Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

EZCORP, Inc. (NASDAQ:EZPW)

F2Q 2014 Earnings Conference Call

April 23, 2014 5:00 PM ET

Executives

Mark Trinske – Vice President of Investor Relations and Communications

Mark E. Kuchenrither – Executive Vice President and Chief Financial Officer

Paul E. Rothamel – President and Chief Executive Officer

Analysts

William R. Armstrong – C.L. King & Associates, Inc.

Bob H. Ramsey – FBR Capital Markets & Co.

Operator

Good afternoon, ladies and gentlemen. And welcome to the EZCORP Second Quarter of Fiscal Year 2014 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Mark Trinske, Vice President of Investor Relations and Communications. Sir, you may begin.

Mark Trinske

Thank you, operator and good afternoon, everyone. I’m Mark Trinske, EZCORP’s Vice President of Investor Relations and Communications. On the call with me today is, Paul Rothamel, our President and Chief Executive Officer; and Mark Kuchenrither, our Executive Vice President and Chief Financial Officer.

Today’s conference call contains certain forward-looking statements regarding the Company’s expected operating and financial performance for future periods. These statements are based on the company’s current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of uncertainties and other factors including fluctuations in gold prices for the desire of our customers to pawn or sell their gold items, changes in the regulatory environment, changes in market conditions in the overall economy, and in the industry and consumer demand for the Company’s services and merchandize.

For a discussion of these and other factors affecting the Company’s business and prospects see the Company’s annual, quarterly and other reports filed with the Securities and Exchange Commission. Also we’ve provided supplemental information on our website. This information gives more detail on the impact of gold and jewelry scrap on earnings per share and a breakdown of our net earning assets by segment. These materials can be found at ezcorp.com in the Investor Relation section of our website.

On today’s call Paul Rothamel, will present his opening comments, Mark Kuchenrither, will talk about a few items on our financial statements and then we will open the call to your questions.

Now, I would like to turn the call over to Paul Rothamel. Paul.

Paul E. Rothamel

Thank you, Mark and good afternoon everyone. I want to take just a few minutes and share with you what we’re seeing in marketplace in our business today. First, we continue to see growing demand for our loan and retail services and we’re seeing across all of our products geographies and channels. We are constantly looking at our own transactional data, third-party data as well as survey in market data.

All of that information continues to point to our customer demographic gaining access to cash more than ever, coupled this with the macro trend of trading credit; you see the growing need for our various products. Our largest businesses in the U.S. today, the consumer is definitely feeling the pressure these converging influences.

On both the loan and retail side of our business, we see the consumer activity growing over the mid and long-term. We see similar trends in the data coming out of Mexico, Canada and U.K. with Mexico and the U.K. being the most disrupted markets today due to shifting competition and regulatory changes.

The second areas is the negative impact of the gold marketplace, obviously we and the industry saw significant negative financial impact beginning in 2013 in the first half of this year. We do expect to see material moderation in the second half, as year-over-year scrap profits and gold driven pawn service charge comparison should improve as we anniversary the gold volume declines.

Coupled that with expected continued strong jewelry retail sales and our largest business U.S. pawn should return to financial growth by the end of the fiscal year. With that business contributing roughly 65% of the company’s segment contribution, it bodes well for the expected consolidated performance.

Lastly, we continue to see increased regulatory activity at the local, state and federal levels. While this activity is generally seen as negative to our business in the short-run it also creates significant challenges for company’s that are unprepared or lack the necessary infrastructure. Those competitors the lack flexible systems, structures and resources to deal with the rapidly changing landscape are disappearing.

At EZCORP, we simply expect to grow our market share with lower yielding, longer-term products that are well received by the consumer. These products will continue to the best cheapest choice for our customers. For us it means a longer cash cycle and lower overall yield than historically seen by our industry, but as it is ancillary to our pawn and retail business we expect solid earnings in cash flow to complement or main business.

I believe that its worth mentioning again that the investments that we have made over the last three years to our systems, structures and processes uniquely position us to capitalize on the changing marketplace. Examples like our storefront lending and retailing system improvements. Our investment in online selling technology and processes and our investment in gold processing from the loan customer for the retail customer or refiner are just a few of the examples.

These advancements are what drive our competitive advantage in the marketplace and we intend to continue to exploit the more and more as times goes on. Specific to our second quarter business we saw continued strength in our U.S. jewelry sales and our online sales. Our jewelry presentation and promotion at the store level delivered strong comps of 25% and strong margins of 43%, while our scrap volumes, the margins were ahead of our expectations as well.

Our online selling business, primarily general merchandise and specifically electronics also had another strong growth quarter, accounting for 8% of our sales volume and growing by 68% versus the same quarter last year. Margins were also very strong at 44% running well ahead of our storefront margins as you would expect.

Overall, our Pawn loan balances were down mid single-digits in the quarter compared to last year. Right now we’ve seen that moderate in the first month of the third quarter by roughly 200 basis points, and as we’ve already said we expect our Pawn loan balances to be flat by year end.

We also saw strong growth in our installment and auto loan products in the U.S. and Mexico, while traditional payday lending continued to decline. Those traditional payday loans now makeup less than 10% of our earning assets as we have focused on Pawn, installment and auto type loans across the diversified business.

And finally, our online lending channel continued to grow with over $7 million for the loan balance in the U.S. and UK. This growth comes as we improve our bad debt lower expenses and improve our lead generation processes with reduced costs as well. With just over five months left in our fiscal year, we remained focused on day-to-day execution of the point of transaction, the customer interaction.

We expect continued choppiness with the markets that we serve continued to show it themselves out. But we expect with our strong balance sheet, strong cash flows and focused execution will continue to be a leading provider of cash to our customers.

And with that I will turn the call over to Mark to talk about a few of the line items on our financial statements. Mark?

Mark E. Kuchenrither

Thank you, Paul. I want to highlight a few line items on our consolidated statement of operations. If you look at the other revenue line that is where the accelerated gain of $5 million is recorded from the Grupo Finmart structured asset sale. The structured financing also resulted in $16 million of cash flow receivable inside the quarter, which was received by the company in April. This is the second of these types of transactions this year. And we will continue to consider this type of transaction in the future to finance our growing business.

Moving down the income statement to administrative expenses the $20 million of expenses were impacted by $8 million due to charges related to the retirement of Sterling Brinkley, our Executive Chairman. This is also broken out for you on the reconciliation of GAAP to non-GAAP results schedules provided.

Further down this statement you will see the line item described as equity and net income of unconsolidated affiliates. This is where the Cash Converters International Limited and Albemarle & Bond earnings combined resulted in a $4 million quarter versus quarter shortfall. Cash Converters International Limited announced their third quarter results yesterday which reflected strong earnings growth when compared to their first half of the year. This will reflected in our next quarter earnings as we record based on in lag methodology.

The next line of the income statement is described as impairment of investments. This is where the write-down of the remaining investment in Albemarle & Bond is reflected. This is also broken out for you in on the reconciliation of GAAP to non-GAAP results schedules provided. Just below that line is other expenses. This includes $400,000 foreign exchange loss from the Albemarle & Bond write-down. This was also broken out for you on the reconciliation of GAAP to non-GAAP results schedules provided.

The other expenses line also includes $900,000 foreign exchange loss and the final Grupo Finmart earn out payment. Now, please turn to the consolidated balance sheet, let me point out a couple items. When you analyzed both the restricted cash and restricted cash non-current line you will notice an approximate $27 million increase year-over-year.

Grupo Finmart has collateral obligations with respect to some of the loans they have outstanding. The collateral can be either in the form of loans or cash, due to the success of the second securitization they had temporarily used cash as collateral in some cases and were replaced with loans over the course of time. There will always be a balance though as some of the loan structures create sinking fund balances to ensure adequate liquidity to make payments.

