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EZCORP Inc. (NASDAQ:EZPW)

F2Q08 (Qtr End 3/31/08) Earnings Call

April 24, 2008 4:30 pm ET

Executives

Joe Rotunda - President and CEO

Dan Tonissen - CFO

Analysts

Dennis Telzrow - Stephens Inc

John Rowan, Sidoti & Co.

Liz Pierce - Roth Capital Partners

Daniel O'Sullivan - Utendahl

Andrew Moore- B. Riley

Operator

Good afternoon, ladies and gentlemen, and welcome to the EZCORP second quarter, 2008 earnings call. (Operator Instructions).

I will now turn the call over to Mr. Joe Rotunda. Mr. Rotunda, you may begin.

Joe Rotunda

Thank you, Rose. Good afternoon, everyone. With me is Dan Tonissen, our Chief Financial Officer. Thank you all for joining us today. I'm going to provide an overview of the quarter. Dan will follow with more detail on the financial statements. At the end of the call, we'll insure that we have the opportunity for questions.

Last quarter, we thought we did such a superb job of discussing the business that there wasn't one question, not one comment. However, we learned afterwards that no one was able to access the question mode on their phone. This quarter, we believe it's going to be able to work and function properly.

Quarter two, fiscal year 2008, represents our 23rd consecutive quarter of year-on-year earnings improvement. Net income for the period is $13 million, an increase of 28% over last year. Diluted earnings per share were $0.30, a $0.01 better than our public guidance. It represents a 30% increase over the $0.23 we reported a year ago.

The macro-economic environments had more of a profound influence on our US operations in this quarter than any other time in the past seven years. Everyone is feeling the economic stress for their disposable cash when they visit the grocery store or the gas station. And I believe, it is more pronounced with the cash and credit constrained consumer. Coupling this with higher unemployment and a lack of job growth has amplified the demand for short-term cash from both unemployed and underemployed consumers.

There is an additional economic factor that impacts specifically our pawn business. Gold prices have continued to climb. In our US EZPAWN segment, we've responded by increasing our loan values on the gold products that are pawned in our shops. With over half of our pawn portfolio in jewelry, this has driven up the dollar amount of our average loan. This in turn, has helped accelerate the growth in both loan portfolio and our pawn service charges. At the same time, we've also realized concurrent improvements in the rate of redemptions, extensions, and renewals. The higher market price of gold also benefits both the margins and volume of our gold scrapping.

For the quarter, our US Pawn segment recorded growth of $6.3 million, or 40%, in store operating income over last year. And here is how it breaks down.

The Jumping Jack Cash acquisition from last June delivered $1.1 million of that $6.3 million improvement. The same store growth in operating income was the other $5.2 million. That's a 33% increase over last year on a same store basis. This improvement was primarily driven, actually about half and half, by jewelry scrapping and by our growth in pawn service charges. Overall, it was an excellent performance in US Pawn in the quarter.

Our second segment, the EZMONEY payday loan business was also impacted by the economic environment, but not in a favorable manner. It manifests itself more dramatically with increased difficulty in collecting defaulted loans. This is reflected in the quarter's bad debt in a couple ways. The first is the stress on the consumer's limited disposable income. After initial default, it is more difficult to collect on a defaulted loan than it has been in the past.

The second impact, relates to the ongoing sale of bad debt to third parties. For about three years now, we've been selling our uncollected bad debt after 60 days of internal collection activity. During the last year, we've seen the market rate for our third party sale of bad debt drop three times. As a result, we're continuing to work our bad debt, as we have, but with several modifications. We're shifting more focus of field personnel into collections away from local store marketing. And that doesn't mean we're creating a void in store level marketing, but rather a shift in the balance between those two activities. We're also employing enhanced procedures in our central collections group via the predictive dollar, staffing, and bad debt settlement. And lastly, we're exploring third party debt sales, utilizing both direct and contingency methodologies.

