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Executives

Joe Rotunda - President & Chief Executive Officer

Dan Tonissen - Senior Vice President & Chief Financial Officer

Analysts

David Burtzlaff - Stephens, Inc

Jordan Hymowitz - Philadelphia

Chuck Ruff - Insight Investments

Henry Coffey Ferris - Baker Watts

Elizabeth Pierce - Roth Capital Partners LLC

John Rowan - Sidoti & Company

Ted Hillenmeyer - Northstar Partners

Dan Mazur - JMP Asset Managers

EZCORP, Inc. (EZPW) F2Q09 Earnings Call April 23, 2009 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the EZCORP second 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, John. Good afternoon everyone. I would like to thank you all for joining us today for our second quarter fiscal year 2009 earnings call. With me is Dan Tonissen, our Chief Financial Officer. I would like to begin with a high level overview of the quarter’s performance, provide an update on our two recent acquisitions and how they contributed to the quarters results. I will conclude with a brief commentary on each of our business segments with a key remarks on how the economic environments impacting our business.

Dan will follow on and he is going to focus his time on the consolidated results.

Overall, the March quarter was an excellent quarter for the Company. We grew our net income to $18.3 million from $13 million for the second quarter last year. That is an increase of $5.3 million or 41% over last year.

On a diluted earnings per share basis, we grew to $0.37 from $0.30 last year and we additionally exceeded our guidance of $0.36 for the quarter. The percentage growth in earnings per share was 23%. Last time the percentage growth in net income dollars due to the additional shares issue in conjunction with our two recent acquisitions but still a very healthy growth rate particularly in today’s economic climate.

I am also pleased to point out that this quarter represents now 27 consecutive quarters of year-on-year earnings improvements. During this quarter we also had the benefit of two recent acquisitions. The 11 Pawn Plus Stores located in the Las Vegas metro area which closed in November and DAEWOO point Acquisition with 67 stores primarily located in Florida which closed on mid year’s eve.

In the Pawn Plus stores we made a substantial investment in CapEx and just completed a rebranding of the stores to EZPAWN with signage and other identification. We also invested in expansion and fixturing of the showrooms to allow more merchandise to be displayed with better presentation of our retailer inventory in the stores.

Although Pawn portfolios are large, we filled our substantial sales enhancement opportunities in the Pawn Plus stores. In conjunction with the build ups we added on the average 3 additional full time associates per store to better serve our customers.

During the quarter we also relocated one of the acquired stores. A 3,000 square foot facility with over $700,000 in Pawn loans in a downtown area of Las Vegas to 10,000 square foot store in the same neighborhood but right on Las Vegas Boulevard with plenty of parking.

In May, we run a Grand Rio Main Event for the entire market supported with a strong promotional campaign. During the quarter these acquisitions stores contributed approximately $900,000 in store level operating income.

Our Value Pawn represents a business of much greater scale. Our biggest challenge was converting all of these stores to a proprietary operating system and transferring all the loan inventory human resource and accounting information into our servers and database.

This was completed in conjunction with the simulation of full backroom functions into the EZCORP support center which will be completed at the end of this month.

We will continue to operate under the Value Pawn brand. I believe that Value is the most recognized pawn brand in Florida and has developed the excellent customer win early. These stores have been led past eight years by our veteran pawn operator who has been instrumental in building the business in the Value organization. This operation’s team continues to be supported with an experienced group of human resource professionals that are responsible for recruitment and training.

During this quarter, Value Pawn generated approximately $5.3 million in store level operating income. This is particularly strong considering the current economic environment as well as the distractions that have caused when you install a whole new POS system that changes the way every single store transactions handle as well as going through the transition of their administrative support functions from Orlando to Austin, Texas.

I could not be more pleased with the attitude, commitment, dedication, and professionalism of both the Value Pawn and the Pawn Plus teams. I would be remiss if I did not acknowledge the additional effort of over 100 EZPAWN and EZCORP associates who took on additional responsibility to assist with this integration in a very short period of time.

Together Pawn Plus and Value Pawn contributed approximately $0.02 per share net accretion in this quarter. We expect this will increase in future quarters as we complete the consolidation of administrative functions and realize other synergies and combination scale.

With these acquisitions we added approximately 78 additional store managers and more than 20 multi unit managers to the EZCORP team. I think it is noteworthy to point out that during these three to four month assimilation process that we have been through we have lost only 3 management associates and if you explode this to a run rate, a turnover that is barely 10% annually for the management team.

Now, for a look at the results by segment and I will begin with US Pawn. In our domestic pawn operations including the contributions from the acquisition stores, the store level operating income improved to $28.1 million reflecting growth of $6.6 million or 31% over last year. If you adjust the growth by the 6.2 million contributed by the acquisitions businesses within the quarter, our net same store improvement in US Pawn over the last year was $400,000 or 2%.

Loan activity continued strong in the quarter in the same store basis. It drove a $2.7 million or 13% increase and that is in the same store increase in same store pawn service charge revenues for the quarter. Our same store portfolio pawn loans averaged an 8% increase for the quarter and that is significant and that was coupled with continued improvement in our loan redemption rate which signifies a healthy loan portfolio growth.

Retailer store sales, the second of the three major pawn components were negatively impacted during this quarter resulting in a 2% same store sales decrease for the period.

Our general merchandise sales remained relatively brisk; in fact they were up 5% for the quarter over last year.

Our jewelry sales were down approximately 9% to last year. I think you will find that the jewelry parallels most mainstream retailers, even discounters, because of the discretionary nature of jewelry purchases in today’s environment. Our margins on retail sales were 38% compared to 39% for the prior period quarter.

The gross profit generated from gold scrapping activities, the third component of pawn net revenues, although we scrapped more gram weight than a year ago, we did not have the benefit of a rising gold market as we did last year. Our same store scrap gross product was down $1.7 million or 24% for the quarter and scrapping margins decreased to 31% from 43% in the prior year quarter.

Dan will provide more information and in depth commentary including our forward gold loss in a few moments.

All in all it was another strong quarter in pawn lending activities and a solid contribution from our 2 recent acquisitions but less than robust results in the sales and movement of the scrapped forfeited collateral.

Now, for a look at our EZMONEY signature loan segment, in our EZMONEY operations store level operating income improved at $11.2 million for the quarter reflecting strong growth of $2.2 million or 24% over the last year. This improvement was driven by a combination of two factors. The first is growth in fees of 5% over the last year. The second is an excellent improvement in bad debt and in the quarter of 16% of fees compared with 22% last year. These two factors together resulted in additional fee income of $1.5 million and $1.5 million less in bad debt expense for the period, a really nice combination.

Now, there were several obstacles to preclude an even stronger revenue growth. First of all, our portfolio of loans in the Houston market, one of our most matured and largest groups of stores still reflect the lingering impact of Hurricane Ike which occurred in September. Second is the closing of 11 floor EZMONEY stores recent last year which will anniversary in June and third is the macroeconomic impact of rising unemployment which shrinks our overall potential customer base in Payday lending.

With these economic challenges we have continued to place significant emphasis on managing our bad debts. However, we made no alterations to underwriting requirements nor have we reduced the amount of cash we loan to newer existing customers. What we have done is for greater emphasis on process and execution. The intense focus on getting our customers under due date into the stores has led to improve initial default rates. For those accounts that do slip into default, store driven execution cut over a cross section enhancements in central collection center have delivered improved collection results.

We are cautiously optimistic that we can continue to deliver satisfactory results in the management of bad debt even in these economic and demanding environments. Let me shift to new products in the EZMONEY segments. We continue to focus on leveraging our investment in brick and mortar with multi product of offerings to drive growth and also expand our customer base.

Auto title loans and installment loans have been recently entered this. At quarter end we offered title loans in the 139 EZMONEY stores in 3 states, Utah, Missouri, and Texas. This month of April, we begin adding stores in Wisconsin. Although early, we have been pleased with the initial introduction of the product and we will expand auto title loans to additional states through the second half of the year. Incidentally, the important factor to note is that over 80% of the customers who take out this product are new to our stores.

Installment loan product is the second product that we introduced just over a year ago in Texas and it continues to deliver incremental contributions as it continues to evolve.

Revenues were up 56% this year with 88 EZMONEY stores versus 72 last year. The contribution which is fees less bad debt increased by 53% and bad debt which is absolutely critical to this five month term product was 19% of related fees compared to 17% last year.

We plan to introduce variations of this product in additional space throughout the remainder of this year. From a store expansion perspective, we scaled back our EZMONEY plans for this fiscal year, taking a wait and see position as our legislative process works itself out both at the state and federal level.

We opened eight stores during the quarter and we closed three underperforming stores during the lease review process. We planned to open only two more EZMONEY stores this year in the United States.

Our store expansion focus will now move northerly to Canada. We have been monitoring the positive legislative developments just providence by providence. It is refreshing to see through studies in the payday loan product and very thoughtful standards being established. We plan to enter the Canadian market when final licensing and regulations permit which we anticipate will allow our first store opening as early as September but more likely sometime during the December quarter.

To wrap up this segment, I am going to move on a topic that nobody can accurately predict and that is legislative actions. From a state perspective, there has been activity in the states in which we operate but no movements have anything insignificance. We are cautiously optimistic here that there will be no changes in these year’s state sessions that will impact our economic models.

Activity on the federal level, on the other hand, has picked up. In the House, both Representative Baca and Representative Gutierrez have introduced bills which include rate caps and renewal limitations on payday loans.

Neither of these bills are supported by the industry, yet, neither of them is a prohibition bill and they allow rates of at least $15 per hundred. Both bills demonstrate our movement towards overall acceptance of the payday loan product as a legitimate, buyable, financial alternative for consumers.

I believe this was clearly reflected during the recent hearings of the house financial services subcommittee chaired by Representative Gutierrez. In the Senate, the Durbin bill with a 36% APR cap on all forms of consumer credit would eliminate approximately $42 billion in consumer credit provided by the payday loan industry alone. This is a prohibition bill.

This does not include the credit access provided by many other industries that I believe will be impacted by this bill as well, industries such as pawn and banking among others. However, this piece of legislation does not appear to be gaining any type of support in the Senate.

I will now move further south to our third segment, Empeno Facil. After conversion to US dollars, the store level operating income from our 45 store Empeno Facil, Mexico Pawn operation was relatively unchanged from the prior year at US$800,000. Now, if you exclude the effect of the exchange rate fluctuation, Empeno Facil posted a 34% improvement in store level operating income.

Although the Mexican economy has slowed, we continue to grow as planned and we continue to improve all of our results versus last year. In local currency, all revenue component exceeded plan and reflected collective growth of 64% at the net revenue line over last year with 19 more stores than last year’s 26 at this particular point in time.

With the proportion of new stores and additional drag, the result in operating income still grew by 34% over the last year. During the prior two quarters, we tested upon service charge rate change in Mexico City and we have subsequently raised our monthly rate on general merchandise throughout Mexico except for Guadalajara and the border stores which are already higher.

Moving forward, we will be testing several concepts to explore methods and process to build a greater scale of jewelry in our loan portfolios. In Mexico, we began with a small foothold conducted a lot of consumer research. We have now modified and tweaked the concept or now much better prepare to accelerate growth.

We continue to be pleased with our Pawn operation in Mexico and we believe we will be able to open a total of 30 to 35 new locations by year end including the seven which have already been added thus far.

Mexico is clearly demonstrated that our market segment, one that is frequently in need of cash, exists throughout the world. It has been amplified by Albemarle & Bond and it gives us confidence in pursuing the Canadian opportunity I pointed out with EZMONEY.

Before I turn it over to Dan, I have a brief comment on Albemarle & Bond. A&B contributed approximately $1.4 million to the quarter’s pretax income. This compares the $1.1 million in the prior year quarter. Similar to our Mexican results, exchange rate fluctuates somewhat muted the improvements in our earnings from A&B but we expect to continue strong contribution from them as we move forward.

With that I will now turn the call over to Dan for a more in-dept look at financials.

Dan Tonissen

Thanks, Joe. Now, I will give you a little more detail focusing on our consolidated results starting with the consolidated statement of operations for the quarter which you can find on Page 3 of our earnings announcement.

On line, you see that our total revenues for the quarter increased 37.5% to $156.3 million. With this quarter, EZCORP’s trailing 12-month total revenues has $0.5 billion for the first time. Total revenues include revenues from the Value Pawn and Pawn Plus stores of $31.7 million and $5 million.

Same store revenues for the quarter were approximately 3.5% overall with our US Pawn operation of 4% and our Empeno Facil and EZMONEY operations up 2%. On a constant currency basis, Empeno Facil has 34% same store revenue growth.

Merchandise sales line 2 increase 36.7% to $61.1 million. Same store merchandise sales were down 2% for the quarter. With margins down one percentage point on the prior year period, merchandise gross profit line 2 minus line 10 increased 31% to $22.9 million.

Scrap gross profit line 3 less line 11 increased 36% to approximately $9.7 million. The impact of significantly greater volume was partially offset by lower gold values and higher costs. During the quarter, we scrapped about $2.2 million grams gold jewelry compared to $1.3 million grams in the prior year quarter.

Proceeds per gram decreased 2% to $12.79. The 2% decrease in proceeds per gram is in line with what happened in the gold market this quarter compared to the same quarter a year ago. Our cost per gram increased 13%, $8.29 primarily due to increases in gold loan values and what we paid to purchase gold.

We did not liquidate any diamonds and either the current quarter or last year’s quarter. These are typically included in the scrap of proceeds. We continue to forward contract our gold scrapping and currently have approximately 60% of our estimated June quarter quantities and 50% of our September quarter quantities locked at $890 an ounce and $923 per ounce. In our guidance, we have assumed the gold price of $875 per ounce for the uncovered portion of the June and September quarters.

For the quarter, we turned our inventory 3.8 times, a slight improvement over the prior year quarter. Same store inventory levels per ending store increased $222,000 at the end of March versus $112,000 a year ago.

The actual ending inventory per store and you will see on line 36 of Page 5 to the March 2009 period excludes the inventories from our two acquisitions. Returning to Page 3, you see that pawn service charge revenue line 4 increased approximately $11.7 million or 53.8% to $33.5 million. This is up roughly 12% on a same store basis.

Annualized yields on our pawn loan balance were 160% in the quarter compared to 149% from the prior year quarter. The improvement in this yield is largely due to the addition of higher yielding pawn portfolio in the acquired Value Pawn stores.

Our ending pawn loan balance was up 40% for the prior year, 4% on a same store basis. For the quarter, our signature loan contribution line 5 less line 14 improved 13% to $26.5 million. The benefit of a 5% increase in signature loan fee revenue was compounded by a 21% decrease in signature loan bad debt. Signature loan bad debt expense measured as a percentage signature loan fee revenues decreased to 16% from 22% from the prior year quarter.

Now, looking at bad debt levels relative for loans originated in the quarter, our net default in principals percent of loans originated came in at 3.8% compared to 4.2% for the prior year quarter. Loan originations for the quarter were down 2% to $150.9 million.

In the quarter, auto title loans contributed $373,000 in net revenue and that is line 6 less line 15. Bad debt on title loans measures as a percent of fee revenue was approximately 10%. After higher levels of operations expense which you see on line 19, administrative expense on line 20, and depreciation and amortization line 21 and this is being offset by a gain on disposal of assets versus a loss in the prior year period and you see that on line 22. Operating income increased 40% to $27.7 million.

Value Pawn and Pawn Plus contributed $4 million and $900,000 at overall operating income. Increases in operations, administrative expense, and depreciation and amortization are primarily due to the acquisitions and new store openings.

The gain on disposal of assets for the quarter is due to the property insurance recoveries that we realized on properties damaged by the Hurricane Ike. Operating income margins as a percent in net revenues were up one percentage point to 29%. Lower operating margins in the acquired Value Pawn stores adversely impacted at the overall operating margins by approximately two percentage points but we were still one percentage point above the prior year quarter.

After higher levels of equity interest in the income of Albemarle & Bond, higher net interest expense of 36.1% tax provision net income increased 41% to $18.3 million or $0.37 per share. The Value Pawn and Pawn Plus acquisitions contributed approximately $2.3 million and $500,000 to net income in the quarter.

The $49.3 million weighted average shares for the quarter seen on line 35 includes the $1.1 million shares issue in the Pawn Plus acquisition and a $4.1 million shares issue in the Value Pawn acquisition. The two acquisitions after consuming the impact of additional shares issue were accretive to earnings by just over $0.02 per share for the quarter.

