Stuart Grimshaw - Chief Executive Officer Danny Chism - Chief Financial Officer Michael Kim, Investor Relations.

Good afternoon, ladies and gentlemen, and welcome to the EZCORP, First Quarter of Fiscal 2020 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 the conference over to Michael Kim, Investor Relations. Please go ahead, Michael..

Thank you, and good afternoon, everyone. During our prepared remarks we will be referring to slides which are available for viewing or download from our website at investors.ezcorp.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 regarding the company’s expected operating and financial performance for future periods. These statements are based on the company’s current expectations.

Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks and 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. Stuart Grimshaw. Stuart..

Thanks Michael and good afternoon to everyone. Now turn briefly to page four, I'll summarize the little on the positioning we are coming out of the first quarter for the 2020 financial year. Our clear focus has always been a meeting our customers need for cash, and we haven’t wavered in this intent over many years.

While PLO remains relatively flat across the year, we saw a good PSC improvement in Latin America with pawn service charges up 5%, highlighted by monthly yield improvement up 80 basis on an adjusted basis. Merchandise sales were up 18% in Latin America reflecting the strong cash position of our customers.

However, merchandise margins were impacted by a movement of aged inventory across the quarter, which Danny will touch on a little later. We will continue to focus our efforts on moving infantry, particularly aged and aging and building cash balances in the company.

After a few quarters of negative IT performance, this quarter had uninterrupted service at the stores, and pleasingly all stores in the U.S. and Mexico are now operating on the new point of sale system.

We also continue to focus on the de novo expansion of our business in Latin America, with four opened in the first quarter, with a further nine currency under construction. We plan to open approximately 40 for the year.

While we continue to see opportunities for acquisitive execution, the prices do not merit the capital being sought by vendors, and we will continue to maintain our discipline in this regard. Lana went live in the first quarter, and we have three pilot stores in Florida currently integrated into the Lana offering.

We anticipate having around 140 stores integrated with Lana up and running by the end of this quarter and we currently have 4000 Lana debit accounts with customers have to sign-up in on average of 3.5 minutes. The apple AWScustomers digitally view and extend their pawn loans without having to be in this store.

Finally, on the capital management position, we repurchased 142,000 shares in December 2019 and subsequent to that have continued activity with a total of 415,000 shares now repurchased as of the February 3. I’ll now pass it across to Danny for further comments. .

Thanks Stuart. Good afternoon everyone. I want to start by providing an update on the share repurchase program the board approved in December of last year.

First, we shorten the blackout period from a month to two weeks prior to the quarter end and we established a 10b5-1 plan prior to the window closing in December, which allows the investment bank to repurchase shares on our behalf using predetermined criteria even in blackout periods when we may be in possession of material non-public information.

As Stuart mentioned, these actions allowed us to repurchase approximately $1 million of Class A common stock in December. From inception of the program through today, we’ve now repurchased approximately 415,000 shares for $2.7 million retiring approximately three quarters of a percent of our outstanding share count.

In future periods we’ll report repurchase activity only through the end of the reporting period. But as we just initiated the repurchase program and 10b5-1 plan in December, I wanted to provide a real time update this quarter. Stepping back we remain focused on allocating capital to what we believe will deliver the highest shareholder returns.

While we continue to evaluate acquisition opportunities, potential transactions must meet our strict financial and strategic criteria. Coupled with new store development, we continue to see buybacks as an attractive use of capital to deliver return on investment and return capital to our shareholders in a tax efficient manner.

Looking ahead, we remain well positioned to fund new store development, pawn loan growth and investment spending reflecting the strength of our balance sheet combined with a strong free cash flow generation of the business.

To that point, we ended the quarter with $143 million in total cash on hand, and the long term trajectory of cash from operating activities continues to be strong.

For the first fiscal quarter of 2020, net cash from operating activities was impacted by reduced payables as we continue to refine working capital management, the payment of year-end bonuses and prepayment of sales taxes to maximize discounts provided by certain states.

In the current quarter, we adopted the new lease accounting standards also known as ASC Topic 842.

While this doesn't change the cash flows related to any of our leases and had no material impact on the income statement, it did require us to record on our balance sheet, lease liabilities totaling just over $234 million, mostly offset by a Lease Right Of Use Asset of almost $226 million.

The $8.5 million difference relates to straight line lease expense recognition, which generally causes companies to recognize rent expense sooner than the actual cash flows, so that rent is recognized evenly over the lease terms.

Upon adoption of ASC-842, the $8.5 million accumulated difference arising from the straight line rent recognition was removed from the balance of accounts payable and accrued expenses, and re-classified as a reduction of the Lease Right-Of-Use Asset.