All that being said, our results for the quarter in the EZMONEY segment recorded fee growth of 35% to $29.5 million. On a same store basis, our fees grew by 21% over last year in our EZMONEY stores that have been opened over 12 months. These results are after a $650,000 additional deferral of fee revenue. During this period, we revised our method of estimating CSO revenues that should be deferred, which consequently increased the deferral and reduced the fees by that same amount. This resulted in absolutely no change to the amount or the timing of cash flows related to this product, just the timing of when we recognize that revenue. Absent this increased deferral, EZMONEY revenues increased 38%. And the total earnings per share for the company would have been about a $0.01 higher than reported.

Bad debt did grow at a faster rate than fees and ended the quarter at 22% of fee revenue. The net revenue, the net revenue is after bad debt, increased by $3.9 million as 20% over last year. Again, absent that deferral, the increase in net revenues after bad debt would be up 24%. This is excellent growth in net revenues, particularly in this economic environment.

During this quarter, we also expanded our installment loan product to an additional 19 EZMONEY stores, bringing the total to now 72 locations. These stores are in area with higher consumer demographics. And the product itself incorporates tighter underwriting requirements. We wrote $440,000 installment loans and generated $350,000 in fees during the quarter. Our bad debt on this product was 17% of fees for the period and is trending favorably. This reflects the ongoing adjustments that we have made to our underwriting criteria for the installment loan. We'll continue with a measured rollout of this product an additional 10 stores to 20 stores in Texas over the balance of this year, and we plan to add an additional state later in the fall.

Although we believe the stress on bad debt is temporary and not systemic, we're going to be cautious with our EZMONEY store development for the balance of this year. Our EZMONEY store count at March ending is 462 locations, compared to 369 a year ago. We've now adjusted our development plan for EZMONEY to the range of 40 to 50 new stores during the balance of this year through September.

By September end, we will have opened a total of 70 to 80 new stores, most likely still one of the most aggressive development plans in the industry. For the quarter, our EZMONEY segment recorded growth in operating income of $300,000 last year. But again, absent that adjustment, it would have been a million dollars.

New stores is a pretty good segue to our third segment in Empenos Facil which is Spanish for EZPAWN, our brand in Mexico. We opened two new stores this year through March, one in each quarter. Over the next month, we'll open an additional two stores and we plan to add at least two additional stores by the end of July. We expect to end the year with 10 to 12 new stores in Mexico, rather than the 7 to 10 that we announced earlier. Directing more of our growth to this segment will further diversify our business. We continue to be pleased with the results in Mexico.

During the second quarter, we generated gross revenues of approximately $2.7 million and four-wall operating income of about I'm sorry, $800,000. That's an operating income margin of 48%. Our Mexico pawn team has done an excellent job in profitably growing the business on a same store basis and additionally accelerating the timeline for store development. We have high expectations for the growth potential of this segment as we move forward.

Now, on to Albemarle & Bond, A&B recently released their six month results through December, which now reflect the integration of the 26 store Herbert Brown acquisition completed last July. Their results are impressive. They now have 113 stores, up 35 shops over the prior year. Both total revenues and operating income increased by approximately 45% for the same period. And their net income grew by 29%. Our equity interest in their income for the quarter was $1.1 million and it represents 36% in growth. The dividend we received this quarter increased to $1.1 million, compared to $825,000 last year. At quarter end, our balance sheet carries our investment in A&B at $37 million and compares favorably to the open market value of our holdings of $63 million on March 31st. This represents $26 million in unrecognized appreciation.

With that, I'll turn the call over to Dan for more detail on the quarter.

Dan Tonissen

Thanks, Joe. Joe gave you an overview of some of the numbers, and I'll give you a little more detail, starting with the consolidated statement of operations for the quarter, which you'll find on page three of our earnings announcement.

For the quarter, our pawn net revenues comprised of sales gross profit, lines two and three less line eleven, pawn service charges, line four, and other revenues, line six, increased $10.2 million or 28% to $46.7 million. Merchandise sales, line two, increased $5.2 million or 13% to $44.7 million. Same-store sales for the quarter increased 4%.

After a one percentage point margin decrease, merchandise gross profit, line two minus line nine, increased $1.6 million or 10% to $17.5 million. Scrap gross profit, line three less line 10, increased $3.4 million to $7.1 million. Higher gold values net of higher cost and higher volumes produced the increase in scrap gross profit.

