Q1 2021 EZCORP Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to easy Corp.
First quarter fiscal 'twenty 'twenty, one earnings conference call at this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time as a reminder, this call may be recorded I would now like to turn this conference over to Mr. Michael Kim Investor Relations.
Please go ahead, Michael you may begin.
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 at investors Dot easy Corp dotcom.
Before we begin I'd like to remind everyone that this conference call as well as the presentation slides contain 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.
And by these forward looking statements due to a number of risks or other factors that are discussed in our annual and quarterly and other reports filed with the Securities and Exchange Commission.
And as noted in the presentation materials materials and unless otherwise identified.
<unk> 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 Cool Us Jason.
Thanks, Michael and good morning, everyone.
And I start by thanking our team members for their ongoing efforts and dedication.
We remain focused on the health safety development and retention of our team members through and beyond the pandemic with the goal of building the most effective and seasoned workforce and the industry.
And it is because of this outstanding team and we were able to make the progress we are making toward our goals.
I also want to thank our customers for their trust and loyalty through the pandemic.
We remain committed to strengthening and growing our core pawn business to address our customers' needs for cash and affordable pre owned merchandise.
Virtually all of our stores remain open with ongoing initiatives to expand payment options enhanced our digital pawn servicing platform to brought and customer engagement.
And increasingly leverage technology, and data analytics across geographies and optimize lending and retail pricing.
So starting on slide for the Investor presentation.
The first key financial themes for the quarter was strong and consistent growth and demand for pawn launched even if store expenses remained flat quarter over quarter.
Pawn loans outstanding or PLO ended the quarter at $148 million.
Up 11% on a sequential quarter basis, primarily driven by ongoing efforts to enhance our value proposition to customers and a fading impact from prior government stimulus programs.
<unk> said that the recently implemented second stimulus package and reduced demand for pawn loans and early January before stabilizing and the second half of January.
The upcoming tax refund season, more further and temporarily curb loan demand and therefore, PSC and the near term.
Once we get through tax season, and incremental stimulus programs run their course, we expect PLO and ultimately pawn service charges to pick up as they did and the first quarter.
And lead to a return to pre COVID-19 levels.
Second the revenue backdrop remained challenging during the first quarter as well as through January with pawn service charges merchandise sales depressed relative to prior year levels as we continue to work through rebuilding PLO.
As a result, adjusted EBITDA and EPS were down year over year with further pressure likely to come and fiscal 'twenty 'twenty one.
Third while lower inventory levels, resulting from declining pawn loans, and forfeitures or constraining sales to some degree merchandise sales gross profit trended higher reflecting accelerating inventory turnover and higher margins.
For the first quarter of fiscal 2021, our inventory turnover ratio reached two nine times compared to two times for the year ago quarter.
We also continue to make progress on more effectively managing our inventory.
To the point and aggregate aged general merchandise inventory stood at $2 1 million or five 2% of total inventory at the end of December 'twenty, and 'twenty down from $7 4 million or seven 2% of total inventory a year ago.
Fourth and the first quarter, we identified and realized incremental cost savings above what we implemented and communicated and the prior quarter, which we will discuss in greater detail later and remain on track to meaningfully improve operating efficiencies as a result of our strategic expense reduction initiatives.
Looking ahead, while store level operating costs will trend higher as transaction activity rebuilt ongoing cost reduction and simplification efforts across the business position us well to drive outsized operating leverage as assets and revenues rise.
Thereby driving a step up and earnings power over time.
And finally, our balance sheet remains strong with $290 million of cash on hand at quarter end and no near term debt maturities and providing us with the liquidity and flexibility to continue to fund accelerating PLO growth de novo store openings and potential M&A opportunities should they arise with and ongoing emphasis.
On generating strong returns on capital.
We believe slide five illustrates at a high level, how we think about continuing to strengthen and grow our core business.
Each of the pieces is critical and starting with the strength of our team members and their passion for pawn broking and our focus on customer service.
