Q3 2021 EZCORP Inc Earnings Call
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Please standby we're about to begin.
Good morning, ladies and gentlemen, and welcome to the Easy Corp, third quarter fiscal 2021 earnings 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, today's call is being recorded.
Turn the conference over to Mr. 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 Dot easy Corp dotcom.
Before we begin I'd like to remind everyone that this conference call as well as the presentation slides.
Certain forward looking statements regarding the company's expected operating and financial performance for future periods. These.
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 our 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 easy Corp's, Chief Executive Officer, Mr. Jason Coolest Jason.
Thanks, Michael and good morning, everyone.
We thought it'd be appropriate to start this morning's call by stating our easy court purpose.
We exist to serve our customers short term cash needs, helping them for live and enjoy their lives.
We are driven by a diverse team with a passion for Paul on who are motivated to be their best because our customers families stay.
Stakeholders and the communities environment in which we live deserve it.
We talk a lot internally about the importance of having 1 message 1 message that ties to our strategy and communicates our purpose, both internally and externally and 1 message that resonates with team members customers investors and all of our constituents.
The third quarter marked another period of meaningful progress against the key strategic initiatives that we've laid out.
<unk>, our core pawn business for durable growth coming out of the pandemic.
P. L O. The key driver to our revenue and earnings power is up 25% on a sequential basis and 35 per cent compared to a year ago.
At North of $150 million CLO at the end of June reached the highest quarter ending balance since the beginning of the pandemic.
The growth began in mid April and continued through the quarter and we saw further growth in July.
Looking ahead, the higher starting point for CLO bodes well for growth in pawn service charges revenue in the coming quarters, given the natural lag that exists in the business between PON originations and related fees.
Merchandise sales volumes are below peak pandemic levels from last year due to the positive impact of stimulus payments on sales last year. However, our merchandize sales gross profit was essentially flat versus the year ago quarter, reflecting sharply improved inventory management metrics, including continued strength in the inventory.
Turnover rates declining aged inventory levels and expanding gross profit margins.
We remain on track to realize meaningful cost savings this fiscal year and are focused on optimizing operating operating cost ratios as expense levels rebuild in conjunction with accelerating transaction volumes at the store level.
Furthermore, we are increasingly leveraging our strong and liquid balance sheet.
Beyond funding accelerating PON demand, we completed the acquisition of 128 stores in Mexico, our largest acquisition to date in terms of store count and.
And acquired 11 stores in the Houston, Texas market and opened for de Novo stores in Latin America. During the quarter. We now operate 1143 stores with 55% of those locations across Latin America.
We also recently finalized our decision to close our Peru operations in Latin America, consisting of 11 stores, reflecting our ongoing efforts to focus the business on areas, where we can drive profitable growth.
While there is still much work to be done we remain confident in the differentiated platform. We have built and are encouraged by the progress. We've made in further strengthening our core pawn business, particularly through the pandemic.
We remain focused on meeting our customers' needs for cash and affordable pre owned and recycled merchandise across the U S on Latin America, and our ongoing strategic initiatives will enhance the pace and trajectory of our growth going forward.
As shown on our prior quarter presentations.
For us a graphical representation of our strategic roadmap.
And Tim and I will go into greater detail on some of our more recent milestones over the next few slides.
At a high level all of the underlying components or pieces of the puzzle work together to enhance relationships with our team members and customers deliver sustainable growth and strong financial performance and drive long term shareholder value.
You may have noticed in our social media posts that we are highlighting our role in the circular economy and the natural resources that can be saved when you buy an item in a pawn shop instead of buying it do.
This component of our business, which is core to who we are is something we will continue to highlight along with the rest of our customer value proposition and our financial metrics.
Turning to slide 5 key financial themes for the quarter included modestly negative EPS consistent with the prior year quarter.
On an adjusted basis, we reported a loss of <unk> <unk> per share compared to a loss of <unk> <unk> for the third quarter of fiscal 2020 as.
As improved profit before taxes was offset by higher income taxes.
Net revenue was up 1% year over year, driven by higher on service charges.
Strong sales margins, making up for lower sales, while adjusted EBITDA totaled $12 million for the quarter up 126% from $5.3 million due to higher PSC.
PLO ended the quarter at $153 million up 35% on a year over year basis, and within 17% of fiscal 2019 with further growth in July despite the transitory step up in liquidity for customers as a result of the pull forward and expansion of child tax credit payments.
Turning to the retail side of the business, while sales volumes were down from prior year levels that were temporarily propped up by stimulus payments and high inventories merchandize sales gross profit was essentially flat on a year over year basis for.
For the quarter merchandise sales margins reached 44%, reflecting continued inventory management efforts.
Inventory turnover continues to trend higher and aged general merchandise ratios are now negligible compared to double digit rates, just 12 months ago.
