Q3 2020 EZCORP Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the easy Corp, third quarter of the fiscal Twentytwenty earnings Conference call.
At this time, all participants are in listen only mode.
Later, we'll 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 or download from our website that investors dot easy Corp. dot com.
Before we begin I'd like to remind everyone that this conference call as well as the presentation slides.
Taint 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 risks or other factors that are discussed in our annual quarterly and other reports filed with the Securities and Exchange Commission.
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., Jason Koulis Jason.
Thanks, Michael and good morning, everyone.
I wanted to start off this morning by thanking Stuart Grimshaw for his many contributions and accomplishments over the years is ongoing council and support as we moved to the leadership transition.
I'm honored and incredibly excited about the opportunity to work with the talented team here at easy Corpus CEO.
We spent the last few weeks continuing to develop our overall business strategy.
We have a large store base spread across diverse markets that are underpinned by attractive demographics stable regulation and a runway for growth.
We have a team upon brokers, who provide a service that is unique in the central for our customers and I'm more confident than ever and we will emerge from the current crisis in a stronger position as it relates to our business operations financial performance and growth profile.
So starting on.
Slide four at the Investor presentation.
Hi level, we strive to be our customers first and best choice for short term cash needs are increasingly leveraging our durable competitive advantages.
A key priority for us is creating the most tenured diverse and highest performing team in the industry.
We recently appointed a new head of diversity and inclusion.
We're excited about the opportunities we have going forward as we more closely track and measure the progress of our diversity efforts.
The more we remain very focused on the safety and well be of our team members and these uncertain times with strict adherence to see see guidelines here in the U.S. and local government procedures across Latin America.
Our team members are working hard every day to serve our customers and we're committed to continuing to ensure that they're safe while they do it.
Encouragingly employee attrition continues to drop with store turnover down 10% and then you pass and 16% in Latin America for the quarter on a year over year basis.
Turning to our customers, we continue to provide critical and essential financial services as of July 31st 99% of our stores remain open which is key to continuing to meet our customers' needs for cash and providing affordable merchandise for working remotely and home schooling.
Our consistency in this regard being there for our customers every day is a big driver of our customer loyalty.
Finally from a financial standpoint, our balance sheet remains a key differentiating factor.
Our unrestricted cash balance grew by over 100 million on a sequential quarter basis to 311 million at June Thirtyth and has continued to grow incrementally in July.
Positioning us well to serve our customers that they're short term needs rebuild overtime.
The strength of our balance sheet highlighted by net debt of 6 million at quarter end, no near term debt maturities and no restrictive debt covenants.
Ensures that we remain strong well funded and able to me large increases in loan demand in all of our internal recovery scenarios.
In addition, as I'll discuss further we're targeting significant cost savings by reducing administrative overhead and operational expenses and rationalizing noncore activities, including plans to exit our cash next business in Canada.
On slide five you walked through some financial highlights for the quarter.
Key things in Q3 included 5% revenue growth driven by strong merchandise and scrap sales.
John the topline offset a decline in pawn service charges.
Versus the prior year quarter.
Pawn service charges, a significant driver of our profitability are down given lower demand for PON loans, reflecting stimulus payments and extended unemployment and forbearance benefits.
An important item to note as the federal government prepares for a second rabbit stimulus funding is that additional stimulus actions could further impact our loan balances and related pawn service charges, although not to the same degrees the first round of stimulus.
Additionally, we would not expect pawn service charges to be impacted as much as PLM given the positive trend in yield that we saw in June relative to the quarter on a consolidated basis.
Next we have made considerable progress in managing aged inventory levels here in the U.S. driven by rising merchandise sales and higher inventory turns.
We reduced age general merchandise inventory levels in the U.S. by nearly 60% year over year with the percentage of aged inventory dropping to 4.9% as at the end of our fiscal third quarter of 2020 from 6.3% a year ago.
We are stepping up our focus on inventory management Latin America.
We're levels have trended higher due to a more challenging environment as well as extended store closures at Jeep GPM Max.
[noise] inventories declined from high levels due to strong sales and we have seen the merchandise selection in stores decrease with lower inventory levels, we expect to see a decline in Q4 from current levels of merchandise and scrap gross profit.
In summary, while sales gross profit margins were strong the tradeoff and higher margin pawn service charges for lower margin sales negatively impacted EBITDA and EPS for the quarter.
On slide six we show updated stats across several macroeconomic indicators, while jobless claims have mater moderated from peak levels in April recent trends likely drive increased trapped cash needs from nonbank sources, including call.
Post any subsequent stimulus actions.
In light of this backdrop, we took the opportunity to refrain our strategic initiatives to position the company for optimizing both top and Bottomline long term growth.
Which we detailed over the next several slides.
So on slide seven at a high level, we mapped out three key initiatives first we are committed to reducing administrative overhead and operational expenses and rationalizing noncore activities to optimize our cost structure and generate significant annualized cost savings.
Second we are continuing to focus on strengthening our core business operations through fostering high performance and tenured store members continuous optimization and pricing a lending and ongoing modernization of our technology and data assets.
And third we remain focused on more fully leveraging innovative payment solutions across curbside, Lana online and pay by phone auctions digital marketing to capture new customers as well as selectively pursuing de novo in M&A opportunities to grow our store count and expand our footprint.
As we highlighted news on this page all of these efforts are underpinned by the quality of our team members a relentless focus on our customers and a strong balance sheet that allows us to execute.
So digging a bit deeper on optimizing our cost base in slide eight.
We plan to reduce both corporate costs and operational expenses to maximize profitability and better align with near term FILO trends.
Initial areas of focus include increasing the efficiency of our operations and selectively reducing expenses related to our digital efforts as well as shutting down the non core cash next business in Canada over the next few months.
These efforts are expected to add an even greater level of resiliency to our business through the current environment and future economic cycles.
Furthermore, we are taking a balanced approach to growth and maintenance capital expenditures, ensuring that we remain committed funding key strategic initiatives over time.
We're still in the early early stages of identifying mapping out cost savings and we'll be providing more detail and regular updates on subsequent quarterly earnings conference calls.
We do not expect these efforts have significant impact on Q4 results, but we will begin reporting on our progress in our fiscal fourth quarter and beyond as we identified these additional measures to reduce costs from current levels.
Next on slide nine we lay out a number of initiatives centered on continuous optimization and modernization of our infrastructure to strengthen our core business operations and drive more consistent profitability as well as a better better balanced caster cash cycle.
More specifically, we continue to invest in system generated pricing to improve the overall customer experience team member productivity and profitability.
On the lending side, we are increasingly implementing automated guidance systems to generate a higher and more consistent return on earning assets over time.
Early results of these efforts are showing in loan to value ratio ratios on forfeited collateral having decreased by 12% in the U.S. and by 15% in Mexico paving the way for higher merchandise sales margins.
In addition, we believe these enhanced systems and processes will help us develop new team members and professional pawnbrokers increased productivity and improved team member retention.
On the Keysight efforts to modernize our infrastructure include the ongoing rollout Pos to with El Salvador in Guatemala to be completed in the fourth quarter. This fiscal year, enabling increased standardization across geographies.
In addition, we are focused on broader use of store tablets and digital engagement across key customer interactions and centralized data management with the goal of enhancing the growth of our core pawn business.
As well as increasingly penetrating new channels, and bringing new products to market.
Turning to our innovation and growth initiatives on slide 10 and 11.
Our customer centric culture continues to enable innovation through the crisis. For example, we are expanding customer choice across pay by phone across four payments, thereby enhancing convenience and the customer experience.
As temperatures have increased and store staffing has been impacted by cobot 19, our curbside offering has been pulled back but we fully expect that to continue to be an important service going forward.
Next we remain focused on leveraging our differentiated digital capabilities to capture new clients.
Our efforts are focused on driving higher social media engagement online activity search engine optimization and online reviews.
Focusing on Lana, we continue to increasingly penetrate existing stores in customers with the platform currently available in 374 stores more than doubled to 159 stores at March 30 Onest.
And with over 40000 customer accounts at the end of July compared to just over 8000 at the end of our fiscal second quarter.
Functionality is also on the rise with over 10000 extensions processed in July and more than six times than ever number of extensions in March while we expect customer debit card payment and lay awake capabilities to come online in the next six months or so reinforcing liner as the digital loan servicing platform for our customers.
Turning to grow we maintain a large and growing store base spread across diverse markets underpinned by attractive demographics stable regulation and strong prospects.
On de Novo opportunities. Despite the challenging backdrop, we remain on track to open 23, new stores in Latin America. This fiscal year with plans to open another 25 next year.
And from an inorganic perspective, we remain disciplined and scanning the market for PON store acquisition opportunities across core markets and potential new geographic region regions.
As shown on slide 12, while more recent EBITDA growth and margin trends have softened.
Largely a function of the stimulus fuel pay down upon loans.
We know how this story ends and expect to pent up lending demand to drive a return to and beyond pre cobot levels upon loans outstanding overtime.
Now turning to our financial results results for the quarter on a GAAP basis, we reported diluted earnings per share of negative 10 cents a decrease of 16 cents from the prior year.
On an adjusted basis, we reported diluted earnings per share.
Of negative one cents for the fiscal third quarter compared to 18 cents in the prior year quarter.
Adjustments for the quarter included a loss of 1.8 million inventory 400000 loan restitution losses, and 200000 property plant and equipment due to looting that occurred in 30 of our U.S. stores. During riots in late May in early June as well as our typical excludes non cash interest expenses related to our convertible debt.
And adjustments for foreign exchange fluctuations.
Focusing on our consolidated financial highlights on Slide 13, total revenue was up 5% driven by 31% increase and merchandise sales and 15% growth in scrap sales on a year over year basis sales gross profit was up 25%, reflecting stepped up demand for shelter at home merchandise and higher inventory.
In terms as a result inventory was down 28% and we made significant process progress on liquidating, aged inventory to expand related margins and optimize cash the cash cycles.
However, our ending PL low balance of 117 million was down 39% year over year largely related to the impact of stimulus payments included 19 headwinds.
Thereby driving lower pawn service charges in net revenue despite the offset of as your 0.5% decline in total operating expenses. These factors pressured EBITDA and margins for the quarter.
Turning to us on slide 14 trends for the quarter were similar with higher merchandise sales and gross profits on stepped up inventory turns and effective.
Inventory management, driving strong revenue growth and with lower pillow and PSC pressuring that revenue.
Ending pillow was down 42% on a year over year basis, reflecting ongoing koby related headwinds.
The PSC was up 30% given a lesser declined an average people over the quarter and an uptick in yields also driven by higher redemption rates.
We continue to leverage our enhanced point of sale system to optimize loan to value decisions drive higher pawn loan production rates and yields.
More favorably merchandise sales margins held steady versus the prior year quarter with age general merchandise inventory down 4.9% compared to over 6% a year ago.
In addition, jewelry scrap gross.
Gross profit increased 86% with related margins up 840 basis points to 24.8%.
Much of the step up reflected our decision to capitalize on higher gold prices and we do not expect the same level of scrap sales profits and margins in the fiscal fourth quarter.
And finally operating expenses remained well managed with costs inline with prior year.
Segment, EBITDA was down 17% on lower pawn service charges.
Next on Slide 15, Latin America results were more challenging with decreased EBITDA contribution, reflecting lower PSC and merchandise gross profit, partially offset by reduced expenses store closures and reduced operating hours outside of Mexico, We're a big driver to be expense reductions.
Similar to us pillow declined largely reflecting cobot 19 headwinds while stores in Mexico generally remained open koby to related closures persisted through the quarter at Gtx with many stores operating under reduced hours restricted business activities when locations with limited public transportation.
As a result, PSC declined by 35% year over year, driven by lower average tier low for the quarter and a lower yield.
Merchandise sales were down, 2%, reflecting reduced and store traffic and store closures at GPM, Max with related margins contracting 700 basis points compared to the prior year quarter.
As mentioned earlier, we are increasingly intent on optimizing ltvs and more effectively managing aged inventory levels across Latin America to drive improving yields and merchandise margins overtime.
Finally to follow up on a few of the forward looking statements made this morning, while we started to see demand for pawn loan begin to pick up in the U.S starting Jim It will take time for pillow and PSC to rebuild and we expect the trends temporarily reverse for the second round of government stimulus payments.
And why we're focused on rightsizing, our cost structure and recognizing significant annualized cost savings. We're still early in the process with material expense savings more of a fiscal 2021 story.
All that said, we remain confident the demand for PON loans will meaningfully pick up overtime driving accelerated revenue growth and building earnings power, particularly as we increasingly rationalize expenses and invest in value added initiatives related to that we also remain focused on deliberate delivering more consistent financial performance.
And plan on providing regular updates and metrics to the market on our progress against key strategic initiatives, we've laid out.
Put very simply we're going to focus on efficiency operations and growth.
We'll optimize our cost structure in the coming quarters, while we continue to enhance our store level operations and give our customers more choices and conveniences and we will do all of that while continuing to look for ways to grow both organically and inorganically.
Underpinning these initiatives as a relentless focus on the safety of our team members and on providing outstanding and safe surface to our valued customers, while maintaining a strong balance sheet and excess liquidity to invest in our growth.
We know that if we execute on these initiatives, we will emerge from the Coca 19 crisis in a position of strength and we will be in a position to meet our customers' needs for cash even more efficiently and effectively.
With that I'll open up the call for questions.
Thank you at this time to ask a question. Please press star one on your telephone keypad again that is far went to ask a question to withdraw your question. Please press the pound.
Okay. Your first response is from Greg Pendy. Please go ahead.
Yes, I'll, let Doug on the hold on I.
I just I guess a couple of questions here first of all are you comfortable about the each inventory levels of right now you think or.
At a level, where you can get back likely equally target 35, Oclock, 48% Muslims.
Yes, we are we're very pleased with the progress we've seen in the U.S. and that's obviously a huge driver of our performance.
We announced earlier this fiscal year that we we had pretty high levels of aged inventory in the U.S. and the sales cycle that we've gone through.
Through this cobot 19 period has really helped us reduce those levels down to a very manageable.
Sustainable level at the same time.
We are making sure that our operations are performing in a way that doesnt lead to going back to those old levels of hi, aged inventory as we move forward. So we're pretty confident in that.
We're also pretty pleased.
Back to margins if you look at the U.S. margins, we think the trends there really positive as we as we work off of a more normal base of aged inventory. So so the go forward look on that is pretty stable for us.
Okay, and then I think earlier on the call you mentioned.
Renewals momentum, while you did impact of Hamas can you elaborate on model a little bit why you think that might be the case.
Sure and difficult to note what exactly what the impact will be because we don't know yet the form that the stimulus will take that we havent idea and clearly there will be more cash coming to consumers. The reason that we think that the impact will be more muted. This time is because we through this stimulus.
The people, who still have need who needed PON loans and you still have PON loans outstanding.
We'll see either a continuation of the same amount of cash or something slightly less likely.
And so we don't expect a significant change there.
The other factor here is what we don't know is how long rent abatements in those other kinds of accommodations will continue and our expectation is that some of those might start to lapse. So given all those factors, we would expect more stimulus to have an impact, but but that's the reason we don't we don't think it would be anywhere near what the impact of the first round.
Yes.
Great. That's helpful and then just one more.
Just on Google They go to put a lot through stop this time around from a consumer behavior, just given where prices are not any indication right long adult people might be taking walk with Apollo gold all given the higher crisis.
We're not we're not really seeing a big pickup in that but I think thats largely driven by the overall kind of macro trends that just cash needs aren't very high right now.
We would expect at these prices as cash needs increase that we would see some additional.
Funding of gold.
Although as you've seen over time in our business, there's there's been a shift toward general merchandise.
And and so we would expect both both categories to be strong once demand comes back.
Great Thats helpful. Thanks, a lot.
Sure. Thank you. Thank you your next responses from lets just short of Jefferies. Please go ahead.
Hi, Thanks for taking my question.
First what is a little more on.
The stimulus.
Thats previous caller asked about.
Are you do you expect you know as Steve as you I and are you going to see more of a quote unquote normal recession, where IPO balances are going to go up merchandise sales are going to go down and if you. If you are thinking about that.
Could you kind of elaborate on how you're thinking about them in a model going forwards.
Sure Lance Thats, absolutely what we expect the big question, it's just what the timing yours.
In another round of stimulus will delay this and push it out a little bit, but we were already seeing.
We restart our bottom NPL low and we were starting to work our way back we are working against some year over this is our lending season right. So year over year comps are still pretty pretty tough, but we were seeing that balanced turnaround the other way, which is very encouraging.
And in what we expect is that that will stop and go slightly the other way through another round of stimulus and then and then we'll see demand pick up pretty considerably.
For now our comments are forward looking comments were mainly focused on Q4, but if you. If you look beyond that yes, we expect man to come back strong.
And that's the reason why we're so focused on maintaining such a strong balance sheet and a good cash position and very low almost no debt no net debt position because we want to make sure that we're in a position to be that demand.
When it comes.
Awesome, Thanks, and then second question's around.
The.
Investments customer facing technology I was wondering if you could kind of clarify how you think that might impact results and how are you going to gauge the success of those investments.
We've seen a real benefit from the investments we've made in those areas because if you think about spend environment like the one we've been at we're really people prefer not to get out in some cases, they couldn't get out, but but but generally prefer not to.
We were in a really good positions to continue to allow our customers be able to service loans. If they wanted to do it from the convenience of their home. So in this fiscal year, we've launched both.
The line extensions, which had been you've seen great growth in line extensions.
Doing that from the comfort of your home, but we've also launched pay by phone, which is allow people to extend on loans and service the loans from from from their phone in anywhere.
And the combination of those two has we've seen a big pickup in the percentage of our overall transactions of people as people have wanted to engage with us in that remote way.
So thats been that's been probably the biggest impact we knew that that would be a positive impact on our business over time, we didnt know as we were making those investments is that it would be so relevant and through our global pandemic.
Well, that's the reason we've seen such such big pickup rates in those in those.
And those projects going forward, we expect adoption to continue.
Because of the convenience being able to digitally service. Your pawn loan. We think is a real difference differentiator for us and when our customers need us. They know they can come see us in store and we want that but when they want to do things from the convenience of their home or they have logistics issue in getting to us by the right at the right time, we've got a way that they can.
On the taken surface their loans remotely as well. So we think we think that will only get better over time, but we've already already so a big pickup there.
Awesome. Thanks, and then just one more kind of around the cost savings initiatives.
How much has kogut accelerated the need or.
As it has provided new opportunities.
As you've been looking at these cost saving initiatives I know, it's definitely driven.
Higher use of the online services platform, but on the cost saving side.
How its scope it kind of accelerated those things.
It's it's kind of going both ways, because you know to a certain extent cobot has brought some incremental expenses from making sure that we're investing in items that we need to keep our our team member safe.
To invest in when we havent exposure at the store level and what's needed to clean that store and properly get it back to back open again, so we've seen some some increased expenses on the margin from from Covidien that way at the same time, though yes through this period.
And especially right now as we go through a lot of our planning for fiscal 21.
We are seeing some opportunities to re look at how we staff our stores to re look at how we separate corporate office and some of the infrastructure we had in place.
That we maybe able to trend a little bit and as you add up all those initiatives. We think that there's we think theres a real opportunity.
I would like to say that even if we weren't going through a coke in 19 situation, we would be looking at those same factors to make sure that.
We're leveraging we're getting as much operating leverage as we can but clearly going through a period. Like this has as has driven even more those efforts and I think that's the reason we make the statement as we come out of this and demand picks up we're going to see a little bit of a multiplier effect because we'll be doing it as a more efficient company as some of these some of these.
Initiatives play out in fiscal 21.
Awesome. Thanks, so much.
Thank you.
Thank you you next responses from Scott Buck of B. Riley SCR.
Hi, Good morning, guys I'm curious with two consecutive strong quarters of merchandise sales.
What did the remaining inventory supports.
Yeah merchandise strength going forward.
With the you know whether or not you still have enough of the kind of in favor shelter at home products left.
To get people excited.
Yes. Thanks, Scott that's a great question, we we started up in a position where we had a lot of excess inventory. So clearly there was a big driver for us over the last couple of quarters on a relative basis, because we started with so much we still have.
We still have inventory and we feel like we're still in a position too.
To be able to to drive sales, we did indicate in some of our comments, we expect to sales to pull back.
As we go into the next quarter, but we still we still think that we'll be able to drive sales.
One thing that's been interesting is that the mix of our inventory has shifted a little bit toward jewelry as is the as that is the general merchandise has as really the sales are really picked up there but.
But what we've seen is that as that's happened. We've also seen a little bit of an uptick in jewelry sales.
Where where customers come in and they they look at what we have and they do still make some purchases, but again, we do we do expect sales to drop from the current levels.
As as you would naturally expect.
Going into this next couple of quarters.
Okay. That's helpful.
Second one for me given the cash balance you seemingly would have enough to me any kind of future loan demand any thought to reinstituting the buyback program.
Our view on that is still what it has been which is we want to get to the other side of the crisis before we address those kinds of issues and questions internally clearly.
The board level, what will take up those matters and we'll always.
Endeavor to make the best corporate finance decision and decision overall.
For the company with our excess cash right now.
It gives us a lot of comfort that we're sitting on cash position that we are because.
As you can imagine any scenario we run.
As we go through a recovery, which for us is a bit use of cash as loan demand increases.
Under any scenario that we can model right now as you said, we've got plenty of cash.
But we don't want to look at that as excess cash until we get to the other side of this.
Hi, fair enough thanks, guys.
Thank you.
Thank you there were no further questions at this time I will turn the call back over to Jason currently.
Okay. Thanks, everyone for your time. This morning, we look forward to continue to discuss our progress on future calls move everyone has a great day.
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This concludes today's conference call you may now disconnect.
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Yeah.