Q2 2021 EZCORP Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the easy Corp, second quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen only mode.
Can you share will be 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 at investors <unk> easy court dot com.
Before we begin I'd like to remind everyone that this conference call as well as the presentation slides contain certain forward looking statements.
Guarding 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.
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. Jason course, Jason.
Thanks, Michael and good morning, everyone.
As always I want to start by recognizing the continued hard work and dedication of all of our team members.
We've made tremendous progress in positioning our core pawn business for sustainable growth coming out of the pandemic and none of that progress would have been possible without the enthusiasm determination and relentless efforts of all of our team members who are so passionate about serving our customers.
I also want to specifically acknowledge Tim judgments.
Insights and leadership have been instrumental in all that we have achieved over the last year or so and instrumental in our future and the board and I are pleased to appoint him Chief financial officer officially removing interim from his title.
This move gives us great stability and continuity on the financial side of our business.
No Tien shares my excitement for the opportunities in front of us and I look forward to carrying on our partnership as we continue to strengthen and grow our core pawn business to address our customers' needs for cash and affordable pre owned merchandise across the U S and Latin America.
So starting on slide for the roadmap, we lay out here hasn't changed in our strategy is intact, but we wanted to reinforce all of the progress we've made by highlighting some key accomplishments.
First continuously developing our team member base remains foundational for driving sustainable growth and profitability.
We've implemented new diversity and inclusion initiatives as well as enhanced recognition programs and we're seeing the benefits of our efforts through rising productivity and declining attrition.
On the customer side, we installed store traffic counters in our U S stores, allowing us to better understand customer behaviors to inform PON and sales strategies.
In terms of strengthening the core.
Merchandise sales gross profit was up strongly.
With related margins up nearly 900 basis points year over year, reflecting higher inventory turns and declining aged general merchandise inventory.
Reducing costs and further streamlining the business remains a key strategic priority will dig into this later in the discussion, but we continue to make progress on this front and have now increased our targeted annual cost savings to more than $14 million. After also increasing the number last quarter from our original projections.
We also remain focused on strategically expanding our store footprint and we have added 17 stores since the end of our fiscal first quarter in December a one seven per cent increase in our total store count.
We opened four new stores in Latin America in the second quarter and an additional two stores since the end of Q2.
And we recently acquired 11 stores in Houston, strengthening our presence in Texas.
All of these pieces contributed to our strong financial performance for the second quarter and set us up well for a considerable step up in earnings power over time as our PLO rebuilt.
Turning to slide five key financial themes for the quarter included steady earnings on a year over year basis adjusted EPS for the quarter came in at 17 sets consistent with the level in the second quarter of fiscal 2020.
As the expected decline in net revenue was offset by reduced expenses.
Net revenue was down 11% with the declined mostly a function of the decrease in PON transactions outstanding in pawn service charges.
Hello ended the quarter at $123 million down 24% on a year over year basis, reflecting increased government stimulus in the quarter. In addition to typical seasonal headwinds related to tax refunds.
Tim will discuss our forward outlook in more detail, but it's important to point out that stimulus payments and an extended tax season have remained in play here in the U S. Thus far this quarter.
As a result, PON demand has softened putting near term pressure on pawn service charges, which will take time to work through even as PLO rebuilds, having said that we've been very pleased to see pawn balances begin to increase since mid April.
Turning to the retail side of the business, while lower inventory levels continued to pressure sales merchandise sales gross profit was up strongly year over year driven by higher margins.
For the quarter merchandise sales margins reached 43% with ongoing improvements in inventory turnover and aged general merchandise inventory levels, reflecting our focus on more effectively operating the business at the store level.
Our cost optimization program continues to drive meaningful savings and we remain diligent and uncovering and realizing further efficiencies as part of our culture.
And finally, our balance sheet continued to strengthen with just over $335 million of cash on hand at quarter end and no near term debt maturities, providing us with ample liquidity and flexibility to fund PLO growth.
Finance de Novo store openings and capitalize on M&A opportunities, if and when they arise.
Slide six highlights the progress we've made against our cost reduction and simplification efforts when we implemented our expense reduction initiatives in the fourth quarter of fiscal 2020, we initially targeted realizing approximately $12 million of recurring annual savings mostly related to G&A.
Over the last couple of quarters, we've identified the incremental efficiencies and now expect to achieve more than $14 million of annual cost savings.
