Stuart Grimshaw - Chief Executive Officer Mark Ashby - Chief Financial Officer Jeff Christensen - Vice President, Investor Relations.

Bill Armstrong - CL King & Associates Mike Del Grosso - Jefferies Chris Smith - GLG Partners Gregg Hillman - First Wilshire Securities Eugene Fox - Cardinal Capital Management Todd Meadow - Nomura.

Good day ladies and gentlemen and welcome to the EZCORP fourth quarter and full year fiscal 2016 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.

If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this call may be recorded. I would now like to turn the conference over to Jeff Christensen, Vice President of Investor Relations for EZCORP. Please go ahead, Jeff..

Thank you and good morning everyone. Joining me today are Stuart Grimshaw, Chief Executive Officer of EZCORP, and Mark Ashby, Chief Financial Officer of EZCORP. During our prepared remarks, we will be referring to slides which are available for download on our website at investors.ezcorp.com.

Before we begin, I’d like to remind everyone that this conference call contains 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 the future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks and other factors that are disclosed in our annual, quarterly and other reports filed with the Securities and Exchange Commission. Now I would like to turn the call over to Mr. Stuart Grimshaw.

Stuart?.

Thanks Jeff, and welcome everyone. It’s a chilly day here in Austin, but we’ll go through the financial year that’s just completed. It’s been quite a long year and there’s a bit of stuff to get through, but we’ve got some pleasing messages which come out of a year of very hard work.

On Slide 3, I’ll touch on four of the messages that we do want to leave you with, and the first one is we’ve continued the intense focus on meeting our customers’ desire for cash whenever they want it and wherever they want it.

We’ve got some strong training programs that we’ve been executing behind this, particularly the mystery shop program where on a quarterly basis we have three phone calls and one video of the interaction our customers have with our staff.

That’s an important training tool which we continue to utilize and learn from, which is leading to some strong positive metric growth in the net promoter score as well. We continue to invest in that tool as it’s bringing the desired results.

The results are actually followed through in the second point, that we are capturing market share and we’re leading the market in PLO growth in both the U.S. and Mexico. Same store PLO growth in the U.S. is up 4% year-on-year, and this is the fourth consecutive quarter of positive growth.

In Mexico, it’s up 20% year-on-year and it’s the ninth consecutive double digit quarter. But importantly, the same quarter last year was 20% growth as well, so we’ve comped 20% on 20%, which is an exceptional outcome and shows the focus and the strength of the management team in Mexico.

We have a proven track record of pawn execution with strong operating leverage, and I’ll deal with that particularly over the page. Importantly, we have a strong liquidity position in which we’ve finished the year.

We’ve got a $66 million cash balance at year-end, $50 million in undrawn credit facility, and we anticipate receiving $45.7 million of the $89.9 million notes receivable from the Grupo Finmart sale, and Mark will touch on that a little bit later in the presentation.

So I turn to Slide 4, and what we see here is the strength of the operating leverage in the business.

We look at the total revenues up 5%, net revenues up 9%, profit before taxes up a large number; but if you look at the drop in the dollar, we increased our net revenue by $37 million, and $20 million of that actually dropped to the bottom line, which means that $0.54 of every dollar of net revenue was finding its way to the bottom line, and that’s a very strong leverage factor that we’ve been able to achieve.

We look down to the metrics below, the pawn lines outstanding we’ve talked about, the strong PSC growth of 4% and 22% for U.S. and Mexico respectively. Inventories are up in the U.S. and Mexico. In the U.S. particularly, we had a very low inventory balance last year.

As many of you will recall, we actually started moving our aged inventory quite rapidly, and our sales gross profit has been up quite strongly over that period of time. Onto Slide 5, which is a consistent slide that we’ve shown, shows the path of execution, and we have achieved quite a lot in a very short period of time.

But as we look forward, we’re looking to how we further invest into the fabric of our pawn businesses. The technology structure and point of sale system, there’s a new point of sale system which we will start piloting in the first quarter of next year, calendar year, so our second quarter financial.

We’re investing the product in customer data analytics. We have a lot of rich data that sits within the business that we’re now starting to use and integrate into the point of sale system as well.

Still early days, but we’re finding that that’s providing with some great insights into how the customer is behaving and which products are actually starting to move quickly. We’re investing in process analysis and improvements.

We don’t have as much standardization through the stores as we would like to have, so we’ve embarked upon a complete analysis of process efficiencies. This is still in its early days, but we can see there will be some easy wins out of the analysis that’s already being undertaken.

Store refurbishment program, we haven’t actually touched the stores for quite a period of time. That actually makes it somewhat hard for our customers and our staff to interact, so we have to invest into the fabric of those, and that’s a three-year program which we’ll be running through.

We’re tracking towards the end corporate expense of $50 million in FY18, as we have always outlined, and I’m sure Mark will touch on that just a little bit later on. So with that sort of introduction, I’ll now pass it over to Mark Ashby..

Thanks Stuart. Good morning everybody. I’ll take you through a few financial slides with the focus on the adjusted results, so taking into account restructuring, restatement costs from last year that fell into FY16, constant currency impact, and some non-cash impairment charges, and there’s a reconciliation of this in the rear of the deck.

As we have a look at the year, some of the points that Stuart’s already touched on, we’ve got PLO growth of 6.2%, merchandise gross profit up 17%, and that really did drive the net revenue up 9% to $438.2 million for the full year. The U.S. pawn segment, you can see down the bottom there was good growth in U.S.

pawn segment profit, Mexico pawn segment profit, and Stuart’s touched on some of the drivers of that and the focus in those areas. As we look at the cost structure, the Q4 costs are not really representative of the run rate.

In the quarter, we increased the accrual for store operations incentives as well as corporate incentive and bonus plans, and the annual is probably a bit more meaningful to look at.

So as you look at the annual number, we are now seeing a $2 million per quarter reduction that will annualize into next year, so that’s an $8 million number coming off that $64 million as we come into FY17.

Overall, the underlying costs, excluding the changes to the SGI and the long-term incentive plans, were actually down about $8 million, and they were offset by that amount. So as you look at the bottom line for the year, we’ve got a profit before tax of $23 million on an adjusted basis compared to $3 million of last year.

If we look at the next page and look at the annual performance, firstly the U.S. pawn business, and these charts are available for the quarter a bit further into the pack as well, again just reinforcing the PLO growth - same store up 4%, pawn service charges up 6%, 4% on a same store basis.

We’re looking at average PLO per store now an industry leading $288,000. Continued improvement in merchandise margin as we reduced our aged inventory even further, and that will also apply to Mexico, so there was substantial growth in merchandise margin, about 300 basis points.

Consistent yields in PLO and inventory to last year also supported the growth.

The expense, really primarily I’ve touched on for each of the stores, there’s a bonus pool that’s been implemented and a strong incentive program for the year, and we’ve seen the benefits of that, and also the increase is driven by the cost of new stores that were acquired during the course of the year.

If we turn to the next page, which is Page 8, which is the Mexico pawn, similar types of positive improvement - the PLO same store up 20%. We’re really compounding 20%, as Stuart mentioned, last year which is a very strong effort. This drove pawn service charges up some 22% and the monthly yield has been consistent over the year.

Similar to the United States, the merchandise margin had a very strong increase, up to 32% from 20% last year, and that really drove improvements in the inventory yield.

Expense increase, really driven again through store incentives, some new stores that were opened during the year, de novo stores, and an increase in the marketing which we’ve seen the benefits from growth into the business.

If we turn to Page 9, and Stuart touched on this earlier in his presentation, as you’re aware, we touched on the--we sold the Grupo Finmart business in September, and as a part of the deal there is a notes receivable to EZCORP and they were created to the tune of $89.8 million.

All the committed payments to date have been received of some $6.4 million, and during 2017 we expect $45.7 million worth of cash to come into the business.

If you add that incoming liquidity to our opening cash position for the year of $66 million plus the $50 million undrawn debt facility, that gives us a very positive framework to provide investment and support investment back into the business.

One question that does tend to pop up is what’s the exchange and exposure, and at the bottom left-hand side, we break out what the denominations are for the notes, and there is very little FX exposure back into the United States. So on that note, I’ll pass back to Stuart..

Thanks Mark. On Slide 10, what we’ve outlined there is exactly how we are focused on the market leadership position that we are aspiring to. The important thing here is you’ve seen that 99% of our revenue is actually coming out of pawn operations, so the investments that Mark is talking about is actually going [indiscernible] into the pawn business.

There are eight items there that we’re focused on, and a couple of them I’ve touched on already. I think the things that we are really focusing on is around the people, which when we look at the incentives, training, coaching and mentoring, we have increased the number of district managers in the field by three to four people.

We have grown in depth at the district VP level, and that’s allowed us to actually have more people in the field looking and training the people on the ground. The discipline in pawn loan values is quite critical.

As we’ve seen in the past, the discipline actually makes us successful, and we’ve seen with the new point of sale system coming in, that will allow us to have very tight discipline around the pricing that happens at store level.

The store acquisitions and de novo openings, as we’ve said before, we’re looking at the de novo openings in Mexico in particular, and with store acquisitions, we’ve looked at many potential acquisitions over the last three to six months.

A number of them haven’t actually met our hurdles, so we have backed away from that and we will continue to exercise capital discipline should any further store acquisitions come across our desk. Onto Slide 11, this is really the summary of where we are. The industry is an attractive one.

It’s a large industry, it’s mature but it’s highly fragmented, and with that provides opportunities for us, and we’re seeing that through the positive PLO growth that we’re achieving. It’s a fully collateralized loan portfolio and the recourse to the customer doesn’t exist, so it’s a very good product for the customer base that we do service.

From an EZCORP perspective we have now established a very strong track record of execution, as we’ve talked about - four consecutive quarters of positive PLO growth in the U.S. and nine consecutive quarters of positive PLO growth in Mexico. We have also done what we’ve said - we said we’d shut the U.S.

financial services down, and we did that on time and ahead of budget. We also completed the sale of Grupo Finmart, as we had announced to the market, on time. I’ve talked about the focus on customer leadership, and I can’t reiterate how much this is driving the results that we are seeing.

We’re relentless on ensuring that we are meeting the needs of our customers, and the results we’re seeing ensure that that does happen. The last thing I would say is that we’re actually very disciplined.

We have improved our liquidity position, we’ve got strong leverage, and we continue to exercise with caution the way we allocate capital to ensure the returns meet the hurdles that we do have. So with that overview, we’ll now turn it over to questions..

[Operator instructions] Our first question comes from Bill Armstrong with CL King & Associates. Your line is now open..

Good morning, gentlemen. Nice quarter. I’d like to talk about the retail margins in the fourth quarter, roughly flat in the U.S. and up big in Mexico.

In Mexico, can you remind us, were margins depressed in any way because of clearance sales last year, and what other drivers might there have been? And then in the U.S., are we kind of at maybe a level of margins that are sort of a steady run rate going forward?.

Thanks Bill. In Mexico, we actually sold off a lot of our aged inventory in the last quarter particularly, which caused the compression in that margin, and we finished the year with 4% aged inventory.

We’re down to 3% this year, which means that we could capture some of the margin, so we had a healthier inventory position coming into this year, which is reflected through that Mexican margin. With the U.S., we did offload a fair bit of aged inventory also, but we think the margins--we’re pretty much hitting around that level.

If we can keep them at 36 to 38% level, we’d be doing pretty well..

Okay, got it. Then on the administrative expenses, obviously down year-over-year, but they were up versus Q3 on a sequential basis. I think you mentioned something in your opening comments, I was wondering if you could just expand on what drove that and what we should kind of look at as we go into the new fiscal year..

It’s Mark here, Bill. There was a couple of drivers in the fourth quarter, particularly the bonus impact if we’re talking administrative expenses in the stores, if we’re talking administrative expenses in what we call corporate in here.

You have a similar effect were we increased our accrual quite substantially, but it’s actually across the business, so it does tend to be a bit lumpy from that perspective, hence I’m trying to give an indication when we look at the corporate numbers coming forward of them coming down by about $2 million a quarter over the course of the year, so off that $64 million type base.

There was--outside of that, there was obviously we took an equity loss on the CCV business of about $5.8 million, I think it was or so, during the last quarter, so that actually reflects in some of the numbers as well..

Okay, so I understand that, then we had $64 million in the year just ended, so would you be targeting around $56 million, in that neighborhood in fiscal ’17; in other words, an $8 million decrease?.

Yes, that’s the run rate we’re expecting at the moment, Bill..

Okay, great. Thank you. I’ll get back in queue..

Our next question comes from Mike Del Grosso with Jefferies. Your line is now open..

Morning. Quick question, actually, on a similar line on the store opex. You mentioned a store efficiency program you’re planning on running out, and wanted to ask about kind of the trajectory as we head into next year.

Are there any upfront investments associated with that, and how do we think about that?.

Most of the upfront investments will be through the capital expenditure patterns. As I mentioned, the IT install refurbs will be capital expenditure.

We have--there’s been a slight increase in staffing levels through the stores, so we are probably more focused on ensuring that the corporate expenses are minimized while we continue to invest in the front, so we don’t want to, I suppose, choke the stores off by pursuing a cost regime.

We’re actually in a--we’re here to serve the customers, and in some of our stores, we actually have run the staffing down to too low levels, so we’ve already increased this. I don’t think we’re going to see too many more--too much more in the way of increases in store operating expenses, so I’d expect it to be pretty much flat..

Got it, thank you..

Our next question comes from Chris Smith with GLG Partners. Your line is now open..

Hi there, how are you doing? Just a couple of questions. You talked about your healthy liquidity situation right now. Just wondered if you can maybe highlight how you’ll be looking to use that cash.

Will it be in terms of rolling out new stores? Again, you talked about you’ve looked at several potentials but not really seen anything that’s that attractive.

Are you able to give any guidance on the number of stores that you’re looking to add this coming year?.

No. I mean, it all depends if the opportunity comes up, and that’s the advantage of having liquidity, is that we have the opportunity to transact in some form of size if something comes in.

But having been through two years of, I suppose, tougher liquidity conditions, I’m more than happy to actually be in a very liquid position and not transact if something doesn’t meet our hurdle. So we want to be fairly conservative, Chris. We don’t want to just pursue stores for the sake of pursuing stores, which can get us into trouble.

I think we’ve reiterated many times, we just have to continue to have the discipline that perhaps we haven’t had in the past and make sure we have a very liquid balance sheet..

Okay, so in terms of cash use, you don’t really have anything else in mind in terms of--.

No..

You’re going to remain very much focused now on the pawn business?.

Yes, that’s correct..

Okay..

It’s Mark here. Just in terms of our capex spend coming into the year, we touched on the store refurbishment program, and so we’re kicking that off. In our capex expectation over the next three years now, it’s probably about $55 million, but about $23 million or so could be in FY17, just depending upon how quickly we kick the refurb program off.

But that’s really up from about $13 million or $14 million in the last year. .

Okay, great. Thanks.

Then just a follow-up question, now you’ve sold the Grupo business and the business overall is a lot cleaner, are you able to kind of give any guidance on where you see revenue, EBITDA checking out this year?.

No. No, we don’t give guidance..

Okay, no problem. That’s all I have. Thank you very much..

Thanks Chris..

Our next question comes from Gregg Hillman with First Wilshire Securities. Your line is now open..

Yes, good morning gentlemen.

Two questions - first of all, based on some of your recent results, do you have reason to change your three-year plan in any ways in terms of expense reductions or other items in your three-year plan? Then number two, the whole question of the impact of taking away much of the payday loan business on the pawn industry, what’s the current state of the industry for states that have already shut down payday loan businesses, for like Maryland, and like in the last 25 years? Have you reviewed that evidence, and what does that tell us what happened?.

On the expense reductions, we are actually--they're locked, so we’re not going to change those. Once we get to the end of the three years--well, probably at the end of two, we’ll start reviewing where we head from there, so there’s no changes to that.

In a number of states that have actually taken payday out, we actually haven’t been; say Maryland, we’re not there. We’re trying to--we’re sort of looking at it at the moment.

We’re watching with interest what’s happening with the transition going through at the moment, because we’re not quite sure how the industry is going to play out, so I think everyone on both sides, be it pawn or payday, are watching with interest to see what are the first moves around discussions with the CFPB and how the Republicans look at these industries.

.

But hasn’t this already been played out several times?.

Yes, I don’t have enough information, Gregg to be honest, to actually answer that with a degree of accuracy..

Okay.

Getting back to the three-year plan, so basically the three-year plan is more or less on track and on time and going as you outlined it when you first came?.

Yes, that’s correct..

Okay, great. Thanks..

Thanks Gregg..

Our next question comes from Eugene Fox with Cardinal Capital Management. Your line is now open..

So, just two questions. As it relates to this bonus expense, we would have seen that in both the corporate line as well as the operation expenses.

Would I assume the order of magnitude would have been similar between the two?.

No, I think corporate was a bit higher..

Okay, and it would have all been in Q4, but conceptually we should think about it as spread--it’s for performance over the year?.

Correct..

Got it.

Second question , the Cash Converters stock that you took the write-down on, how are you thinking about that strategically?.

We’re looking at it with interest. We have a much higher entry price. We think the company has a lot more potential than perhaps where it’s reflected in the share price, but it’s been going through a bit of a tough time.

We’d like to try and see where value can be restored into the stock price and then consider what should be done there, so at the moment it’s pretty much let’s see if we can get some of the value back on that stock.

It’s in a good--it seems to be in a pretty good industry, it’s got a great brand, and we review it every year as to what’s happening, but at the moment it’s a watch [indiscernible]..

Okay, thank you..

Our next question comes from Todd Meadow with Nomura. Your line is now open..

Hey guys. Congratulations on a great quarter and continued execution on your plan. Just wanted to ask a question about the notes receivable.

At the bottom of Slide 9, the footnote, percentage of notes secured, can you provide a little detail around that?.

Yes, some of the notes are actually secured against some of the loan portfolio that Grupo Finmart have, so it’s a direct security over those lines..

Got it, and do you--.

And it’s collateralized, is a better way to describe it..

Do you have a reserve account for uncollectability of that at all, or--?.

It’s over-collateralized..

Yes..

It’s over-collateralized, so by default the reserve sits within the over-collateralization..

Okay, I got it. Thank you..

Thank you, and I’m showing no further questions. I would now like to turn the call back over to Stuart Grimshaw for any further remarks..

Thanks very much, and thanks for dialing in, or if you logged into the webcast, thanks for listening to us. Mark Ashby and Jeff Christensen are available for follow-up questions later this day, so this concludes the call. Thanks for everyone for dialing in. Have a great day..

Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone have a great day..