On expenses, we remain on track to realize more than $14 million of expense reductions for fiscal 2021, mostly related to lower G&A spend.
And we remain focused on optimizing store operating cost ratios as transaction activity rebuilds.
And finally, our balance sheet remains a key differentiating factor as.
As mentioned earlier, we closed 2 acquisitions during the quarter and we continue to fund accelerating PLO growth and de Novo store openings.
And with over $280 million of cash on hand at quarter end and no near term debt maturities, we still maintain ample liquidity and flexibility to further enhance growth.
Slide 6 focuses on our ongoing cost optimization and productivity efforts.
G&A costs declined by 10% for the fiscal third quarter compared to the prior year quarter, resulting in 19% savings on a year to date basis.
Store expenses decreased by 3% for the quarter on a year over year basis, and 7% when looking at year to date costs.
On a sequential basis store operating costs were down $1.8 million or 2%.
So we do anticipate related expenses to trend higher starting in our fiscal fourth quarter as transactional demand continues to rebound.
Okay.
Next on slide 7 team member highlights for the quarter included introducing benchmarking surveys launching talent and succession plans enhancing recruitment campaigns and a continued focus on improving inclusion initiatives.
And other technology and process efficiency, we walked through specific modernization initiatives recently implemented to enhance operations and productivity.
Turning to slide 8.
Innovation is a key driver of our sustainable growth initiatives and our efforts to do more for customers.
On line extensions through our Lana digital Pond channel accounted for 9% of total extension payments with more than 130000 payments made on line in the quarter.
In addition over 5000 layaway payments for processed online last quarter.
And we are in the early stages of bringing online payment capabilities to Mexico.
We also remain focused on our customer service retention and acquisition initiatives, including launching a loyalty program in the next several quarters and adding searchable online inventories in select stores.
And finally, we grew our store footprint by 13% for the quarter driven by 2 acquisitions and the opening of 4 new locations as previously mentioned.
With that I'd like to turn the call over to Tim <unk>, Our Chief Financial Officer, Tim.
Thanks, Jason.
For the third quarter of fiscal 2021, we reported a diluted loss per share on <unk> on a GAAP basis compared to a diluted loss of <unk> 10 for the fiscal.
Third quarter for.
The prior fiscal year third quarter on it.
On an adjusted basis, we reported on a diluted loss per share of <unk> for the quarter compared to diluted loss of <unk> <unk> per share for prior year quarter.
Consistent with the 2 quarters of fiscal 2021 adjustments for the third quarter on mostly limited to our standard practice of adding back noncash interest expense related to our convertible debt and constant currency impacts.
Starting with our consolidated financial results on slide 9 CLO.
Hello ended the period at $153 million up for <unk>.
35% on a year over year basis, and down 17% compared to the pre pandemic level in 2019.
Following suit.
<unk> revenue was up 12% versus the year ago quarter with much of that growth driven by higher average PLO.
Merchandise sales were down 23% from their peak pandemic levels a year ago.
That said merchandise sales gross profit was essentially flat with low sales volumes about offset by higher margins.
Merchandise sales gross profit expanded by 967 basis points from the prior year quarter, primarily driven by reduced inventory levels and higher sales.
For the last day.
And then just turnover improved to 3 times and the aged general merchandise inventory ratio continued to decline from 11% of total channel inventory a year ago to just 1% at the end of the third quarter of fiscal 2021.
Steady sales gross profit and lower inventory levels contributed to a stronger return on earning asset ratio for the quarter at 193% versus 150% for the third quarter of the prior fiscal year.
Finally until that I had an EBITDA of $12 million more than doubled from $5.3 million in the third quarter of fiscal 2020.
As a result of higher PSC revenues and our ongoing focus on expense controls.
Turning to our U S pawn operations on.
Slide 10 segment PLO rose, 35% on a year over year basis, mostly driven by our focus on operating model and the absence of government stimulus payments.
Importantly, U S. PLO levels continue to trend closer to pre COVID-19 levels with quarter end PLO only down 21% compared to the same point in 2019 for the third quarter PSC was up 7% year over year, driven by higher average PLO.
On the retail side of the business merchandise sales were down 27% to the third quarter of fiscal 2020, when when volumes were inflated by stimulus payments.
Oh, 5 really merchandize sales gross profit was down a lesser 8% year over year as lower sales levels were offset by higher margins.
The gross sales margin expanded by 970 basis points versus the prior year quarter.
Let's say a function of more effective inventory management.
Aged general merchandise inventory continues to decline and accounted for just 1% of total general merchandise inventory in the U S at quarter end versus 5% of the total a year ago.
Turning to the bottom line U S pawn EBITDA was down 5% compared to the prior year quarter with a lower net revenue, partially offset by lower expenses.
Store expenses were down 5% year over year, mostly related to lower labor costs.
Slide 11 focuses on our Latin American pull on operations.
Segment, PLO grew 36% compared to the year ago level, reflecting stronger same store growth as well as the recent acquisition on cash at Pollo of FIC Tivo in Mexico.
As a result, PSC was up 30% on high average PLO for the quarter combined with a more favorable PLO yields related to an improved redemption right.
Merchandise sales were up 2% versus the prior year quarter, while merchandise sales gross profit was up 67%, reflecting high margins accelerated inventory turnover and tricking aged general merchandise inventory.
Most specifically HTM inventory represent less than 1% of total GMA inventory at quarter end, a sharp decline from 18% a year ago.
EBITDA improved from just above breakeven for.
For the year ago quarter to $4.8 million.
On higher PSC and merchandise sales gross profit partially offset by increased.
Expenses.
<unk> expenses were up 16% year over year with much of the increase a function of stores being opened for the entire quarter compared to last year as COVID-19 impact.
Finally, I wanted to provide some perspective on the fourth quarter of fiscal 2021.
As I mentioned earlier PLO levels have continued to increase since mid April reflecting more favorable corn.
Demand trends accelerating transaction volumes on a focused team.
In July we are continuing to see PLO rise and it is now only down 15% from 2019 levels.
However, the lag in PSC will continue as PLO rises.
The recently enacted tax credits in the U S and more challenging macroeconomic backdrops and increased Covid cases across Latin America, Luckily represent near term headwinds for the pawn lending activity.
We expect the impact related to these tax credits to be transit straight in nature.
Also we would expect bottom line growth to be somewhat tempered in the knee time in light of rising store operating costs due to additional stores as well as accelerating transaction activity and normalizing merchandize margins with lower inventory levels.
Well the resumption of standard sales discounting practices will impact profitability, we will anticipate gross profit margin to remain at high end of the historical range.
Putting it altogether, we do expect adjusted net income and EPS for the fourth quarter to be consistent with the third quarter levels and out of a meaningful step up in earnings power in fiscal 2022.
All else equal.
I will now turn it back over to Jason for a few closing comments.
Thank you Tim.
In summary, we are pleased with the progress we've made down the path of generating long term sustainable growth.
With third quarter results across core operating metrics reinforcing that progress.
Our accomplishments, thus far can be directly attributable to the ongoing dedication and execution of all of our team members.
Their enthusiasm and passion for customer service serves as the backbone for our success. So I'd like to take this opportunity to thank all of them again for their hard work and contributions.
We expect that the steps we've taken over the past year, plus will continue to translate into stronger financial performance. As we've said in recent quarters, our ongoing inventory management and expense optimization efforts should continue to drive better results as pond transaction activity and the related growth in PLO and PSC continues to.
Increase.
We look forward to continuing to discuss our progress in future quarters, and with that will open up the call for questions operator.
Thank you, Sir if you'd like to ask a question at this time. Please signal by pressing star 1 on your telephone keypad. Please make sure that your mute function is turned off to allow your signal to reach our equipment.
Once again that is star 1 if you'd like to ask a question.
Our first question from John Hecht with Jefferies.
Good morning, guys. Thank you for your question for taking my question.
Hey, John comment.
You guys did comment on that.
Transitory in nature.
But I'm wondering generally inc.
Yes.
Kind of a linear recovery.
Though at this point for.
Could it be theory based on.
Just trying to get a sense, yes near term margin.
Yes, absolutely. Thanks, John So yeah, we do believe its transitory in the example will give us.
1 other things we've talked about last quarter is the balance that we've been seeing is faster. So when a new round of stimulus comes through the recovery and PON demand comes back quicker and each incremental.
Time, and we saw that with the first kind of round of checks that came through on the pull forward and expansion of the child tax credits, where we saw a little bit of a pullback and then a pretty quick bounce.
With more of that coming we expect to see some headwinds there obviously with we're watching the delta variant closely and and the impact that'll have on on our stores going forward.
But we expect all of that to be temporary or transitory. However, you want to say it and we do expect that.
That growth is going to continue to be fairly linear if you look at the growth that we saw throughout the quarter, we talked about hitting the low point in mid April and then and then really starting to build from there that growth continued through the through the latter part of April through May through June and now as Tim said, it's continued in July.
So we're pretty happy to see what's going on there.
The the lag in PSC, we know how that story ends we know that.
The pawn service charges follow to growth.
In PLO, but we do expect that to be.
Short of.
A little bit of.
Stopped here and they're fairly linear going forward.
Okay, and then margins you talked about them sustaining at high higher than that.
Yes towards the high end of long term ranges.
Very high do you has there been a change in kind of your customer behavior, where we think that high level will be sustained or as your balances normalized back to pre COVID-19 levels do you think that inventory or excuse me margin. So we'll go back towards pre COVID-19 levels as well.
