Q2 2020 Earnings Call

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on musicals. Thank you for your patience.

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Good afternoon, ladies and gentlemen, and welcome to the Easy Corp, second quarter fiscal 2020 earnings conference call.

Time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time as a reminder, this call may be recorded I would now like to turn the conference over to Michael Kim Investor Relations. Please go ahead Michael.

Thank you and good morning, everyone.

During our prepared remarks, we will be referring to slides, which are available for viewing are down barred from our website.

Investors not easy <unk> dot com.

Before we begin I would like to remind everyone that this conference call as well the presentation slides contains certain forward looking statements regarding the companys 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.

It was expressed or implied by these forward looking statements due to a number of risk.

Other factors that are disclosed 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 unadjusted basis.

Removed the effect of foreign currency fluctuations and other discrete items.

Now I'd like to turn call over to Mr. Stuart Grimshaw Stuart.

Thanks, Mike and good morning, everyone.

As we do this presentation.

We are embracing names of territory.

Good old deal with your family cycling healthy.

He's a difficult times right people our customers they can lead to basically already.

And for all of US as we try to understand it matters the exit the guy that 19 and daily.

I would like to express my deepest anticipation to the health care professionals, that's responders and other central walk in so doing each all day everyday people say.

I would also like to take the members of easy Cool family Super supplements. This crisis with actionable professional money. They bought unbelievable service truck customers in the must trying to tops.

It's been not the focus of the company has been on serving in sporting out people in cost, which as I tried to make things to the story I'm simply pairing.

We provide critical unique said this is Chuck.

And I won't prices I considered essential services in nearly all sites.

At this time, we have not not seen about store sizes in the U.S., Mexico with many about 100 stores operating under a reduced has restricted operating activities or environments with no limited public transportation.

Oh, it's always hard here into the CDC century guidelines, including provision of gloves and not as.

Well as old U.S. stores, having launches the safety that team members and customers.

When unemployment right just sitting under 15% completely on the magical some three months ago.

We know that customers are facing challenging times is through these challenging times that we need to help them when other institutions will not.

As shown on slide four we committed to maintaining the wellbeing about what pulls through this cross.

Layoffs.

Absolutely and I understand I seem to me U.S. and pool seems in Latin America.

Additionally, we have implemented that might work options social distancing majors.

And your cleaning procedures and all that schools.

We are providing our customers more choices by introducing it does it actually makes his support transactions in coatings, just kind of slot hold capabilities.

Summarizing the role and Atlanta.

Slide where my blood management options right customers.

We now have Lionel rational in 357 stores, which would be into the March.

Hundred 59.

The addition of types like well, one Atlanta and helped us maintain a high level of service type crack huh.

At a time, there had been looking to service them efficiently as being necessarily restricted.

We entered the process in a position of financial stability sound liquidity and a strong balance sheet.

In the midst of uncertainty and volatility we've been taking appropriate actions to preserve and enhanced liquidity and position ourselves positively through this process.

Our cash position is that I'm incident levels for quite some $250 million a cash no near term debt maturities and I restrictive desktop since.

In addition, we continue to buggies steady free cash flow.

So assisting customers, who do you need cash flow through this period of time.

We continue even if he wants spaces, including the identification to $70 million.

Savings expected from Capex this fiscal year, incorporating a slowing in denied by Lightning Sun life. After 25 from the original 40 anticipated.

We expect this Tonight I program to ramp up once they called they stopped Riyadh.

Turning to share repurchase program, we temporarily suspended buybacks in the quarter next you must liquidity anticipated future line today.

What's the bars impact is competing neutralized boarding reconsider the shall we can just surprised that miss out on Apple to capital allocation strategy.

Turning to slide five we were pleased with strong financial performance for the fiscal second quarter.

Even if that results in focus what impacts from the last few weeks of matches the kind of at 19 Crosstex develops.

One of the unintended consequence is what I think its pandemic driven environment has been the impact of accounting standards in these unprecedented economic times.

Second fiscal quarter, we were required to record a noncash asset impairment charge of $47.1 million.

My memory likes its the impairment of goodwill and by the U.S. and my fan, reflecting the potential long term financial impact of opened 19, who likes it store closures.

