Q1 2020 Earnings Call
As a reminder, this call may be recorded would now let's turn the conference over to Michael Kim Investor Relations. Please go ahead Michael.
Thank you and good afternoon, everyone. During our prepared remarks, we will be referring to slides, which are available for viewing or download from our website that investors Dot easy Corp Dot com.
We began I'd like to remind everyone that this conference call as well as the presentation slides contain certain forward looking statements regarding the companys expected operating and financial performance for future periods.
These statements are based on the company's current expectation.
Actual results for future periods may differ materially from those expressed or implied by these forward looking statements due to a number of risk or other factors that are discussed in our annual quarterly and other reports filed with the Securities and Exchange Commission.
And as noted in the presentation materials and unless otherwise identified.
Results are presented on an adjusted basis to remove the effect of foreign currency fluctuations and other discrete items now I'd like to turn the call over to Mr. Stuart Grimshaw.
Sure.
Thanks, Michael and good afternoon to everyone.
I turn briefly to paid for Samarasinghe looking to position, we have coming out of the says corner for the Twentytwenty furniture you.
A clear focus has always been on meeting our customers' need for cash we haven't way that into some type of many years.
Well I feel I remain relatively flat across the year, we sort of good PSC improvement on Latin America with one severance charges up 5% highlighted by monthly yield improvement by 80 basis points on adjusted basis.
Merchandise sales right, 8% in Latin America, reflecting the strong cash position about customers. How does the merchandise margins were impacted by I didnt get aged inventory across the quarter, which Danny will touch on on that later.
We will continue to Pakistan, where that's on the inventory, particularly h. not aging and building cash balances in the company.
After a few quarters of negative logic performance. This quarter ahead uninterrupted service at the stores and pleasingly.
Stores in the U.S. and Mexico, now operating them and you pointed shelf system.
We also continued to focus on the denies expansion of that business in Latin America.
I think in the first quarter, but it's at a non currently under construction, we plan to watching their books before he said to you.
Well, we continued to see opportunities for consistent execution the process do not make up the capital being sold by beetles and we'll continue to maintain that discipline in this regard.
Well I wouldn't lock in the first quarter and we had three pilot stores from Florida, apparently integrated each blocked off.
We anticipate having around 140 stores undergraduates locked up and running by the end at the school.
How many have forecasts and lot of different accounts with customers love to sign up in on average 3.5 minutes.
The Apple asked questions can you just leave you and extend their coal mines that having to be in the store.
Finally on the capital management position, we repurchased 142000 shares in December 29 came and subsequent to that that's continued activity with a total of 415000. She has now reached that just as I said in February.
Ill now pass Costa Danny for fairly common.
Thanks, Stuart good afternoon, everyone I want to start by providing an update on the share repurchase program. The board approved in December of last year.
First we shortened the blackout period from a month to two weeks prior to the quarter end and we established a tenbfive one plan prior to the window closing in December which allows the investment bank to repurchase shares on our behalf using predetermine criteria, even in blackout periods. When we may be in possession of material nonpublic information.
As Stuart mentioned these actions allowed us to repurchase approximately $1 million of class a common stock in December for.
From inception of the program through today, we now repurchased approximately 415000 shares for $2.7 million retiring approximately three quarters of a percent of our outstanding share count.
[noise] in future periods will report repurchase activity only through the end of the reporting period.
But as we just initiated the repurchase program and Tenbfive one plan in December.
I wanted to provide a real time update this quarter.
Stepping back we remain focused on allocating capital to what we believe will deliver the highest shareholder returns. While we continue to evaluate acquisition opportunities potential transactions must meet our strict financial and strategic criteria.
Coupled with new store development, we continue to see buybacks as an attractive use of capital to deliver return on investment and return capital to our shareholders and the tax efficient manner.
Looking ahead, we remain well positioned to fund new store development pawn loan growth and investment spending reflecting the strength of our balance sheet combined with a strong free cash flow generation of the business.
To that point, we ended the quarter with $143 million in total cash on hand, and the long term trajectory of cash from operating activities continues to be strong.
For the first fiscal quarter of 2020 net cash from operating activities was impacted by reduced payables as we continue to refine working capital management, the payment of yearend bonuses and prepayment of sales taxes to maximize discounts provided by certain states.
In the current quarter, we adopted the new lease accounting standard also known as AOCI topic 842.
Well this doesn't change the cash flows related to any of our leases and had no material impact on the income statement. It did require us to record on our balance sheet lease liabilities totaling just over $234 million, mostly offset by at least right abuse asset of almost $226 million.
The eight and a half million dollars difference relates to straight line lease expense recognition, which generally causes companies to recognize rent expense sooner than the actual cash flows. So that rent is recognized evenly over the lease terms.
Upon adoption of assay 842, the eight and a half million dollar accumulated difference arising from the straight line rent recognition was removed from the balance of accounts payable and accrued expenses and reclassified as a reduction of the lease right of use asset.
Taking a look at the financial results on a GAAP basis EBITDA more than doubled to $15.2 million as we reported diluted earnings per share up two cents for the first quarter fiscal 2020 versus a loss of six cents in the prior year quarter, if you'll recall I mentioned last quarter that we anticipated recording attack.
$10 million pre tax charge for our portion of a class action settlement reached by our equity method Investee cash converters in October.
Net of the related tax benefit this amounted to $7.1 million recorded in our current quarter under equity and net loss of unconsolidated affiliates.
GAAP results also include a 700000 dollar write down of costs related to a business intelligence system that we're replacing with better technology and will be more efficient better supporting data analysis and business insights.
GAAP results continue to include noncash interest expense related to our convertible debt and the effects of foreign currency fluctuations, which are excluded from our adjusted figures.
And finally as it relates to taxes, the GAAP effective tax rate for the quarter was skewed by the cash converter settlement charge with the related 3 million dollar tax benefit reported in the line item net income from unconsolidated affiliates in accordance with equity method accounting rather than on the income tax provision or benefit mine.
The current quarter, 32% adjusted tax rate is more reflective of the low to mid 30% range I continue to expect for the remainder of the year, excluding the cash converters charge.
On an adjusted basis, we reported diluted earnings per share of 16 cents per the fiscal first quarter compared to 28 cents this quarter last year.
Wanna Our digital platform was previously included in our corporate expense, but is now broken out as a separate segment as it begins to produce discrete revenues as our current year adjusted earnings no longer adjust for lot of we recast the prior year results on the same basis, so they're comparable year over year.
While we anticipate lawn I will improve our customers overall experience pawn loan redemption rates and yields by enabling customers to make remote loan extensions and receive communications via mobile device. We don't plan to allocate any incremental pawn service charge revenues to the lawn a segment as doing so would be subject of at best.
While the benefits to upon revenues will remain in the U.S. PON segment.
We'll report in the Llanos segment, any discrete lonore revenues and all on a related expenses.
As shown in the earnings release, the revenue impact in the first quarter fiscal 2020 was minimal as long. It was introduced to a select number of stores in Florida late in the quarter.
Looking ahead.
We expect to continue to show a loss throughout this fiscal year for the longest segment as most of the platforms benefit will be included in U.S. pawn and discrete revenues will take some time to build volume.
Early results in customer adoption had been encouraging as Stuart mentioned in the locations, where it's been introduced.
We'll continue to roll this two additional stores in states as well as beyond our existing customer base as we continue throughout the year.
Turning to the adjusted highlights on slide five we produced record high upon related revenues total revenues grew 3% year over year, reflecting 5% growth in merchandise sales, a 2% increase in scrap sales and a 1% uptick in PSC.
Revenues in Latin America were particularly strong up 13% overall with an 18% growth in merchandise sales and PSC growth outpacing the increase in pillow with higher pawn loan yields reflecting quality of the loan portfolio.
Similar to what we experienced last quarter the growth into Latin America loan balance was below the rapid growth we've seen over the last few years as the Mexico, social welfare programs discussed last quarter continue to suppress loan demand somewhat offset by higher sales as our customers more flush with cash.
As expected the pressure seen on merchandise sales margins in both the U.S. and Latin America reflect our continued efforts to optimize overall inventory levels reduce aged inventory.
And accelerate the cash the cash cycle.
Increasing free cash flows.
On slide six you can see the impact of lower margins higher corporate expenses and the drag from new stores with EBITDA margins down in Latin America and on a consolidated basis, while U.S. pawn EBITDA was down slightly from lower net revenues, the EBITDA margin expanded a bit reflecting effective Ics.
Fence management.
As we accelerate new store openings in Latin America I continue to expect some pressure on short term EBITDA EBITDA margins and EPS until those stores ramp.
Typically new stores in Latin America reach breakeven in six to 12 months and reach full ramp in three to five years at which point, we would expect our EBITDA margins to mirror those at more mature stores.
Well this pressure short term earnings Denovo store growth in Latin America continues to represent one of the highest possible returns on invested capital.
Turning now to the consolidated financial highlights on slide seven.
And then consolidated upon loans outstanding or pillow was essentially flat year over year.
As growth from acquisitions, and new stores was about offset by modest decline in same store loan balances that said PSC revenues were up despite lower average pillow for the quarter with the year over year growth, mostly a function of a higher yield reflecting the quality of the loan portfolio.
Merchandise sales were up 5% from the prior year quarter with same store sales growth of 3%.
Ongoing efforts to enhance inventory management impacted merchandise margins down approximately 260 basis points year over year.
On a sequential basis merchandise margins improved from 33% in the fourth quarter fiscal 2019% to 34% in the current quarter.
Notably we've successfully reduced age general merchandise inventory in the United States by 23% year over year.
Optimizing and fine tuning loan to value decisions through the point of sale system is expected to drive higher pawn loan yields and sales gross profits overtime.
Turning to jewelry scrapping sales scrap gross profit increased 44% on a 2% increase in sales.
Consolidated scrap margins approach, 19% in the current quarter compared to 13% in the prior year quarter, reflecting higher gold prices and a reduction in diamond scrap sales, which are fetching far lower prices than a year ago.
Prevailing gold prices remain elevated reflecting investors general uncertainty regarding the broader market.
On the expense front operations expenses were well managed 1% favorable to the prior year. Despite a 2% increase in total store count.
The 4.4 million dollar spike in corporate expense resulted primarily from investments to support the successful implementation of the new point of sale system Paas two.
And the transition to a new cloud service provider.
These efforts resulted in significant improvements and point of sale availability performance and scalability across the us in Mexico.
Corporate expenses also reflect an increase in audit related services and staff enhancements made since the prior year quarter to strengthen the ITC control environment as well as professional fees related to the adoption of the new lease accounting standard.
Both corporate expense and Latin America operations expense reflects some severance costs in the quarter that we would expect to benefit future periods through lower ongoing labor costs.
While discrete revenues in lot of segment remain minimal as its digital platform was just introduced in December 2019 expenses and the segment loss improved to $1.3 million from $2.1 million in the prior year quarter.
The prior year included professional fees related to the initial exploratory work conducted with Boston consulting groups digital ventures, depreciation and amortization of the lot of platform will increase in future quarters as current quarter depreciation only began on the data. It was introduced in December 2019.
We remain excited about the enhancements this can provide to our customer service and product offerings.
We're also pleased to have taken the platform from initial conception to fully functional digital platform in only a year.
Turning to the U.S. pawn highlights on slide eight ending an average pawn loan balances were both essentially flat for the quarter on a year over year basis with PSC also relatively unchanged at $64 million for the first quarter fiscal 2020.
Merchandise sales in the U.S. were up 1% year over year, while related margins softened 220 basis points to 36% given the incremental discounting to move aged merchandise.
AIDS General merchandise now stands at 7% of inventory down meaningfully from 9% at this point last year I expect efforts to reduce aged inventory to continue throughout much of this year.
While segment EBITDA was down year over year, mostly reflecting lower sales margins operating expenses were well managed in us PON essentially flat to the prior year period.
Focusing on Latin America on slide nine.
Financial performance was strong.
While ending and average pillow for the quarter was essentially flat with the social welfare programs in Mexico remaining a bit of a headwind PSC was up 5% compared to the prior year period on significantly higher yields.
For the fiscal first quarter the segment generated a monthly yield at 16.1% up 80 basis points from 15.3% this quarter last year.
The improvement includes the impact of cost to lending guidance designed to take into account not only the value of the loan collateral, but also the likelihood of loan redemptions based on prior experience with the customer.
We enhance lending guidance is not necessarily expected to result in an increase in the overall loan balance, but rather lower amounts loan to higher risk customers and more generous loans to customers more likely to redeem their loans.
Scrap sales gross profit and related margins were all meaningfully higher versus the year ago quarter.
Further merchandise sales were up 18% with same store sales up 16%, though merchandise margins declined 300 basis points year over year as we remain focused on adjusting the loan to value ratios to optimize inventory and sales gross profits.
For the quarter segment, EBITDA was down slightly year over year, primarily driven by higher store wages and rent from storefront growth and inflation as well as new licensing requirements and new store drag.
Going forward, while we remain focused on improving oversight and operating efficiencies. We expect some continued pressure on short term EBITDA margins in Latin America, as we accelerate new store openings in fiscal 2020.
We've opened 22, new stores since the prior year quarter with four of those opened in the most recent quarter and closed one store.
We plan to open a total of about 40, new stores in the full fiscal year.
Finally, I wanted to provide an update on financial trends as we move through the year, the social welfare programs in Mexico will likely continue to impact pillow and PSC trajectories in the near term.
While our ongoing efforts to optimize inventory management weigh on short term merchandise sales margins.
That said, we remain focused on growing free cash flow and driving higher returns on earning assets over time.
More specifically, we believe the rollout of our new point of sale system will improve lending decisions based on customer specific history and system lending guidance driving higher loan redemption rates yields PSC and net revenues and we continue to invest in the business to more fully leverage our technology distribution and.
Customer service to enhance long term growth prospects.
This combined with our continuing share buybacks are expected to enhance shareholder returns.
With that we'll open the call up for questions.
Thank you at this time, if you would like to ask a question. Please press star and the number one on your telephone keypad.
At Star one on your telephone keypad to ask a question.
Your first question comes from John Hecht.
Jefferies. Your line is open.
Thanks, guys for taking my question first just it.
Some.
I guess basic modeling questions.
You talked about some labor cost saves going forward.
So I'm wondering can you can kind of give us a quarterly aspect of details about but might save on a quarterly basis second with the lease expense accounting change change any of the quarterly lease accruals and then you mentioned theres going to be an increase in DNA online.
Hi that.
Yes, so I've not quantified or wouldn't want to put a number on the savings that I expect from some of the severance.
Wooden factor in a huge change, but would expect some savings going forward both in the corporate.
Well as a little bit in the store expense, particularly in Latin America.
The.
On the.
The launch of depreciation we only had about I think what 36000 or so come through this quarter we.
Ended up having about six and a half 7 million of capital put into that last year.
Over a five year term I expect that to be about a 1.3 1.4 million per quarter depreciation.
And that obviously would would change if we do further development on that as well but.
Based on what was in there right now.
And then.
On the.
The lease costs I wouldn't expect that to really changed the income pattern going forward.
Thats more an impact on the balance sheet there'll be a little bit, but that's primarily just grossing up the balance sheet for the asset and liability.
The other when you look at the accounts payable and accrued liabilities will see also there was a as I mentioned there was about a half million movement out of that account into the.
A reduction of the.
Kind of use asset on leases.
Okay. That's very helpful. Thanks did so couple questions what does that forgive me. If you had it in the presentation you mentioned it but do you have handy, but same store PL, though.
In both Us and Latin America.
Yes.
Same store pillow in the us was.
Down 1%.
And.
Adjusted in Latin America was.
Same store Peel It was also down 1%.
That was up a bit in gap at.
Constant currency was down a bit.
Yes, okay. Thank you very much and then youre talking about it so it sounds like you're focused on.
There's a few moving parts with respect to your margins one is focused on reducing aged inventory, but that also some other ramping up of stores and lat am and support what do we think about the pace of.
Gross margin this year.
Based on your perspective of getting rid of aged inventory and so forth when might at bottom or how we already bottomed.
We haven't bottomed yet.
It's a mix and then we always try to get the margin back to where we indicated we account for which the 35% to 38%.
But the.
We've got a balance selling the fresh pockets of inventory as well and if we can balance the French fresh pockets with removing the age then we will move back towards that ratio at the moment, we're not moving to first buckets as quickly as we like and the real focus of management, but in the U.S. and Mexico's get a balanced approach to the inventory reduction.
To maintain the margin as best as we can that as simple view as we think we've probably got a bit too much inventory, which we want to restock into cash as soon as we can.
Okay.
And last question.
As you buyback and I take your shareholders would make any any amount of buybacks. Good like you guys you initiated a little bit in the buyback, but it's still a very small component of the overall a lot of them out.
Sure rules with quiet periods. It's unfortunate we should we expect a greater focus in greater usage of that or how do you think about your prioritization of that.
Oh, we sort of say, we'd be doing 20 million year with pretty much on track with where we thought it would be I mean, we're fortunate to get into the market earlier than.
We thought we would.
But.
We've we've committed to subject to anything else coming up to the 60 million over three years on a pretty much linear path.
On a per annum base.
Okay, Alright, thank you guys.
Again, I would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from Greg Pendy from Sidoti Your line is open.
Hey, guys insisted on questions.
Just on cigarettes inventory or book incentive went from on a year over year basis from 9%, 7% can you give us any color on what categories, namely walking through electronics or can you just give us better.
Breakdown of where I guess, the highest portion of the aged inventory as.
As many in the.
In the electrical area, where the technological obsolescence as its highest particularly the lcds and the and we had plasmas, which I haven't seen for quite a while we had a few of those that we we actually have liquidate and we'll we're looking at through it on a product category basis to actually see when then also licenses Haas and might tighten the rot price points.
To move that inventory.
Okay. That's helpful and then I, just I guess on the buyback on the change.
Danny I think you mentioned went from.
Sort of a blackout period of a month when delta to.
Is that offer any dollars is it 48 hours after reporting.
So.
So for the window to officially opened it would be although we're still under the Tenbfive one trading plan that we put in place in December. So we're still under that plan. This assuming it hits the parameters, we set up within that we we could still be in the market purchasing currently.
Okay very helpful. Thank you.
Thanks, Greg.
There are no further questions at this time I'd like to turn the call back over to Stuart Grimshaw for closing remarks.
Thanks, very much and thanks, everyone for the for tuning in I will be around two obviously ask the questions.
The next couple of days and we look for ties compensations. Thanks once again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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