Finally, the deferred tax asset and deferred tax liability lines were impacted by the Albemarle & Bond write-down. The write-down of Albemarle & Bond creates a cash tax savings of approximately $5 million, which will be taken by fiscal year-end.

And with that we will now take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Bob Ramsey of FBR. Your line is open sir.

Bob H. Ramsey – FBR Capital Markets & Co.

Hey, good afternoon guys.

Mark E. Kuchenrither

Hi, Bob.

Bob H. Ramsey – FBR Capital Markets & Co.

Just I guess follow-up on Albemarle & Bond that you mentioned, you talked about the tax, tax cash savings. Does that effect your GAAP effective tax rate over the remainder of the year, and if so what should we expect, if not sort of what’s been historically.

Mark E. Kuchenrither

No, it does not, it’s a – it’s just a cash pick up on our tax books, but we have expect that our effective tax rate will be around the 31% level for remainder of the year.

Bob H. Ramsey – FBR Capital Markets & Co.

Okay, great. And now that Albemarle & Bond has been written off, does that now become no longer have any impact on your income statement or to the extend that their remain losses until it’s completely unwound, does that still have any impact on you?

Mark E. Kuchenrither

No, there is no impact.

Bob H. Ramsey – FBR Capital Markets & Co.

Okay, great. You also mentioned in the press release some incremental expenses related to the new FCA regulations over in the UK and plan changes in your online lending business over there. I was just wondering if you could give a little more color on what sort of changes you are implementing and how you are thinking about the evolving the U.K. regulatory landscape?

Paul E. Rothamel

Sure, Bob its Paul Rothamel. Also as we said I think we lost roughly $2 million is a second contribution in the first quarter in that business broke even essentially I think we lost just under $100,000 in the second quarter, which is where we’re projecting to be. And the FCA activity technically they took around April 1 from the OFT, but they have been very active for 90 days. I know you guys are well appointed with this from another conversions with competitors and obviously the public releases from the FCA.

For us it kind of comes down to some simple things, we are primarily an online lender, while Cash Converters does have a presence in the UK, and they do lend under the FCA prevalence are number one concern of the Cash Genie business there. We are an online lender, pure play online lender, there are in that space today, that’s probably less than 100, when they was growing to 130 plus online lenders. And the big three which is Wonga, Cash America and dollar frankly owned by some estimates as much as 60% to 70% of the marketplace.

So we are a small player, but large enough to be able to handle, the specification of the FCA changes. So we think, while we don’t have a lot of risk over there today. We think we have a lot of upside as this picture becomes clear, but the picture is going to remain a bit unclear, we believe until as late as December and January, December of this year and January. And the reason is because that’s really the timeframe when all of the players have to get final license and permit to operate.

And so we are going to see a lot of falloff between now and then from the players that have decided, but they just can’t do the work. And then I think the second thing is they also have been asked to review rate caps. And what we understand and what’s been publicly stated is that they are going to look those rate caps in that same timeframe. So I think there is going to be a fair amount of uncertainty between now and then.

There is certainly plenty of demand there. We are seeing that. Our ability to grow loan balance today is not an issue, it’s going to be really about as you go into the timeframes and just describe it’s going to really be about those affordability and requirements that the FCA requires, and then the collection practices on the back end.

So how do I think all that shakes out in the end? I think you are going to have a lot less providers online and at the store front. Those of us that are left for grab larger market share on more yielding products. And I think we are all going to have to move upstream with the customer, meaning that we are all going to be kind of fighting for a higher demographic. Because that’s where your underwriting is going take you. And so the unfortunate thing in that will be that some of the people that need services the most will probably not have access to those services and products.

Bob H. Ramsey – FBR Capital Markets & Co.

Okay, remind me in terms of roll over’s where cash seen here today, are you all at three?

Paul E. Rothamel

Yes, we were at three with the industry best practices. That’s correct.

