EZCORP, Inc. (EZPW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the EZCORP 2020 Annual Shareholder Meeting. [Operator Instructions] As a reminder, this call may be recorded. I'd now like to turn the conference over to Michael Keim, Investor Relations. Please go ahead, Michael.

Thank you, and good morning, everyone. Again, welcome to EZCORP's 2020 Annual Shareholder Meeting. During our prepared remarks, we will be referring to slides, which are available for viewing and download from our website at investors.ezcorp.com. And just before we begin, I'd like to remind everyone that this conference call and webcast as well as the presentation slides contain certain forward-looking statements regarding the company's expected operating and financial performance for future periods. 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. So now I'd like to turn the meeting over to Mr. Stuart Grimshaw. Stuart?

Thanks, Michael, and good morning, everyone, and welcome to the Annual General Meeting. We have some slides, which we'll run through today. Give a brief overview of what's happened through the year, but we're focusing on probably 5 key points, which is long-term value creation, strategic initiatives, touch on the market share gains, financial highlights, and also, we'll talk a little bit around Lana, which is our digital platform. So if we turn to Page 4 and if we just look at the long-term value creation slide, there's a number of key points which I'd just like to pull out here. One is, we do generate quite a strong cash flow and we have consistently over a number of years. With cash flow, we've allocated $60 million over 3 years for the share repurchase program. As of the end of December, $1 million was repurchased. We still believe this is the right usage of capital, which is the high return that we see on this. We have a strong balance sheet. We have cash of $143 million as of the end of December. We repaid $195 million of the convertible bond in June of 2019. The debt profile is long term. The first maturity is 2024. And as we've mentioned quite a bit through the last few quarters, we are improving the aged inventory position. However, we will be working more on the inventory overall position to try and reduce that as there is some work going on there to get some cash out of there. EBITDA continues to grow strongly, and it has over a number of years. Lat Am, in particular, has been a strong driver of that. And we'll look at that in the last 2 quarters, it slowed for reasons we'll touch on a bit later on. However, the acquisition of GPMX in Guatemala has been a good one for the company. In Mexico, we continue to do a de novo-based operation, hoping to open 40 de novo stores this year after 21 last year. And we do have -- done some acquisitions, although it has been a bit tougher to get value through the acquisition front in Latin America in recent times. U.S. continues to be a good cash generator for the company. And importantly, the point of sales is to which we've talked quite a lot about is -- has been -- is up and running in Mexico and the U.S. completely. We've seen good speed at the storefront. And importantly, it's been a very stable platform compared to where we first started with. There are a few shakes through there. Getting to Slide 5. We are principally a lending company. We do provide cash to our customers in times of need. We continue to see some good growth, but importantly, we have a consistent yield coming through. And that has been consistent over a number of years, which suggests we are lending correctly to our customers. The point-of-sale system is improving us in terms of the analytics from both the customer and product point of view. So that's really helped us at the point-of-sale and with our staff. As I mentioned, the geographic expansion, we continue to look at opportunities, however, I meant, we are disciplined on that front, and we haven't yet been able to strike value on both sides of the equation. So in lieu of that, we opened 21 stores in Latin America in the last 12 months. We're planning for 40 in this year. And importantly, Lat Am accounts for about 49% of our total stores, which -- it was quite high compared to when we first started 5 years ago on this journey. Our Lana, I'll touch on a little bit later on. But is -- we have developing digital platform and it is live now, and it has been introduced in select stores in Florida through December '19. And as I mentioned previously, we have a share repurchase program underway, and we will continue to execute that over the next 3 years. On to Page 6. As I mentioned previously, we have had some very consistent growth over a long period of time. But if you look at the bottom right-hand corner of the Lat Am slides, you'll see the PLO growth was negative. That's due mainly to a lot of the macro issues we've seen coming through in the Mexican economy, where cash from the government has become readily available to a lot of our customers, such that there is cash in their hands more so than we have seen previously, and that's a macro effect. And talking with our competitors, they've been seeing the same hit to their business, and they believe that during halfway through this calendar year, we should see some reversion. We'll watch that closely. But typically, our customers do adjust to the cash flow that they do get, and they do come back once they start spending the money. As I mentioned previously, we have some very strong yields through the portfolio, 14% on a monthly basis in the U.S. and 16% in Lat Am, which has been consistent, which means, we are lending correctly. On Slide 7, again, is the EBITDA growth story. But importantly, you'll see in the Lat Am in the fourth quarter as they have started to drop off through reasons of macro as well as some of the system impacts we had during the year that caused a slight dip in the efficiency ratios. But we are focused on driving those ratios back to the positive trends that we have seen in the previous years. On to Slide 8. Again, this shows the quality of the portfolio. The pawn loans outstanding have grown at a CAGR of 6%, with the PSC yield has grown at 7%, which means that we are continuing to see a quality portfolio growing over time. I mentioned previously on inventory, which is in the middle slide on the right-hand side. We have grown inventory relatively quickly, and we are now focused on actually being more efficient on the loan inventory ratios and trying to move that inventory down. We have moved the aged inventory reasonably well over the past 2 or 3 quarters, but there's still more work, and it's a good opportunity for us to do that. The merchandise margins have remained reasonably consistent in that 35% to 38% range with the last quarter showing a slight decline there, but we still believe that's where we should be aiming to achieve. On Slide 9, we pick up on Lana. And it is now operational as a public beta out there. We have 95 stores operational in marketing the Lana platform. 50 of those have come on the last month. So all Florida is pretty much using or has access to the Lana platform through the store format. Texas will roll out over the next 2 months. We have over 5,000 customers on the Lana platform currently. There's an additional 2,000 that actually use the platform just to look at their loans. So they actually can pick up and see what's happening and 300 loans were extended digitally in February. That's very important for our customers to be able to actually extend their loans from their home rather than having to come into the stores to make the extension. We also have an ability across all our stores to accept payments. So you don't actually have to go to the same store you have the loans to repay the loan, and that's helping with our customers and the benefit of that as we'll see over the page is that if you were to extend your loans at the utmost convenience that means that customers will still retain their product. We won't get drops occurring due to the inability to get to the store. And we're looking to do this in Mexico as well as you can imagine, a lot of our customers have to go on a bus or they're time constrained. So being able to do it at home is a great benefit to them. It's -- also the platform is really hitting on the financial inclusion. It's a 0-fee account that enables people who don't have high degrees of cash to be able to access a bank account with a debit card, which gives them access to services that potentially they wouldn't be able to use otherwise. It gives them control of their money. They can track their money. They can track their loans, and they can withdraw their money from over 19,000 ATMs across the country and also deposit through 90,000 locations, such as with CVS and Walgreens. So the access is actually very strong. So if we look at Slide 11, in less than 12 months, we've actually developed capability, which is on parity with the number of competitors in the market. We do direct deposits. There's a visa debit card. Get paid 2 days early. We do mobile payments, and you'd also do loan management. We're actually working on a Spanish version of this app as well, which is quite unusual in this market. And we're looking to see what other products we can offer through the platform that will suit the need for that. On Slide 12, we just want to make it clear that there's 2 things we're working. One is the financial inclusion for our customers that also is benefiting the pawn business. Being digital in this space is critical to the way our clients interact with us. We believe we will be the only digitally enabled pawn option in the market. The ability to extend the loans should increase the yield on the portfolio. We should actually increase our PSC generation over time. It actually means that members of our team and the stores aren't tied up with one, say, low-value transactions on repayments. So it should increase the productivity of the store at the same time, and importantly, increases the customer satisfaction. At the end of the day, this is about the customer, is right thing for the customer. And as we get more of our customers on to this platform, we believe the satisfaction rates will drive further. That's briefly the summary of where we are. We're obviously very excited with the way Lana is going. We believe we're actually on track to continue our strong performance as we've done over many years. So with that summary, let's just open it up for any questions there may be.

My first question is on Lana. So how -- suitably makes sense, but how do you drive your customer base on to the platform? And talk about how you are trying to educate these guys at the store level. And then maybe talk about maybe some of the other products you could offer down the road, and just kind of a blueprint to see how you -- it plays out.

Yes. A lot of it's the interaction with the customer at the storefront. So we have to bring out our own staff along on the journey to enable them to sell it. So we're running a number of programs, competitions and platforms within the store environment to actually promote the line of product within the store. What we're also mindful of is not taking -- making sure we're meeting the immediate need of the customer who's in the store, which might be a loan or a purchase or repayment, but at the same time, try to sell them through the product. Our best stores are probably doing about 10 accounts per week. And it varies depending upon the store managers, digital capability, which is quite interesting. There's a strong correlation between that. So we're still actually trying to segment our stores into where we need to assist or where we don't. Texas, will be the -- as we roll out, we'll get to see more of how that interaction works. We're continually revamping the competitions in the programs. We haven't really gone externally, marketed heavily in the space. We did a couple of Facebook ads very early on and that was quite well accepted. The real challenge for us is to get them to be very active users of the accounts. So as we sign them up, we want them to be active rather than just giving an account. We have a number of direct deposits coming in. I think about 1,500 of those 5,000 have direct deposits coming.

The deposits...

It comes from your salary.

Into the wallet...

Into the wallet, yes. In terms of what we're looking at next, we're looking at opportunities such as remittances. We're looking at to see whether there's an application like that. We're just trialing a number of ideas with customers to see whether it resonates on remittances that are on the list.

Their loan over their -- is that a good idea?

They can because they can use their Lana account to repay the loan.

But they don't have to go into the store?

No.

Do you have a banking partner or...

Green Dot provides us the infrastructure for us to play upon.

A PSC is that what you mean...

As much as I'd like to, no, they're not.

Were they involved at all anymore?

No. They're not. No. No. So we -- they ceased their involvement in December of last year.

But when you talk about maybe like some of the higher-performing stores that had [Audio Gap] week?

Yes.

And maybe just talk about like goals for like capture rates. Because I mean, 1 million customers or whatever the number is in the U.S., I mean, talk about maybe where you think this [Audio Gap] tipping point in terms of [Audio Gap]

It's the -- it's quite complex. So what we're trying to ascertain is [Audio Gap] typically, in the financial services space, if we can get the customer using 2 to 3 products on the platform, even 10 of them, they use it much more. So at the moment, we've really only got the -- we've used the pawn line extension, which is good. We've got the deposits. We're looking at add-on capabilities, which will then enable us to get towards that high reusability rate, which then starts driving the profitability of the platform. At the moment, we're trying to, I suppose, do a bit of a grab as how many customers before we get on to the platform, so that we can start pushing product into that, where once we get Texas pretty much up and running, that will be about 300 stores. That will then give us very good platform on which to go forward on. And you would really underbid on the market 3 or 4 months at the end of the day, but it's still very early days, but we're excited about what it can do.

Is there a peer-to-peer sort of facility within the [Audio Gap] customers [Audio Gap]

Not at the moment.

Is there any [Audio Gap] speaking about remittance, that's not going to be a [Audio Gap] Latin American bank or how...

It'll -- we're just looking at -- I mean one of the things we're looking at is, we don't want to build. We've done the build already, so we want a partner. Got to find the right partner to work with. We've got the customers of the infrastructure now to how do we actually get the right partners to create a great option for our [Audio Gap]

Right partners would be [Audio Gap] effectively South America, parallel or...

Depends on -- I think you can't.

You can't?

Yes. You can't.

Operator, can you poll for questions?

[Operator Instructions] There are no phone questions -- my apologies, there are no phone questions at this time.

Thanks. Tom's got a [Audio Gap]

I was wondering what your plan was for the debt coming due in 2024. Were you planning to provision cash for it at that point, or I know it's still...

It's far out 4 years away. We're still looking at -- I mean we're generating cash at this point of time. So when we get closer to it, we'll probably reconsider the options that we have and then [Audio Gap] What we've always said, we like to have strategic flexibility. Means that we got cash, how are we best going to use it for the best use for the company. There's a lot of options which we could do. But at this point of time, it actually hasn't reached the discussion at the Board table. It's -- not too worried about it at this point in time.

Your cost of debt seems relatively high compared to your I think [Audio Gap] thing that the markets are becoming [Audio Gap]

I suppose there's 2 things. One is, we've got convertible debt. So the actual cash interest cost is very low compared to our peers. The GAAP cost is [Audio Gap] There's a little bit of gain through the profit lining [Audio Gap] But the actual cost is around 2 and [Audio Gap] We like 2 and 3 quarters. By the way [Audio Gap] The debt markets, we do look at all the time. And my preference is, I don't like [Audio Gap] Number of lenders would probably give us a line if we had a fully secured balance sheet, but also a number of the covenants require purchase with [Audio Gap] that market probably better than -- and anyone will be looking in previsiting. Are those opportunities to see whether we can, wouldn't say exploit, but find the right niche for us to go forward with.

So a slightly different question, speaking of competitors. So looking at the net income before taxes over the past 3 years and comparing that First Cash with EZPAWN, even equating for revenue differences, First Cash has been vastly more profitable. Probably not coincidentally, EZPAWN's stock has dropped 48%, and First Cash has increased 87% in the past 3 years. So my question is, if the focus is really shareholder value, why not just try and copy First Cash and focus on decreasing expenses, increasing profit and hopefully increasing the stock price?

Yes. No, I think it's a good question. We do look at First Cash. Our DNA is really in the lending, and it's hard to change the DNA quickly to copy a competitor. And we are starting to revisit the way we do operate in the lines of trying to get that bottom line. I don't think anyone who's in management has a strategy to reduce net income and [Audio Gap] shareholder value problems to try to increase it. So we do look at what First Cash does because they have been very successful. Their focus is probably a little bit more retail-based announced, so we're revisiting whether that's an appropriate strategy that we need to go back and look at [Audio Gap] So we are looking at those opportunities to change our model. If it makes sense?

That's encouraging. It does seem like since there's a successful role model right in front of us, that might reinvent the wheel, right?

Well, and part of it is they do have a very strong cash generation given the scale that they do have. The acquisition they did do of Cash America gave them a very good scale benefit, which enabled them to keep adding de novo stores. If you look at the store performance on a loan basis, we're pretty much better than them at the store level in terms of how we lend and the returns we get from the portfolio, our yields on the portfolio are actually stronger than First Cash's. That's why we like lending because we think we do it better. They are getting better margins on their retail. That's what's driving a part of their profitability. So that's why we're starting to look into the retail side of our business capabilities.

Operator, is there any questions online?

There are no phone questions at this time. [Operator Instructions]

Anybody else in the room?

Let's officially close the meeting, and thank everyone on the line and on the web for listening in and appreciate your support of the company. And thanks everyone here for tuning up. Thanks very much, and we'll have a coffee and have a chat. Thank you.

Thank you.

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