Coupled with people like balance productions as a result in excess cash in the hands that cost was being applied to L. Ilan repayments.

Well, let me charter that stores have remained.

Portion of the stores. The GP makes had been clustered smashed what did you get a bulk of the goodwill impairment is recognized.

Once the wasted a noncash impairment expenses removed.

Adjusted results for the fiscal second quarter reinforces the strength and resiliency about business.

Revenues and EBITDA healthy because if I follow files, coupled with tight control of expenses.

Adjusted EBITDA was up 14% year on year, what type of weight than you for the quarter up 5%.

I can take on a core U.S. going on right now.

In addition, dot south and southeast gross profits were up slightly year over year, dropping strong free cash flow for the quarter Huh.

The majority of <unk> corporate expense cash flow generated from the U.S.

Hi, Scott Marine we councils demand has remained strong in the U.S. and Latin America and it continues to drop in business and stimulus deposits shakes and began to be distributed.

Our retail sounds to mine has increased youre sitting in Texas being around the nation online demand exacerbated by et cetera to pull monthly payments.

Turning to page six I won't spend too much time in the slide as I'm sure you're well aware of the macroeconomic backdrop and the key message here is that the financial health of the U.S. consumer is increasingly coming under pressure, which we believe will drive increased need among banks also cash in the future.

On slide seven we outline attacking approach to growth.

The been listening liquidity remain key hallmarks of that business not just from a financial perspective, but also I wasn't lifestyle Rocky systems employee retention culture and expense management across the company.

Ours is a recession resilient business and we're well positioned to we're guiding light in the meantime, juries are more challenged macro economic cycle with the majority on store size and a conservative and liquid balance sheet to set about customers is lying demand increases.

Flexibility across platforms products and I'm not from the lines. Another key differentiating factor as bill discussed snakes.

Turning to how do we continue to expand out pricing.

We remain committed to I'd be new stores, and a well position to capitalize on opportunistic acquisitions to compliment organic revenue growth.

And accelerating demand London has stimulus and ongoing focus some probably higher returns on any assets at the top.

Next on slide I want to provide some additional context on how we're increasingly leveraging integrated systems I phones and approaches to enhance customer choice in growth.

Starting with line you might recall that makes the control that well on the platform to 140 stores funny that you too.

We've accelerated the ball now with 357 stores come by almost like Oh, not right thousand customers signed up at the end of Q2.

At the end of iPhone that number has moved over 14000 customers.

Well, so nice when we price just as a full fast and 600 pulmonic stations on the system rent cheap when I talked a number of much.

On a further enhances the customer experience I've never been crisis accidental in communications and we plan to increase the leverage and differentiated in digital and engagement initiatives moving ahead.

Fast on social media, we've engaged more than 600000 consumers and four weeks Remapping opened stores in major cities and I can upside offering.

Young digital and the response, you kind of non thing.

Recently implemented cuts like Poland capabilities and to continue to meet customers' needs within social distancing parameters.

For the safety of the vehicle.

Sadly being services include new lines extension payments Lundgren yields liquidations that you're down files and you lie wise and my wife payments on that first pilot store and ankles list. We know its coincide says there's not a 60 stores and I hope to maintain store operations and improved customer convenience, which we believe it.

Well deliver long consent benefits and around customer loyalty and retention.

Lastly, we remain focused on a multichannel approach to payment spanning Lana inside on cross school payment capabilities and David My final options for the convenience about customers, which should support redemption rights in PMC yields going forward.

In summary on business remains well positioned to navigate through this process.

Well the feature mine, it's difficult to predict we believe it or more challenging economic backdrop with satellite tomorrow on loans at the time. Furthermore, we are increasingly leveraging and differentiated quite of south system to drive optimized blaming decisions and margin improvement and you'll injury pockets and to give us some flexibility to introduce new products and services.

However in the immediate said, we'll continue to focus on the health and safety by town waste and I customers develop even in different ways satisfy customers need.

Finally, we're very excited to bring onboard cakes and come up as president and Chief Financial Officer.

Actually was a member vehicle boards and high school 29 team and brings with him a deep background can cost about finance.

I'll now pass its Jason that have comments.

Thanks, George Good afternoon, everyone just to start I'm very excited to join the easy Corp. Chaim I'm looking forward to continuing to work with store and the team to drive the company forward.

To begin as Stuart mentioned, we recorded a noncash pretax impairment charge of 47.1 million or 85 cents per diluted share in our fiscal second quarter.

These primarily related to impairment of goodwill on our U.S. pawn and Latin American reporting units.

The bulk of our stores have remained open many of the stores in our GP in many countries have been closed.

Prior to the store closures in March did you Pemex business was performing well with profits before tax ahead of plan.

As Michael mentioned in the introduction results in this discussion are presented on adjusted basis. So the impact of the noncash impairment charges added back in order to better reflect our core operating performance in the quarter.

Before getting into more detail on the financial results I wanted to provide a better contacts on how to quarter played out in light of the cobot 19 pandemic.

And how we're positioned going forward.

Retail sales of remained strong throughout our fiscal second quarter offsetting a delay in demand for pawn loan the continued into April.

Largely reflecting the impact of tax refunds season, followed by the uncertainty of the current crisis and eventually by the distribution of the first stimulus Chuck.

You can see that's reflected in the ending pillow down 5% year over year.

In April the decline in pillow continued with U.S. on Pos down approximately 30% versus April 2019 in Latin America, P.O. down just under 20% on a constant currency basis.

We expect to see accelerating loan demand post the stimulus and an April retail sales volumes have continued to be strong and provide a meaningful offsets to the current drop in loan demand.

Turning to expenses, we've stepped up our focus on streamlining and optimizing resources across two operations and at the corporate level and are in the process of negotiating agreements with suppliers.

Oh processes across the company being reviewed with the goals of improving the time required to make a new parmesan expanding payment options for customers and optimizing the valuation of collateral.

And as Stuart mentioned earlier, our balance sheet continues to strengthen and we are ready for a pickup in loan demand.

We have a growing cash balance positioning us to serve our customers loan needs as well as capitalize on potential opportunity stick acquisitions.

Our cash balance in late April is greater than 250 million, which is over 100 million greater than the 143 million. We had at the end of December.

As we run stress testing scenarios on the business. We're confident we can run our business effectively in a number of different environments, while maintaining a strong balance sheet.

And finally, the debt structure of our balance sheet isn't advantage for us with no near term debt maturities covenants restricting our operations.

Looking ahead, while lower end of quarter loan balances will pressure PSC revenue in the short term, we expect loan demand to return post stimulus in the meantime, we continue to see higher merchandise sales and gross profits and we're seeing early returns in the U.S. from our efforts to manage inventory and optimize operations.

Now turning to our financial results for the quarter on a GAAP basis, we reported diluted earnings per share of negative 74 cents a decrease of 80 cents from the prior year.

Driven by impairments to goodwill on our U.S. pawn in Latin America reporting units previously mentioned.

In addition to adding back the impairment we added back our typical exclusion of noncash interest expense related to our convertible debt.

Other adjustments related to minor write offs FX fluctuations.

Other discrete items totaling just 1 million an aggregate on a pre tax basis.

On an adjusted basis, we reported diluted earnings per share of 17 cents for the fiscal second quarter.

Here to 19 cents in the prior year quarter.

Focusing on our consolidated financial highlights on slide 10.

Total revenue was up 5% driven by retail demand that is continued post quarter with government stimulus actions.

Secondarily, the influx of cash from healthy pawn service charges as launch were redeemed.

Driving a 5% reduction in palm loans outstanding for the quarter.

Merchandise sales grew 8% on a year over year basis with same store sales growth of 6% and it remains strong in April.

Sales gross profits were up 2% as we increased inventory turns and reduced aged inventory.

Even with prior quarters, our efforts to optimize cash to cast cycles and inventory management continued to pressure related margins at 34%. Our merchandise sales margin was flat on a sequential quarter basis, but was down about 200 basis points compared to the fiscal second quarter of 2019.

Europe buckets are coming in stronger and showing early returns from our efforts to optimize the business.

On the expense front operating expenses were down 1% year over year.

Despite a 3% increase in total store count or corporate cost were held in check as a result of expense control measures importantly, we've reduced non score based expenses by 16%.

As a result, adjusted EBITDA grew 14% to 26.1 million for fiscal second quarter, 2020, and our EBITDA margin expanded by 240 basis points.

North of 20% for the quarter in spite of the March impact is covered night chain.

Turning to the U.S. on highlights on slide 11.

Total revenue was up 5%, reflecting 7% growth in merchandise sales, while EBITDA was up 5% year over year with the related margin expanding by approximately 110 basis points to 32.9%.

Well ending up yellow was down 7% a year over year basis.

At quarter end kilo per store 238000.

The average loan that balance was down less than 2% with most of the point to point decline coming late in the quarter as a result of early cobot 19 related impacts.

As mentioned earlier, our enhanced point of sale system is increasingly improving undervalue decisions on the front end and it turned driving higher <unk> pawn loan redemption rates and yields.

So the point PSC remained essentially unchanged at 62 million for the second quarter fiscal 2020 with yields up 70 basis points from the prior year quarter.

Again merchandise sales on the U.S. were up 7% year over year for fiscal second quarter 2020.

And sales growth remained strong at April up approximately 50% over April 2019 sales margin softened in March by 70 basis points to 36% given ongoing progress and moving age merchandise. These efforts have been effective with age general merchandise inventory down 10% to 6.5% of total limits.

Sorry.

7.2% last year.

In addition, as strong sales have continued into April we've seen a further drop in our aged inventory to just over 5% a drop of roughly 20% since the end March jewelry scrapping gross profit increased 38%.

With related margins up 220 basis points to 19.2% on higher gold prices.

Focusing on Latin America on Slide 12, both ending and average T O low for the quarter were up 1% with same store loan balances down 0.5%, largely reflecting recently introduced social welfare programs in Mexico as well as the impact of Cobot 19, driven redemption activity.

Yes, he was flat compared to the prior year period.

Higher average pillow balance offset by a lower yield for the quarter.

While stores in Mexico have remained open activity GPM Acs has been impacted by store closures.

Merchandise sales remained strong growing 14% versus the prior year quarter with same store sales up 7%.

Sales volumes remained strong in April with sales in Mexico up over 15%.

Versus April 2019.

Merchandise margins declined 600 basis points year over year as we remain focused on optimizing ltvs to drive long term inventory yield improvement.

Notably inventory turns increased from 2.3 times in the prior year quarter to 2.5 times for the fiscal second quarter of 2020.

Segment, EBITDA was down 13% year over year, primarily driven by lower merchandise gross profit and higher operating expenses, which related growth just above the inflation right.

Going forward and Latin America, while we remain focused on realizing incremental efficiencies near term margins likely remain somewhat depressed as de novo stores continue to ramp up in mature.

In addition to maintaining financial flexibility to fund the expected increase in demand for loans investing in new stores remains a key high return growth driver and we plan to open approximately 25, new stores in Latin America This fiscal year.

Beyond de Novo growth the team continues to be position for opportunistic acquisitions should they arise.

In summary in our fiscal second quarter, we've reacted quickly to keep our team members and customers safe.

Introduced innovations in the way, we serve our customers that will last well beyond the current crisis, Ms flexibility is allowing us to engage our customers in new ways.

Our geographic diversity is proving to be a strength as a large percentage of our cash flows are coming from our U.S. bass stores.

We've added to our strong balance sheet and maintain a cash balance will allow us to operate effectively and grow overtime and all scenarios.

And our systems are starting to become a differentiator we expected them to be.

With that we'll open up the call for questions.

Thank you as a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound or hash key please standby will become pilot Q in a roster.

And our first question comes from the line, Greg Pendy from Sidoti and company. Your line is open.

My question just real quick how should we think about the rising gold prices because it would look like customers, maybe choosing to just outright sale over upon in order to take advantage of the prices. So do you think that's a positive or somewhat negative that gold prices have risen.

Thanks, Gary I don't think is feeling good morning, we're not seeing as much a goal coming through.

One, but as we had in the past ones that matches crude.

Each of which means are captured admitted that gold price rise through the scrap or most of that one bed jewelry content actually involves hold on things as well. So it's not that lot gold I think are people are just holding off at the moment due to the fact that got a stimulus fixing them off that there's not a real rush for them to.

