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EZCORP, Inc. (NASDAQ:EZPW)

F1Q09 (Qtr End 12/31/08) Earnings Call

January 22, 2009 4.30 pm ET

Executives

Joe Rotunda – President & Chief Executive Officer

Dan Tonissen – Senior Vice President & Chief Financial Officer

Analysts

John Rowan – Sidoti & Company

David Burtzlaff – Stephens, Inc

Chuck Ruff – Insight Investments

Ted Hillenmeyer – North Star Partners

Operator

Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2009 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, President and CEO. Mr. Rotunda, you may begin.

Joe Rotunda

Thank you, Jamie. Good afternoon everyone. Welcome and thank you for joining us today. With me on the call is Dan Tonissen, our Chief Financial Officer. We had a little delay in getting the release out, PR Newswire has informed us that it has now hit and it should be available and we have distributed our copies here. I am going to begin with a high level overview of the quarter's performance, make a few comments on the economy and how it relates to our business. And then a brief commentary on each of our business segments. Dan will follow and he will provide more detail on our financial statements.

Overall, our first quarter was a good quarter for the company. You will see when we get into the metrics of our business, that each of our segments is sound. I am also pleased to point out that this is the 26th consecutive quarter of year-on-year earnings improvements. We grew our net income to $14.8 million in the quarter, an improvement of $2.3 million or 18% over the same period a year ago.

On a diluted earnings per share basis, we grew to $0.33 from last year's $0.29. As you will see in the press release, included in the quarter is an unusual pretax charge of approximately $1.1 million, which had a negative impact of $0.02 in earnings per share. Excluding this charge, the company earned $0.35 per share, an increase of 21% to last year. In the quarter, we also completed two significant acquisitions. The first on November was the asset purchase of 11 pawnshops in the Las Vegas-Henderson area for $34.4 million of stock and cash.

The second and the largest was the acquisition of Value Pawn with 67 stores located primarily in Florida for $77.4 million of stock and cash, plus the assumption of $30.4 million of Value Pawn's debt. The transaction was closed on December 31 New Year's eve. Before we look at the segments results, I’d like to make a few comments on the macroeconomic environment. Nearly, every economic consumer group and business in our country has been affected by the most challenging economic environment in decades. In December, the unemployment rate jumped to 7.2% and consumer confidence declined an all time low. All types of credit from home mortgages to car loans to almost any type of consumer loan has either become very restricted in its availability or the underwriting for the credit has tightened considerably.

And on a daily basis the media continually reports and reinforces the economic uncertainty. And with all of this, the question is how these external conditions impact our business. My response is no different than it's been in the past. We are relatively well insulated from most macroeconomic conditions. Although, there were periods of adjustment since economic changes occur, it's really all about consumer behavior and our operating model. The customer's behavior will soon adjust and the business model works such that a weakness in one component typically contrasts with the strengthening in another and vice versa. And when you look at our business globally in the U.S., this is what you see in this kind of environment, loan demand strong, but it’s much more pronounced in pawn than in the payday loan segment in the quarter.

However, the demand in both loan products has shown growth over the years, which also include the good times as well as these difficult times. It’s noteworthy to mention here that a primary difference between our two loan products is that to obtain a payday loan the customer must be employed. In pawn, we recorded same-store sales growth in the mid single-digit range, now we normally consider this a modest increase, but if you compare it to traditional retail, it appears quite strong. But it's not dramatically stronger than our trend has been over the years. And our redemption rates and our inventory turnover metrics have remained consistent and strong as well.

In payday loans, we have also seen a return to historic lower levels of bad debt. This is probably more a product of internal rather than any type of external factor. Now, I should point out there is another actually more quantifiable economic impact, and it’s associated with the recent strengthening of the U.S. dollar. The result has been the relative devaluation of peso and pound to the U.S. dollar. As we convert foreign earnings from their currency in Mexico and the United Kingdom to U.S. dollars. We’ve experienced an adverse earnings per share impact of about $0.005 in the quarter. But there is also another more positive factor for our company that fits well into the discussion of the U.S. economy.

In conjunction with our closing of the Value Pawn acquisition, we also closed on a new credit facility with a $40 million term loan and an $80 million revolving line of credit with very attractive terms. We chose to drive down the term loan, but the $80 million line of credit remains untouched. Combined with our cash balance and our operating cash flows, this provides us with significant liquidity to pursue other acquisition opportunities that may arise.

Now, if I look at the results by segment and I’ll begin with our largest, which is domestic pawn. Net revenues in our U.S. pawn operations were robust and they grew by 14% over this quarter last year. The major drivers were same-store loan growth in pawn loans of 10% coupled with our same-store sales increase of 6%. The result in net revenues reflected a 13% increase in pawn service charges and a 7% increase in retail sales gross profit. Our scrap gross profit additionally grew 13%. The primary driver is a substantial increase in scrap volume over last year.

Store operating expenses grew at a slower rate than the growth of revenues and this provided a strong improvement in operating income in our U.S. pawn segment. Our operating income dollars grew by 16% over last year, and the operating income margin grew to 47% up a point from last year. On November 13 of this quarter, we completed the acquisition of 11 Las Vegas Henderson pawnshops. Our consolidated results reflect an additional four-wall operating contribution of about $500,000 from these stores for that period of time. Not reflected in the quarter's results is any earnings impact from the 67 pawnshops acquired from Value Pawn on December 31. The results of these stores will be included from January 1 forward.

Now, between these two acquisitions, we added a pawn loan portfolio of $24 million, we added inventory of $19 million and just over $1 million of auto title loans, you frequently hear us talk about our focus on earning assets as part of our growth platform. The reason is that these are the drivers of our current and our future revenue streams. This additional $44 million of earning assets should serve well in enhancing our pawn segment's future earnings potential. All in all, with another strong quarter for our U.S. EZPAWN operations team.

Now, if I look at our second segment EZMONEY payday loans. Our net revenues or fees after bad debt grew by approximately $2.7 million over the same quarter a year ago that is an 11% improvement. Our revenue component grew by 8%. Although, this is positive to last year, it still reflects the lingering effects of Hurricane Ike, which hit the Houston area in mid-September. That storm’s impact resulted in reduced loan balances in our Houston stores and those balances have not yet grown back to pre-hurricane levels. Houston represents 92 of our most profitable mature EZMONEY stores and of these the two Galveston stores still have not yet reopened.

The fees also reflect the closure of our 11 Florida EZMONEY stores last fiscal year, which will cycle as we go through our third quarter. Our bad debt component in EZMONEY improved by more than 2 percentage points to last year and returned to historic seasonal levels of bad debt. In fact, our bad debt was actually lower in dollars this quarter and the quarter last year even with $2.6 million more in fees this year than last year.

Two primary factors that fueled these results. The first is continuing improvements in the store level execution of servicing the customer in the loan. The other is enhanced productivity measurement tools in our central collections group and continuing technology and system enhancements. After somewhat higher payroll investments, our operating income in the EZMONEY segment grew by 8% over last year, delivered a margin of 40%, which was about a point under a year ago.

Strategically, in EZMONEY, we continue to focus on developing a multi-product offering to leverage our investment in store fronts, generate new revenue streams, and reduce our regulatory risk of any single product within this segment. Our installment loan product has been refined and we have comfort with the associated bad debt management. It's now been expanded into 91 stores and the loan balance itself has grown 64% over this period a year ago. We plan to roll this product to several additional states before the end of the year.

And we announced last quarter the development of a second product, an auto title loan product, which was introduced in Missouri. Since then we've now expanded it to a total of 30 stores including stores in Utah. Our plans are to continue to introduce it into several additional states and end the year with more than 100 EZMONEY stores offering the auto title loan product. From a store expansion perspective, our plan is to open 30 to 35 EZMONEY stores during fiscal year 2009. We will continue to concentrate on filling in existing states and the majority of the new facilities will be our larger superstore concept with a focus on multi-product offerings.

During the quarter, we opened six new stores, and we closed or consolidated six stores. This resulted in 477 stores in 11 states including the six managed by the U.S. Pawn segment. The six closures were related to routine site and lease reviews and we opted not to continue operations at these specific locations. We will continue to evaluate underperforming sites as lease expiration dates approach as we move forward. I’m going to shift now to a topic that nobody can accurately predict and the topic is legislative actions. I’d like to take a moment and address obvious questions regarding the status and the outlook of the legislative environment we are facing in 2009.

While we have no crystal ball on a federal level, it's difficult to imagine adoption of rate caps either as a result of any type of Obama stimulus plan or really any other congressional action. Consumers are already facing a significantly restricted credit environment and it's difficult to conceive that our federal government would further restrict consumer's access to credit and liquidity in a time of otherwise very tight credit. Additionally, if rate caps were established, the federal government would be entering a new frontier by regulating what has traditionally been the responsibility and the purview of the individual states. This applies to rate in terms for virtually any products including user recaps, insurance rating terms, rent and alike.

Looking at the state level, we are cautiously optimistic about the regulatory stability of the states at which we offer payday loans. We have been fortunate thus far in not having to deal with some of the aggressive legislative action that others in our industry have faced in several states. We do however expect those to be filed in several states. We feel that the legislators or pro-business and have been receptive to learning about the industry. We will continue to work with both the industry and trade associations to lobby and educate legislators.

And we will now move onto our third segment, Mexico, which is Empeno Facil. During the first quarter this segment generated gross revenues of approximately U.S. $3.9 million and net revenues of U.S. $2.4 million. The result in four wall operating income is just over $1.1 million that is an 87% increase over the prior year. And if you take this and you exclude the impact of the fluctuation in exchange rates between the two periods, the operating income growth would have been well in excess of 120%. We are particularly pleased that even with the drive from new stores, Empeno Facil produced an operating income margin of 47% of net revenues, which compares favorably to 42% a year ago.

We continue to evaluate Mexico pawn operating model and we began to test several enhancements to further improve the overall performance. Our plan is to add between 30 and 35 new pawnshops in Mexico during this year. We opened two during the first quarter and we acquired one with the Value Pawn acquisition. We now have 41 stores in operation in Mexico. And we continue to be pleased with the results being produced by our Mexico pawn team and being able to grow and manage this business segment.

Now, before I turn it over to Dan, just a brief comment on Albemarle & Bond. Our equity interest in A&B provided us with more than $900,000 in pretax contribution during the quarter. However, this is down about a $100,000 from the prior year contribution primarily due to changes in currency exchange rates. If you exclude the negative impact of exchange rates between last year and this year, the current year of pretax contribution from A&B increased just over 5% from last year. So, with that I’ll turn the call over to Dan for a look at the financial statements in some depth.

Dan Tonissen

Thanks, Joe. Now, I'll give a little bit more detail on our financials. And I'll start with the consolidated statement of operation, which is fourth page in our earnings announcement. Starting on line A, you see the total revenues for the quarter increased 14.5% to $128.6 million. Same-store revenues in the quarter were up 10%. Merchandise sales line two increased $4.3 million or 10.6% to $44.8 million.

Same-store merchandise sales were up 6% for the quarter. With margins down a 1 percentage point from the prior year period, merchandise gross profit line two, minus line 10 increased $1.4 million or 8.5% to $17.6 million. Scrap gross profit line three, less line 11 increased $800,000 to just over $6.5 million. Higher gold values, net of higher cost and more volume generated the increase in scrap gross profit.

During the quarter, we scraped about 1.6 million grams of gold jewelry, an increase of roughly 29% from the prior year quarter. Proceeds per gram increased 3% to $12.07. Our cost per gram increased 11% to $8.02. During the quarter, we realized approximately a $150,000 in proceeds on the sale of loose diamonds compared to $300,000 in the prior year quarter. These proceeds are included in the jewelry scrapping sales line three. We continue our forward contracting for our gold scrapping and currently have about 75% of our estimated March quarter quantities locked at around $840 per ounce. In our guidance for the balance of the year, we continue to assume a gold price of $775 per ounce.

For the quarter, we turned our inventory 3.3 times up a tenth of a turn from the prior year quarter. Same-store inventory levels per ending store increased to $143,000 at the end of December, compared to a $131,000 a year ago. The actual ending inventory per ending store that you will see on line 35 of page five, which is our balance sheet for the December 2008 period includes the inventories from our two acquisitions. Returning back to page four, you see that pawn service charge revenues, line four, increased approximately $3.5 million or 15% to $26.4 million. This is up roughly 10% on a same-store basis.

Annualized yields on our pawn loan balance were 141%, compared to a 146%. Our ending pawn loan balance was up 20% from the prior year, and that is 9% on a same-store basis. For the quarter, our signature loan contribution, line five, less line 14, improved 11% to $26.5 million. The benefit of a 7% increase in signature loan fee revenue, which you see on line five was compounded by a 2% decrease in signature loan bad debt, line 14. Consolidated signature loan bad debt expense, line 14, measured as a percent of the signature loan fee revenues, line 5, decreased to 26% from 29% for the prior year quarter. 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 5.2%, compared to 5.3% for the prior year quarter.

Loan originations for the quarter were up 4% to $178.4 million. Auto title loans contributed $214,000 to net revenue, that is line six less line 15. This is primarily from our 11 stores acquired in Las Vegas. After higher levels of operations expense, line 19, administrative expense, line 20, and depreciation and amortization, line 21, offset by a gain on disposal of assets versus a loss in the prior year, line 22. Operating income increased 15% to just over $22 million. Increases in operations expense and depreciation and amortization are primarily due to acquisitions and new store openings.

Included in the administrative expense increase of just under $2 million, which you see on line 20 is the $1.1 million charge related to the bonus due to two executives upon the exercises of their 1998 stock options. As Joe pointed out, this unusual charge adversely impacted our earnings per share for the quarter by approximately $0.02 although it is cash neutral. The gain on disposal of assets for the quarter is due to property insurance recoveries on properties damaged during Hurricane Ike in our September quarter.

Operating income margins as a percent of net revenues were up slightly to 28%, a modest margin improvement in our U.S. pawn operation and the addition of high margin operating income in our Mexico pawn operation were partially offset by the 1 percentage point margin decrease in our EZMONEY segment and higher level, relative levels of administrative expense. After lower levels of equity interest in the income of Albemarle & Bond due to the stronger dollar, slightly higher net interest expense and a 35.2% tax provision, net income increased 18% to $14.8 million or $0.33 per share. The 44.7 million weighted average shares for the quarter seen on line 35 includes the 1.1 million shares issued in the Las Vegas acquisition for approximately half of the quarter.

The 4.1 million shares issued in the Value Financial acquisition have a negligible impact since they are only included for one day of the quarter. Both of these additional share amounts will be included in our weighted average share count for the full month for the full March quarter, when we report those results. Now, if you turn to page six of our earnings announcement I will make a couple of comments on our segment results starting with our U.S. EZPAWN operation in the left column.

Our U.S. EZPAWN operations total revenues line 7, increased 16% that is 12% on a same-store basis to $89.4 million. Store level operating income line 15, increased 16% to approximately $23.5 million. This includes approximately $500,000 from our 11 stores acquired in Las Vegas. Store level operating income margins for our U.S. EZPAWN operation improved just over a percentage point to 47% of net revenues.

Moving over to the next column to the right, our Empeno Facil operations total revenues line 7, increased 76%, that is 21% on a same-store basis to $3.9 million. Empeno Facil generated store level operating income of $1.1 million and you see that on line 15. Store level operating income margins in these stores were strong 47% of net revenues, and they were approximately a tenth above our U.S. pawn operation.

Moving over to the third column, our EZMONEY operations total revenues increased 8% and that’s 3% on a same-store basis to $35.3 million. Store level operating income, line 15, increased 8% to $10.5 million. Operating income margins decreased 1 percentage point to 40% of net revenues. For the quarter, our U.S. and Mexico pawn segments made up approximately 73% of our consolidated total revenues and 70% of our consolidated store level operating income, you see that on line 15.

Now, a few comments on the balance sheet on page five of the earnings announcement. You can see that we have approximately $41.6 million of cash and you see that on line three and we have $40.3 million of debt, and that is lines 23 and 29. With our new credit facility and the closing of the Value Financial transaction, we drew down on the $40 million term loan portion of this facility. Of the $41.6 million cash balance, approximately $33.3 million is non-operating. This non-operating cash and our strong operating cash flow, which we expect in the March quarter should be sufficient to meet our operating cash needs and fund any contingency payments due under the merger agreement with the Value Financial shareholders.

You can see that our payday loan balance and you see that on line five, grew 34% in last 12 months to 8.2 million. Not included in our payday loan balance is $24.7 million of short-term loans and $600,000 of installment loans both of which are brokered with unaffiliated lenders. Our investment in Albemarle & Bond is carried on our December balance sheet at $37.9 million and you see this on line 15. Assuming a 211 pence market price on their stock and an exchange rate of a $1.39 per pound, our 16.3 million shares would have a market value of just under $48 million.

Finally, you see on lines 38 and 39 that we ended the quarter with 412 pawnshop locations, including 41 Mexico locations and 477 EZMONEY locations. The 412 pawnshop locations include the acquired 11 Las Vegas locations and the 67 Value Financial locations. Now, let me turn the call back over to Joe.

Joe Rotunda

Thanks, Dan. I'll conclude my prepared remarks with an update to our earnings guidance for 2009. In quarter two, we expect earnings per share of $0.36, compared to $0.30 last year. For the full year, we are adjusting our earnings guidance as a result primarily of the 1998 option impact to $1.52 per share for the year. This guidance represents diluted earnings per share growth of 20% in quarter two, and 26% for the year. Both the quarter and the year incorporate the benefit of the two acquisitions.

Now back to Dan and pick up a couple issues.

Dan Tonissen

Okay. During this conference call, we’ve used a non-GAAP financial measure, when referring to earnings per share excluding the unusual charge related to the 1998 stock option grant. For clarity we would refer listeners and readers to the non-GAAP to GAAP reconciliation on the second page of our earnings announcement and our 8-K filed today with the Securities & Exchange Commission. These can be accessed on the EZCORP website.

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 the 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 in 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 & Exchange Commission.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from John Rowan from Sidoti & Company. Please go ahead.

John Rowan – Sidoti & Company

Good afternoon.

Joe Rotunda

Hi John.

John Rowan – Sidoti & Company

Joe, just – just to be clear on the $1.52 guidance includes the $0.02 impact from the bonus accrual right?

Joe Rotunda

That is correct

John Rowan – Sidoti & Company

Okay. Dan, I guess the rate on your debt on, with the new credit agreement, it changes with your leverage, can you just give me a rough estimate as to what you're paying right now on that debt?

Dan Tonissen

The first two quarters, it's going to be a 250 over LIBOR and that was something that we negotiated with the extensions. So, that will be for the March and June quarters. And then it will be repriced at probably a 175 over LIBOR.

John Rowan – Sidoti & Company

Okay. Do you know yet, if you're going to face any or not face, but have any expenses related to the deficiency agreement in the merger with the merger of Value Financial?

Dan Tonissen

I would suspect we will, but we do not know that amount at this point.

John Rowan – Sidoti & Company

Do you know, when you're going to start getting that information back?

Dan Tonissen

I would expect over the next several weeks for any shareholders that have sold, but that period is open for 125 days after the acquisition.

John Rowan – Sidoti & Company

Okay. And just one last question, you did say that your inventory per store was up on a year-over-year basis, but I assume that also includes the Nevada stores, which should have a dramatically higher inventory level per store, can you kind of give me an idea of what the inventory per store looks like excluding the Nevada acquisitions?

Dan Tonissen

Well, I actually gave that to you, it's….

John Rowan – Sidoti & Company

I am sorry.

Dan Tonissen

On a same-store basis, it's a 143,000 at the end of December of '08, and in the prior year period it was a 131, and then I think that's very much in line with the – the loan growth that we've generated.

John Rowan - Sidoti & Company

Okay. Thank you.

Joe Rotunda

We would also point out John, our turnover was up the last year, 3.4 in the pawn segment U.S. pawn segment versus 3.2 a year ago.

Operator

Our next question comes from David Burtzlaff from Stephens, Inc. Please go ahead.

David Burtzlaff - Stephens, Inc.

Good afternoon guys. Just have a couple of questions real quick. Weighted really to merchandise sales I mean, how did sales trends react throughout the quarter?

Joe Rotunda

We had a modest increase through October and November regarding to that last week 10 days before Christmas we had some very intense sales activity in our stores.

David Burtzlaff - Stephens, Inc.

Okay.

Dan Tonissen

Good growth.

David Burtzlaff - Stephens, Inc.

Okay, and did the Houston market, I mean I assume sales were good down there as people replaced merchandise?

Joe Rotunda

They had some [stimulus] checks earlier back I think it was in October timeframe. But I didn't see anything extraordinary through the holiday season in Houston with sales.

David Burtzlaff - Stephens, Inc.

Okay. And then the last question related to the sales did you start had to discount more heavily in Christmas to try to keep inventories in line or is there?

Joe Rotunda

No we didn't do really anything out of the ordinary. We made a couple promotional efforts during the period. Basically, in-house and some flyers around the stores in our retail points upfront, and we had focused on game systems and jewelry during that period of time. If you note, our retail margin was 39% versus 40% a year ago. So, it was down about a point, but I think that point was probably more associated with clearance activity that we had with a good flow through of order merchandise during this period of time and of course a higher cost of goods.

John Rowan - Sidoti & Company

Okay. All right thank you very much.

Joe Rotunda

Sure.

Operator

(Operator Instructions). Our next question comes from Chuck Ruff from Insight Investments. Please go ahead.

Chuck Ruff – Insight Investments

Good afternoon guys and good quarter.

Joe Rotunda

Thank you.

Chuck Ruff – Insight Investments

I know a lot of industries have been talking with the Obama, people since well before even the election, I’m wondering if your industry lobby or whoever has been speaking with them, and if you have gotten any feedback at all regarding the likelihood of some sort of federal action on payday loan?

Joe Rotunda

Well our CFSA, which is industry for payday lending has been very active in lobbying efforts at a federal level, not just this year, but over the years and has developed I think a very strong presence with many members of congress although there certainly have been some shift in the membership recently. But as to Obama specifically I rate his stimulus plan is out and there is absolutely to my knowledge no reference at all, the payday loans rate caps or anything of the like. Now at a federal level there have been bills filed virtually every year, they have something to do with payday lending but they gained no momentum to this point in time, and I have no knowledge of anything that is different this year. But I’d go back to my earlier statement, and I believe there are two primary reasons that it would be inappropriate to expect any type of federal legislation that has anything to do with rates and terms with payday lending. The first one is it’s just totally uncharted ground for the federal government. And there are implications with all these other products that really have the responsibility at the state level, and the other is this is a time where access to credit is very difficult and I can’t imagine that any line of credit would be taken away. And I can refer you to any number of academic studies that have been done as well as several studies by the Federal Reserve Bank of New York that point out the economic benefit on payday lending and the adverse impact if it’s not available.

Chuck Ruff - Insight Investments

I am in complete agreement with you, but as we’ve all seen strangest things that happened in the past few months. If somehow the payday loan industry does get regulated out of existence, how much of that administrative expense that can incorporate overhead line, would you be able to adjust? I’m trying to get some sort of down side, I’m trying to think about what’s worst case down side and I’m just wondering if that number is adjustable at all?

Dan Tonissen

I think what I do Chuck is look at the segment reporting and the split that I went through at the several of the operating income lines it’s about a 70, 30 split, and I think if you push that on down to the consolidated operating income line, the assumption that you might think is it would follow with similar split.

Chuck Ruff - Insight Investments

Okay great. And you have mentioned the potential liability or payments on the Value Financial deal. Is there a maximum there?

Joe Rotunda

Yes, there is a - there is a maximum deficiency reserve as well as a premium fund.

Dan Tonissen

Yeah and then given the number of shares that were issued it would work out to be just over a $16 million would be the.

Joe Rotunda

The maximum.

Dan Tonissen

The maximum, yeah.

Chuck Ruff - Insight Investments

Okay, great. And how many shares are you assuming in your fiscal ’09 guidance?

Dan Tonissen

It would be the 4.1 million shares that were issued to the Value shareholders, and the 1.1 million that were issued in the Las Vegas acquisition. And obviously, as I try to explain, that’s going to be a weighted average.

Chuck Ruff - Insight Investments

Yep

Dan Tonissen

You won’t see the full impact of that over the full 12 months in our 2009 fiscal year.

Chuck Ruff - Insight Investments

Yeah.

Dan Tonissen

But each quarter you will see that ratchet up in the year-to-date number.

Chuck Ruff - Insight Investments

Right.

Dan Tonissen

In the quarterly numbers you see the full impact of those additional shares.

Chuck Ruff - Insight Investments

Okay thanks.

Operator

(Operator Instructions). Our next question comes from Ted Hillenmeyer from North Star Partners. Please go ahead

Ted Hillenmeyer – North Star Partners

Hey guys.

Dan Tonissen

Hi Ted.

Ted Hillenmeyer – North Star Partners

Do you actually have the fully diluted share count at the end of the year?

Dan Tonissen

We do not, because there will be some adjustments to it over the balance of the year. But if you take, if you take the, 44 points, take the diluted shares for the quarter, and that includes half the quarter of 1.1.

Roughly 500,000 to 600,000, on top of that would be the full quarter’s impact in the March quarter of the Value acquisition. And then on top of that would be an additional 4.1 million shares. Now, it won't be that precise because of our fluctuations in the fully diluted shares depending on what happens to the stock price and options and other things. Does that give you rough we would look at it?

Ted Hillenmeyer – North Star Partners

Okay. And then when you guys point out the 70:30 split, will that be what the split will be throughout the year, I mean as seasonality plays out?

Dan Tonissen

That is, that would be for the – for the December quarter and there is obviously any shift, I suspect more to 78 to 80 split.

Joe Rotunda

That is without any impact at all of Value Financial.

Dan Tonissen

Yeah.

Joe Rotunda

Of 67 stores, it's only for half a quarter of the larger 11 stores in Nevada. Ted, our approach will be much closer to 80:20 than it is 70:30.

Ted Hillenmeyer – North Star Partners

Thanks.

Operator

(Operator Instructions). We have a follow-up question from Chuck Ruff from Insight Investments. Please go ahead.

Chuck Ruff - Insight Investments

Can you talk a little bit more about the auto title business and how large do you expect that to get, you talked about I think, you said 100 stores by the end of the year, can you give us some idea of what sort of revenues we should expect to see on that going forward I am trying to get bigger than a breadbox feel for how large a business you think that can be?

Joe Rotunda

We haven’t sized it at all. At least what I rated publicly I think disclosed any of the sizing to everybody, but I will give an idea of what the loans look like. We model with an average loan of about $600 to $700 and our fee rate is 25% and our bad debt, we anticipate bad debt on this product to probably be approximately half of the bad debt that we incur on payday loans, because this is a collateralized loan and our loan values are going to be such that we are going to be at 50% of back look. You can model in or ramp up to get to 100 stores by month end with an assumption of volume in the neighborhood of one or two loans per week as the business develops, and that could bring into a portfolio on a fee.

Chuck Ruff - Insight Investments

Can I ask a couple of quick additional ones here?

Joe Rotunda

Sure.

Chuck Ruff - Insight Investments

The tax rate for the quarter, should we assume that's a reasonable estimate for the year?

Dan Tonissen

At this point yes.

Chuck Ruff - Insight Investments

Okay. And can you tell us what sort of net interest income or expense you are assuming in your fiscal '09 guidance?

Dan Tonissen

We haven’t disclosed that, but it's going to be very modest and the reason it will be is, as you can see on our December ending balance sheet, we actually had about 40 million in cash. And so, we have got interest income, and actually it will depend on a number of times, I mean, conceivably after the March quarter, we would have sufficient cash to retire the term loan should we choose to do that.

Chuck Ruff - Insight Investments

Okay, thanks. That is all I had.

Operator

And we have a follow-up question from Ted Hillenmeyer from North Star Partners. Please go ahead.

Ted Hillenmeyer - North Star Partners

Are acquisitions still in the table or do you need to absorb the two that you've made for some period of time?

Joe Rotunda

We’re still quite interested in any acquisitions to make good economic sense in pawn either domestically or in Mexico, so we have the capacity with our infrastructure to continue to pursue that.

Ted Hillenmeyer - North Star Partners

Okay. And then where are you planning on opening, I think you said 35 to 40 payday stores?

Joe Rotunda

We’re currently in 11 states in payday lending. And there are a couple of them that we are not interested in expanding at all, so the concentration is going to be in the states that we are comfortable with the financial model in a regulatory environment and I really believe that in the payday lending it’s going to be much like pawn was, if you go back as pawn was being developed and it was in the same regulatory stage of its business life cycle, there were states that adopted regulations and maintained them that were very positive for the industry and other ones that were not very attractive at all, where you really wouldn't want to do the pawn business and over a period of time, it stabilized and if you look at virtually every change in pawn regulations that has occurred in the last eight years, as I have been associated with this business they have all been favorable to the industry. States like Colorado have gone from 10% to 20% in fee base, Florida has gone from 20 to 25%, Texas that is a – a tiered rate has adjusted the tiers frequently that are reflecting more positive impact on the industry. And I think the same thing is going to happen with payday lending and it's going to shake out to whether some states that are very attractive for payday lending and other states that are not going to be able to do payday lending if they want to. And I think it's that we are still early, we are still in that portion of the life cycle of the industry. So, the states that we are doing business in and the states that we are looking to enhance and fill in and put in this larger footprint are the states that we believe will be conducive to payday lending in these types of products as we move forward.

Ted Hillenmeyer - North Star Partners

Does the 35 to 40 include any stores in Mexico or potentially any in Canada?

Joe Rotunda

No, not in that number. And as you know, as I said today, we opened six of those stores in the first quarter and we also then closed six stores in other states as we did that. But we still have an high level of interest in Canada, and we are watching from the sidelines as they finalize the rates in terms by individual province and although the first province Manitoba was at 17%, was not particularly attractive as it’s now moved onto another province and we look forward to British Colombia. We believe that we are seeing higher rates and we believe that rates are going to be much more attractive as these become finalized.

Chuck Ruff - Insight Investments

Okay. Can you just give us?

Joe Rotunda

We have to grow in Canada, but they are not in those numbers.

Chuck Ruff - Insight Investments

Okay. And can you just give us an update on Texas, I’m guessing there is nothing happening, much activity last month?

Joe Rotunda

The legislature just convened about I guess 10 days ago and the speaker of the house was elected, pro-business legislator. I don’t believe committee assignments have been yet finalized, but we feel good about the very pro-business nature of the legislator in Texas. But there is no new news, there is one Senator who ever year files a bill or bills about the industry, but to my knowledge none of these bills have ever come through committee.

Chuck Ruff - Insight Investments

And just lastly, do you know when the Q will be up?

Joe Rotunda

I am sorry.

Chuck Ruff - Insight Investments

Do you know when the 10-Q will be up?

Dan Tonissen

It should be around the middle of February.

Chuck Ruff - Insight Investments

Okay. Great. Thanks guys.

Operator

We have a follow-up question from John Rowan from Sidoti & Company. Please go ahead.

John Rowan – Sidoti & Company

Hi. Just two quick follow-up questions, Dan, you said that you could potentially pay-off all the term debt by the end of the March quarter, did I get that right?

Dan Tonissen

It could be that if we chose to, I suspect I mean the March quarter has very strong operating cash flow.

John Rowan – Sidoti & Company

Okay. Actually, there is no prepayment penalty on either of the two loans that you have right now?

Dan Tonissen

Yep.

John Rowan – Sidoti & Company

Okay. And then just one last question, the one Senator in Texas who like you said every year submits something on the industry, can you just remind me is it generally, it's the challenge to the CSO model, is it a challenge to payday lending or pawn or both?

Joe Rotunda

My experience over the last two sessions, which is four years as I recall it, has all been CSO.

John Rowan – Sidoti & Company

Okay. Okay. Thank you.

Operator

And we show no further questions.

Joe Rotunda

Okay, Jamie. Thank you very much and appreciate everyone's time and interest today on the call. Thank you.

Operator

Thank you. Ladies and gentlemen this concludes the first quarter 2009 earnings conference. Thank you for participating. You may all disconnect.

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