G&A costs decreased by 11% for the second quarter compared to the prior year quarter, resulting in a 22% decline through the first two quarters of fiscal 2021 Stuart.
Store expenses decreased by 7% for the quarter on a year over year basis, and 9% when looking at year to date costs.
Going forward, we remain focused on extracting further operating efficiencies without sacrificing our potential for growth.
In that regard, we expect store expense to gradually trend higher as transactional demand increases.
On the left side of slide seven we call out some of our team member initiatives. We continue to believe that reporting strong financial results is directly tied to our ability to attract and retain a well trained motivated and diverse workforce.
And then we concentrate on technology on the right side.
Ongoing tech initiatives include expanding sales and payment options further enhancing our digital upon servicing platform to broaden customer engagement and increasingly leveraging our data across geographies to inform more systematic lending and pricing decisions.
Turning to our innovation and growth initiatives on slide eight we continue to build out the functionality of Armada digital PON channel.
On line extension transactions were up 70% on a sequential quarter basis, our related P. S. C collected was up two times compared to the first quarter of fiscal 2021.
In addition, layaway payment options are now available for all of our U S stores with more than 1000 payments made during the quarter.
Our customers continue to tell us that they want choices in how they interact with us and we are pleased to provide these convenient options.
Second ongoing customer service initiatives include enhancing online account management and centralized support capabilities, which are driving real time improvements in online reviews and customer retention.
Our digital initiatives go beyond account management and customer support we continue to make inroads on the digital marketing side by leveraging search engine optimization, social media to enhance customer acquisition and as mentioned earlier, we deployed traffic count technology in all of our U S stores to track related campaign analytics.
And finally, we remain focused on increasingly leveraging our strong and liquid balance sheet to fund de novo store openings and potentially capitalize on M&A opportunities to further enhance our footprint and growth profile.
So with that I'd like to turn the call over to Tim judgments, our Chief Financial Officer, Tim.
Thanks, Jason.
For the second quarter of fiscal 2020, one we reported diluted earnings per share of <unk> 10 cents for the quarter on a GAAP basis compared to a loss of 74 cents for the product for schools youth second quarter, which included $47 million goodwill and intangible asset impairment charge.
On an adjusted basis the other.
EPS was <unk> 17 cents for the quarter consistent with the prior year quarter.
For the first quarter adjustments for the second quarter were mostly.
Limited to our standard practice of adding back noncash interest expense related to our convertible debt.
Focusing on our consolidated financial results for the second quarter on slide nine.
Hello ended the period at $123 million down 24% on a year over year basis.
A function of multiple rounds of government stimulus payments.
Following suit P. C revenue declined 21 per cent compared to the prior year quarter's level.
Merchandise sales were down 11% year over year, largely reflecting lower inventory levels.
That said merchandise sales gross profit was up 12% on more private level profitability.
Let's start sales gross margin expanded by 890 basis points from the prior year quarter to 43%, primarily driven by reduced inventory levels and higher sales velocity.
Inventory turnover improved to three one times from three one times, a year ago, and the aged general merchandise inventory ratio continued to decline from ice to sense of total J M inventory a year ago to just 2% has the day end of the second quarter of fiscal 2021.
Finally, rising sales gross profit and inventory.
And lower inventory levels continue to drive elevated return on earning assets ratio, which reached 199% for the quarter up from 137% in the prior year quarter.
Consolidated EBITDA was down 23 per cent compared to the second quarter of fiscal 2020 with self that PC revenue, partially offset by higher merchandise gross profit and lower <unk> expenses.
As Jason discussed earlier continued focus on expense control decreased store expenses by 7%, while general and administrative costs were down 11% year over year.
Turning to our U S pawn operations on Slide 10 segment P. L O was down 22% on a year over year basis.
Led to a 20% decline in PC, driven by lower average PLO for the quarter, partially offset by a year over year improvement in PLO yields due to a high redemption rate.
On the retail side of the business merchandise sales decreased 8% compared to the second quarter of fiscal 2020.
Both favorably merchandise sales gross profit was up 13% and related margin expanded by 850 basis points to 45 per cent from 36% a year ago, reflecting ongoing inventory management initiatives.
Reinforcing our progress.
General merchandise inventory continue to decline and now stands at just 400000 or 2% of general merchandise inventory versus $4 million or 6% of the total a year ago.
Moreover, sounds velocity continues to trend higher with inventory ties up to two nine times during the second quarter or 45% higher than a year ago.
From a bottom line perspective U S pawn EBITDA was down 14% compared to the prior year quarter with lower corn service charges, partially offset by higher merchandise gross profit and lower expenses.
We remain focused on tightly managing expenses with U S store expenses down 6% year over year.
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Turning to our Latin American pulling operations on Slide 11 segment polo declined 29 per cent compared to a year ago, largely reflecting headwinds around constrained traffic limited operating hours and elevated remittances from the U S.
PSC was down 24% as lower average PLO for the quarter was offset by more favorable PLO yields due to a higher redemption rates.
Merchandise sales declined 20% versus the prior year quarter.
But the segments merchandize sales gross margin expanded by 940 basis points driven by increased sales velocity.
Inventory tons up 16% to four times.
Moreover, general merchandise inventory decreased to just 3% of total GMA inventory versus 11% a year ago.
EBITDA was down 48% year over year to $3 $9 million on lower P. C, partially offset for a high merchandise sales gross profit and lower expenses.
Store expenses of $18 million were down 4% year over year, driven by lower labor costs.
Finally, we have been for dinovo stores in Latin America during the quarter and two more since the end of the quarter.
With new stores typically pressuring earnings in the short term as they ramp up while driving higher profitability over time.
Looking ahead HELOC balances remained under pressure through mid April reflecting lingering impacts from the second stimulus package as well as a delight tax filing season in the U S.
Furthermore trends in Latin America remain challenged due to the factors previously mentioned.
These macro related factors that continue to temporarily reduce corn demand.
In the second half of April we have seen a return in corn demand from the.
The mid month flow, which is an encouraging sign.
From a timing perspective, the natural lag that exist in the business for trained corn growth and the ultimate revenue impact mostly in the form of pawn service charges will pressure, our top and bottom line in the near term.
Particularly in the fiscal third quarter, given the lowest starting point for PLO.
On top of that lower inventory levels remain a near term headwind for merchandise sales on an absolute basis.
Despite ongoing expense reductions, we expect adjusted EPS to turn negative for fiscal third quarter.
With Poland demand picking up since mid April and demand trends normalizing over time, we expect our regular sales discounting to return, which will bring merchandise margins back to typical levels.
Be it at the higher end of the historical range.
We also expect store expenses to increase in line with increased transaction volume.
As demand for our pawn offering normalizes, we have positioned the company for a meaningful step up in earnings power, particularly in light of ongoing cost cut cost saving initiatives and simple crashing habits across the business.
Increasing leveraging differentiated technology and data analytics to further enhance pawn lending economics and redemption trends.
As well as deeper customer engagement via digital servicing and payments capabilities.
I will now turn it back over to Jason for a few summary comments.
Thank you Tim.
At the end of last summer, we began talking internally about a journey to fit easy Corp. On a path to long term sustained success.
We intentionally kept our strategy is simple focusing on Paul on an operating or core business more effectively permanently embedding a higher level of cost consciousness in everything we do and continuing to invest in innovation and store growth.
The acquisition, we just announced in Houston as 11 stores to an important market for easy Corp.
It also validates the tremendous amount of effort, we've put into developing a strong M&A pipeline.
At the halfway point in our fiscal year, we are proud of the accomplishments we've made in each of these areas and the way, they're showing up in our operating metrics.
Better margins increased inventory turns and sales velocity.
Lower expenses more stores. These metrics should drive improved financial performance for easy Corp. As both PON end retail demand increase over time.
We are passionate about meeting the short term cash needs of our customers and providing pre owned retail merchandise that is both affordable and environmentally friendly and we are equally passionate about staying true to the journey. We began last year, we look forward to continuing to discuss our progress in future quarters.
And with that we'll open up the call for questions operator.
Thank you if you would like to ask a question. Please press star one on your telephone keypad. Please ensure the mute function on your phone is switched off for now your signal to reach our equipment. If you find your question has been answered you may remove yourself from the queue by pressing star two okay.
Please press star one to ask a question.
Moving now take our first question from John <unk> from Jefferies.
Morning, guys, Thanks, very much and congratulations Tim on the the CFO that designation.
Thanks first question is you guys mentioned a improvement of kind of demand activity. Starting a few weeks back you also talked about having traffic counters installed I mean do you have any stats around kind of.