That foundation enables us to drive key strategic initiatives focused on strengthening the core reducing and simplifying our cost structure and continuing to innovate and grow.
And as reinforced by several key performance indicators this quarter ongoing execution against our plan will drive sustained growth and actual results and shareholder value.
The key message on slide five is that each piece of the puzzle is critical.
We will now go into some additional detail on several of these.
Turning to slide six we want to provide and update on our cost reduction and simplification efforts as you may recall on last quarter's conference call. We laid out plans to streamline expenses to better align with our near term PSC trajectories.
And to maximize profitability when revenue growth resumes at.
And at the time, we identified and realized approximately 12 million of recurring annual savings mostly related to G&A.
With further work in the quarter, we had raised that the $13 million and we look forward to continuing to report on our progress and future quarters.
Turning to store costs, while PLO increased 11% quarter over quarter.
And we achieved incremental store expense savings during the quarter, which are down over 9 million compared to last year.
This has been achieved through improving efficiencies at all levels and leveraging our lower store staffing model.
While we will continue to increase productivity and we anticipate adding additional expenses and a cost effective manner as transactional demand increases.
Stepping back it's important to reiterate that we will remain focus on extracting further operating efficiencies and fiscal 'twenty 'twenty, one and beyond with ongoing plans to simplify and centralized corporate functions.
And it is back office and store processes, rationalized data and reporting and automate corporate and store level practices.
Next on slide seven we frame ongoing initiatives to strengthen our core pawn business.
From a people perspective, we remain focused on enhancing career development programs and succession planning to promote our passion for prime broking.
And to improve engagement and retention.
In fact annualized turnover for hourly team members here in the US declined by 24% and Mexico declined by 14% and the first quarter of fiscal 2021.
On the technology side, we continue to leverage our next generation point of sales system to automate product pricing increase transaction speed and improved pricing accuracy.
We continue to optimize lending values and introduce new products and services and a deliberate manner and we are increasingly adopting business intelligence and customer analytics to improve performance metrics.
Turning to our innovation and growth initiatives on slide eight.
As we discussed last quarter, we continued to reposition and as our digital pawn channel and we are seeing encouraging results and.
Number of online extension transactions through line of Dot com doubled on a sequential quarter basis, while the amount of PSC collected was up three ex compared to the fourth quarter of fiscal 2020.
In addition, we introduced layaway payment options and select stores and the first quarter with plans to broaden participation across all U S stores and the next few months.
Second improving customer service remains a top priority.
Related ongoing initiatives include the development of online account management and enhancing central customer support capabilities.
Next we remain focused on increasingly leveraging digital to drive client acquisition.
We are and the process of developing a comprehensive digital marketing strategy with an initial focus on search engine optimization and social media.
And from a process standpoint, we have implemented a disciplined test and learn approach to control marketing spend and maximize return on investment.
Finally in terms of store growth, we continue to take a measured approach to de novo openings in light of ongoing macroeconomic uncertainty primarily related to the pandemic and to maximize liquidity to fund PLO growth and any potential acquisition opportunities across core markets that meet our strategic and financial criteria.
Our pawn operations, playing a central role and meeting the short term cash needs of our clients both here and the U S and across Latin America.
While our complementary retail business facilitates the recycling of pre owned goods.
And while we've made significant progress and optimizing our core pawn business. We remain focused on continually improving all aspects of our operations in order to position easy Corp to drive earnings power and shareholder value over time.
So with that I'd like to turn the call over to Tim <unk>, Our interim Chief Financial Officer, Tim.
Thanks, Jason.
For the first quarter of fiscal 'twenty 'twenty, one we reported diluted earnings per share of eight cents for our.
On a GAAP basis compared to two cents for the prior fiscal years first quarter, which included a $7 1 million dollar T V settlement charge.
And on adjusted basis diluted earnings per share was <unk> 13 cents for the fiscal first quarter compared to 17 cents in the prior year quarter.