We think they will but but it's important.
You acknowledged that there.
There were clear that we feel like we're going to end up at the high end of that historical range.
Because.
The way that we operate the business at the store level. The way that we are focused on zero to 90 day sales sales velocity turning inventory.
Maintaining.
Our inventory without letting it roll into H those kinds of things that's going to help us sustain higher margins going forward. The margins that we see right now are reflective of where we think we will end up.
But we'll still end up in a place that relative to where we've been historically and kind of the industry has done historically is a really really positive place because of the operating metrics that we have in place now.
Okay, and then you guys have been pretty active acquiring maybe can you just give us some comments on.
The acquisition pipeline as it stands today and the geographical disposition of that.
Yes.
Obviously, 1 of the core pieces of our strategy.
Is innovation and growth and to be able to see that we've had some success. After all the hard work for a long period of time by our M&A team.
And in closing some acquisitions, we're really pleased to see that progress.
I'd say the pipeline is as strong as it's ever been.
The thing with these M&A transactions is that they they have their own timing and they take on a life of their on and you never know exactly when theyre going to hit so they're difficult to to project, but we would hope to continue to be able to have some success. There right now we just announced the acquisition of <unk> of 128.
Stores in Mexico on 11 in the U S.
We want to make sure we integrate those successfully and we're focused on that as well.
But over time, we'll continue to make sure that that M&A pipeline stays strong and our team is very focused on continuing to make sure. We're on top of it.
Okay. Thanks, very much guys.
Thanks, John.
Alright, once again that is star 1 if you'd like to ask a question. We will go next to Greg <unk> with Sidoti.
Hey, guys. Thanks for taking my questions just real quick just trying to understand the for key guidance and a lot of the moving parts with the child.
Tax credit so just trying to understand that Inc.
What you're trying to say and I know, we're looking out a little bit but.
On a little bit of near term pain, but maybe in that March quarter tax refund season.
Might see a little bit less seasonality in the PLO decline that I think happens during tax refund, but maybe offset by lower merchandise sales is that fair.
That's that's that's definitely a fair statement, we would definitely see as as they taught ex currency come early obviously, they're not going to come during that tax season. So we think that's why there's a little bit of a trend turning nature, there and that would be a fair statement.
You're saying.
Okay, Great and then just trying to 1 of the biggest.
Question is it seems to be on the high cash position and I know that.
Pawn loans pick up on you wanted to maintain liquidity, but just trying to understand I mean this company I believe in fiscal 2019 supported a PLO book of around $200 million with maybe about $150 million in cash or cash levels double that and I know you've done some acquisitions, but how are you thinking about stock buyback.
At this level I mean, even maybe a moderate.
I'll now just given the cash position.
We're very committed to making sure that every incremental dollar we put to work is put to work in a way to maximize shareholder value and also part of that is making sure that.
We maintain a strong balance sheet.
At the board level, we've had discussions regarding a win we would.
When we would again sort of address those kinds of questions.
And we continue to talk about the fact that we will we'll really engage in those discussions once we feel like we've cleared the the impacts of the pandemic.
We're very bullish about what 2022 looks like for the business. We've set a really strong foundation now we're seeing the PLO growth come through and we really feel like the business is set up for a strong year ahead of us.
But we need to get there before we take up those discussions.
We've we've seen that we have some acquisition opportunities we've seen that we need some of that liquidity to rebuild upon the PON book at the same time on.
Our business produces a lot of free cash flow, particularly when it gets to the levels of performance that we expect going forward. So.
Yes.
Those will be interesting discussions to have at that time were just not quite there yet.
Okay, and then just 1 final 1 if I'm not mistaken I think you were testing out some counters at the store is that in the stores right now any insights into that if I'm correct that you're putting some counters in the stores the.
Monitor traffic.
Yes, yes, we've completely rolled out.
Traffic counters in the U S and on the process of doing that across Latin America.
We're already seeing net debt.
We're able to.
Monitored data and start to collect data, it's going to be very helpful for us.
The most helpful comparisons will be year over year comparisons, but incrementally sequentially, we will be able to see debt. Some of these efforts that we talked about on the digital side of the business, where we're doing certain social media marketing campaigns and those kinds of things to be able to measure what traffic was before and after those and not have to guess will be a real adverse.
<unk> for US, we think and.
And we're excited about what that's bringing to the business. It's still early days for us, but we're excited about it.
Okay, Great. That's all I got it thanks, a lot guys.
Thank you Greg.
All right and it looks like we have no further questions at this time, so I'd like to turn it back over to our speakers for any additional or closing remarks.
Okay.
Thank you and thanks, everyone for your interest and time. This morning, we look forward to continuing to talk about our progress in future quarters Hope everyone has a great day.
And that does conclude today's call. We thank everyone for their participation you may now disconnect.
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