Is that the momentum.
Just to give us a sense for.
The the recovery and how the cadence for the recovery and how it might look.
Sure I'll give some some detail on that so.
So on the traffic counters.
Just recently been installed and we're establishing baselines that I think theres more to come on that in the future, particularly around as we mentioned in the.
The digital initiatives and marketing campaigns, and the effectiveness of those and being able to measure them.
I'm also looking at capture rates and those kinds of things.
On the on the PLO, it's interesting because we did see PLO continued to decline through mid April, but we started to see a turnaround beginning in mid April so.
And this is speaking of the U S and Mexico ended G. P M X.
We actually saw an increase from the beginning of March the DNA for April.
Marginal increase in both of those parts of the business in the U S were down.
Very slightly from March to April.
But we're down less than we were in mid April so that turnaround started in mid way through the month and started going the other way, which is a really encouraging sign another aspect of this that we spent a lot of time looking at obviously is just new loans made in both dollars and transaction counts.
If you look at.
Where we are on dollars and transactions versus last year across the board in the business at the end of April where we're significantly ahead of where we were.
If you look at the very end of April.
This year versus the very end of April last year.
The new loans made that trends are much stronger. We also do though just for discipline compare ourselves to two years ago, because that's a more normalized level of operations that we want to get back to and beyond we're still below that but if you look at where we were at the end at the very end of March on those origination trends versus where we.
Set where we sat at the end of April the gaps were a little bit smaller versus two years ago. So so all in we're really seeing some encouraging signs for things starting to come back and this is all obviously subject to how.
How these additional stimulus actions have an impact but what we're seeing in every case now is that when those things happen, they're temporary and demand comes back pretty quickly after they fade.
Okay. That's super helpful. And then you referred to some of this but I'm wondering if you could give us maybe a little context of what's going on in Latam versus U S.
I mean, the U S. Clearly has some stimulus activity that debt logically can be crowding out loan demand for period of time.
But it looks like the the PLO and so forth and Nevada, Ams off more than the U S and I'm wondering but you also cited that it might be recovering faster. So I'm wondering if you can just some color. There why do why are there differences why are the pressures were the pressures on that day and greater and do you expect the recoveries to be similar.
Sure.
So first of all if you look at the performance of U S versus Latin America.
The story is much more about the performance of the U S.
And it really exceeding our expectations.
You know some of that you can attribute to timing of stimulus versus what we expected, but but a lot of it also can be attributed to just really good solid operations.
And moving inventory and and.
And sales velocity in that first 90 days and just operating the business for you know again very effectively.
We do have some differences between Latin America and the U S.
If you look at just activity levels.
<unk> of action vaccination.
If you compare the percentage of people vaccinated in U S vs across our Latin American footprint, it's significantly different.
Which is leading to lower levels of activity.
And then also some of the some of the dollars that go to the people in the U S ended up showing up in remittances.
But you know it's a similar story.
It's kind of the mid April comments I made it actually goes back a little farther if you look at the last couple of months and in Latin America, we've really seen things start to pick up.
And we're we're pretty happy with what we're seeing we saw a long way to go as you pointed out but.
But these are if you look at the trends that we're seeing the positive trends combined with the demographic factors.
The penetration of the PON product.
In the in the different countries, where we operate we still believe that the future is extremely bright and in Latin America, which is why you see us continue to invest there and de novo locations or those kinds of things but.
There are differences and we expect those to dissipate over time, but as it stands right now that the U S business is producing more than Latin America.
Okay. That's that's helpful.
Last question is.
Obviously, a good trends on an opex is this quarter a good run rate and I think you kind of mentioned that you would think some other variable expenses start to move up as transaction counts move up but are there any other moving parts. There are any other opportunities that you see to continue to drive.
Opex Opex is lower.
Okay.
We would think Oh, yeah, we still looking for more savings as we go.
But we think we have found that most of the low hanging fruit and now we are just looking at trying to maintain those cost savings.
Going forward.
And two and to keep those expense savings low, but as we said those store expenses will slowly come back as that transaction volume increases.
Okay, great. Thanks, very much guys.
Thank you John.
Yeah.
We will now take the next question from Greg <unk> from Sidoti. Please go ahead.
Hey, Thanks for taking my questions I, just wanted to dig into the inventory turns.
