve done a – our operations group has done an excellent job of getting the focus there and bringing down those initial defaults. But in this economic environment, our challenge is to deal with the customer who does default. We are continuing to focus on that.

Alan Brochstein – AB Analytical Services

Okay. My last question – and I appreciate your taking these questions is, now with another quarter behind us, can you comment any on the stimulus checks, was your initial analysis do you stand by that? Are there any updates to how you view that especially since we may go through that again potentially?

Joe Rotunda

I paraphrase; I think the stimulus checks had a net positive benefit in our pawn operation and in our payday loan business. Our bad debt benefited significantly but I believe there was a more significant drag on new loans in payday lending than there was in pawn. Both of them had an adverse impact of the checks in loan demand.

Alan Brochstein – AB Analytical Services

Okay. Well thanks a lot guys. Well, keep up the good work.

Joe Rotunda

Thank you.

Operator

Our next question comes from Liz Pierce from Roth Capital Partners. Please go ahead.

Elizabeth Pierce – Roth Capital Partners

Thanks, and a nice quarter. Joe, can you just on Mexico are the – the potential acquisitions are there – I mean you surveyed the landscape so to speak. Are there a lot and are these sizable acquisitions? Are they more five to 10, 10 to 20, and what you’ll be willing to share with us about that?

Joe Rotunda

I think there is a lot of interest on individual owners’ parts to have anywhere from two stores to as many as 100 stores to look at the marketplace and see what their business operation maybe valued at. And I think the public announcement that Cash America recently made has stirred a lot of interest in the market in Mexico to shop their pawn operations. There are many different kinds, as you know, having been down there it is – from the jewelry only concept to very heavy general merchandise.

Elizabeth Pierce – Roth Capital Partners

Right.

Joe Rotunda

But it’s a very active environment. There aren’t a lot of chains that really are much bigger than 100 or so stores.

Elizabeth Pierce – Roth Capital Partners

What do you think optimally – well, before you would put too much pressure on your own infrastructure, like how many could you handle in a year? How many could you digest?

Joe Rotunda

An acquisition? Well, it’s very dependant on the quality of the operators in the business. Strong group of operators would be relatively easy to assimilate because we have global people staff. It’s a tremendous benefit. We have a store operating system that’s in Spanish that when we were able to complete the interfaces with Mister Money Mexico provided significant benefit on the administration of the pawn operation through loan values and the like–

Elizabeth Pierce – Roth Capital Partners

And you’ve really – the right operations could almost be as seamless, but (inaudible) seamless, but you can kind of drop it in and go from there?

Joe Rotunda

That’s right. Say that’s about three months I think, approximately three months from October to January to really get Mister Money Mexico integrated.

Elizabeth Pierce – Roth Capital Partners

Okay.

Joe Rotunda

And with what we learn from that and provision [ph] we made to our system to be easier in the future.

Elizabeth Pierce – Roth Capital Partners

Alright. And then in terms of the product that you are going to be adding some of the EZMONEY stores, any clarification on what kind of a product that would be?

Joe Rotunda

Well, at this point, it’s basically the auto title loan –

Elizabeth Pierce – Roth Capital Partners

Okay.

Joe Rotunda

Installment loan. There is one other product that we have in test and we are still learning about it and we’ve consistently had products that we’ve been exploring and tinkering with to see if – if it fits goods, the demand is there, and we are able to manage the bad debt, the application of the loan product and we’ll continue to do that, but at this point it would be installment loan, payday loan and the auto title.

Elizabeth Pierce – Roth Capital Partners

Okay, alright. And Dan 35.2% is the tax rate that we can be using for the year?

Dan Tonissen

2009, that would be correct.

Elizabeth Pierce – Roth Capital Partners

And then what about 2010?

Dan Tonissen

I would still use the 35% to 35.5%, somewhere in the same range.

Elizabeth Pierce – Roth Capital Partners

Somewhere in the same range. So this thing – that’s it from me, unused – if I am not going to say it right, tax credit, Albemarle & Bond kind of go forward or is there like an expiration on this, I wasn’t quite clear.

Dan Tonissen

Yes, it will have essentially about $1 million benefit each year. It will reduce our tax provision by roughly $1 million each year and that assumes that there is no change in Albemarle & Bond’s income, which we certainly hope that continues to grow at the rate it has and I would be – would reduce our tax provision proportionately.

Elizabeth Pierce – Roth Capital Partners

And that’s just because of the way you have been reporting it net versus growth?

Dan Tonissen

That’s correct.

Elizabeth Pierce – Roth Capital Partners

Okay. I think that’s it. Thanks.

Operator

Our next question comes from Ted Helenmeyer [ph] from Lone Star Partners. Please go ahead.

Ted Helenmeyer – Lone Star Partners

Hey, guys. Dan, did you give what you expected the percentage of pawn to be after the two acquisitions?

Dan Tonissen

We did but I just – top line is probably going to be around – it’s going to approach 80%

Ted Helenmeyer – Lone Star Partners

And will that be similar to the gross profit line or EBITDA line?

Dan Tonissen

Very similar.

Ted Helenmeyer – Lone Star Partners

Okay. And then in your ’09 guidance, what are you assuming for growth in payday? I think you said pawn was mid-to-high single digits or lack of growth?

Dan Tonissen

Yes, I don’t think we said it in the comments. I think that for existing stores probably mid-single digit growth.

Joe Rotunda

Without new products.

Dan Tonissen

Without new products. Yes. Still, a lot of moving parts with the EZMONEY stores. We saw the maturation of the store portfolio and the introduction of new products.

Ted Helenmeyer – Lone Star Partners

Okay. And you mentioned an assumption of $775 gold price. Is that also the case for – was that for all of 2009?

Dan Tonissen

Except for the December quarter where we already have locked in $867.

Ted Helenmeyer – Lone Star Partners

Okay. Alright. And then what are the returns for opening a new either I guess Mexican pawn store versus a U.S. Payday store?

Dan Tonissen

Yes, if you are – I mean we look at it as typically a four wall return on invested capital where you are looking at basically the operating income within the four walls untaxed. And over the total investment including any startup losses that you would experience. It’s just kind of a good benchmark way to look at multi-unit businesses and both should be in that 50% to 60% return on invested capital. At the – yes, excuse me, Joe pointed out, that would be going into year three. So you have a – you are – you have an operating loss the first six to nine months turning profitable in that fourth quarter of operation and then the run rate as you end as you end year two going into year three would be in that 505 to 60% range.

Ted Helenmeyer – Lone Star Partners

And have you seen new stores ramp at the same rate as old stores?

Joe Rotunda

We’ve been very pleased with the ramp of the new stores we’ve opened. I commented some time ago about the border stores were meeting the pro forma bottom line. The ramp was some good, some bad, and I commented one was – one store, the first one we opened really didn’t give us the kind of portfolio ramp we wanted. I’d say the interior stores that we’ve opened this last year have just been extraordinary with the ramp of portfolio. They have been able to develop and our operators in Mexico have just done a terrific job of being able to gather forfeited collateral in good balance by categories and the day the stores open, they have a full representation of merchandise on the showroom floor that I think assisted greatly in attracting the customer to come in and understand that this is a place to get a good loan for their merchandise. They’ve been very good.

Ted Helenmeyer – Lone Star Partners

And have you seen any impact today on the merchandise side effects from the economy, but your inventory levels were good?

Joe Rotunda

We had – our same-store sales in the quarter was up I think it was 1%, and the same store base is about 5% or 6% in total. We haven’t seen a strong demand of customers dropping down into pawn retail, if that’s what you mean, Ted.

Ted Helenmeyer – Lone Star Partners

You have or have not?

Joe Rotunda

Have not. We’ve seen much greater demand for the loan product and this is where typically you have very strong demand for one element, it’s weaker in the other, and as one begins to weaken, the other one tends to strengthen substantially. And they tend to complement each other.

Ted Helenmeyer – Lone Star Partners

You haven’t seen your existing customer pawn merchandise buyers drop off?

Joe Rotunda

Drop off, no. No, we are not incurring decreases. Those results were even after the impact of Hurricane Ike in September on quite a few of our pawn shops where we have a high concentration in Houston, as you know.

Ted Helenmeyer – Lone Star Partners

Okay. That’s all from me. Great job. Thanks.

Joe Rotunda

Thank you.

Operator

Our next question comes from Jay Rosnehan [ph], WestPark Capital [ph]. Please go ahead.

Jay Rosnehan – WestPark Capital

Hi, great quarter guys and wonderful guidance for next year. My questions have been asked and answered. It was on the split of business. Thanks.

Joe Rotunda

Thank you, Jay.

Operator

Thank you. Our next question comes from Chuck Ruff from Insight Investments. Please go ahead.

Charles Ruff – Insight Investments

Hello again. Can you talk about why with your wonderful balance sheet you would issue shares to make the acquisitions?

Dan Tonissen

Yes, I think it’s primarily to maintain a more conservative capital structure and just to have the credit facility that would be in place for any other opportunities.

Joe Rotunda

These economic times too gives us continued flexibility to able to continue to pursue opportunities to grow our business.

Charles Ruff – Insight Investments

Okay. So basically you just want to have a really strong balance sheet going forward. Period. That’s the basic approach.

Dan Tonissen

Yes.

Charles Ruff – Insight Investments

Okay. Do you measure share buybacks against acquisitions or is that not really enter into the equation?

Dan Tonissen

Generally does not. We still believe that the best long term return to the shareholders is to make good quality acquisitions as we have and – like the two that are in the pipeline. And just – as I said, we will maintain a very conservative capital structure. We will use debt, but we’ll try and maintain a very conservative capital structure.

Charles Ruff – Insight Investments

Okay. And can you talk – Albemarle & Bond has obviously been a good investment for you. You bought it for a lot less than it is worth today. Can you talk at all about what you foresee there? Do you just plan on owning 29% forever or do you ever hope to buy the rest of it or – I am trying to get an idea of longer tem how you view that?

Joe Rotunda

We view it more as – we have a number of different options as we move forward without committing ourselves by maintaining this ownership level. To go beyond this would require in effect a tender offer and we are not prepared at this time to do that. However, the U.K. market I believe – we believe has tremendous potential in this segment of business that we are engaged in and this allows us the opportunity to share in the benefit of that marketplace and still have the potential to expand our portion of that I mean through them or in conjunction with them as we go forward.

Charles Ruff – Insight Investments

Okay. When you say you’ve got a number of options, can you mention now what you view as the options.

Joe Rotunda

Obviously we have the potential of the option of a making a tender offer for the entire company, participating with them in a joint venture and expansion of potentially a modified business model in the United Kingdom, even using them as a – or working with them as a base of operations to expand beyond the United Kingdom potentially into Eastern Europe and so forth.

Charles Ruff – Insight Investments

Okay. Thanks.

Joe Rotunda

Or to realize the investment that we’ve made in them in the past.

Charles Ruff – Insight Investments

Okay. Thanks again and again congratulations.

Joe Rotunda

Sure. Thank you.

Operator

At this time, I show no further questions.

Joe Rotunda

Okay, Kim, I think we are finished then, and just like to thank all the participants for their time and attention and particularly or everyone’s continued interest in and support of EZCORP. Thank you.

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Source: EZCORP, Inc. F4Q08 (Qtr End 9/30/08) Earnings Call Transcript
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