Now, few comments on the balance sheet which you can see on Page 5 of the earnings announcement. You see that we have approximately $55.2 million of cash line 3 on our balance sheet at $40 million of debt in some of lines 24 and 30 of the cash balance approximately $49.3 million would be non-operating cash. You can see that our payday loan balance line 5 grew 21% from the last 12 months to $6.4 million that concluded in our payday loan balance to $17.4 million of short term loans, $500,000 of installment loans and $78,000 of auto title loans, brokered with unaffiliated lenders.

The brokered loan balance at the end of the quarter decreased 1% from the prior year due to our withdrawal from the Florida market where we brokered loans and lower levels of demand at our Texas stores, the only remaining market where we brokered loans.

Our investment in Albemarle & Bond is carried on our March balance sheet at $34.7 million and you can see this on line 16, assuming 183 pounds market price on their stock and an exchange rate of $1.47 per pound or $16.3 million shares we have a market value just under $44 million.

During the quarter, Albemarle & Bond recorded strong results for their six-month period ended December. They reported 25% increase and net income to $4.4 million pounds or $0.08 per share, our total revenues of $26.5 million pounds. As of the end of December, they operated 114 branches and were the largest operator of pawnshops in the UK.

Finally, you see on lines 39 and 40 that we entered the quarter with 416 pawn locations including 45 Mexico locations and 482 signature loan locations, six of which were managed by our EZPAWN operation.

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

Joe Rotunda

Thanks Dan. We have had a number of questions concerning the status of the EZCORP shares which were issued in conjunction with the value acquisition. As most of you are aware, we agreed to pay contending consideration to form our Value Pawn shareholders depending on the price on which they sold their EZCORP stock that they received in conjunction with that acquisition.

We issued approximately $4.1 million shares. Through this morning, we have received and processed claims for contingency payments of $3.3 million shares for a total of just under $9.7 million. Approximately $750,000 shares remained allegeable for these payments. However, those shares must be sold by May 5th that is in less than two weeks from today in order to qualify for any payment.

I will conclude our prepared remarks with an update on earnings guidance for 2009. This year, we are in an economic environment that is created a lot of uncertainties and has changed the behavior of virtually all consumers with regard to how they set the priorities and how they spend their money.

We also have a lot of noise in last year’s numbers with stimulus checks, a significant benefited we received with foreign tax credit adjustments and Hurricane Ike which hit us in Houston. All this makes our forecasting a little more difficult.

With that said, we are still bullish on the business. Although the macroeconomic environment has had an impact we are well insulated I believe from it. We plan to continue our strong growth and our track record of compounded earnings improvements to maintain in the strong balance sheet.

Here is our guidance and this incorporates the benefit across the Value Pawn and Pawn Plus acquisitions. For the full year, we expect to be in the range of $1.50 to $1.52 compared the last year’s actual $1.21. That represents an increase in the range of 24% to 26% for the full year.

We expect to our June quarter to be approximately $0.34. That represents in the increase of 36% over last year. Quick math will provide then the September quarter guidance will to be in the range of $0.46 to $0.48. That is an increase of 24% to 30% over last year.

So, with that, I will go back to Dan for the safe harbor and we will conclude with questions.

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 the acquisitions, and expected future earnings.

These statements are based on our current expectations. Actual results for these future periods may materially differ from our current expectations due to a number of 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 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.

John, we will now open the conference call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Burtzlaff - Stephens, Inc.

David Burtzlaff - Stephens, Inc

Great quarter here. I have got a few questions. First, on the loss rate, are you seeing any change in your new customers that may bring that loss rate down?

Dan Tonissen

I do not believe that there has been any impact from that. In fact, when you think about it David, our initial defaults were down significantly the last year and typically that is not something you see with new customers and I said in my remarks earlier most of that is from the focus that we have in the store of working with the customer courtesy calls on very working to get demand on a few days.

David Burtzlaff - Stephens, Inc

Okay. And then, with respect to the Pawn loan balances, did you see those declines later in the quarter than when they normally would and as a result under the bottom happens later in the quarter and has it recovered all the way at quarter end?

Dan Tonissen

Typically, the loan balances due decline faster. As you, near the end of the quarter because of the tax reflects.

Joe Rotunda

Yes, but if you look at the seasonal pattern during the quarter David, and I think that is your question. I would not say there was a significant change from what we have seen in the past years.

David Burtzlaff - Stephens, Inc

Okay. And then did you say you have title loans on the 138 stores now?

Joe Rotunda

A hundred and thirty six.

David Burtzlaff - Stephens, Inc

So, that is all. I mean, you ramped that up a lot faster than what you had indicated before because I thought on the last call, you said you have about 100 stores by year-end.

Joe Rotunda

That is correct. We were pleased with the roll up. We have it fairly well-systemized as well. There is very little for the associate to do and the system is able and with limited information being put in to be able to obtain a low value based on the value of the car as well as the income of the customer.

David Burtzlaff - Stephens, Inc

Okay. Then, last question: on the guidance of the $1.50 to $1.52 does that include the two said charge in the first quarter for the stock option grant?

Dan Tonissen

It has a net of that.

David Burtzlaff - Stephens, Inc

Okay. So, the X side is still $1.52 or $1.54?

Dan Tonissen

You would be correct. Yes.

David Burtzlaff - Stephens, Inc

Okay. Thank you very much.

Dan Tonissen

You are welcome.

Operator

Your next question comes from the line of Jordan Hymowitz - Philadelphia.

Jordan Hymowitz – Philadelphia

Just two quick questions. The title that is obviously you waved off during the quarter, did you say approximately how much is the title loan fees during the month of March or even better? Give some kind of guidance as to in your third quarter or fourth quarter this year; what type of title loan fee you are hoping to achieve? Basically, any sort of guidance you could give on a title business I am trying to get at.

Joe Rotunda

We have a very little actually in the March quarter, Jordan, but just to give you an idea, we anticipated what we are seeing is about $600 average loan value and we are looking for a ramp-up because that loan is store over at period of 3 or 4 or 5 months. We launch further. Or, week per store… over that period.

Jordan Hymowitz – Philadelphia

Will people know about our stores?

Joe Rotunda

We are going to continue to roll it out through the balance of the year. We just moved on to Wisconsin and we are looking to add some additional states as well. We will give you some additional information on the next call after we build it out a little bit more. Even though we have had it in Utah and Missouri for a few months now, we have really seen quite a difference in the take-off in Texas. I think much of it relates to the type of competitive environment in those states and a different level of demand.

Jordan Hymowitz – Philadelphia

The second question is – The payday business is obviously slowing and may have regulatory issues but everything else seems to be moving along quite well. If you are sitting here two or three years from now, what percent of business do you think would be from non-payday? In other words, Pawn Plus, Mexico, plus Canada, plus-- anything but US payday basically which is about 75% of total income now, what do you think the number would trend towards?

Joe Rotunda

It depends on the rate of growth outside of the United States including Pawn in the United States. I think it would be fair to say that you are going to see that proportion to the total, decline, continue to decline and the faster we move in Canada and the faster we move in Mexico, and that is why we are able to do more pawn acquisitions in the United States. All that is going to contribute to a rapid decline in the penetration to the total but payday lending but I am confident that as we are able to continue to do business in the states that we are in, that we will be able to grow significantly, organically, and with new products, the payday loan business in the United States. Even in this past quarter, as we look at our business in payday lending, we had same-store, albeit small about 2%. Same store growth rate in payday lending even with the challenges that exist today.

Jordan Hymowitz – Philadelphia

Final question, would you care to discuss the pawn inventory as it start year and over the same thing, the cash mark as disclosed this morning.

Joe Rotunda

We have not done that in the past. It is something that we have talked about and we will consider it. We have been considering it. We will, for the future.

Operator

Your next questions comes from Chuck Ruff, please go ahead.

Chuck Ruff – Insight Investments

Well, could you talk more about the outlook for the two house bills? Would it our understanding that it is very difficult to know exactly where it is going. Can you give us your kind of best guess on how you think those are going to progress?

Joe Rotunda

The bills have to go through the process and I think they are still early on in that process. The only bill that is held hearing has been the Gutierrez bill and I thought that the hearings were very constant with the testimony and the comments from the legislators during those sessions. Typically, what I believe in these two bills, there are some similarities, and a number of differences between the two of them and I would think that as this goes forward that will be at neither the process where they go along parallel paths and at some point, the two bills are going to have to come together before they, I would think, before they are put onto the floor for any type of debate and vote before the house. Once it goes through that process, then it has to go to the Senate. Any other similar bills that are there will have to be considered, I would think, in conjunction with them. I believe this will move forward, as this moves forward, there will be some modifications and some compromises that would be done before they have reach the house floor but it is impossible to predict.

Chuck Ruff – Insight Investments

All right. I think, we are talking with your industry lobbyist, et cetera, do you have any feel for how much support there is out there for either both bills.

Joe Rotunda

The house bills?

Chuck Ruff – Insight Investments

Yes.

Joe Rotunda

Just the house?

Chuck Ruff – Insight Investments

Yes.

Joe Rotunda

The industry does not support…

Chuck Ruff – Insight Investments

I know that. I am asking support within Congress. I was not sure there.

Joe Rotunda

To my knowledge, there has been no poll that has taken place to determine that.

Chuck Ruff – Insight Investments

Your lobbyist, et cetera are not giving you any feel for that?

Joe Rotunda

No.

Chuck Ruff – Insight Investments

Okay. On a different subject, can you talk a little bit about the potential for share buy backs? I have to see if you got a wonderful balance sheet but yet a very high cost of capital right now. To me it would make sense to buy back a little stock but you are not doing it so can you talk about that?

Joe Rotunda

We talked about this a number of times over the past years and the thing that we are really focused on is being able to build on our earning assets and invest in our earning assets that will provide a revenue stream and the stream of revenue that allows us to some chance to grow our earnings are we move forward. If you looked at where we worked 2 years ago, less than two years ago, we have increased our earning assets probably by 25% and introduced earning assets available to generate some type of substantial yield for us. Our intention, as long as we have the opportunity to be able to look at expanding and growing earning assets, we would rather invest in that than share buybacks, although we do not talk about it as the subject of discussion with the board, I am not saying it is not going to happen.

Chuck Ruff – Insight Investments

Yes. It seems that you guys have made a lot of acquisitions over the years. Obviously, any acquisition you make is, by definition, you are not going to know those companies as well as you know EZ. On a risk-adjusted basis, can you mention making an acquisition that is cheaper than the company you are on?

Joe Rotunda

I think what you have to look at is what you can do with the assets that you purchase. If you are able to enhance them and add any kind of value to them, you can turn it around overtime; they are going to provide us much greater return.

Chuck Ruff – Insight Investments

Yes. Okay. Just like you have gotten credit for the growth we have seen which shareholders are going to be happy with the earnings record a bit but I feel like we do not get any credit for it. I do not know if you feel the same way.

Joe Rotunda

I think there has been some over hang from several different issues. I am not sure it is share buyback that has cost any [deposit]. We have demonstrated our ability to continue to grow our earnings. Now, year after year, we have maintained a sound balance sheet and I believe that as long as we are able to continue to do that, that our share price would naturally catch up to it. Every time, and we have had a good momentum in building our share price and frequently, there has been some type of interruption to it whether it is an analyst report that maybe somewhat off base that has happened a couple of times or concerns for the regulatory environment. How that might impact us and how it is pointed towards us or something of that nature. It will always bounce back and I believe over time we will continue to run a significant to grow significantly our share price.

Chuck Ruff – Insight Investments

Okay. I will give someone else a chance. Thanks.

Operator

Your next question comes from the line of Henry Coffey Ferris – Baker Watts.

Henry Coffey Ferris – Baker Watts

Could you go over those cash balance numbers for me; they caught my attention. You said you have how much in on instead of when you call it non-operating cash, I am assuming you mean by accessible cash.

Dan Tonissen

It is just over $49 million of non-operating cash.

Henry Coffey Ferris – Baker Watts

That means that it is cash sitting here that you could deploy outside?

Dan Tonissen

That is correct.

Henry Coffey Ferris – Baker Watts

What other restrictions to just paying off your debt or instead of waiting for the whole value deal to sort of self out?

Dan Tonissen

The $40 million of debt we have on our balance sheet is part of our term facility. We could repay that if we chose to. It is our choice to this in time to actually keep the cash as additional capital to grow the business.

Henry Coffey Ferris – Baker Watts

What is the borrowing cost on the term debt right now?

Dan Tonissen

It is going to be about 250 over LIBOR so you are probably talking at about 3.5% or 4%.

Henry Coffey Ferris – Baker Watts

Yeah. That is a relatively cheap considering. And, that is not a line of credit. It is a term debt facility. So, if you pay it, it is gone.

Dan Tonissen

That is correct.

Henry Coffey Ferris – Baker Watts

If you kind of look forward for the rest of the year, what is your outlook on United States’ retail sales? You said, what, down 2% on the same store sale’s basis.

Joe Rotunda

We work every quarter. Our general merchandise sales were up but our sales decline was in jewelry and as we move forward, if that continues, if we loan appropriately on the jewelry, we should be able to convert the forfeit on the collateral into more revenues from scrapping.

Henry Coffey Ferris – Baker Watts

Are you adjusting for that or…?

Joe Rotunda

We are not optimistic about sales. Yes, we are adjusting. We are not optimistic about the sales growth in the balance this year considering the fact we had stimulus checks out there in the third quarter last year, they gave our sales performance a year ago in pretty strong and a pretty nice lift that will be somewhat difficult to replicate this year. So, we are taking that back into consideration.

Henry Coffey Ferris – Baker Watts

Well, I agree with the previous caller—the market does not get it but congratulations on a great quarter.

Joe Rotunda

Thanks, Henry.

Operator

Your next question comes from Liz Pierce please go ahead.

Elizabeth Pierce - Roth Capital Partners LLC

Thanks. It is a nice quarter. I am going to ask the inventory question just a bit differently. How comfortable do you feel with the aged inventory and the quality inventory?

Dan Tonissen

It looks like, I am glad you asked that because I think to Jordan’s question about the aging. I think, if you look at our inventory turnover at 3.8 times in the quarter, I think that is one of the better inventory turnovers in the industry. The margin that we are getting is at least comparable or better than some of our peers. If you look at the evaluation allowance that we have on the inventory, I believe, there is a percentage of the growth inventory; it is well above our peers. So, I guess, we have not disclosed the inventory aging in the past but I think that from the inventory valuation standpoint evidenced by that valuation allowance is just a percentage of the growth inventory; we tend to be very conservative.

Joe Rotunda

Also, if you would look at our inventory on a first store basis, same store basis at a year ago, change in our inventory is not somewhere going to change in our portfolio on loans as well. Then, we are going to indicate a pretty healthy relationship.

Elizabeth Pierce - Roth Capital Partners LLC

So that was the other thing. I was going to ask—you said your retail, they all grow up at 2% count?

Joe Rotunda

Now, we were down by 2% in retail sales.

Elizabeth Pierce - Roth Capital Partners LLC

Obviously, one of the metrics we look at retail is comp inventory per store. So, you are saying comp inventory per store was down 2%?

Joe Rotunda

No. No. I am not comparing the inventory to sales, comparing the inventory to the growth in the portfolio—our pawn portfolio.

Dan Tonissen

That is where we went from $112,000 in inventory per store last year to $122,000 this year. That is pretty much in line with the growth that we are seeing in our pawn portfolio.

Joe Rotunda

Also as I said earlier, our strength in sales was in general merchandise.

Elizabeth Pierce - Roth Capital Partners LLC

So, we can say enjoy.

Joe Rotunda

That is correct, and typically when you have any type of inventory problem with aging, it does not exist in jewelry it exists in general merchandise. We were flushing that.

Elizabeth Pierce - Roth Capital Partners LLC

Right, so I presume you are scrapping it.

Joe Rotunda

No, general merchandise, I said. We are flushing after the sales.

Elizabeth Pierce - Roth Capital Partners LLC

Right. Do you scrapping, could there may be scrapping the jewelry?

Joe Rotunda

That is correct. Our scrap weight was up this year over the last year.

Elizabeth Pierce - Roth Capital Partners LLC

Right, right. Okay. And then I presume Joe when you said you have, what is that you received in process. That means you have paid that money out?

Joe Rotunda

I am not sure what you mean.

Dan Tonissen

You are talking about the value…I am sorry.

Elizabeth Pierce - Roth Capital Partners LLC

Yes, I said it but yes under the value financial contingency payment.

Dan Tonissen

[Inaudible]

Elizabeth Pierce - Roth Capital Partners LLC

Okay. And then just the nine, I remember correctly that for anybody that does it now, is not that much, right, $0.30 is it?

Dan Tonissen

No. That would be a favor in the premium payments of the…

Elizabeth Pierce - Roth Capital Partners LLC

Oh, yes, there the deficiency guarantee still exists; right, less than 1467?

Dan Tonissen

That is right. The difference is [1467] in the marketplace to sell.

Elizabeth Pierce - Roth Capital Partners LLC

Right, okay. So, you could still have a better payment to be made?

Dan Tonissen

On about $750,000 shares to remain, that is correct.

Elizabeth Pierce - Roth Capital Partners LLC

Right. And Dan, when you think about your growth strategy and maybe since you talked about Canada, maybe, can you rank how you feel you are going to deploy the capital between because you mentioned domestic acquisition some time. You have mentioned Canada that you are going to go in may be I think you said the fourth quarter of second half of calendar 2009 and then obviously already in Mexico. So, just looking at the cash you have on the balance sheet with $49 million of that being non-operating, what do you think you get in your most banks are looking for?

Dan Tonissen

We believe we get in all three of the segments and our intention in the way we run the business is that each of the three are growth segments in amongst themselves and we do not restrict the capital we deploy to any of them other than the return on the way we will get on it. We are quite pleased with Mexico. We will move as fast as we can in Mexico. The challenge there is being able to find the appropriate real estate and we are also interested in many acquisitions that we are able to find to make good economic sense for us in Mexico. We will accelerate as quickly as we can being able to overcome those hurdles in the growth in Mexico and each year or as we move forward end up broader our base gets faster, we will be able to accelerate that growth.

Elizabeth Pierce - Roth Capital Partners LLC

Okay, so…

Joe Rotunda

And using money at stateside with the new products, we believe provide us additional leverage on the investments we have already made in the facilities that we have and the flow through on these new products is phenomenal because relatively little additional investment with the CapEx is already set cost. The labor is there and the occupancy and so forth. So, we are able to flow through considerably those types of products and that is why we have accelerated our expansion because we have seen the consumer response to it. Carrying this phenomena, the way that the various provincial legislators have or regulators have looked at the product and the thoughtfulness of it, the research that they have done, the rates, they replied we want to move there as quickly as we can and what we like to see there is we will take less when we need to get a foothold to establish once we do is to be able over the next several years is to get the kind of growth there that we get in the United States.

Elizabeth Pierce - Roth Capital Partners LLC

And in Canada, are you looking, because some of the operators are operating at levels how much higher than the rates then do you think you will have an opportunity to maybe pick up some locations that there is going to be some vacancy if you will on the space?

Joe Rotunda

Well, we surveyed the real estate market and it appears that first of all, there is good sighting available, number one. Number two, I am not sure that anyone who had a site that did not do very well when that would be the type of site that we would have wanted to pick up as they vacate it.

Elizabeth Pierce - Roth Capital Partners LLC

Okay and then just going back to Mexico because you said you found locations and just is it become too crowded all of a sudden with Cash's just moving to the space in terms of finding good location, good acquisition for the right price?

Joe Rotunda

No, the thing you have to understand and Liz, we did travel down there together…

Elizabeth Pierce - Roth Capital Partners LLC

Right.

Joe Rotunda

The spec of the stores that you saw, there are typically 4,000 or 5,000 square feet because our model is general merchandise in Mexico and there is a quite a high demand for that. There are a lot of general merchandise pawn brokers in Mexico so we are looking for a 4,000 to 5,000 square foot facility. We are not competing with other pawn brokers generally. It is typically retailers and others that would use something at that size. Most of the competitors, you mentioned Cash, down there are probably 400 or 500 square feet.

Elizabeth Pierce - Roth Capital Partners LLC

Right, I do not realize that and that does not make sense so it is just a matter of, I guess winning things that demand for 4,000 to 5,000 square feet by general merchandisers.

Joe Rotunda

Right. It is very difficult just finding that size of facility because most of the shops in the commercial or retail areas…

Elizabeth Pierce - Roth Capital Partners LLC

Are smaller, yes.

Joe Rotunda

The difficulty is sometimes we will build the suites or finding a couple whether adjacent to one another or even, a good store in fact has apartments near it and the fact that you may have seen some of the stores there where we have a 1,500 square foot showroom and the backroom storage area used to be apartments.

Elizabeth Pierce - Roth Capital Partners LLC

And then my last question, I mean I like to come also and thanks for the kind of reminder. You said you rebranded the Value Financial stores.

Joe Rotunda

We rebranded the Pawn Plus in Las Vegas stores. It is working with the plan because the Value brand is very well known, very well regarded in Florida. We are going to take advantage of the name that we bought.

Elizabeth Pierce - Roth Capital Partners LLC

That is what I thought. I guess I just misunderstood and had a sudden kind of, what? You did what? That clarifies it.

Operator

Your next question comes from the line of John Rowan - Sidoti & Company.

John Rowan - Sidoti & Company

I missed the beginning of the call so I just have a couple of questions. I am sorry if you are repeating anything but did you guys put any gold scrap hedge for the quarter?

Dan Tonissen

Yes, let me just grab that John. We had locked in 60% of our June quarter quantities and 50% of our September quarter quantities and that is at $890 an ounce and $923 for the June quarter and the September quarter.

John Rowan - Sidoti & Company

The June was 8…what?

Dan Tonissen

June was 60% at $890 and the September quarter 50% at $923.

John Rowan - Sidoti & Company

Okay and just one more question, did you have a supplemental acquisition payment in the quarter for the deficiency agreement?

Dan Tonissen

We did and that is $9.3 million I believe.

Operator

Your next question comes from the line of Ted Hillenmeyer - Northstar Partners.

Ted Hillenmeyer - Northstar Partners

Can you discuss, I agree with some of the other callers in terms that you do not seem to be getting credit for the growth and just go straight to the worst case scenario of if payday goes away, what would that require you guys to do in terms of getting out the leases? I listened to the Gutierrez hearing and that does not sound like it is likely in anyway but you do not seem to be getting credit for it. I am just trying to figure what the floor might be on the stock.

Joe Rotunda

Okay, most of our leases can have a change of low class. If there is a change in the regulatory requirements in the states that we are operating the store, it allows us an option to opt out. One particular state at one time in the past of 45 leases that we looked at, 44 of them had the change of law of that lost. We are pointing out also that the majority of our leases in EZMONEY are three-year leases. There are few five but most of them are three to five years which is a pretty short cycle as well.

Dan Tonissen

And that three to five would be the full term and on average, it might be a year and a half to two and a half years.

Ted Hillenmeyer - Northstar Partners

So, under the opt-out provision, how quickly if the law change?

Dan Tonissen

At lease by lease, generally 30 to 90 days.

Ted Hillenmeyer - Northstar Partners

Which is how long have you been in any way to continue to collect, correct?

Dan Tonissen

Yes.

Joe Rotunda

It changed a lot of curves. Typically, there is some period with advance notice.

Dan Tonissen

Yes, or if it comes back.

Ted Hillenmeyer - Northstar Partners

And then if I look at kind of the other items G&A, depreciation and amortization, how much would have to be absorbed by the Pawn side that is currently been allocated to Payday?

Joe Rotunda

I am not sure if we can quantify that but that was a point down. What you are describing, Ted, although you said having listened to the hearing you do not believe that it is a probability. What you are describing is a doom state type scenario in the industry. If that would occur, we would look at redeploying the resources that we have committed in Payday Lending. We would look at other product lines. We would look at other uses of resources.

Dan Tonissen

We will effectively utilize them obviously to generate profits.

Joe Rotunda

That is correct obviously.

Ted Hillenmeyer - Northstar Partners

I just second the thought of the previous caller in terms of considering a buyback and then is that, I calculated it, it looks like you are kind of getting credit for six times EBITDA for Pawn and zero for payday or pay for just less than five times EBITDA and they are not getting any credit for growth and you guys keep putting up 20% plus type of growth so as you kind of weigh here careful allocation decisions, I would not think you would be able to find too many companies that get you 20% growth which is that was well as your own. Not that I would suggest taking away what you have achieved on the other side but just a portion since you guys are currently have more cash than debt. It just seems like a logical use as you go through your capital allocation checklist.

Dan Tonissen

We hear you.

Joe Rotunda

We appreciate it.

Operator

(Operator's instruction) Your next question comes from the line of Dan Mazur - JMP Asset Managers.

Dan Mazur - JMP Asset Managers

Just a quick follow up on, you say the deficiency attainment was 9.3 in the quarter?

Dan Tonissen

It was 9.7.

Dan Mazur - JMP Asset Managers

It was 9.7 and was in the quarter or year to date.

Dan Tonissen

That is year to date.

Dan Mazur - JMP Asset Managers

So are you still thinking…?

Dan Tonissen

…this is basically down in the quarter because we closed on New Year’s Eve.

Dan Mazur - JMP Asset Managers

Okay, yes. Are you still seeing claims come in or are they still trickling in?

Dan Tonissen

Yes, the remaining shares if we can talk about the things about 700,000, they have until May 5th or they can actually claim after that but the shares would have to be sold before May 5th.

Dan Mazur - JMP Asset Managers

Okay and even though you are probably happy to have value on board but it seems like this is created an overhang, I mean this is the structure you just look to in future acquisitions?

Dan Tonissen

I would say this was very unique and I could not rule it out in the future but are being unique. I would not say it is very often.

Dan Mazur - JMP Asset Managers

Okay and I may have missed this in the call but just given the strength in your balance sheet and the lack of the buyback accounts like there are some pretty interesting opportunities probably for you on the acquisition side, just if you have addressed it already. If you have, I apologize but just what you are looking at in the acquisition standpoint?

Joe Rotunda

Our interest is in any Pawn acquisitions in United States will make good economic sense to us as well as the seller and we are also interested in Mexico as it relates to Pawn and we are also interested in other types of short term financial instruments in Mexico as we explore that market and maybe it would come across as we are looking for Pawn. Those are our primary interests at this point.

Dan Mazur - JMP Asset Managers

Okay and then so Canada would be at an overall growth with that Pawn or Payday?

Joe Rotunda

It is Payday Lending and the model works out so well for a very healthy return on invested capital with rates that are allowed in Canada and we are able to, we found that we can open a 100 stores at here in the United States and from what we have learned in Canada, we can overtime replicate that rate as well. It makes more sense to lease out the stores than to hear an acquisition.

Operator

We have no further questions at this time.

Joe Rotunda

Okay, I would like to thank everybody, all of you, for your time and your interest today and we are going to continue to be bullish on the business and we are going to continue to do the things that we do. So, thank you all very much.

Operator

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

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Source: EZCORP, Inc. F2Q09 (Qtr End 4/23/09) Earnings Call Transcript
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