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EZCORP, Inc. (NASDAQ:EZPW)

F3Q09 Earnings Call Transcript

July 23, 2009 at 4:30 pm ET

Executives

Joe Rotunda - President & Chief Executive Officer

Dan Tonissen - Senior Vice President & Chief Financial Officer

Analysts

David Burtzlaff - Stephens, Inc

John Rowan - Sidoti & Company

Chuck Raff - Insight Investments

Elizabeth Pierce - Roth Capital Partners LLC

Ted Hillenmeyer - Northstar Partners

Operator

Good afternoon, ladies and gentlemen, and welcome to the EZCORP fiscal 2009 third 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, Monica. Good afternoon everyone and thank you for joining us today. With me is our Chief Financial Officer, Dan Tonissen. I am going to begin with an overview of the quarter’s performance, quantify the contribution of our recent acquisitions and include some commentary on each business segment. Dan will follow and provide detail on our consolidated results. We will conclude with an update on the final quarter of the year before providing an opportunity for questions.

Quarter three was a good quarter for EZCORP. With a 16% improvement in diluted earnings per share over last year, it represents our 28 consecutive quarter of year-on-year earnings improvement.

We grew our net income by 33% to $14.4 million. It is noteworthy that this is on top of an exceptional 60% growth in earnings during the same quarter last year when our customers had the benefit stimulus checks.

On a diluted earnings per share basis, we grew to $0.29 from last year’s $0.25. This 16% increase in earnings per share is on top of last year’s 56% increase. Our results this year benefited from the successful integration of two recent acquisitions, the 11 store Pawn Plus brand in the Las Vegas metro area completed November and the 67 store Value Pawn brand which closed on New Year’s eve.

I believe these results clearly demonstrate the value of our strategy to build earning assets including the pursuit of quality pawn acquisitions. These 78 acquired stores were immediately accretive by $0.02 in the March quarter and have continued to gain momentum as they have been assimilated into EZCORP.

In the current quarter, they contributed approximately $0.04 of earnings per share. We are quite pleased with these results and we are looking forward to continued success with these stores.

Now, let us take a look by segment and I will begin with our domestic pawn operations, which are on Page 6 of our release.

On lines 15 and 35 under the column titled US Pawn Operations, you can see that we had $6.4 million increase in our store level operating income. That is 34% growth over the same quarter last year. Included in these results is approximately $6 million in store level operating income contribution from the two acquisitions I just addressed?

With so many moving parts, I am going to direct my comments to the key metrics of our US pawn operation on a same store basis. That is without the benefit of the acquisitions.

Our pawn loan portfolio reflects high quality loans as demonstrated in the portfolios yield which grew to 147% this year. This is a 300-basis point improvement to last year and demonstrates continued improvement in our redemption rates.

From a scale perspective, our pawn loan portfolio ended the quarter up 7% over last year, which was not quite as strong as we had anticipated. We did, however, realized much stronger loan growth in general merchandise loans which increased by 15% over last year. The dampening effect was with jewelry loans which trailed with only 4% growth in the quarter.

In order to accelerate our portfolio growth in the jewelry category, we just recently stepped up our loan values on gold. Jewelry accounts for more than half of our pawn loan portfolio.

Same store merchandise sales for the quarter were down 2% to last year and the sales performance reflects a merchandise category pattern that is similar to the pawn loans. General merchandise sales showed some strength with an increase of 4% in the quarter while jewelry sales decreased by 5% to last year.

Our challenge has been to build our jewelry merchandise sales and what as we believe the most discretionary of any product category that we carry in our stores. What we have done is develop marketing programs to create urgency with the consumer with regard to our jewelry offering.

The first is a well executed Christmas in July program which makes a jewelry purchase easy and affordable. The program provides a discount, low down payment and an extended layaway period. That runs in the month of July. The months of August and September will follow with different promotions focused on the jewelry category.

Our same store sales margins were 39% this year compared to 42% last year and they reflect a more aggressive discounting approach in what I would term a rather difficult sales environment.

Gold scrapping generated $6.6 million in gross profit and that compares to last year’s $7.1 million on a same store basis. Our inventory turned 3.5 times same as a year ago and our same store inventory levels have increased only 3%. This indicates that we have done a good job of selling through our inventory with no indication of a problematic buildup.

Store level operating income is up 2% over last year and operating margins remained constant at a very respectable 43%. This is probably a good place to respond to your request last quarter to disclose our levels of aged inventory.

In general merchandise, which is the most at risk category due to potential obsolescence, 7% of the gross inventory is more than a year old which we classify as aged. In jewelry, which typically has a much slower inventory turnover and retains commodity value, we have 21% as age. If you blend both GM and jewelry together, it results in total aged inventory of 15% of our total gross inventory and that is before the inventory valuation reserve.

Our total gross inventory of $63 million has a $6 million valuation of loans placed against it. I believe you will find this provides adequate coverage for any risk associated with the aged portion of the inventory and is a realistic conservative valuation.