To common in Poland as we've seen with a decline of balances is bad surplus cash in their home. So at this stage I think there was a bit of just waiting to see from our customers. When they run out of cash we may see a bit full gold coming to us but at this moment, we haven't seen the Russians mass we sold back in 2009, when it was my stimulus and people.

Our.

Quite active in really Julie.

Go into was to a two at a line will purchase.

Great. That's helpful. And then if it just one more I'm just I'm on a on the roll out have you guys rolled out a that with mobile functions and is there more to come where are you on that front.

Oh, sorry, what do you need but in terms of my vote assumptions right.

I believe you had some mobile capabilities that you were looking to roll out at some point.

May be mistaken.

Yeah, I'm not sure whether there are lot of it it is a itself. It's all a on the on the fine too, but its weapon idle that when she can use on the side pretty pretty easily and we are increasingly the utility that function.

Absolutely not specifically answers your question.

No. That's that's what we can take the rest of that offline. Thank you feel like thanks, Greg.

And our next question comes from the line of Scott Buck from B. Riley FBR. Your line is open.

Hi, Good morning, guys I was hoping you might be able to provide a little bit of the history lesson.

Curious if we look back to the O. eight or nine financial crisis, where pillow peak to versus pre crisis levels in sort of what was the the cadence of that ramp during that period.

Hi, Scott will have a crack at L.C.J.C. could add to what they this is that at a different scenario what was like what we're seeing it was a bit of an unemployment led recession, whereas in the late at night.

And that was a bit of OLED and they certainly wouldn't the stimulus payments. So what we're seeing is a rapid pay down of the loan balances around the slow increase in a loan balances. So I like about nine on really that representative of what we've seen today I think the closest that weve tried to understand as weather.

A lot the hurricanes that we saw through a three keys.

And in a in Miami earlier last year could provide us with any insight and we saw it took with the FEMA payments. It took a couple of months before we started seeing the loan activity crawling back and in that case, it probably took around.

12 months for the loan balances to come Matt No. We're not sure whats how exactly to model of which I'm sure as when Youre looking at as well Scott is given the stimulus that.

That is in the economy at the moment and if you look at some of the most recent reports it seems to suggest that well get some hospice states that are a C. Receiving the unemployment benefits from the federal and state probably getting paid more than they would to looks it isn't it's that's winding down we think we'll see it come back, but probably the ended advantage.

That's what disadvantage for somebody to customers and said what the unemployment rate as high as it is.

We may see an increase in the population that are looking to like the pool in mind industry given that the young payday is probably shrinking and giving them the length of employment for which they buy supply lines on so we think there might be an increase in that state from populations, we would use out.

And <unk>, we still think it's probably a couple of months before we'll stop thing to pick up back to normal levels of loan demand that was saying.

Jason do anything today.

<unk>.

Yeah. Just briefly you know we have a new slide this quarter a slide six that goes through somebody economic trends that that Stuart just mentioned then he also mentioned than some of the prepared remarks.

But what's important about that is we sort of know how this how the stories where it plays out I'm right now the stimulus checks are are driving the behavior that they're driving but we know at some point, our consumers are going to need cash and and so that's where you see some similarities to maybe maybe prior.

Periods of stress the comparison to the Hurricanes and something we've we've been talking about lot internally as Stuart mentioned, but you know the nice thing for our business is front for now all the cash and strong were benefiting on the retail side, particularly as people are are are buying goods for working in schooling from home.

Coming to us to buy things they need to spend more time with their family game consoles Tt's.

Those kinds of things and laptops and and then when when the cash begins to sort of not be a strong.

In the loan demand pickup picks up.

We're position to be able to meet those needs and to be there for our customers as we continue to build our cash balances.

Great appreciate that color guys. Thank you.

Thanks.

Again, if you'd like to ask a question that star one on your telephone keypad.

I would like to turn the call back over to Stuart Grimshaw for closing remarks.

Thanks, very much and I know this is a tough times that everyone's really busy. So we appreciate the time that you've taken to listen to the cold and Ah that's an out around Sheila on she takes and tools like rooms for the next few days, but.

Sites and that would support to talking so thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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