From to three one from two one how much of that is just the reduction in aged inventory and leaner inventory levels overall, and what do you think a normalized level could be I mean are we seeing the impacts of Lana I guess help your inventory turns and how should we be thinking about that.
So we're really excited about what we're seeing on that aspect of our business in both the U S and Latin America from cross the entire pawn business, we're seeing higher turns.
And a greater focus on on turning merchandise from the first 90 days when it's where it's most economical for us to do that.
Clearly this situation that we've gone through with sales.
Sales demand starting about this time last year has helped us work through some of the aged inventory we had.
But we also have what we call internally, a new card operating model debt.
That lends itself to incentives being in place and operations being focused on continuing to manage inventory effectively turn it faster to have that velocity would be high.
And the result is.
Has been great to see and we think that result is going to continue to drive positive results because at the store level, we're seeing at the store manager level just for managers able to see if.
If we manage it this way there are a lot of other aspects of the business that benefit.
Financially and otherwise so we would expect that debt that this is not temporary that we've achieved.
A much greater level of efficiency in our operations and how we manage inventory that ratio of polo to inventory.
Is more in line with what we would expect to see going forward.
Obviously, the challenge for us will be as inventory increases along with.
PON demand going up and that trending higher over time will need to be as effective at at higher volumes, but we really believe strongly that we've got a new.
Operational focus in place that's going to lend itself to that so so we actually think these pickups and the inventory turns are here to stay we did mention that the sales gross profit margins are likely to fall back a little because they are extremely high right now.
And as you go into a more normal part of the cycle, where there's a little more in negotiation they'll just slip a little but the turns.
And the progress we've made on those we expect to keep and we'd like to continue to build on.
Okay. That's helpful. And then can you just talk a little bit about the the M&A in the U S. Given the market is very fragmented kind of was this a distressed opportunity just given what's going on in the pawn environment is that what you're looking for and are there any meaningful change the debt.
You see or is it still going to have to be kind of you.
You know smaller a smaller sized acquisitions in the U S. What are you seeing there.
Yeah and in the U S. The opportunities do tend to be smaller it's still a really fragmented market.
This is just a.
Broad number kind of a general number but there was something like 5000 owners at 10000 pawn shops in the U S. So it's extremely fragmented a lot of mom and Pops and and obviously it takes as much time to do a small acquisition as it does to do a larger one but at the same time, we're focused on all of them I mean, we are having.
You really good productive discussions with with opportunities of all sizes.
But again, they do tend to trend smaller than the U S and I wouldn't say that this is a distress situation at all.
People will sell for for many different reasons, sometimes its a generational.
Handover.
Times, they're just ready to to retire in and go fishing or whatever it may be and we're having ongoing discussions to make sure that they know that we're here.
And we want to pay up.
Market price and and get deals done and move quickly.
Still do our diligence and be effective but also move quickly and we've seen a good reception from that.
We hope to continue in future quarters to be able to announce that we've had more success. This this 11th store acquisition in Houston is.
This has been a big topic of discussion this week in the markets.
Inflation is a transitory or not and those kinds of things building materials consumer staples consumer discretionary goods prices for things are going up and <unk>.
<unk>, it's interesting because the balance of that on the other side of it is you know unemployment's much better. It was it you know almost 15 per cent last April and now it's back down to six per cent not where we were at the beginning of 2020, but still really strong relative to where we were consumer confidence is high average hourly earnings are now back to above.
<unk> pre crisis levels.
So the consumer sits in a pretty good position was probably lends itself to less of a need for the government to intervene as much of that going forward in future, but also <unk> offset by the fact that that with some of these inflationary factors creeping in what you would typically see in a market that's sort of operating on its own.
Is is that kind of an environment would drive more needs for short term cash uhm. So the pond is typically does well in all parts of an economic cycle, but it does better S. As prices are going up and and things tend to be <unk>, Inc.
Incrementally more distress. So so you would expect overtime. If if these inflationary trends are not transitory uhm, you would expect that to drive more upon demand and for that to benefit our business.
That's very helpful. Thanks, a lot.
Thank you.
That would cause these question and answer session I'll know him back Jason Kunast for clothing for Max.
Thank you everyone for your time this morning, and we hope everyone has a great day.
Thank you that we're conspiracies conference call and thank you for your participation ladies and gentlemen, you may now disconnect.