Now, for a look at our second segment, EZMONEY signature loans and I am still on Page 6 of the schedule. Our total revenues grew by 1% to $30.9 million in this quarter. The recent addition of the auto title loan product contributed $600,000 of additional revenues which more than offset the drop in the signature loan revenue.

EZMONEY net revenue is defined as fees after bad debt grew by 1% over the same quarter last year. But now, what we would expect in the normal market, I think the fact that we grew revenues in this segment at all during this period of extraordinary unemployment is quite an accomplishment.

It also demonstrates the importance of new products which provide more loan options to a broader range of consumers. Interestingly, we found that the majority of both auto title and installment loan customers have never been an EZMONEY customer in the past.

At quarter end, 246 of our EZMONEY stores offered auto title loans compared to 139 at the end of the March quarter. It has not been long since the product’s introduction, we are really excited about the early results. The auto title loan balance in EZMONEY has rapidly grown reaching $1.5 million at June end. With bad debt at only 12% of fees, net revenues for the quarter were $526,000.

I believe that this product line represents significant upside as the product ramps as these 246 stores mature. By the end of December, we planned to roll auto title loans to more than 100 additional stores.

Installment loans, a new product that was tested and deployed last year, are now offered an 89 EZMONEY store in the state of Texas, although, this is up only three stores from this time last year, it remains a steady profitable product.

Installment loan net revenue grew 43% to $430,000 in the current quarter. We are nearing the completion now of system software development that will allow us to move the installment loan products here in Texas.

We expect to add installment loans to our EZMONEY stores in four to five additional states during the September quarter. The EZMONEY segment signature loan bad debt for the quarter is 27% of fees as the same level as last year when we had the benefit of the stimulus checks; 27% is the lowest level of bad debt that we have had in this segment’s June quarter since we have been in the payday loan business.

Collectively, our store operating income for the EZMONEY segment was $7.8 million down $500,000 to last year and largely reflective of the drag for the new stores opened this year. We planned to open only one additional EZMONEY store in the US, next later this month and it is the last lease that we have in the pipeline for the United States.

We have since redirected our expansion and development efforts to Canada. We are nearing the completion of several leases in Canada and planned to have stores opened well before the holiday season. Canada is a very attractive market for us with a well studied and pragmatically developed regulatory environment.

Now, let us shift our attention to the Mexican pawn business, Empeno Facil. In US dollars, our net revenues grew 25% over the quarter last year. It is quite an accomplishment considering the headwinds of foreign exchange rates.

Store operating expense grew by 35% for the same period and it was related to 17 new stores that are still in their first year of operation and not yet contributing their full earnings potential. Store operating income grew by 13% over last year in US currency.

Now in the constant currency basis, the results reflect net revenue growth of 60% including the new stores and store operating income growth of 46% also included in the drag of those new stores.

At June ending, we have 47 Empeno Facil stores, nine of which opened in this fiscal year. We planned to open approximately 20 new stores in Mexico during the September quarter of which two have already opened in July.

These two new stores represent a modified concept which incorporates a jewelry only store within a store that will join to our general merchandise Empeno Facil pawnshop. We are excited about the concept and we are anxious to see if the consumer’s excitement is as strong as ours.

We often referred to Albemarle & Bond as our fourth segment. As a reminder, A&B is the largest pawn operator in the United Kingdom, a public company that trades only. Over the years, EZCORP has maintained ownership of just under 30% of their outstanding common stock.

A few weeks ago, we announced that Tom Roberts, EZCORP’s Lead Independent Director and I have been appointed as non-executive directors of A&B. Tom has been a member of our EZCORP Board since January of 2005 and has extensive experience including positions as a Chief Financial Officer and as President of worldwide electronics for Schlumberger.

We are both excited about joining their Board and having the opportunity to represent all of their shareholders. Over the years, A&B has done a nice job of consistently growing the scale and profitability of their business.

We believe with our business experience and knowledge of the pawn and signature loan industry that we can make significant contributions to enhance A&B’s performance as engaged Board Members.

During this quarter, our equity interest in A&B provided us with $850,000 in pretax contribution versus a million dollars last year. On a constant currency basis, our portion of A&B’s earnings increased about 14% in the current quarter.

Dan will discuss the current market valuation during his remarks and that is a pretty good segue to turn the call now over to Dan for a look at to consolidated numbers.

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 will find on Page 3.

Keep in mind that I am reviewing our consolidated results while Joe mainly discussed our segment results.

Consequently, some of the segment metrics he discussed maybe different in similar metrics for our consolidated results.

Starting on line 1, you see that our total revenues for the quarter increased 36.7% to $147.8 million. Total revenues include revenues from the Value Pawn and Pawn Plus stores of $35.1 million.

Same store revenues for the quarter were up approximately 2% overall with our US Pawn operation up 4%, Empeno Facil up 1% and our EZMONEY operations down 1%. On a constant currency basis, Empeno Facil has 29% same store revenue growth.

Merchandise sales on line 2 increased 41.2% to $50.4 million. Same store merchandise sales were down 2%. After a 4 percentage point margin decrease from the prior year period, merchandise gross profit, line 2 minus line 10, increased 29% to $19.4 million.

Scrap gross profit, which you see as line 3 less line 11 increased 53% to approximately $11 million. During the quarter, we scrapped about $2.3 million grams of gold jewelry compared to $1.3 million grams last year.

Compared to the prior year quarter, proceeds per gram decreased 1% to $13.38, while our cost per gram increased 6% to $8.73. Scrap proceeds include approximately $600,000 in liquidated diamonds in both the current quarter and last year’s quarter.

We continue to forward contract our goal scrapping and we currently have approximately 70% of our estimated September quarter quantities locked at $938 per ounce. In our guidance, we have assumed the gold price of $920 per ounce for the uncovered portion of the September quarter.

You see the pawn service charge revenue as line 4 increased approximately $10.2 million or 44.9% to $32.9 million. This is up roughly 7% on a same store basis.

Annualized yields on our pawn loan balance were 151% compared to 144% for the prior year quarter. The increase is largely due to the addition of the higher yielding pawn portfolio in the acquired Value Pawn stores.

For the quarter, our signature loan contribution, line 5 less line 14, declined 2% to $22.2 million driven mostly by lower fee revenues. Signature loan bad debt expense measured as a percent of signature loan fee revenues is 28% compared to 27% for the prior year quarter.

Looking at bad debt levels relative to loans originated in the quarter, our net default at principal came in at 5.2% compared to 5% a year ago. Loan originations for the quarter were down almost 5% to $152.3 million.

In the quarter, auto title loans contributed $926,000 to net revenue, line 6 less line 15. Bad debt on title loans measured as a percent of fee revenues was approximately 10%. 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 $5.2 million to $21.5 million.

Value Pawn and Pawn Plus incrementally contributed approximately $5.3 million to overall operating income. Increases in operations expense and depreciation and amortization are primarily due to the acquisitions and new store openings, higher administrative expenses due to acquisitions and store openings, higher levels of professional fees and the other inflationary increases.

The gain on disposal of assets for the quarter is due primarily to property insurance recoveries on damaged properties. Operating income margins as a percent in net revenues were unchanged to 24%.

Our equity interest in the income of Albemarle & Bond decreased approximately 15% to $850,000. On a constant currency basis, our equity interest in their income increased 14%. After higher net interest expense in a 34.4% tax provision, net income increased 33% to $14.4 million or $0.29 per share. For the September quarter, we expect our effective tax rate to be 35.8%. The Value Pawn and Pawn Plus acquisitions contributed incrementally approximately $3.2 million to net income.

The $49.3 million weighted average shares for the quarter seen on line 35 includes the $1.1 million shares issued in the Pawn Plus acquisition and a $4.1 million shares issued in the Value Pawn acquisition. The two acquisitions, after considering the impact of the additional shares issued, were accretive to earnings by approximately $0.04 per share for the quarter.

Now, a few comments on the balance sheet which you will find on Page 5 of the earnings announcement.

On line 3, you can see that we have approximately $46.5 million of cash on our balance sheet and $37.5 million of debt and you will find that on lines 24 and 30. Of the cash balance approximately $41.2 million is non-operating cash. Our pawn loan balance which you see on line 4 increased 39% in the prior year to $94.6 million at the end of the June period. Our pawn loan balance increased 4% on the same store basis.

Keep in mind that our current balance is matching up against the prior year balance that was depressed due to the 2008 tax rebate checks. During the quarter, our pawn loan balance grew to a slower rate than we would typically expect. During normal years, we would expect our balance to grow approximately 25% between the end of March and the end of June. During the current period, it grew just over 19%.

As you can see that our payday loan balance, line 5, grew 16% in the last 12 months to $7.6 million not included in this balance is $20.3 million of short term loans and $600,000 of installment loans that are appropriated with unaffiliated lenders. These brokered loan balances are down 7% from the prior year.

On line 7, you see that our other title balance has grown to $1.1 million. This amount excludes $1.2 million of auto title loans. Those are appropriated with unaffiliated lenders. So, the total auto title loan balance including this profit loans is $2.3 million.

As of the end of June we offered our auto title loans in 246 EZMONEY stores and 35 EZPAWN locations.

On line 10, you see that our net inventory made up of largely of [Audio break] collateral was $51.7 million. The actual inventory per ending store that you see for the current period on line 36 includes the inventories from our two acquisitions.

Same store inventory levels per ending store increased to $126,000 at the end of June compared to $122,000 a year ago. For the quarter, we turned our inventory 3.6 times compared to 3.4 times in the prior year quarter.

Our investment in Albemarle & Bond is carried on our June balance sheet at $34.8 million and you can see this on line 16, assuming at 212 pence market price for A&B stock and an exchange rate of $1.63 per pound, our 16.3 million shares would have a market value of just over $56 million.

Finally, you see on lines 39 and 40 that we ended the quarter with 417 pawnshop locations including 47 Mexico locations and 480 signature loan locations, six of which were managed by our EZPAWN operation.

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

Joe Rotunda

Thank you, Dan. Before I address the guidance for the balance of the year, I would like to take a minute to provide a few summary remarks.

All in all, even in the difficult current economic environment, we feel these results continue to validate the business strategy we have outlined in the past.

Our domestic pawn operations are exciting. The benefits of three acquisitions during the past two years have added substantially to earnings performance. Each of these three was the largest acquisition that EZCORP ever made in its history at that point in time. We will continue as we move forward to seek good quality pawn acquisitions as part of our strategic platform.

Our US pawn operations had historically demonstrated solid organic growth and we expect this to continue as we move forward. Jewelry slowed down a bit in the current economy but we know what we have to do and we take an appropriate action to stimulate this product line in both loans and in sales.

Next, I would like to emphasize that EZMONEY is still alive and well. We are pursuing two strategic tracts. Number one, the addition of new loan products; this not only brings in more new customers and more business, it also diversifies beyond just payday loans. And number two is Canadian entry, with an under served market and a well defined regulatory environment, this offers us an opportunity to become a major Canadian payday loan provider in a relatively short period of time.

Further south, Empeno Facil was a huge growth opportunity in and out of itself. We are just starting to pick up speed, have made some adjustment in rates, developed an alternative concept that provide us flexibility to move faster and pursued the best of both jewelry and general merchandise pawn. The financials have been there and we now need to accelerate our store builds.

Finally, as to the Albemarle & Bond, I would reiterate that they have done a very nice job over the years. The marketplace has responded well to their concept but they still have, I believe, significant upside potential.

With all that being said, I will now wrap up with our guidance for the fourth quarter. It remains unchanged from our pre-announcement several weeks ago at $0.41 to $0.43 per share compared to $0.37 last year. This will bring our full year guidance to a $1.40 to a $1.42 compared to a $1.21 last year, approximately 16% to 17% over last year.

That concludes our prepared remarks and I will turn you back now to Dan to cover the Safe Harbor then we will open the call up for the questions.

Dan Tonissen

This conference call and earnings announcement contains certain forward-looking statements regarding EZCORP’s expected operating and financial performance for future periods, including but not limited to new store expansion, anticipated benefits of acquisitions, and expected future earnings.

These statements are based on our current expectations. Actual results for future periods may materially differ from these expressed or implied by these forward-looking statements due to a number of uncertainties and other factors, including change of market conditions in the overall economy in the industry, consumer demand for the Company’s services and merchandise, actions of third parties who offer services and products in the Company’s locations, and changes on the regulatory environment.

For discussion of this and other factors affecting the Company’s business and prospects, see the Company’s annual, quarterly and other reports filed with the Securities & Exchange Commission.

Monica, 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

Few questions, in relation to your original expectations and in your original guidance for the third quarter, can you breakout where the shortfalls were on the three revenue launch for your revised guidance?

Dan Tonissen

Yes, primarily in the signature loan fees, the pawn service charges and merchandise sales.

David Burtzlaff - Stephens, Inc

You do not have like; I mean what contributed more to that?

Dan Tonissen

The largest would be the fees on the two loan products.

David Burtzlaff - Stephens, Inc

Okay.

Joe Rotunda

And David, the issue was the ramp up of our portfolios. When we come up with the March season, the income tax, the refund season, the season when the customers are really flushed with cash, the rate of increase in our portfolios in the quarter, we expect it to be sharper because of the impact of the stimulus checks last year that we felt slower down somewhat during that period. But this year, we anticipated a sharper ramp up at a more historic level than last year’s and it did not come in that strong.

David Burtzlaff - Stephens, Inc

Okay, And then the merchandise margins were seen a little weak, is that mainly due to the value?

Joe Rotunda

On the merchandise margin?

David Burtzlaff - Stephens, Inc

Yes, the gross margin.

Joe Rotunda

It is about two point’s difference in cost of goods there that affects it. But the other factor was just on a same store basis, if you look at EZPAWN, we were down about three points in margin than last year. Last year was a higher margin than normal, we were 42% during this quarter a year ago in the EZPAWN and I think the stimulus checks at that point helped us because sales were very strong during the quarter and they seem to come a little bit easier, allowed us to or not have to negotiate at the point of sale to the same degree that we do this year where the market is much more difficult.

David Burtzlaff - Stephens, Inc

Okay.

Joe Rotunda

But even at 39%, it is within about a point of our traditional margin level, which is right up 40%.

David Burtzlaff - Stephens, Inc

Okay. Did loan balances pick up any relative to your expectations after you preannounced it all? I mean did you see any pick up late in June?

Dan Tonissen

Nothing that we would really be material.

Joe Rotunda

The ordinary typically picks up.

Dan Tonissen

It is simply moved forward.

David Burtzlaff - Stephens, Inc

Okay. And then the last question, on the two test stores in Mexico, is that mainly because you do not do a big jewelry business in those stores and since the predominant model down there is jewelry only?

Joe Rotunda

That is correct. In the United States, in our pawnshops, our full line pawnshops, we typically have over 60% of our portfolio in June and in Mexico, it is much less represented in that portfolio in the full line GM stores. And as you know, throughout Mexico the standalone jewelry stores are the most dominant pawn model that is available to consumer. So, basically what we are doing is the same thing we did with Payday Lending when we put them to an adjoined pawnshop and that has given them their own fund position and their own entrants and the ability for the customer to go in and out very quickly.

Operator

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

John Rowan - Sidoti & Company

A quick question, Dan, you are right. Do you have $41.2 million of non-operating cash on your balance sheet?

Dan Tonissen

That is correct, $41.2.

John Rowan - Sidoti & Company

Okay. I am just curious. Why are you guys holding so much cash? It is obviously more than debt that you have. I mean are you comfortable that your evolving credit is available at this point?

Dan Tonissen

We are. The outstanding debt that we have, the $37.5 million is a term debt.

John Rowan - Sidoti & Company

Okay.

Dan Tonissen

We could retire our debt but it just leads to additional dry pattern.

John Rowan - Sidoti & Company

Okay. If I am not mistaken, I heard that question before. There is no kind of pre-payment penalty if you prepay that term debt, right?

Dan Tonissen

Of course not.

John Rowan - Sidoti & Company

Okay. And then just to go over the store openings, did you say 20 pawns in Mexico just in the September quarter?

Dan Tonissen

That is approximately 20, yes. We expect to do, yes.

John Rowan - Sidoti & Company

Okay. Now, is there anything else for you for the fourth quarter or is it just 20 of the current balance to get to where you should be at the end of the year?

Joe Rotunda

Are you referring to Mexico specifically?

John Rowan - Sidoti & Company

No, the entire pawn footprint.

Joe Rotunda

Yes. That is it for pawn. We have one additional store that we will open in EZMONEY. That is because it is a lease that we are obligated to for some period of time or just a point that the property is available now.

We do hope that we are able to get a store to open in Canada but much of that is going to be dependent on how quickly the regulatory environment is finalized and allows that to happen. But if they do not fall into this fiscal year, which ends in September they will be shortly thereafter.

John Rowan - Sidoti & Company

Now, you see in Canada, are you doing any kind of pawn store in Canada or just a payday store?

Joe Rotunda

No, just payday.

John Rowan - Sidoti & Company

Any thought of doing anything on the internet in Canada?

Joe Rotunda

Not to this point, no. They have been tossed but no actions or plans.

Operator

Your next question comes from the line of Chuck Raff - Insight Investments.

Chuck Raff - Insight Investments

Can you talk about your view of how your US pawn business did versus the competition you feel like you fell short a little bit or what is your view?

Joe Rotunda

We have not really had an adequate time to thoroughly review it. I would point out that on a same store basis, our operating earnings in US pawn without acquisitions improved over last year.

Chuck Raff - Insight Investments

When you talk about increase gold lending guideline, does that mean you are just willing to lend a higher percentage of the estimated value or what exactly does that mean?

Joe Rotunda

It means that we have raised our loan values on gold. That has been done basically as the result of several factors where the spot market is and has been and where we believe it is moving and the locks that we made. It relates also to an increase in some purchasing of gold this year, last year as a result of the concentrated effort that allows us to acquire some portion of that product at a lower cost because typically as we buy it from the consumer we buy it at a lower value than we lend on it. And as we look at where we were and have been and what we are able to sell for, we believe that there is a little bit of room there to allow us to increase these loan values.

Chuck Raff - Insight Investments

Okay. Can you give us…?

Joe Rotunda

There is one other factor and it is very important and that is the redemption rate that we currently have. It indicates that at the levels that we are loaning today, the customer elects to continue to redeem or extend those loans at a higher rate than they have in the past, which also gives us confidence in raising those loan values.

Chuck Raff - Insight Investments

Okay. Can you give us an order of magnitude there when you talk about raising the loan values? You are talking about 10% or some idea of how big of a move that is.

Joe Rotunda

Let us say it would be net single digit improvement. It should plan through the different current compensations.

Chuck Raff - Insight Investments

Okay. And in the payday loan business, are the internet operators taking share from the brick and mortar stores in that industry?

Joe Rotunda

I do not know. If you look at our same store growth, you have to take into account I think, many of the economic factors that exist and the lost of jobs which is a basic requirement to get a payday loan is difficult to separate from many type of competitive element and you almost have to do it by state and I would think anytime there is an additional option for the customer, there is some illusion of your ability to grow but I cannot quantify or can I even tell that is a significant impact.

Chuck Raff - Insight Investments

Okay. In payday loan, some people believe that at least the Texas market has been saturated. Do you have a view on that?

Joe Rotunda

I believe there has been additional competition that has come in to Texas. I believe there is still opportunity in Texas for us to open stores if we chose to continue to expand in the US beyond where we are today in our market that we have not penetrated in Texas.

Chuck Raff - Insight Investments

Okay. I have got more some questions but I will give someone else a chance. I will get back in line.

Operator

(Operators Instructions) Your next question comes from the line Elizabeth Pierce - Roth Capital Partners LLC.

Elizabeth Pierce - Roth Capital Partners LLC

I wonder if we could circle back to the new prototype or new concept you were talking about in Mexico because I thought these stores had jewelry in them already. I was a little bit confused.

Joe Rotunda

They do have jewelry in them today but if you reflect on it most of the stores if you go through the general merchandise showroom floor to the very back and in the back you would typically find one to two in most stores showcases of jewelry and the penetration of jewelry in those stores is very low. The customer places great value however on a general merchandise as well.

So, the general merchandise volume where I think we were quite pleased with but there is an opportunity there. We believe a significant opportunity. We believe to substantially grow our scale of jewelry loans.

Elizabeth Pierce - Roth Capital Partners LLC

Well, that is going to make in at a boutique kind of front center when they first locked in?

Joe Rotunda

Yes as I pointed out also in those stores we are not selling jewelry. We are only loaning on it.

Elizabeth Pierce - Roth Capital Partners LLC

Okay. I got it, alright. And then, have you guys in other term, what is the lead in terms of your store openings in Mexico for next year? Any kind of sense you can give on guidance on what we might think about modeling?

Joe Rotunda

No. Not at this point. On our next conference call will be talking about the store builds for Canada and for Mexico and some other things for our new year. One of the things we found in Mexico is it takes so much longer lead time to be able to bring the leases to fruition and we did not have sufficient scale or number of leases in our pipeline which is extreme, more important in Mexico than anywhere and this year we have quite a few sites that we have already…, the real state committees already approved and leases are being developed on and some of which have been signed for next year. So, we have quite a few more in that pipeline.

Elizabeth Pierce - Roth Capital Partners LLC

Okay. But that would be the real thing to focus on that your pipeline is a lot fuller than it was at this point last year?

Joe Rotunda

That is yes.

Elizabeth Pierce - Roth Capital Partners LLC

Okay. And then in terms of the installment product, so if I understand what you said correctly, you got new software that will enable you to roll this out. What is state, sorry if you do not mind talk about, what state maybe how can tell us how you determine those states?

Joe Rotunda

Well, I would rather not disclose the states now, after we roll them out, I would, because in each of those states we need to be compliant with the individual state regulations and the software that we have developed and it took quite a period of time to get it done for Texas works well in Texas. As we go into these other four, five states, that software had to be modified to allow us to be compliant with the various financial regulations in those states and that has been the delay in getting that done and there are some real upside in these other states with the installment loan. I think even more or so than the State of Texas, not talk about that also as we talk about our next year.

Elizabeth Pierce - Roth Capital Partners LLC

Could this be something that can go in every state or there is some states have a barrier to this, that you would…?

Joe Rotunda

Yes. The financial regulations in some states are such that we have no interest in going in. Of the 11 states that we have our payday lending in today, there are five of them that we have identified, six in total that we have identified that we feel we can do installment loans profitably with an adequate return.

Elizabeth Pierce - Roth Capital Partners LLC

How are the stores in Houston it has not been quite a year yet, I mean how are they coming back into close to where they were? Are they 50%?

Joe Rotunda

They are beyond 50% but collectively the group of stores has not grown to the same rate above where it had been as we would have expected. That is in payday lending. In pawn, much of that has come back now, although we still, at the beginning of the quarter we still had two pawnshops that were still closed. They have not reopened and during the quarter we reopened one of them. One of them is still closed from where we were a year ago in September.

Elizabeth Pierce - Roth Capital Partners LLC

But now, that is down to one store that is unopened?

Joe Rotunda

One pawnshop.

Elizabeth Pierce - Roth Capital Partners LLC

Okay. And then, curious on, you talked about, I mean obviously you gave us your comments on gold for the fourth quarter. Any thoughts about what you are seeing for fiscal 2010 and would you think of changing any of your strategy or forward contracting strategies?

Joe Rotunda

Not currently. When we announced our earnings for the fourth quarter, we will give you our thoughts on our guidance at that point.

Elizabeth Pierce - Roth Capital Partners LLC

Okay. Maybe you guys can get some airtime on the pawn reality stores, like you said going out in Vegas.

Joe Rotunda

Yes. The Christmas in July event.

Operator

(Operators Instructions) You have a follow up question from the line of Chuck Raff - Insight Investments.

Chuck Raff - Insight Investments

I think there was a proposal in Wisconsin on payday loan restructuring the rate. Can you talk about that a little bit and maybe what the status is?

Joe Rotunda

Okay. In Wisconsin, there were two state representatives that I believe have been circulating the bill, talking about the bill with a 36% rate cap. That rate cap would in effect be a prohibition rate for payday lending in the state. That has not been introduced. There has just been I think a discussion, at a discussion level.

There are two other representatives I understand who have a different bill. This basically just a best practices bill, has no rate cap or anything of that nature. Those of the two bills I believe they are circulating were being discussed in Wisconsin. They are on recess now I believe until this fall, September, and there is a state industry association that is very strong. Our line is the Consumer Choice I believe that is part of the Consumer Choice Coalition. It is part of their name. They are, I believe, addressing these bills at this point. That is as far as I know about.

Chuck Raff - Insight Investments

Thanks. Can you talk about the Financial Product Safety Commission that is being proposed in Washington DC? What your opinion is about whether that is going to happen and what kind of impact that would have?

Joe Rotunda

It is almost impossible to predict what is happening in the political arena, I think. An awful lot of controversy around this proposal, the primary function of this, as I understand, is to ensure adequate disclosures and prevent unfair and deceptive type of practices and it goes on with certain levels. One of them is that they cannot do and that is specifically excluded is the ability to establish any type of usury limits.

As far as its potential, I am not sure. I think it was inactive today, there is one paper came out against this. It is a Treasury Department Agency, I believe, but everything I have seen on it just been consumed with controversy from different aspects of the government and I have no idea what is going on.

By the way, this is not directed at payday lending. This is directed at all credit products and payday lending would be included with that, sure. But the banks, I believe have rallied against this as well as many other consumer financial service industry associations.

Chuck Raff - Insight Investments

Okay. Both the payday loan and the auto title loan seem to be targeted by some politicians and consumer advocates. I guess the question is, why expand in an area that is in some peoples’ target?

Joe Rotunda

Well, first of all, when you talk expansion in Canada, Canada is a fully regulated environment. This is going through from the federal government down from province. The provinces are established regulations. They have been really thoughtful. They took a very pragmatic approach. They studied this and they have basically defined regulations. They are very conducive to doing business in Canada.

I would say this is very, very low risk. So, put it back aside, if you are only talking the new products, installment loans and auto title in the United States, it will stop store expansion in the United States. We did that probably six months ago.

Much of the controversy in discussion that you hear about payday lending, as it is defined, does not affect installment loans because they are beyond the 92-day definition of payday lending and auto title loans are, in most in state that were doing the product except for Texas which is CSO, are well defined by the state regulations for that product in the states that we are doing that product.

So, we are operating under state regulations. I think auto title lending is going through this regulatory period of its lifecycle, some years ago as payday lending is doing it today and it is basically being fairly well stabilized. The regulations today provide quite a bit of consumer friendly requirements in holding period, notice period and the like with auto title. But we feel it is a much more regulatory stable product than payday lending. Even in payday lending I would point out to you that there has been in the past considerable talk about the doomsday scenario payday lending and there are several bills that have gotten a lot of attention on a national basis and certainly once the Durbin bill that puts a 36% cap on payday lending was introduced in the senate but the bill lacks co-sponsors and the bill appears to be stalled and I think many people understand the adverse impact that they definitely have. And if you look at the house today in the House of Representatives, there are three bills that have been introduced.

One of them is the Gutierrez Bill that has received an awful lot of crash and today that bill has 35 sponsors and we do not support the bill. But the fact of matter is that the bill establishes 15% rate on payday lending for the payday term, effective two-week term. That is 390% APR annually with that and we feel that is restrictive because there are many states out there that have established rates higher than that. Then there is another bill that enhances it and that is much more conducive to the industry and that is the Baca bill. There is another one, it is the [57.49] bill.

The [57.50] basically would allow rates that are higher than we are charging, I believe in any state that we operate today and that bill has 19 co-sponsors at this point in time and I think it is in Gutierrez and these others I think have demonstrated that there is a recognition of the need for the payday loan product and the issue with the APR and that is what everyone seems to focus on is it gets so many people’s attention but an APR implies that consumers are going to have it for a full year and it is no different than going into a hotel and asking what the room rate is and rather than telling you it is $100 a night, they will tell you it is $35,000 or something like that because that is what it would be if you had that room for an entire year.

There is no difference in quoting rates in that manner and you can apply that for car rentals and many others as well.

Chuck Raff - Insight Investments

I understood. With Gutierrez as you meant to say a $15 cap not a 15% cap, correct?

Joe Rotunda

It is $15 per hundred. That is right, 15% only for the period.

Chuck Raff - Insight Investments

Yes, okay. Can you talk about what you see is the upside in Canada, how big an opportunity is Canada? You are obviously just going to start there or so kind of get a better idea of what you see ahead?

Joe Rotunda

We believe and we talk about numbers at the next call as to our potential there but there are two primary players that have about 400 locations each in Canada. There is a third one that has roughly 100 stores from there and it is down to a very fragmented group of payday lenders in Canada.

We believe that the customer has a high degree of need and demand for the payday loan product as we have studied the market and we believe they have a much greater tendency to repay the loan. The economics were very good as far as numbers of stores I would think that they have probably put easily have twice the stores that they have today. One of the things you need to look is the concentration of population and the concentration of those stores and I think that identifies some additional opportunity for store growth.

Chuck Raff - Insight Investments

Okay. The last thing I want to ask you about is you obviously have a whole lot of things on your plate. You are going to be entering Canada. You are growing very rapidly in Mexico, you just made two acquisitions, and we have got a couple of newer products in installment loans and in title loans. How will you know if you are going to do too much? What are the things you are going to be looking for that will indicate to you that perhaps there are too many irons in the fire?

Joe Rotunda

I think the most important aspect here is what we have done with the organization and we have been much able in our organization over the last several years. If you look at the function ahead of development, we have an individual who came on Board about a year ago who has a tremendous experience heading Blockbuster and enough to 500 stores a year. We brought in a general counsel who was the general counsel with Dell. We have brought in and actually moved through the organization, a very experienced payday lender and put him in charge of our stores and moved to the head of operations for payday lending. We took an individual who ran our payday lending operation and put them in charge of all of our pawn operations in the Americas. He is responsible now for the United States and for Mexico and as we did the Value Pawn acquisition, we picked up significant strength and the management talent there and we have an individual in the organization, despite capable and confident of the pawn and who knows the pawn business well makes a great contribution and can even do more.

So, we have got an organization and I have not gone through them all. There is more. But we have an organization we believe it has a capacity to be able to move our Company forward and do the things we talk about. I think that is far we have been. We have got a pretty good track record of doing the things that we said we were going to do.

Chuck Raff - Insight Investments

I agree with you and those are all reasons why you expect to be able to continue to do that. But I guess what I am asking you is, are there some indicators that you are looking for that will cause you to say we need to pullback here or there because we cannot handle these many challenges?

Joe Rotunda

Well, we have a series of business reviews that we do ourselves. We do each of the segments. In fact we actually go down a level beneath the segments as we look at the performances. We have functional reviews corporately. We have objectives established for the year for each of these types of elements that we have consistent reviews of. We have individuals who are assigned responsibility for each of them. We have frequent reviews and meetings as an executive committee to review our progress and we attempt to stay on top of the business and the key metrics of the business on a very, very consistent basis to say at least monthly. We have these reviews and we have actually functional reviews every two weeks.

Chuck Raff - Insight Investments

Okay.

Joe Rotunda

When you say identify the metrics, each of these elements has its own series of metrics.

Operator

(Operator's instruction) Your next question comes from the line of Ted Hillenmeyer - Northstar Partners.

Ted Hillenmeyer - Northstar Partners

Just following up on last caller's question, do you feel you are in the position to make acquisitions now or the other guy assimilated enough that you feel like you have the bandwidth to do them and if so, in what areas would you be looking at? Is it just pawn or is the Payday in Canada as well?

Joe Rotunda

First of all, the two acquisitions, our two most recent acquisitions we have taken are the stores in the Las Vegas metropolitan area and various stores have been completely rebranded and in those cases, we expanded the showroom of these stores and a couple cases, we expanded the capacity.

We have an experienced group of four model managers that are now responsible for the 15 stores that we have in Nevada and it is just a matter now of building on the base business that we have and Value Pawn there has been one change in the regional director of ops and outside, a very experienced person took that role.

Outside of that, we have the same management team managing the 66 domestic stores from Value Pawn and we are quite pleased with their capacity, their ability to run the business and the head of their operations prior to the acquisition is still the head of operations. Subsequent to the acquisition, he is doing a fine job with the business. So these businesses are stable now and it is just a matter of generating organic growth in both of them.

So, I believe we have the capacity to continue to seek out additional acquisitions to contact and we are interested in pawn domestically. We are interested in at least exploring to see if there is anything that make sense in Mexico and in Canada if we were able to get a small base of operations to use to build on, we would be interested in that as well and that is where our focus in acquisitions will be at least for the near term. It is for the near term.

Ted Hillenmeyer - Northstar Partners

And are there any earn outs with the past acquisitions made you already paid the one payment for the Value Pawn?

Joe Rotunda

Yes, that is actually, over now there is, we have no other obligation. We do have a consulting agreement with the former proprietor of the Pawn Plus locations and he is working with us in that marketplace. That is the only continuing obligation.

Ted Hillenmeyer - Northstar Partners

And how are those two markets doing? Are you able to break out how same store sales? It is really a lot of numbers and I actually see that you provided the same store sales.

Joe Rotunda

No, we did not go to that granular with the businesses. We suffice it to say the contribution we would get through sales to mine sales and their accretion I think was right at $6.1 million in operating contribution in the quarter and accretion is about $0.04 combined.

Ted Hillenmeyer - Northstar Partners

Do you know or were the same stores roughly in line with the rest of the Company or above, below?

Joe Rotunda

The performance; metrics are a little bit different actually between them, between sales and PLO compared to EZPAWN but collectively, the overall performance is pretty close. There is a difference in the Las Vegas acquisition because there is a substantial change in the model, in the disposition of work for the collateral to what they have done before which was quite heavily leveraged on eBay and Jobbers or wholesalers.

Ted Hillenmeyer - Northstar Partners

Can you just give what you have hedged for gold for the rest of the year or however long you have done actually?

Don Tonissen

It is 70% of the September quantities and that is at 938. We are assuming where the other 30%, 920.

Ted Hillenmeyer - Northstar Partners

And anything hedged down in December quarter?

Don Tonissen

Nothing.

Ted Hillenmeyer - Northstar Partners

And the 10-Q would be out when?

Don Tonissen

It should be around the second week of August.

Operator

We have no further questions in queue. Back to you, Mr. Rotunda.

Joe Rotunda

Thank you, Monica and thank you all very much for your time, attention and continued support. We appreciate it.

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. F3Q09 (Qtr End 07/23/09) Earnings Call Transcript
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