Importantly adjustments for the quarter were mostly related to our standard practice of adding back noncash interest expense related to our convertible debt.
Focusing on our consolidated financial results for the first quarter on slide nine.
Hello ended the period at 149 million and increase of 15 million since the end of September 2020, and up $33 million and June 'twenty and 'twenty.
On a year over year basis, PLO was down 24% driving low PC revenue for the quarter.
This was an improvement sequentially from being down by 33% at the end of September and down 39% at the end of June.
Merchandise houses down 14% year over year, largely reflecting low inventory levels.
Mostly a function of higher turnover.
That said merchandise sales gross profit is up 2% on more favorable profitability.
Merchandise sales gross margins expanded by 640 basis points from the prior year quarter, primarily driven by reduced inventory levels and high velocity, particularly and the zero day 90 day I each bucket.
Putting it altogether consolidated EBITDA was down 24% compared to the first quarter of the prior fiscal year were soaked up and you see revenue, partially offset by lowest store and G&A expenses.
Turning to our U S pawn operations on Slide 10 segment PLO continued to improve on a sequential basis and it was up 15% versus last quarter.
However, on a year over year basis P. L. A was down 21%.
This led to a 22% decline and PSC driven by lower average PLO for the quarter.
Partially offset by year over year improvement and PLO yields due to our continued refinement and execution of our systemic lending guidelines and focus on our customer.
On the rate outside of the business merchandise sales decreased 14% compared to the first quarter of fiscal 2020.
More favorably the U S segments merchandise sales gross margin expanded by 590 basis points versus the prior year quarter.
This is a result of the change to a pawn operating model, which focuses on selling fresh inventory and reducing aged.
And so it's somewhat small racing trends IH general merchandise inventory continues to decline and now stands at $1 million or just three point for percent of general merchandise inventory for us.
As for $9 million or nearly 7% of the total a year ago.
From a bottom line perspective.
We remain focused on identifying and realizing further expense synergies.
In fact store expenses were down 9% year over year.
However, U S pawn EBITDA was down 25% compared to prior year quarter.
Mostly a function of lower pawn service charges.
Slide 11 walks through our financial results and Latin America.
While PLO and PSC trends improved on a sequential basis year over year comps were more challenging.
More specifically pulling loans outstanding declined 33% compared to a year ago, largely reflecting ongoing COVID-19 related headwinds, including operating restrictions and transportation limitations across select regions.
Following through and it was down 32% as lower average PLO for the quarter was offset by a more favorable PLO yields due to a higher redemption rate.
Merchandise sales declined 15% versus the prior year quarter, but the segments merchandise sales and gross margin expanded by 770 basis points driven by increased velocity with England trends up 41% for two 3.8, and we remain focused on continuing to optimize <unk>.
T base and inventory management.
Finally, EBITDA was down 35% year over year to $6 2 million on lower PSC.
Oh, it was up from around breakeven last quarter, driven by ongoing expense reduction efforts.
Turning to our forward outlook.
Hello, and balances here in the us softened and the first half of January following Incrementals stimulus payments and we expect further pressure on pawn loan demand assuming for the government programs and as we work through tax refund season.
Britain and trends suggest a more muted PLO impact related to incremental stimulus versus pri government actions and we fully expect demand trends to normalize over time.
Last quarter, we highlighted the natural lag that exists and the pawn business between new loan growth and the ultimate revenue impact.
Whether it be in the form of pawn service charges or related merchandise sales, assuming the underlying collateral drops to inventory.
Furthermore, despite accelerating turn over and velocity lower inventory levels remain and near term headwind of merchandise sales on an absolute basis.
More favorably ongoing expense management efforts remained key offsets and set up us well for a step up in earnings power as revenue rebuilds overtime.
And with that we'll open up the <unk>.
Call for questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two share and move your question from the queue for participants using speaker equipment and May.
And the necessary for you to pick up your handset before pressing the star Keith and Mark.
While we poll for questions.
The first question comes from the line of Greg <unk> with Sidoti You May proceed with your question.