Taking a look at the financial results, on a GAAP basis EBITDA more than doubled to $15.2 million as we reported diluted earnings per share of $0.02 for the first quarter of fiscal 2020 versus a loss of $0.06 in the prior year quarter.

If you will recall, I mentioned last quarter that we anticipated recording a $10 million pretax charge for our portion of a class action settlement reached by our equity method investee cash converters in October.

Net of the related tax benefit, this amounted to $7.1 million recorded in our current quarter under equity and net loss of unconsolidated affiliates.

GAAP results also include a $700,000 write down of costs related to a business intelligence system that we're replacing with better technology and will be more efficient, better supporting data analysis and business insights.

GAAP results continue to include non-cash interest expense related to our convertible debt and the effects of foreign currency fluctuations, which are excluded from our adjusted figures.

And finally as it relates to taxes, the GAAP effective tax rate for the quarter was skewed by the cash converters settlement charge with the related $3 million tax benefit reported in the line item, Net Income From Unconsolidated Affiliates in accordance with the equity method accounting rather than on the income tax provision or benefit line.

The current quarter’s 32% adjusted tax rate is more reflective of the low-to- mid 30% range I continue to expect for the remainder of the year, excluding the cash converters charge. On an adjusted basis, we reported diluted earnings per share of $0.16 for the fiscal first quarter compared to $0.28 this quarter last year.

Lana, our digital platform, was previously included in our corporate expense, but is now broken out as a separate segment as it begins to produce discreet revenues. As our current year adjusted earnings, no longer adjust for Lana, we’ve recast the prior year results on the same basis so they're comparable year-over-year.

While we anticipate Lana will improve our customers overall experience, Pawn loan redemption rates and yields by enabling customers to make remote loan extensions and receive communications via mobile device, we don't plan to allocate any incremental pawn service charge revenues to the Lana segment, as doing so would be subjective at best.

While the benefits to pawn revenues will remain in the U.S. pawn segment, we’ll report in the Lana segment any discrete Lana revenues and all Lana related expenses. As shown in the earnings release, the revenue impact in the first quarter of fiscal 2020 was minimal as Lana was introduced to a select number of stores in Florida late in the quarter.

Looking ahead, we expect to continue to show a loss throughout this fiscal year for the Lana segment as most of the platforms benefit will be included in U.S. pawn and discreet revenues will take some time to build volume. Early results and customer adoption have been encouraging as Stuart mentioned in the locations where it's been introduced.

We'll continue to roll this to additional stores and states, as well as beyond our existing customer base as we continue throughout the year. Turning to the adjusted highlights on slide five, we produced record high pawn related revenues.

Total revenues grew 3% year-over-year, reflecting 5% growth in merchandise sales, a 2% increase in scrap sales and a 1% uptick in PSC.

Revenues in Latin America were particularly strong, up 13% overall with an 18% growth in merchandise sales and PSC growth outpacing the increase in PLO, with higher pawn loan yields reflecting quality of the loan portfolio.

Similar to what we experienced last quarter, the growth in the Latin America loan balance was below the rapid growth we've seen over the last few years as the Mexico social welfare programs discussed last quarter continue to suppress loan demand, somewhat offset by higher sales as our customers more flush with cash.

As expected, the pressure seen on merchandise sales margins in both the U.S. and Latin America reflect our continued efforts to optimize overall inventory levels reduce aged inventory and accelerate the cash-to-cash cycle, increasing free cash flows.

On slide six, you can see the impact of lower margins, higher corporate expenses and the drag from new stores with EBITDA margins down in Latin America and on a consolidated basis. While U.S. pawn EBITDA was down slightly from lower net revenues, the EBITDA margin expanded a bit reflecting effective expense management.

As we accelerate new store openings in Latin America, I continue to expect some pressure on short term EBITDA, EBITDA margins and EPS until those stores ramp.

Typically new stores in Latin America reach breakeven in six to 12 months and reach full-ramp in three to five years, at which point we would expect their EBITDA margins to mirror those at more mature stores, while this pressure short term earnings, de novo store growth in Latin America continues to represent one of the highest possible returns on invested capital.

Turning now to the consolidated financial highlights on slide seven. Pending consolidated pawn loans outstanding or PLO was essentially flat year-over-year, as growth from acquisitions and new stores was about offset by a modest decline in same-store loan balances.

That said, PSE revenues were up despite lower average PLO for the quarter, with the year-over-year growth mostly a function of a higher yield reflecting the quality of the loan portfolio. Merchandise sales were up 5% from the prior year quarter, with same-store sales growth of 3%.

Ongoing efforts to enhance inventory management impacted merchandise margins down approximately 260 basis points year-over-year. On a sequential basis, merchandise margins improved from 33% in the fourth quarter of fiscal 2019 to 34% in the current quarter.

Notably, we've successfully reduced aged general merchandise inventory in the United States by 23% year-over-year. Optimizing and fine tuning loan to value decisions through the point of sale system is expected to drive higher pawn loan yields and sales gross profits over time.

Turning the jewelry scrapping sales, scrap gross profits increased 44% on a 2% increase in sales. Consolidated scrap margins approached 19% in the current quarter compared to 13% in the prior year quarter, reflecting higher gold prices and a reduction in diamond scrap sales, which are fetching far lower prices than a year ago.

Prevailing gold prices remain elevated, reflecting investors’ general uncertainty regarding the broader market. One the expense front, operations expenses were well managed; 1% favorable to the prior year despite a 2% increase in total store count.

The $4.4 million spike in corporate expense resulted primarily from investments to support the successful implementation of the new point of sale system POS2 and the transition to a new cloud service provider. These efforts resulted in significant improvements in point-of-sale availability, performance and scalability across the U.S. and Mexico.

Corporate expenses also reflect an increase in auto-related services and staff enhancements made since the prior year quarter to strengthen the IT control environment, as well as professional fees related to the adoption of the new lease accounting standard.

Both corporate expense and Latin America operations expense reflects some severance costs in the quarter, that we would expect to benefit future periods through lower ongoing labor costs.

While discrete revenues in the Lana segment remain minimal as its digital platform was just introduced in December 2019, expenses and the segment loss improved to $1.3 million from $2.1 million in the prior year quarter.

The prior year included professional fees related to the initial exploratory work conducted with Boston Consulting Group's Digital Ventures. Depreciation and amortization of the Lana platform will increase in future quarters as current quarter depreciation only began on the day that it was introduced in December 2019.

We remain excited about the enhancements this can provide to our customer service and product offerings. We're also pleased to have taken the platform from initial conception to a fully functional digital platform in only a year.

Turning to the U.S Pawn highlights on slide eight, ending and average pawn loan balances were both essentially flat for the quarter on a year-over-year basis with PSC also relatively unchanged at $64 million for the first quarter of fiscal 2020. Merchandise sales in the U.S.

were up 1% year-over-year, while related margins soften 220 basis points to 36% given the incremental discounting to move aged merchandise. Aged general merchandise now stands at 7% of inventory, down meaningfully from 9% at this point last year. I expect efforts to reduce aged inventory to continue throughout much of this year.

While segment EBITDA was down year-over-year, most of them reflecting lower sales margins, operating expenses were well managed in U.S. pawn, essentially flat to the prior year period. Focusing on Latin America on slide nine, financial performance was strong.

While ending an average PLO for the quarter was essentially flat, with the social welfare programs in Mexico remaining a bit of a headwind, PSC was up 5% compared to the prior year period on significantly higher yields. For the fiscal first quarter the segment generated a monthly yield of 16.1% up 80 basis points from 15.3% this quarter last year.

The improvement includes the impact of POS2 lending guidance, designed to take into account not only the value of the loan collateral, but also the likelihood of loan redemptions based on prior experience with the customer.

The enhanced lending guidance is not necessarily expected to result in an increase in the overall loan balance, but rather lower amounts loan to higher risk customers and more generous loans to customers more likely to redeem their loans. Scrap sales, gross profit and related margins were all meaningfully higher versus the year ago quarter.

Further, merchandise sales were up 18%, with same store sales up 16%, the merchandise margins decline 300 basis points year-over-year as we remain focused on adjusting the loan-to-value ratios to optimize inventory and sales gross profits.

For the quarter, segment EBITDA was down slightly year-over-year, primarily driven by higher store wages and rent from storefront growth and inflation as well as new licensing requirements in new store drag.

Going forward, while we remain focused on improving oversight and operating efficiencies, we expect some continued pressure on short term EBITDA margins in Latin America as we accelerate new store openings in fiscal 2020.

We've opened 22 new stores since the prior year quarter, with four of those opened in the most recent quarter and closed one store. We plan to open a total of about 40 new stores in the full fiscal year. Finally, I want to provide an update on financial trends as we move through the year.

The social welfare programs in Mexico will likely continue to impact PLO and PSE trajectories in the near term, while our ongoing efforts to optimize inventory management weigh on short term merchandise sales margins. That said, we remain focused on growing free cash flow and driving higher returns on earning assets over time.

More specifically, we believe the rollout of a new point-of-sale system will improve lending decisions based on customer specific history and system lending guidance, driving higher loan redemption rates, yields, PSC and net revenues, and we continue to invest in the business to more fully leverage our technology, distribution and customer service to enhance long term growth prospects.

This, combined with our continuing share buybacks are expected to enhance shareholder returns. With that, we’ll open the call up for questions. .

Thank you. [Operator Instructions] Your first question comes from John Hecht from Jefferies. Your line is open. .

Thanks guys for talking my questions. First, I guess basic modeling questions. Danny, you talked about some labor cost savings going forward. So I’m wondering, you know can you kind of give us a quarter aspect of the details of about, like say on a quarterly basis.

Second, will the lease expense account change any of the quarterly lease accruals, and then you mentioned there's going to be an increase in D&A on Lana, maybe you can quantify that?.

Yeah, so I’ve not quantified or wouldn’t want to put a number on the savings that I expected from some of severance. I wouldn't factor in on a huge change, but would expect some savings going forward, both in the corporate, as well as a little bit in the store expense, particularly in Latin America.

On the Lana depreciation, we only had about I think – what, 36,000 or so come through this quarter. We ended up having about $6.5 million, $7 million of capital put into that last year.

Over a 5 year term I’d expect that to be about a $1.3 million, $1.4 million per quarter depreciation and that obviously would change if we do further development on that as well based on what we’re putting in there right now. And then on the lease costs, I wouldn't expect that to really change the income pattern going forward.

That's more an impact on the balance sheet. There will be a little bit, but that's primarily just grossing up the balance sheet for the asset and liability.

Hey, in the other, when you look at the accounts payable and accrued liabilities, you will see also there was a – I think I mentioned there was about a $8.5 million movement out of that account into the – a reduction of the right of use asset and leases. .

Okay, that's very helpful, thank you. Again, so a couple of questions. What is – you know and I – forgive me if you had it in the presentation initially, but do you have handy the same store PLO in both U.S.

and Latin America?.

Yeah, same store PLO in the U.S. was down 1% and adjusted in Latin America was – same store PLO was also down to 1%. That was up a bit in GAAP, but constant currency was down a bit..

Yeah, okay thank you very much. And then you know talking about, so it sounds like you're focused on – there's a few moving parts with respect to your margins. One is your focus on reducing aged inventory, but then also you know some of the ramping up of stores in LatAm and so forth.

What do we think about the pace of gross margin this year and you know based on your perspective of you know getting rid of aged inventory and so forth, when might it bottom or have we already bottomed?.

We haven’t bottomed yet. It's a mix. We always try to get the margin back to where we indicated we were comfortable, which was the 35% to 38%, but the – we've got a balance selling the fresh buckets of inventory as well and that we can balance the fresh buckets with removing the aged and we will move back towards that ratio.

At the moment we're not moving the first buckets as quickly as we'd like and the real focus of management, both in the U.S.

and Mexico is giving a balanced approach to the inventory reduction, to maintain the margin as best as we can, but as simple view as we think we've probably got a bit too much inventory, which we want to recycle into cash as soon as we can. .

Okay, and then last question is your buy back. I think your shareholders would think any amount of buy back is good.

You guys initiated a little bit of the buyback, but it's still a very small component of the overall, a lot of the amount, and I know the change in rules require periods as a portion [ph] or should which we expect a greater focus and greater usage of that or how do you think about your prioritization of that?.

Well, we sort of said we’d be doing $20 million a year and we’re pretty much on track with where we thought it would.

I mean we’re fortunate to get into the market earlier than we thought we would, but you know we've committed to – subject to anything else coming up, to the $60 million over three years on a pretty much linear pattern on a per annum basis. .

Okay, alright thank you guys. .

[Operator Instructions] Your next question comes from Greg Pendy from Sidoti. Your line is opened. .

Hey guys, thanks for taking my question. Just on the aged inventory, I think you said it went from on a year-over-year basis from 9% to 7%.

Can you give us any color on you know what categories are we mainly working through electronics or you know can you just give us a little bit of a breakdown of where I guess the highest portion of the aged inventory is?.

Yes, it’s finally in the eligible area where the technological obsolescence is at its highest, particularly the LCDs and the – we have plasmas, which I haven’t seen for quite a while, but we had a few of those that we actually have liquidated and we’re looking at it sort of on a product category basis to actually see where that obsolescence is highest in taking the right price points to move that inventory.

.

Okay, that’s helpful. And then I just, I guess on the buy back on the changes, Danny I think you mentioned it went from sort of a blackout period of a month window to two weeks.

Is it 48 hours – it is 48 hours after reporting?.

So for the window to officially open, it would be although we're still under the 10b5-1 trading plan that we put in place in December. So we're still under that plan, assuming it hits the parameters we set up within that. We could still be in the market purchasing currently. .

Okay, very helpful. Thank you. .

Thanks Greg. .

There are no further questions at this time. I’d like to turn the call back over to Stuart Grimshaw for closing remarks. .

Thanks very much, and thanks everyone for tuning in. We’ll be around to obviously answer the questions over the next couple of days and we look forward to those conversations. Thanks once again..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect..