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Executives

Mark Kuchenrither - Executive Vice President and Chief Financial Officer

Paul Rothamel - President and Chief Executive Officer

Analysts

Bob Ramsey - FBR Capital Markets

John Rowan - Sidoti & Company

Bill Armstrong - C.L. King & Associates

Bill Carcache - Nomura Securities

David Scharf - JMP Securities

John Hecht - Stephens & Company

EZCORP, Inc. (EZPW) F1Q 2013 Earnings Conference Call January 22, 2013 4:30 PM ET

Operator

Welcome to the EZCORP Fiscal 2013 First Quarter Earnings Release Conference Call. My name is Larissa and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we’ll conclude a question-and-answer session. Please note that this conference is being recorded.

Now, I’d like to turn the call over to Mark Kuchenrither. Mr. Kuchenrither, you may begin.

Mark Kuchenrither - Executive Vice President and Chief Financial Officer

Thank you and good afternoon everyone. This call will address our first quarter 2013 results. We issued a press release earlier today with supporting documents that are available on the Investor Relations portion of our website at www.ezcorp.com.

I’d like to remind everyone that this conference call will contain certain forward-looking statements, including statements about our expected financial and operating performance in future periods. These statements are based on our current expectations, actual results in future periods may differ materially from current expectations, due to a number of risks, uncertainties and other factors, which are discussed in our press release and in our filings with the Securities and Exchange Commission.

On the call with me today is Paul Rothamel, our President and Chief Executive Officer. I will review our results for the quarter and will provide our guidance. Paul will then provide some commentary regarding our overall strategy and outlook before providing an opportunity for questions.

As discussed last quarter, this is another year of significant investment for EZCORP as we transitioned from a primarily U.S.-based storefront focused company to a multi-channel leading provider of cash solutions across the world. Execution of our strategy is on track and our team delivered earnings of $0.59 per share during the quarter at the higher end of our guidance range.

I will provide forward guidance in a few minutes, but it is important to note upfront that we expect each quarter through the end of the fiscal year to improve sequentially relative to last year. Our earnings release provides consolidated financial highlights for the first quarter with accompanying financial statements. I will focus on our performance by operating segment. I would also like to call your attention to the supplemental information that we have provided on our website to assist your understanding of our business.

The U.S. and Canada operating segment now includes 1,050 stores, 496 U.S. pawn and retail locations, 486 U.S. financial service locations, and 68 buy, sell, and financial service locations in Canada. Just over one half of these storefronts utilize our store within a store concept today and we expect that penetration to grow over time.

The U.S. pawn and retail operations added 7 de novo stores during the quarter increasing our presence in existing markets. We announced earlier that we intend to open 25 to 30 de novo pawn locations this fiscal year and we are on track to meet that goal. We also entered the Arizona market through the acquisition of 12 USA pawn and jewelry stores for a combination of stock and cash. This continues our strategy of using acquisitions as a means to gain an immediate concentration in new markets. The acquired stores are expected to be immediately accretive to earnings.

The segment also ramped up its online selling presence through several third-party auction and retail sites. In the quarter, about 8% of our U.S. retail sales occurred online compared to essentially none in the first quarter of fiscal 2012. U.S. pawn and retail continues to be challenged by the impact of gold. We obtain gold by providing loans to customers, where gold and jewelry is used as collateral and by purchasing gold and jewelry directly from customers.

In dollar terms, jewelry as a percentage of the total U.S. pawn loan balance decreased 200 basis points to 65%. The jewelry redemption rate was 85% at quarter end versus 84% last year as we improved our qualification of the customer at the point of transaction. The volume of gold and jewelry purchases in the quarter decreased approximately 27% in total and 33% on a same-store basis. We dispose of gold and jewelry through retail sales to our customers and by scrapping. Jewelry sales in the U.S. decreased 5% in total and 10% same-store.

The gross margin rate on jewelry sales was 46%, essentially unchanged from the prior year quarter. For the quarter jewelry scrapping sales were down 20% in total and 23% same store from last year, while margin dollars were down 34%. The continued downward trend in rate is a function of a very competitive marketplace and our intention to gain market share. The affect of these combined factors caused this segment approximately $9.4 million in net revenue in the quarter compared to last year’s first quarter. I will refer you to our website for supplemental information regarding the historical impact by quarter that scrapping has had on our business.

Other portions of our U.S. pawn and retail business showed continued strength offsetting to some extent the challenges in the gold and jewelry environment. Sales of general merchandise increased 15% in total and 6% same store, while margins improved 130 basis points excluding the prior year one-time inventory valuation adjustment. Pawn service charges increased by 7% in total and 4% on a same store basis. Pawn loan balances grew 5% in total, but were down 1% on a same store basis driven primarily by a decrease in gold and jewelry loans. Rate changes in Nevada and operational improvements in Texas contributed to a 500 basis point increase in pawn loan yield. And this is reflected in the delta between the increase in pawn loan balances and the increase in pawn service charges.

Moving to U.S. financial services, this segment added 44 new stores primarily inside or adjacent to existing successful pawn stores. Roughly one-third of these were in the lucrative Las Vegas market where we now operate full suite of products for the first time. Remaining new stores were spread across five states. The planned expansion in U.S. financial services is on track as we intend to open a total of 65 to 75 locations this year.

We also acquired U.S. online lender Go Cash giving us the ability to quickly move towards becoming the leading multi-channel lender in the United States. Currently we are lending in three states and intend to grow that to 12 to 15 by year end. Most of those states will be where we already operate store front successfully and the remaining states will be based on customer need and financial opportunity. Finally, the technology platform we purchased will integrate with our store fronts over time and deliver a seamless solution for our customer regardless of where, when or how they transact with us.

Inside our base business we are growing our revenues as well. Total loan balances were $46 million, up 8% from the prior year quarter. Our balances outside Texas grew by 54% driven by both new locations and new products in existing stores. While our first generation single payment products remain the largest portion of our balance, customers continued to migrate from those products to lower yielding second generation installment loans and collateralized auto title loan products. Balances related to installment loans and other multiple payment products increased 20%. And auto title loan balances grew by 42% as customers respond to our newly enhanced product suite. Loan fees were $43 million, up 1% from prior year quarter reflecting the shift in mix previously mentioned.

Bad debt as a percentage of fees grew by 70 basis points to roughly 25% driven by the higher mix of new stores. The profitability of the financial service business was negatively impacted by over $1 million during the quarter as a result of ordinances enacted in Dallas and Austin. Other Texas cities have adopted or are considering lending ordinances, we are actively supporting the enactment of consistent state wide regulation and expect that the Texas legislature to continue such a measure in its current legislative session which is schedule to adjourn in May.

The fastest growing of our of our segments Latin America includes our Empeño Fácil Pawn business, our payroll withholding lending, Crediamigo and our buy/sell stores TUYO. Latin America has another outstanding quarter, which net revenues up 107% and segment contribution of $9.4 million. Empeño Fácil added 24 de novo stores during the quarter compared to 40 new locations opened during the first quarter last year. This brought the total store count to 254 at quarter end, of which 64 locations have been opened for less than 12 months. All these new stores are full service store within a store format. The full service format locations, which make up 80% of all Empeño Fácil locations regardless of age, are performing well ahead of our investment model. The planned expansion is on track as we intend to open 70 to 80 locations this fiscal year.

Our underlining business trends remained very strong. Pawn loan balances were up 55% in total and 28% on a same-store basis. Pawn service charges increased 44% in total and 25% on a same-store basis. Merchandise sales were up 46% in total and 20% on a same-store basis. The only challenging metric was scrap sales, which increased by only 7% while scrap margin dollars decreased by 41% as we aggressively saw market share. Overall, the revenue margin and expense rates at Empeño Fácil are very strong. We are excited that the team has been able to drive the base business while accelerating the growth.

Moving to Crediamigo, it contributed net revenues of $13.8 million with bad debt as a percentage of fees less than 1% and segment contribution on $6.2 million roughly two-thirds of the total segment contribution for the Latin America segment. All three of these key financial metrics were ahead of our expectations. At quarter-end, Crediamigo’s loan portfolio was $81 million, up 24% since acquisition. Crediamigo signed several new employer contracts during the quarter, a key measure in the payroll of holding sector and a leading indicator to future loan growth. These new contracts alone provide access to over 175,000 new potential customers.

During the quarter, we completed the acquisition of a controlling interest in TUYO, a 20 store buy/sell chain in the Mexico City area. TUYO has a similar business model to our Cash Converters business, and our acquisition provides a logical geographic extension and opportunity for growth. The other international segment includes Cash Genie, our online lending business in the UK, along with net income we recognized from our strategic investments in Albermale & Bond and Cash Converters International.

In November, Cash Converters International Limited, our strategic affiliate in Australia announced that it had achieved a 43% increase in EBIT during its first quarter. Because we report the results on a three-month lag that performance positively impacted our results in our first fiscal quarter. Our equity investment in Cash Converters International combined with our equity investment in Albermale & Bond in the UK generated a 21% increase in earnings attributable to EZCORP for the quarter as compared to the same period last year.

During the quarter, we invested an additional $10.6 million in Cash Converters International as part of a $32 million share placement. This additional investment allowed us to maintain our ownership percentage of 33%. We expect Cash Converters to use the new funds to finance expansion and drive future earnings growth. During the quarter, we also increased our ownership percentage in Cash Genie from 72% to 95% with the remaining 5% held by local management.

And now, let’s talk about our earnings guidance. We reiterate our full year guidance of $2.55 to $2.80 with the second quarter in the $0.60 to $0.65 range. This guidance includes the expected drag associated with the acquisition of Go Cash and TUYO, which we expect to be $0.04 in the second quarter and $0.05 for the year. We believe that our year-over-year earnings performance will improve each quarter as we go through the year and that we will return to earnings growth in the back half of the year and carry that momentum into fiscal 2014.

I’ll now turn the call over to Paul.

Paul Rothamel - President and Chief Executive Officer

Thank you, Mark and good morning everyone. I’ll keep my comments very brief this afternoon as Mark has already covered our financial performance, key trends, and initiatives progress.

Today, we are a leading worldwide storefront provider with over 1300 corporate locations in three countries and another 1000 plus locations in more than 20 countries operated by our strategic affiliates. Through these storefronts, we deliver very products and services that we believe met our customers’ needs for immediate cash. The difference today in going forward is that we are growing other channels to complement that storefront business and provide the service and convenience that the customers demanding.

For example, in the United States, we are now selling and lending online in very material ways. In Mexico, we are buying, selling, and lending declines home, place of work, and our own convenient stores and offices to Empeño Fácil and Crediamigo. In the United Kingdom, we retail and lend in stores and online to our affiliates in Cash Genie. Our intention with these and other similar investments is to position the company in a flexible way to solve our customer’s immediate cash needs in store, in home, online, or any combination.

We are customer-driven and our customers will choose the channel, product, and time to meet their needs. This strategic evolution in the company to a multi-channel, multi-service, multi-national provider cost money and takes time, there is no way around it, particularly when you are focused on where the customer’s expectations are headed, now where they have been or are today. We expect to see continued consolidation of our industry and intend to be one of the largest and most diversified providers for decades to come.

Over the last several years, we have moved EZCORP significantly forward with more and more revenue and profit coming from these new channels, new geographies, and new what we call, second generation products. Our core business is benefiting us well from these innovations and we expect those benefits to become larger as our revenues outrun our initial investment costs. We intend to continue full speed down the pathway of chosen. We believe that we will deliver on our customer-driven strategy and the customer will choose us first in the marketplace for years to come. And that will drive superior shareholder value over the long-term.

And with that, we’ll take questions.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) Bob Ramsey from FBR Capital Markets is on line with a question.

Bob Ramsey - FBR Capital Markets

Hey, good evening guys.

Paul Rothamel

Good evening Bob.

Bob Ramsey - FBR Capital Markets

I was curious you will use the term first generation single payment products and second generation multiple payment products, I am just not familiar with the first generation and second generation terminology, does this imply that the goal is to graduate the same customer base form the single pay to multiple pay or what exactly does that mean?

Paul Rothamel

Sure, it’s a couple of things. I think you are absolutely right, the original payday product is still our largest product and the customer still uses it expensively both we view second generation as the installment loan products, auto title products, auto equity, lines of credit, all those kind of products. And even in payday, we believe we are working and evolving even that product, single pay products to make it more flexible for the consumer. So, depending on underwriting and things like that, a better consumer may not just get more money on the loan, but they might get a different term. Those would be second generation.

Bob Ramsey - FBR Capital Markets

Okay. When you say make it better terms, are you talking about pricing, so rate would actually vary based on the quality of the borrower?

Paul Rothamel

Absolutely.

Bob Ramsey - FBR Capital Markets

Okay, that’s helpful. I guess you have talked about the Go Cash acquisition that you made, I just was curious if you could provide any sort of color into the size of the loan portfolio with Go Cash or if it’s more of a platform, an opportunity you are all buying, but what exactly I guess you’ve got there and what the goal is? I know you talked a little bit about sort of markets, but just having additional detail?

Paul Rothamel

Yes, so Go Cash today, I believe their loan balance is roughly just over $0.5 million. And Go Cash combined with Cash Genie would be probably in the mid single digits of our outstanding balances today and again compared to last year that would have been zero, just as our online selling in the United States was an 8% of sales versus zero a year ago. So, that’s clearly our movement into new channels and it doesn’t happen overnight, it cost a bit of money to get in, but we think we got the right team and the right technology along with about $0.5 million base and that’s growing frankly rapidly everyday.

Bob Ramsey - FBR Capital Markets

Obviously, it’s a relatively small base, but how do you think about the growth potential of a business over an 18-month period?

Paul Rothamel

Sure. Mark touched on it, we expect it to drag in the second quarter as we are in three states now and I think the majority of that $0.5 million is in Texas, but we have got plans to rapidly get in fact in the year I think 12 to 15 states. So, you can do the math and extrapolate it out. We’ve run sensitivities around it, but it will be a significant portion of our business. So, if it’s 5% today, I would expect that if Cash Genie and Go Cash are roughly 5% of our loan balances today, I would think they would certainly be in the 10% to 15% range this time next year.

Bob Ramsey - FBR Capital Markets

Great. And then last question I will hop out, there is an uptick in the other revenue line this quarter I was just curious what drove that increase?

Mark Kuchenrither

I have mentioned it during the call it was it related to the Cash Converters International and their improved performance. We have that three month lag, where we get the benefit of what they have done. And it’s their business they put out as they have improved on their loans both in the UK and in Australia.

Bob Ramsey - FBR Capital Markets

Okay. And that’s in the other revenue line on the consolidated income statement?

Mark Kuchenrither

Well, I thought you meant other international.

Bob Ramsey - FBR Capital Markets

No, no, no I am sorry, maybe I wasn’t clear, but the consolidated revenues, the other line went from $2 million to $4.8 million quarter-to-quarter less than $1 million a year ago just curious about that increase?

Mark Kuchenrither

I apologize I thought you meant other international there are couple of things going there. We have FX favorable of about $1 million and Western Union if you recall we announced that we signed that contract about a quarter ago and that’s worth the majority of the remaining amount.

Bob Ramsey - FBR Capital Markets

Okay. So, this then I guess the FX maybe fluctuates, but otherwise that’s a good level to grow from?

Paul Rothamel

Yeah.

Mark Kuchenrither

Yeah, every quarter fluctuates in the FX to your point and Western Union it’s a good basis to start from.

Bob Ramsey - FBR Capital Markets

Great. Thank you very much guys.

Paul Rothamel

Thanks Bob.

Operator

John Rowan from Sidoti & Company is on line with the question.

John Rowan - Sidoti & Company

Good afternoon guys.

Paul Rothamel

Good afternoon, John.

John Rowan - Sidoti & Company

Just a follow-up on one housekeeping question, the non-controlling interest to 1.4 from 5.6, what caused that again?

Mark Kuchenrither

Well, we had purchase accounting benefits last quarter at the end of the fiscal year. And this quarter is all earnings from operations. And so that’s part of it. The other part of it is as we went from 72% ownership to 95% ownership, which reduces the amount of minority interest benefit that will be shown there.

John Rowan - Sidoti & Company

Okay. As far as the store openings go, I know you gave it by different segment type, I couldn’t really get it all down, can you just run through that again and kind of how that compares to what you said last quarter. I mean, last quarter was I think around 175 stores is kind of the midpoint of what you were guiding to. Is that still what we are aiming towards it looks like you are roughly on track in the first quarter?

Mark Kuchenrither

Yeah, for the year we said we would open up 175, grow by 175 locations. And for this quarter, the combination of de novo and acquired locations, we grew by 107 locations. And the breakdown is 12 locations through the U.S., a pawn and jewelry acquisition in Arizona. 20 stores buy/sell in Mexico City area with TUYO, 44 U.S. financial service locations 7 pawn and retail U.S. pawn and retail locations.

John Rowan - Sidoti & Company

Well, actually what I was getting at is more so you said 70 to 80 Mexico stores right, that’s what your plan is for 2013?

Mark Kuchenrither

Yeah, and we opened up 24 this quarter.

John Rowan - Sidoti & Company

Okay. And we are still at 65 to 70 U.S. financial services stores correct?

Mark Kuchenrither

Yes.

John Rowan - Sidoti & Company

Is that – are there any other buckets I think write-downs that you were talking about?

Mark Kuchenrither

I think I called out 25 to 30 pawn stores in the U.S. pawn and retail.

John Rowan - Sidoti & Company

Okay, I knew I was missing something. Okay. And then again you said 12 to 15 states by year end versus three currently?

Mark Kuchenrither

Yes.

John Rowan - Sidoti & Company

Okay. I think that’s about it. One more thing do you know what the market value right now is of Cash Converters and Albermale & Bond, if you don’t have it, don’t worry about it, but I think you maybe have it.

Mark Kuchenrither

I don’t have it all top of my head. We can provide that if you want to give us a call.

John Rowan - Sidoti & Company

I can look it up. Alright, thanks guys.

Paul Rothamel

Thanks John.

Operator

Bill Armstrong from C.L. King & Associates is on line with a question.

Bill Armstrong - C.L. King & Associates

Good afternoon. The operating expense in the U.S. was up pretty sharply on flat revenue, but I assume that most of that is new stores I was wondering if you can just flush that for us a little bit?

Paul Rothamel

Yeah, you’re exactly right majority of it is new stores. And we did have frankly we would have preferred that our expense performance had been little bit better against the revenues that we had. From the revenue side, we actually part of the challenge we had a very strong October and November and we had soft in December. So, we frankly rolled the dice and we pushed our expense we didn’t cut back on expenses because it was the Christmas season. But they just did not come together, as we had hoped. So, that gives us some work to do in the second and third quarters to get back.

Bill Armstrong - C.L. King & Associates

Got it and on Go Cash, I just want to make sure I got this right. Their loan balance right now is just under $0.5 million?

Paul Rothamel

Exactly.

Bill Armstrong - C.L. King & Associates

Okay. Now, you paid $50 million for this company, right. What else are you getting besides $500,000 of loan balances like…?

Paul Rothamel

So, there is a couple of things, the loan balance is a bit deceiving. There is frankly – they were operating under an export model we are not transitioning that model to a state-by-state model. While we transition the balances obviously came back, but we have access to all of that data, all of the underwriting and the technology that goes along with that along with a strong team. This is a very strategy move for us it’s a bit like Crediamigo. If you look at how Crediamigo came out of the shoots it was a rapid ramp and there is – they are continuing that rapid ramp. We have the same expectation for Go Cash.

Bill Armstrong - C.L. King & Associates

And there is an infrastructure and a lead sourcing infrastructure as well as the technology infrastructure?

Paul Rothamel

That’s correct.

Bill Armstrong - C.L. King & Associates

Okay.

Paul Rothamel

Yeah, that’s actually correct. And as we said I believe in the press release they are held for the same in a 20% ROIC and year three standard. They have gotten outside of that and we are very confident that not only we will hit those kind of numbers in years really about the back half of this year begins, but in years two and three but also that technology platform that I mentioned has obvious ramifications for our store fronts as well.

Bill Armstrong - C.L. King & Associates

Okay, great. Thank you.

Paul Rothamel

Thanks Bill.

Operator

Bill Carcache from Nomura Securities is online with the question.

Bill Carcache - Nomura Securities

Thank you. Hello guys thank you for taking my questions. I wanted to delve into little bit more if we could the expected growth in the online businesses and how should – how are you thinking about and I guess is there anything worth calling out in terms of the growth in those businesses and kind of the learning effect if you will as you kind of go through and grow those businesses is there going to be some kind of additional provisioning that’s going happen maybe early on I guess just broadly speaking is there anything we are calling out relating to the provision…?

Paul Rothamel

Well, I think Mark touched on it in his opening comments that we are expecting drag in the second quarter of roughly 4% related to the online businesses in the United States. Cash Genie isn’t in the profitability this year. So, let me just backup for a second, so you get on idea of why did we picked Cash Genie and why did we picked Go Cash. We’ve been working on this for over two years. And doing analysis, we frankly spoke directly with something in the neighborhood of over 30 online lenders in multiple countries before we made our first investments Cash Genie.

And the fact of the matter is as you all know we were buying eight ball. Three years ago we had no online strategy. So, we started to do the work. We have passed on multiple opportunities that could have been accretive sooner, potentially, but we didn’t think that had the right platforms, the right team or certainly the right integration strategy with our store fronts. So, that’s why these two got picked as I said Cash Genie will throw off couple of million dollars this year of operating income to the – to us. And we expect that Go Cash will do the same, but it will all be back loaded.

Bill Carcache - Nomura Securities

Great, so that pick up, the ramp in the earnings that comes after that kind of initial investment period, how far out roughly speaking is it before we start to see that we have been talking like within 12 months or?

Paul Rothamel

Oh yeah. Yeah, in fact let’s see we – our models which show Go Cash in the black in the fourth quarter of this year and then ramping up nicely in 2014.

Bill Carcache - Nomura Securities

Okay, as separately, switching gears can you give me a little bit more color on the lending ordinances that – the ordinances that you talked about. And I am just trying to get a little bit better understanding on how exactly they impacted profitability. And then along those lines maybe a bit of a better sense of what other cities are you anticipating will load ordinances and..?

Paul Rothamel

Sure. So, in Austin and Dallas essentially the ordinances are very similar in Austin, Dallas and San Antonio since adopted similar stance. But without going into too much detail they essentially render or they impact the profitability of single pay products, installment products and auto type products. We publicly just told you that in the quarter that affected our profitability in Austin, Dallas by $1 million that was roughly 90% of our profit in those two markets. You probably have heard from some of the competitors that they have exited those markets. I believe we know three specific chain competitors that have exited the Austin and Dallas markets.

There are – while we remain slightly profitable, but it was very damaging to our profitability in those markets. And it’s – it impacts, really as I said any type of short-term lending product how they have done it. So, what does that mean, it means that we have a couple of options and we have changed the product a bit at the store fronts. We have also as we just described to you created online lending options for those consumers to move to, but the real answer here is at the state level in Texas. We believe that the cities have every right to regulate zoning, permitting and licensing, but at the state level they should be regulating the products and services that we provide. The state legislature has just convened if you know Texas it’s a part-time legislature every other year, but they just convened and we are working closely with our association and directly with legislatures to try to get some activity there that would frankly level the blank field for store front providers and online providers and that’s our intention.

Bill Carcache - Nomura Securities

Okay and but you’ve got your expected outcome in each of the other potential cities that could be impacted, that – those outcomes are in your guidance. And I guess can you confirm that the first and secondly just talk about the risk…?

Paul Rothamel

That is correct, that is correct we – the impact, the expected impact in cities like San Antonio, Waco and some other smaller cities in Texas are in our guidance. And we have a three pronged attack. We have very aided products that we are introducing into those city place – into the cities today, frankly which will be we think better received by the consumer than they were with our first quarter results. And they still comply with the city regulations. The second is that we now have an online option for them of real magnitude in that is being marketed in those cities, affected cities. And then again thirdly at the legislative level, we are looking for more of a longer-term solution rather than playing cat and mouse of the cities.

Bill Carcache - Nomura Securities

Okay, so and how confident are you that the outcome with the customer downside risk to kind of what’s in your guidance I guess...?

Paul Rothamel

No, I understand, well as I said we have expected outcomes in the next three quarters of our guidance. And we’ve taken a conservative view of that. And I think frankly it would be inappropriate for me comment on my confidence level is we are in a lot of discussions these days.

Bill Carcache - Nomura Securities

Okay understood. And then finally if I may last question is some of the information that you guys put online that you started putting up is very helpful. Then taking a look at some of the data it seems pretty clear that if we exclude scrap gross profits that you have shown steady and consistent EPS growth, but so the question then in thinking about the scrap gross profits and everything that’s happening in the environment and the shift to general merchandise away from gold, do you guys have talked about in past calls how the gold has kind of been tapped. I guess that environment is if we adjust for a lot of these things, the fundamental strength of the business is there, but some of these other things are happening even though they are out of your control, they really do affect the business. And so I am just wondering if you can give a little bit of perspective on what it would take to turn that around, is it really just another bull market that is necessary to kind of allow people to replenish the gold kitty, so that the scrap gross profit can become another meaningful contributor in the future beyond that or I guess if you could just talk a little bit about what it would take to get that back? Thanks.

Paul Rothamel

Right. So, we would love a bull gold market. Now, having said that as we head into the back half of the year, we are anniversarying the real significant negative gold gram trends and even the beginnings of the margin degradation. So, and again part of the reason we are diversifying as much as we are as for these very reasons, but in the back half of the year, we expect to get profitability, because we expect to be counting a much softer gold markets. So, there is some of that built in. We are also, as an example, we just told you we opened about 44 U.S. Financial Service centers they were store within the store. There was a method of the madness why we are opening 44 in Q1 and only about 70 all year, because they cross into profitability usually in the range of 6 to 8 months. So, they are opened in the first quarter, by the fourth quarter, they are making money so. And those are outside of the State of Texas almost exclusively. So, a gold market will help, we are going to anniversary the softer gold. And frankly, our intention is to outrun the gold markets with these other revenue streams that we are talking about.

Bill Carcache - Nomura Securities

Thanks very much guys. Appreciate it.

Paul Rothamel

Thank you.

Operator

John Rowan from Sidoti & Company is back on line with a question.

John Rowan - Sidoti & Company

Sorry, I forgot to ask earlier, but of the $4.1 million that you cited as drag associated with new de novo stores, can you kind of break that down a little bit, is that all operating start-up cost or is there something else in there?

Mark Kuchenrither

It is all operating cost. I mean, we are not – we capitalize our expenses and from a segment standpoint, I can give you some further clarity, but it is operating expenses and operating income loss associated with that. So, in U.S. pawn and retail, the drag was associated with those stores of $1.4 million, U.S. financial services is 400,000 again because those are store within a store formats in existing stores, the cost is less there, Empeño Fácil with the 24 locations we opened up, that’s $1.3 million and let me look here and make sure I am reading right, and Canada, Cash Converters Canada is $1.1 million.

John Rowan - Sidoti & Company

Alright, thanks for the color.

Paul Rothamel

Okay.

Operator

David Scharf from JMP Securities is on line with a question.

David Scharf - JMP Securities

Alright, good afternoon. Thanks for taking my question. Actually, I wanted to circle back to the discussion on I guess the next generation or second generation products we appreciate the disclosure on the growth rates. Can you give us a sense for what percentage of consumer loan balances that they would represent now? And I guess more importantly based on both regulatory environment in Texas and in elsewhere, maybe a roadmap for how we ought to think about the product mix and the yield structure maybe 12, 18 months from now?

Paul Rothamel

So, I think that you are talking about 12 to 18 months from now, I think what you are going to – and I go back to as the customers offered more and more choices, they are an intelligent customer and they are choosing more and more installment products, auto title products, auto installment products, those kind of things. So, again, today, let’s say it this way, two years ago, payday product was about 85% to 90% of our loan balance. Today, it’s I think right just under 50%. So, in two years, it’s dropped dramatically. My guess is it’s still a very valuable product to many consumers. So, I would guess maybe it goes to 25% and the other products would grow just as we are seeing it today.

So, now having said that, the way that it maintains 25% or 30% of your loan balances we get into markets, where we don’t serve today or we get in channels that we aren’t providing today. So, online could mitigate that and maybe it raises a third of your volume, but you guys can do the math on our product yields and model it out that way, but there is still – essentially there is still very good investment products. They have still very good high return products, but they are not the same kind of return that a two-week payday loan made three years ago.

David Scharf - JMP Securities

Right. Maybe we should take south of the border, just a few weeks ago, there was an article on number of the banks stepping up their payroll advance lending in Mexico and other Latin American markets, can you just may give us a little bit of a recap of the competitive environment down there?

Paul Rothamel

Yeah, we wish them well in Mexico, because they are after about 10% of the market share. The 90% of market is on bank and we are having a great deal of success in providing loans to government employees generally, but if it were the banks in the United States that were getting into it, I’d be a little bit more concerned frankly, but there is plenty of market share and I think that group of banks are marketing to a different customer than we are today.

David Scharf - JMP Securities

Got it. And lastly, it’s probably a little too early to tell, but should we be thinking at all about the March quarter loan balances as it relates to the IRS potentially delaying refunds or is that just rounding air stuff?

Paul Rothamel

Yeah, I don’t think it is too early. I think we are going to see a delay. The question is, is it one week, two weeks, or three weeks, where we are seeing some additional loan activity in about the last five days, and sales by the way have softened a little bit as well. So, it looks like – there is no question it looks like it’s delayed until last year, it’s just a question of is it a week, two weeks or three weeks and I don’t know the answer of that yet.

David Scharf - JMP Securities

Great, thank you.

Paul Rothamel

Okay.

Operator

Bob Ramsey from FBR Capital Markets is on line with a question.

Bob Ramsey - FBR Capital Markets

Hi. Thanks for taking the follow-up. Just sort of following along the same lines of the tax refund question, I am curious how you are thinking about the impact of payroll tax changes on the U.S. consumer base as well as the recent declines in gasoline prices?

Paul Rothamel

They are both macroeconomic issues. And I don’t think there is any question that our consumer will feel the effect of the payroll tax yet immediately. I also think and you touched on, the flipside is we are benefiting or our consumer is benefiting from low gas prices. So, we certainly see and again the macroeconomic trends of that Americans particularly are saving a bit more and they are not tending to borrow as much and we’ve seen that. Our new customer activity is higher and our renewals are actually lower. So, that would tell you that some of the folks are finding ways to payoff their loans and not take them up again, but I think it remains to be seen. And you also, just as we talked about, you also have money in what is right now the timing on the federal tax returns which generally again to our customer is a major milestone. So, it will be an interesting, I think it’s going to be very interesting next three months and six months depending on the way the fiscal cliff goes and all those kind of things and how much fear-mongering goes on between now and then.

Bob Ramsey - FBR Capital Markets

And generally obviously there are lot of moving pieces, but I mean if you took one of those items in isolation, which reduced the income or disposable income of the borrower, is that good because there is more loan demand if there is sort of more it’s the budget is a little tighter or is it bad because with the tighter budget they are less apt to borrow?

Paul Rothamel

Generally for our business its better, because of all we are – for all the retail we do now that we have these other revenue streams. We are a lender first and so it’s generally better for us.

Bob Ramsey - FBR Capital Markets

Okay, great. Thank you.

Operator

John Hecht from Stephens & Company is online with the question.

John Hecht - Stephens & Company

Good afternoon. Thanks for taking my questions. Paul just as going back you mentioned that it sounded like October, November on a trend basis were a little bit stronger than December I wonder if can you give us a little bit more color was it related to merchandise sales scrap volumes, loan volumes or what’s the color on that side of business?

Paul Rothamel

Yeah, actually it was primarily what I was referencing was retail sales. We were up mid-single digits in October and November including Black Friday and Cyber Monday. But we struggled in December, part of that was a bit of self infliction because last year we were extremely aggressive in moving some aged inventory and that’s part of why you saw an adjustment last year in our reserve, which is a pickup because we move through so much aged inventory, helped sales and margin we pick the backup in the reserve versus this year we didn’t –weren’t as aggressive, frankly because we were still strong in October and November with our marketing plans. And then December dried up a little bit and that’s why I will go back to the if you remember there is a whole lot of discussion about going over the fiscal cliff what was the effect on my paycheck all those kind of things. So, we think our consumer did pull back in December. And on scrap through a lesser degree scrap was strong in October and November and grams were still strong in December, but we had to do - we had to give up rates to go get it. So, that’s really the color behind that.

John Hecht - Stephens & Company

And on the scrap side of the business I mean you do talk about getting into the second half of the year comps getting easier or you at – we had a point or whether its margins or volumes you can say that it appears to be stabilizing admitting there is kind of more visibility that I guess that operational elements of the market right now or is there still some uncertainty there?

Mark Kuchenrither

Well, I think there is really still some uncertainty. But I think if you look at the supplemental information out there and you look at the trends where we came at first quarter of this year is equivalent from an EPS contribution to third quarter of last year. And we were able to forecast our plan, our actual performance versus our plan was very accurate with the exception of what Paul said we’ve picked up slightly more volume than we anticipated, but we gave up margin dollars and it kind of netted out to our forecast. We still think the second quarter is going to be difficult quarter. And you can see what we’re anniversary up against when you look at the supplemental information. But we and we also are coming up against some a little bit of softening in market price that what we are seeing and we will anniversary - we anticipate anniversarying a lower market price and what we had second quarter last year as well. But we do think that we’re starting to see some of the bottom, we believe we’re seeing the bottom and we’re hoping that that it’s the case.

John Hecht - Stephens & Company

Okay, that’s very good color. Thanks. Last question Crediamigo seems to be doing pretty well, you get site that you had eight new employers that signed up increased the overall customer base or the access to customers. I am wondering can you talk about the sales cycle there and maybe what you got in pipeline and kind of how we might envision how much that business can grow over the next few quarters?

Mark Kuchenrither

Yeah, I think that we’re going to experience double-digit growth for the rest of the year quarter-over-quarter. We – the way that the loans or an average of a three year loan about 15,000 pesos, I think roughly is the loan size. You can see the bad debt is very minimal. And I think we provided yield information last quarter for you in the supplemental information. Getting the contract for the (convene you have) signed is a very important first step. And then the penetration, the sales forces’ ability to effectively penetrate the contracts and reach the employees is very important second step for us. And so we measure the penetration effectiveness on each contract and there are KPIs and incentives built around those type of measurements inside the business. And so we think that if you look at where the business was when we made the investment they had right around 1% penetration on average in their contracts. Now, from contracts we are very high pinned – high penetrated, some were very low. We have increased that to about 4% on average since we have made that investment but again that gives you an indication of what the upside potential is 4% on – it leaves a lot of room for improvement.

John Hecht - Stephens & Company

And what about do you expect similar kind of new customers to add in the near term quarters?

Mark Kuchenrither

Well, we certainly we have a pipeline of new contracts. But if you look at the eight contracts we signed that 175,000 represents an 18% increase in opportunity by itself. So, if we just do our job of effectively penetrating those and continuing to improve our penetration across the board, I think we are going to see some really nice growth. But the company looks at federal, state and municipality level contracts and has a team that’s actually pursing those contracts everyday.

John Hecht - Stephens & Company

Okay, thanks very much.

Paul Rothamel

Thanks, John.

Operator

We have no further questions at this time. Do you have any final remarks?

Paul Rothamel - President and Chief Executive Officer

No. We just appreciate your continued interest in the company. We look forward to talking to you in another 90 days. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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