Hey, guys. Thanks for taking my question.
Can you just help us understand I guess the challenge is to maybe getting inventory to a normalized level and just where that level or how we should think about it might be because it seems like you've swung maybe to a little bit high on the inventory levels to know lean and when it's when you think about us going into tax refund.
And then another round of stimulus it would seem that.
You might be missing sales.
Sure Greg Thanks for the question. So the biggest driver of inventory is going to be our PLO, our loans and the loan.
Balance being down we have less dropping out of loans and the inventory.
We do purchase items as well, but the biggest driver by far is our is our loan book.
One thing that's interesting and if you look at the ratio of inventory to PLO and we really feel like where we are today is much more in line a little bit low obviously that could be a little bit higher but but much more in line with I think where we'd like to be going forward.
I think right now the inventory the PLO for example, and the US is around that 0.6 for range and the right. The right level is a little bit higher than that but still lower than what we've been historically a year ago, we were closer to one to one and inventory the PLO I think that the really interesting point that you made about.
Coming into the season, where sales would typically pick up and having lower inventory going into that is that we do still have inventory.
We also have seen and I.
And I guess I'm encouraging signs in this current environment is that we've had strong sales with less inventory.
So we manage that inventory that we do have better we've got higher inventory turns and we've got greater velocity and that zero to 90 day kind of goes early buckets, you got less aged inventory. So the overall picture in terms of how we're managing inventory is really really positive we'd like to have more and as we make more loans that will generate more.
Jewelry and the good news is as we get that inventory, we feel like operationally, we're and are positioned to manage it much better than we have and the past.
Yeah.
Okay, and then maybe just a follow up on that just given your inventories improved.
And when and where you're kind of thinking on aged inventory.
And historically, you guys, usually targeted and I might be wrong, but.
Our gross margin.
And I should say merchandise margin range I believe it was and the 35 to 38 range and.
Any thoughts on whether that will be kind of tracking as we saw and this quarter towards and over the next couple of quarters.
Its definitely above that range right now, we still think of it as a long term, 35% to 38, although much much more likely to be at the high end of that range.
Given some of the factors that I just mentioned in terms of how we're managing it better.
So I think it will settle into a level, that's likely a little bit lower than we are at the higher than we've been historically because of those operational improvements.
Okay, Great and then just one final one I mean, you mentioned and I guess on the call just a more muted.
Muted and packed and there's been discussions of another I guess.
A 1400 dollar stimulus round coming back can you just give us a little bit of color on the puts and takes on why you are starting to see a more muted impact and the existing.
And the existing PLO balance from the stimulus checks.
Yes, so that is very encouraging and if you look at the impacts and the loan balances of of what started to come through and <unk>.
Early January we did see a little bit of a pullback, but since mid January we've seen that stabilize.
And and and not continue to drop.
We will see a drop if there's if there's another round of stimulus and it's us largest what's being discussed I think what's what's really encouraging for us is.
What we saw and this last and this second round us that it is lower the impact us lower to the book than it was the first time around.
Lot of people that might have taken those stimulus dollars and use them to pay down and pawn loans, maybe you already did that and have not yet come back.
The most encouraging sign that we see is that and.
And we saw this in our and our.
And this last quarter, our fiscal first quarter is that PLO grows when stimulus states, we've seen it and we've been saying that's what happens, but it was great to see it and.
And so that we know as we look forward and we get past tax season, and whatever form that that takes and we get past. This next round of stimulus and the demand comes back and it comes back quickly.
That's very helpful. Thanks, a lot.
Absolutely. Thank you.
Our next question comes from the line of John Hecht with Jefferies. You May proceed with your question.
Yeah, Thanks, guys very much and good morning.
Real quick follow up and the margins.
And I guess, the one question I have and that other than what I.
It was asked US was there anything tied to the mix was there any particular product category that had much better margin.
Flow than the other other categories and yet.
What's the mix of those products right now as we sit here.
Yeah. So thanks John.
You know this overall this better approach to inventory management is all boats are rising with that.
So that's been really positive obviously with some of the moves you've seen and commodity prices.
The margins and gold have been have been good for us.
Also the increase in gold prices has allowed us to learn more.
On each individual piece, which has benefited the business.
In terms of.
Where we are on margins versus where we were in different categories again, we've kind of seen improvement across the board.
When you look at what happened early on and there were certain items that where demand was really strong really quick in terms of.
Thinks that people needed to be at home and be sheltered in place and those kinds of things Tvs game consoles.
Those kinds of items, but but again.
We're seeing improvement across the board and if you look at where we were a.
A year ago and in terms of.
And those margins, we've seen a substantial amount of improvement across the whole business, but also and each piece of the business.
Improvement in the us even greater improvement in Latin America, and as the business scales and we continue to manage it effectively and that way, we think we'll see a big step up but.
Okay. That's that's helpful guidance again, we've seen improvement across the board.
Okay, No that's fair.
And it's very helpful. And then obviously you guys have done a great job controlling expenses.
And you talked about investing and expenses as the business.
And.
Re grows.
And so should we just think about that.
Kind of base level.
Expenses and the score as a starting point and and grow slowly with the recovery the business or any other factors to think about with respect internal investments and so forth indicated and for those.
Yeah, John I think you know that is what you said is exactly how we view it if you compare this coming quarter for example, with a quarter. We just closed it's probably a good base to think about it with <unk>, maybe a slight increase related to and increase and activity you know us.
As we see and what are the impacts of of more dollars coming and that that people would essentially used to pay it online and there's there's more activity and the stores and and you do need staffing and labor and those kinds of things to handle that increase and activity. So we we would expect a slight increase quarter over quarter, but I think the way you said at US is the right approach.
Okay. Thank you and then you <unk> I guess, maybe update and a line and and the investment and the infrastructure there and.
I guess where are we in this process kind of positive effects are you seeing and what are the kind of near term goals with respect to developments and that and that.
Strategy.
Yeah. So we're pretty excited are and what we're seeing with a lot of right now it's in terms of volumes. We we made a few comments and are prepared remarks, but but if you look at you know just where we were over the summer versus where we are now in terms of the number of extensions being done a lotta yeah, we were doing and I think you know.
<unk> and that kind of 10000 extinctions range from from a much lower level and <unk>, maybe a five times increase and where we were in the summer Uhm PSE. This is growing off the small base, but our PSE collections since the summer are up about 12 times. If you look at overall and not the percentage of our T.
Total <unk> extension, they're being made a lot of platform now I think it's you know and that kind of 7% to 8% range of our total extensions are being done through a lotta. So we've we've seen a really big pickup and activity and we think that is just our customer saying you know we do need that convenience from time to time to be able to do and extension from from work or for.
And I'm home Uhm on days, when we can't get into the store and so that's been really good in terms of investment and are are the and the spend onliner to maintain the platform is much lower than than what it was to to grow the platform uhm at the same time, though we are making continued investments because we do want to continue to roll out <unk>.
<unk> functionality and we mentioned lay ways, that's been tested and now over the next few months it'll be rolled out to all stores and the U S and it's just another one of those functionality. That's that's nice if you're making a regular day away payments to be able to do it from anywhere instead of having to come into the store every time you do it. So we will continue to report on those for.
Items, and and what's likely as it continues to grow is that the rate of growth will slow uhm, but it's stablish itself as our digital pawn servicing platform and something that our our customers do appreciate having.
Okay I appreciate the card thanks very much.
Yep. Thanks, John.
Ladies and gentlemen, and we have reached the end of today's question and answer session I would like to turn this call back over to you Mr. Jason collage for clothes and home I.
And closing thank you everyone for your time. This morning, we we look forward to continuing to discuss our progress on future calls and we hope everyone has a great day.
Thank you for joining US today. This concludes today's conference you made US connect your line is at this time.
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