During the quarter, we scrapped approximately 1.3 million grams of gold jewelry, an increase of roughly 19% from the prior year quarter. Proceeds per gram increased 33% to $12.99. Our cost per gram increased 19% to $7.32 due to increases in gold loan values and what we paid to purchase gold.

During the quarter and the prior year quarter, we did not sell any loose diamonds. We continue to forward contract our gold scraping 30 to 60 days out. And currently we have our April quantities locked at $944.00 per ounce. Hopefully, the margin will move up a bit and we can do as well covering our May and June quantities.

For the quarter, we turned our inventory 3.8 times, the same as the prior year quarter. Inventory levels for ending store increased to $112,000 versus $102,000 a year ago.

On service charge revenues, line four, increased approximately $5.2 million or 32% to $21.8 million. Included in the increase is approximately $1.4 million from our acquired Jumping Jack stores and $1.1 million from our Mexico pawn operations. The balance of the increase is due to the benefit of higher loan values on gold jewelry and same store loan growth. Annualized yields on our pawn loan balance were down slightly at 149%. Our ending pawn loan balance was up 32% from the prior year, 16% on a same store basis.

For the quarter, our signature loan contribution, line five less line 15, improved 19% to $23.5 million. The benefit of a 33% increase in signature loan fee revenue, line five, was reduced by higher levels of signature loan bad debt relative to fees. As Joe mentioned, during the quarter, we refined our estimate of deferred revenue on CSO loans and increased the amount of this deferral by approximately $650,000, which reduced our signature loan fees by a corresponding amount.

Consolidated signature loan bad debt expense, line 15, measured as a percent of signature loan fee revenues, line five, increased to 22%, compared to 13% for the prior year quarter. Looking at bad debt levels relative to loans originated in the quarter, our net defaulted principal, as a percent of loans originated, came in at 4.2%, compared to 2.9% for the prior year quarter. Loan originations for the quarter were up approximately 37% to $154 million.

After higher levels of operations expense, line 14, administrative expense, line 16, and depreciation and amortization, line 17, operating income increased 33% to $19.8 million. Increases in operations expense and depreciation and amortization are primarily due to acquisitions and new store openings. The increase in administrative expense is primarily due to staffing increases to support our growth, both here in the US and in Mexico, higher level of professional fees, and other inflationary increases.

Operating income margins measured as a percent of net revenues improved six-tenths of a percentage point to 25.7%, due to the significant margin improvement in our US pawn operation. This margin improvement is after giving up about four points of margin at the signature loan bad debt line. After higher levels of equity interest in the income of Albemarle & Bond, lower net interest income and a 37.7% tax provision, net income increased 28% to just over $13 million or $0.30 per share.

Now, if you'd turn to page six of our earnings announcement, I'll make a couple of comments on our segment results for the quarter starting with our US EZPAWN operations in the leftmost column. US EZPAWN store level operating income, line 15, increased 40% to $22 million. This strong performance is the result of a 22% increase in net revenues, line nine, and a 9% increase in EZPAWN operations expense, line 12. Store level operating income margins for our US EZPAWN operations improved six percentage points to just over 48% of net revenues. The 15 former Jumping Jack Cash stores generated store level operating income of just under $1.1 million. And this amount is included in our US EZPAWN operations.

Moving over to the next column to the right, our Mexico pawn operation generated store level operating income of $815,000 and you see this on line 15. Store level operating income margins in our Mexico stores were also 48% of net revenues. Moving over to the third column, our EZMONEY store level operating income, line 15, improved 3% to $9.9 million. The 35% increase in signature loan fees, line four, was largely absorbed by the higher relative levels of bad debt and higher operating expense.

The primary reason for the increase in EZMONEY operations' expense is the 93 net new locations opened in the last 12 months. These EZMONEY results included drag from new stores of approximately $1.2 million, comparable to the prior year quarter. Operating income margins for our EZMONEY operations decreased 10 percentage points to 34% of the EZMONEY net revenues, line nine. The margin decrease is primarily due to the nine percentage points lost at the bad debt line in this segment.

For the quarter, our US EZPAWN, EZMONEY, and Mexico pawn segments made up approximately 67%, 30% and 3% of our consolidated store level operating income.

Now, a few comments on the balance sheet on page five of the earnings announcement. You can see that we have approximately $35.6 million of cash, line three, on our balance sheet. Roughly $5.4 million of this amount is operating cash. Included in the cash usage in the quarter are $2.8 million of growth CapEx for new EZMONEY and Mexico locations, $1.3 million of maintenance CapEx.

You can see that our payday loan balance, line five, grew 60% in the last 12 months to $5.3 million. Not included on our balance sheet is $19.9 million of short term loans and $358,000 in installment loans, both of which are brokered with the unaffiliated lenders. These brokered loans increased 20% in the last 12 months.

Our investment in Albemarle & Bond is carried on our March balance sheet, as Joe mentioned, at $36.9 million, and you see this on line 13. Using today's closing price on A&B of around EUR2.13 and an exchange rate of $1.97 per pound, our 16.3 million shares would have a market value of just over $68 million. This represents approximately $0.76 in unrecognized book value per share.

Finally, you see on lines 34 and 35 that we ended the quarter with 320 pawn locations, including 26 in Mexico, and 462 signature loan locations, six of which are managed by our EZPAWN operation.

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

Joe Rotunda

Thanks, Dan. In summary, it was a very strong quarter for us exceeding our public guidance and growing our earnings per share by 30% over last year. As a business, we're becoming more diverse with our segments, segments that have the capacity to compliment one another through both good and bad times. Each segment is also a growth vehicle unto itself. We've demonstrated strong organic growth in EZPAWN for the past five plus years. Additionally, acquisition opportunities still exist in the pawn industry. The Colorado acquisition is a good example of the benefit. During this quarter, we enjoyed the incremental operating contribution from Jumping Jack Cash. And there was an additional benefit. The $1.1 million from those stores reflected more than a 25% improvement on the base operating income that was generated in the same period a year ago before we did the acquisition.

Our EZMONEY segment continues as a growth vehicle, both organically and via de novo growth domestically, with potential for entry into Canada. Empenos Facil also offers substantial growth opportunities, organically and through storefront expansion throughout Mexico. And Albemarle & Bond have the benefit of the integration and enhancement of the Herbert Brown acquisition.

Now, to wrap up the call, here is our revised forecast for the year. We're raising our guidance for the fiscal year to $1.14. That's approximately a 30% increase over last year. Our guidance for quarter three is $0.21 in earnings per share and quarter four, $0.34.

That concludes our prepared remarks. I'd like to pause now for Dan to cover the Safe Harbor, and then we'll open it up for 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 acquisitions and investments, and expected future earnings. Actual results for these periods may materially differ from these statements. Such forward-looking statements involve risks and uncertainties, such as changing market conditions in the overall economy and the industry, consumer demand for the company's products and services, actions of third parties who offer services and products in the company's locations, changes in the regulatory environment, and other factors periodically discussed in the company's annual, quarterly, and other reports filed with the Securities & Exchange Commission.

Rose, we'll now open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). We have our first question from Dennis Telzrow from Stephens, Incorporated. Please go ahead.

Dennis Telzrow - Stephens Inc

Good afternoon, Joe and Dan. Great quarter.

Joe Rotunda

Thank you, Dennis.

Dennis Telzrow - Stephens Inc

You didn't mention or update us on the progress of the proposed acquisition of Value Financial Services. Any comment there?

Joe Rotunda

Well, we're still in the due diligence stage. And we're moving through all of that detail. And at this point, we're maintaining our May ending target for closing.

Dennis Telzrow - Stephens Inc

And at that time, you might have some comment on the total potential and then outlook as how it would possible impact next fiscal year?

Joe Rotunda

We certainly would once we get through all the due diligence.

Dennis Telzrow - Stephens Inc

Okay. And the stores you're opening in Mexico, I assume most of those are down in the same territory in which Mister Money had operated. And I guess a second part to that, have you put in your point of sales in those stores down there?

Joe Rotunda

Your second question first. We do have our store operating system, our EZSYSTEM pawn operating system in place. All of the stores have been converted. And we've completed all that in the December, January time frame. As to our expansion in Mexico, if you think of the uppermost, Northwest area that we're in is the Biajo area, and take the route from there down through Mexico City into Veracruz, that's where our primary development is this year, along with a couple stores along the boarder where we're filling in there to build a full area for the multi-unit manager that we have there. That will take us through the end of this year. We'll still have considerable fill in opportunity in 2009. And we'll use that corridor as a hub and then grow out from there.

Dennis Telzrow - Stephens Inc

And I don't know if you have the ability to measure it, but some people and some of the other companies in business have commented that they felt that their collections were negatively impacted by, I guess you could call it, the decline in the customer's use of his tax refund to pay off previously delinquent loans. Is there any way or do you have any thoughts on that?

Joe Rotunda

It'd certainly be very subjective. My gut would tell me that the customer's available cash is more stressed now than it has ever been and that income tax refund that may have gone towards a debt that they had in the past, whether it be pawn portfolio loans or signature payday loans, probably had other demand on it for maybe something more pressing.

Dennis Telzrow - Stephens Inc

Last question, I think you mentioned you raised your loan to value jewelry. Was that just March quarter you did that?

Joe Rotunda

We did. It was towards the end of the quarter. In fact, since in the last year, the last four quarters, we raised the loan to values now three times, most recently in the March ending quarter, more towards the end of the quarter.

Dennis Telzrow - Stephens Inc

Okay. Thank you.

Joe Rotunda

You're welcome.

Operator

We have our next question from John Rowan from Sidoti & Company. Please go ahead.

John Rowan, Sidoti & Co.

Good afternoon. Just so I'm clear, the guidance doesn't include potential accretion from the value acquisition.

Joe Rotunda

It does not, John.

John Rowan, Sidoti & Co.

Okay. And just to go back to credit, I don't know if there is any way to quantify it, but are you seeing any more or less stress from your new stores? Can you just kind of break it out versus your more mature stores versus your new stores?

John Rowan, Sidoti & Co.

We haven't segmented it by operations. Typically early on, very early in the opening of a new store, you're growing your portfolio, bad debt isn't a significant problem for the first couple months. And then, it becomes more pronounced. But over the first six or 12 months of a new store, I don't think the bad debt is significantly higher than as it works into its second year. That's what we've seen as we've looked at it.

John Rowan, Sidoti & Co.

Okay. And can you just give me the CapEx numbers again?

Dan Tonissen

I'm sorry, John.

John Rowan, Sidoti & Co.

Dan, you gave out the CapEx numbers. Correct? Can you just repeat those for me?

Dan Tonissen

Yes. Growth CapEx of $2.8 million and maintenance of $1.3 million.

John Rowan, Sidoti & Co.

Thanks. I'll let someone else hop on.

Operator

We have our next question from Liz Pierce from Roth Capital Partners. Please go ahead.

Liz Pierce - Roth Capital Partners

Thanks and good afternoon. So, Joe, if I understand you correctly, you haven't changed your underwriting requirements or policies or strategies that this is just, you think, a function of the environment.

Joe Rotunda

I think much of it is related to the environment and it requires us to act a little bit differently. We've made in the last three quarters some revisions and adjustments to our underwriting. In this time frame that we're in, in this past quarter, we didn't make any additional adjustments from that end outside of working more with the customer to get the customer in by their due date to make their payment or to payoff their loan in the EZMONEY segment.

Our activities and effort is now shifting to more diligent efforts on working with the customer once they reach that due date and haven't come into the store. And we're adjusting and shifting. Probably the most pronounced shift is in the field organization where we're moving some of the time we spend on local store marketing to bring in new customers to using that effort, that labor, that attention and focus on working with the customer immediately after they default and attempt to get them to either satisfy the debt or work on a plan to satisfy the debt.

Liz Pierce - Roth Capital Partners

Okay. But in terms of if we look into the next couple of quarters, if it doesn't necessarily feel like anything is going to get better, do you think you might get a little bit stricter on the underwriting?

Joe Rotunda

We will adjust our underwriting as we have to if we see a trend that is more negative going forward than we've seen thus far. It's been three quarters of consecutive increases in our bad debt rate as a percent of fees. And I hope to see a leveling off of that relative to prior year levels.

Liz Pierce - Roth Capital Partners

Do you think with the stimulus checks that are suppose to be in the mail or whatever in May that maybe some of this pressure that the consumer has felt goes away a bit? I mean do you think maybe they defaulted in thinking well I'll get another check and take care of it then?

Joe Rotunda

I really wish I knew. We're not really sure how to factor that into our projections. I think the fact is the consumer will have more disposable cash as a result of this. The question is where they are going to spend it. In the hierarchy of needs or in the hierarchy of those that they want to respond to, where will we fall? And that's one of the reasons that we're focusing on working more with the customer to help them satisfy the debt that they've incurred with these loans.

Liz Pierce - Roth Capital Partners

But you're working with them, you said, on the field organization before they default like when they're getting ready for the loan to mature or, I just want to make sure I understand this.

Joe Rotunda

We're doing it at both ends.

Liz Pierce - Roth Capital Partners

Okay.

Joe Rotunda

We're calling every single customer two days or so before their loan is due. And what we're doing is a courtesy call. And it's just to see what time or when they intend to come into the store so we can have everything ready and help facilitate the transaction for them, so they're not delayed on generally a Friday when we have a lot of transactions. That in effect also reminds the consumer of the obligation that they have. So we do that on the front end. We ask them when they intend to come in so we can have everything ready for them. It's a courtesy call, and it acts as a reminder. And then if they're not in on their due date, we immediately begin contact activities in the field locations, not through our centralized collections. And in more of a relationship manner, attempt to work with the customer on coming in to take care of the obligation or working on some type of plan to repay it. We're just intensifying our efforts in those contacts with the customer, particularly on the weekend.

Liz Pierce - Roth Capital Partners

Alright. Thank you. That's helpful. Thanks. Good luck:

Operator

(Operator Instructions). We have our next question from Daniel O'Sullivan from Utendahl. Please go ahead.

Daniel O'Sullivan - Utendahl

Yes. Good afternoon. Joe, I didn't catch all your remarks on the bad debt sales. Did you guys sell accounts during the quarter?

Joe Rotunda

We did have a sale during the quarter, considerably less than it's been in the past, particularly with proceeds. And my comment was that if you look at the last year or so, our debt buyers have reduced the rate three times over that period of time, the rate that they pay for bad debt. We are on a systematic sale of bad debt as soon as it reached 60 days of internal collection activity on our part. Now the rate is down substantially to the point that we're looking for other alternatives and ways to maximize the collection of that bad debt, some internally, some with direct sale to third party debt buyers, and looking at contingency sales as well.

Daniel O'Sullivan - Utendahl

Okay. But is the forward flow still in effect?

Joe Rotunda

Not in a regimented manner as it was before.

Daniel O'Sullivan - Utendahl

Okay. So you're meaning it's more opportunistic. You don't have the forward flow as you just described it in place anymore.

Joe Rotunda

We do have a modified forward flow in effect.

Daniel O'Sullivan - Utendahl

Okay. Real quick, is there any updates on the case in Florida?

Joe Rotunda

It went to an administrative law judge and there was a order that was adverse that was issued by the administrative law judge in late March. And the administrative law judge found, in effect, I'm not sure of the exact reasons, that the fee was to be included as part of the interest calculation. So as a result of that, we expect that we're going to have a cease and desist order relatively soon. We also have found what we believe and have been advised are strong grounds for an appeal. And when that occurs, we'll file for a stay and then we intend to, at this point, pursue an appeal.

Daniel O'Sullivan - Utendahl

Okay. What do you think the timing on all that is?

Joe Rotunda

It's usually, once you get by the stay, it's a fairly long period of time for the appeal process, as we understand it in Florida.

Daniel O'Sullivan - Utendahl

Okay. That's helpful. And a couple quick ones on your cash advance business. Now that you don't have a ton or regulatory risks, I think the only state where there might be some things in place, Colorado. Can you give us an update on what's going on in Colorado right now?

Joe Rotunda

Yes. There was a House Bill that was introduced by a freshman legislator in the House. And it was in effect a prohibition bill. It passed the House, went into the Senate. It never rose to Third Note in the Senate. There were some amendments that were proposed as it went through that process. It went to, I believe, the appropriations committee. And the bill just, may have been this week, early this week, was actually pulled by the sponsor.

Daniel O'Sullivan - Utendahl

And one last one, your CSO lenders, have you guys noticed any uneasiness on their part as far as what's going on in the economy? Do you think they might demand more or will how much your guarantying and your letters of credit will there be any more types of guaranties you'll have to give them given where we're seeing losses going right now?

Dan Tonissen

Dan, no change all there at all with our two lenders.

Daniel O'Sullivan - Utendahl

Great. Nice quarter, guys. Thanks.

Joe Rotunda

Thank you.

Operator

(Operator Instructions). We do have our next question from John Rowan from Sidoti & Company. Please go ahead.

John Rowan - Sidoti & Co.

Hi, guys. Sorry. I have a follow-up question. Can you just comment on how the financing is shoring up for the value acquisition?

Dan Tonissen

Yes, that's in process right now. We're putting together a syndicate that should be more than sufficient to meet that need.

John Rowan - Sidoti & Co.

You don't have any projects to how much it is going to cost though. Well, I'm assuming it's going to be debt, so I'm just trying to figure out kind of what the rate is going to be that you're going to be paying on that.

Dan Tonissen

Yes. I think the market right now and given the leverage ratio where we would be out of the gate, we're probably looking at the one and a half to two range over LIBOR. So what would that be? What's that about 5%?

John Rowan - Sidoti & Co.

Around there. Okay. That's it. Thank you.

Operator

(Operator Instructions). We do have Daniel O'Sullivan from Utendahl. Please go ahead.

Daniel O'Sullivan - Utendahl

Yes, thank you. Quick follow up on your expansion this year for Payday. Which states, Joe, do you think you're going to be expanding into or where are the stores going to be you're going to be opening up this year?

Joe Rotunda

Texas will have a considerable, and you're talking for the whole year or the balance of the year?

Daniel O'Sullivan - Utendahl

The balance of the year. In the next 12 months, I'm sorry. What's your outlook for the next 12 months? Where would you guys see opening up your stores.

Joe Rotunda

Well, we only go through the month of September. And we have the greatest or the lion's share of them in the Texas market. You get beyond that, we did open a number of them in Missouri, which we just got into this year. We're getting enough presence there to have two areas. And finished out Kansas with about two areas. And we're planning a couple more up in the Midwest.

Daniel O'Sullivan - Utendahl

Okay. That's helpful. Thank you.

Operator

(Operator Instructions). We have our next question from Andrew Moore from B. Riley. Please go ahead.

Andrew Moore- B. Riley

Hey, gentlemen, nice quarter. Wonder if you could talk a little bit about pawn sales. It looks like your merchandise sales were up about 13% year on year, pretty strong growth, 4% comp on the quarter, so it looks like traffic has been pretty good. Could you kind of characterize what's going on there and what is driving that strength principally?

Joe Rotunda

Primary strength in pawn sales have come in general merchandise throughout the quarter. Some of the pressure on gold pricing also affects the retail pricing of jewelry in the stores in our pawn shops. And we've had a slowdown in jewelry until really this last quarter. And it began about February and into March where we picked up on our jewelry sales.

We ended our quarter with a fairly good inventory. Dan covered our turnover, 3.8 times for the quarter. We're ending the quarter with about 10% more inventory per store than we had a year ago. We believe we'll be able to maintain our turnover performance and we expect to realize, continual level of sales growth as we've had this last quarter relative to the prior year. Again, GM has been very strong component of that.

Andrew Moore- B. Riley

Very good. Thanks.

Operator

(Operator Instructions). At this time, we have no further questions.

Joe Rotunda

Okay. Rose, thank you very much. And I'd like to thank everybody for your participation today and your continued interest in EZCORP. Thank you.

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. F2Q08 (Qtr End 3/31/08) Earnings Call Transcript
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