Bob H. Ramsey – FBR Capital Markets & Co.

And as you sort of think about some of the changes that you are taking to position yourselves for the FCA new rules, is the further construction at two rollovers for continuous authority guidance, or affordability assessments kind of most impacts well for you guys. I think one of your competitors said that affordability assessments actually are potentially a greater – I don’t if challenge is the right word, but a bigger hurdle right now than the new CPA guidance. So I’m just kind of curious where you see the pressure points.

Mark E. Kuchenrither

Yes, I would agree with that. I think the real issue really is and you are talking and touching on it, there is the affordability, there is the number of rollovers, there is the types of collections that you can do and as is the case in any of the jurisdictions we deal with when you put them all together, it’s the impact of all of them together that in the end causes you to do what I said, which is you will end up with a lower yielding product and therefore you move upstream to reduce your bad debt exposure and drive your business, and so one without the other frankly would work much better than the combination of those things.

Bob H. Ramsey – FBR Capital Markets & Co.

Okay, fair enough. I guess last question, I’ll hop out, but Paul I’m curious if you could share any thoughts with us about the announcement from the board that Sterling is retiring and that they are considering additional corporate governance sort of reviews, I cant remember the exact word, and it was on the press release, but how should we think about that announcement from the board?

Paul E. Rothamel

Well obviously the retirement of your executive chairman after 25 years is a significant event in the company’s history, and I think that the board in the press release talked about that that they formed a governance committee, I believe they are exercising great care, I think they have selected excellent outside advisors with great national reputations that I would seal the thunder I think that will all become transparent to the shareholders at the appropriate time.

And I think they are working quickly as well, so I think they have taken the opportunity to look at as you mentioned everything around the board from structures, to size, to the role of the chairman and their interaction with management. So I think all of those things would be considered and I think they are moving with great expediency and I think the transition with Sterling exiting on June 30, I think they will be in very good position to let the shareholders know exactly what it will look like going forward by that point.

Bob H. Ramsey – FBR Capital Markets & Co.

Great, okay thank you very much for taking the questions.

Paul E. Rothamel

Thank you.

Mark E. Kuchenrither

You bet.

Operator

Thank you. Our next question comes from Bill Armstrong of CL King & Associates. Your question please.

William R. Armstrong – C.L. King & Associates, Inc.

Good afternoon guys. Can you hear me?

Paul E. Rothamel

HI Bill, yes.

Mark E. Kuchenrither

Hey Bill.

William R. Armstrong – C.L. King & Associates, Inc.

Okay, great. Could you remind us on the U.S. side what federal regulatory changes you are referring to that’s causing the bad debt to go up?

Paul E. Rothamel

For us it’s really around ACH activity and on the collection side and that’s what's driving that piece of it.

William R. Armstrong – C.L. King & Associates, Inc.

That’s on a CFPB, well sound more like an – well whose regulations are those?

Paul E. Rothamel

Well it’s the – it is CFPB in your case.

William R. Armstrong – C.L. King & Associates, Inc.

Oh it is, okay.

Paul E. Rothamel

Yes.

William R. Armstrong – C.L. King & Associates, Inc.

Because we are not hearing that from any of your competitors.

Paul E. Rothamel

Well it’s centered around frequency of ACH activity and partially its ACH activity primarily.

William R. Armstrong – C.L. King & Associates, Inc.

That I would refer to electronic debiting in the collections process.

Paul E. Rothamel

That’s correct.

William R. Armstrong – C.L. King & Associates, Inc.

Okay, okay. Got it. Okay that was the only question I had, thank you.

Paul E. Rothamel

Okay, thanks Bill.

Operator

Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Rothamel. Sir.

Paul E. Rothamel

Well thank you for your interest again this quarter and as we mentioned, we look forward to improving back half on our year-over-year financial comparisons, and we look forward to talking to you more about that next quarter. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: EZCORP's CEO Discusses F2Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts