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

Good morning, ladies and gentlemen, and welcome to the EZCORP's 2021 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, and again, welcome to EZCORP's 2021 Annual Shareholder Meeting. 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 or other factors that are discussed in our annual, quarterly and other reports filed with the Securities and Exchange Commission. Now I'd like to turn the meeting over to EZCORP's Chief Executive Officer, Mr. Jason Kulas. Jason?

Thanks, Michael, and good morning, everyone. We are glad to have everyone on the call with us this morning. We'd love to be having this call in person -- or this meeting in person as we would typically do. But we're also very pleased to be able to leverage technology in this way to continue on and move forward with this meeting. The format this morning will be pretty straightforward. We'll go through some prepared remarks and then open the call for questions. And before we get into the prepared remarks and the materials that we sent out to everyone, I want to cover just a couple of things. The first item is we sent a press release out this morning that most of you have probably seen by now announcing that we were reducing the size of our Board as terms expire. This is consistent with the theme of cost cutting that we've talked about over the past couple of quarters. We've come out and talked about all the ways that we're looking -- that we're finding to make EZCORP a more efficient company. And this definitely falls into that category. With these changes, we're going to save about $1.2 million annually, not including travel and other related expenses. So that's a meaningful number for EZCORP. But I want to take a second just to thank these board members for their contributions and service to EZCORP. We're a better company because of their service over the last couple of years. And I look forward to personally keeping in touch with all of them. And the 4 independent board members we're moving forward with, are strong, experienced and diverse group. I'm also looking forward to continuing to work closely with them. So that's the first item I wanted to make sure we covered. And second, one of the things we've been spending a lot of time on internally is coming up with new and better ways to recognize the heroics of our team members. And we've had a lot of fun doing that, and we've really put a lot of new ways in place to just recognize our team members who are going above and beyond every day to serve our customers. And in this environment that we're going through over the last few days in the South with this winter storm, we've seen so many new examples of that. And I want to point this out because we have a lot of our team members on the call this morning listening in and the examples that we've seen through a lot of the snowstorms and those kinds of things that have impacted the business in the South and particularly in Texas, people really stepping forward to make sure our customers get served, to make sure that our stores get opened and in some cases, literally pulling each other out of ditches. I just want to recognize those heroics and thank our team members for their tireless efforts to make sure that our business moves forward and serves our customers. The -- I'm going to spend most of my time, in fact all of my time, on Slide 4 in the presentation, which is titled The Path Forward to Strengthen and Grow the Core. And where I want to start is a little bit off the page. Our -- the pawn business is a very unique and essential business. We provide cash for practical needs that come up in everyday life. And we do it in a very flexible way. You can sell us an item or pawn the item. And when you pawn the item, it's still flexible because you can either redeem the item or not and it's entirely up to you. It's a one-way option for our customer. We also -- in addition to providing that much needed cash, we also sell pre-owned merchandise. This is merchandise that's cost effective for our customers and also environmentally friendly. And through both of those actions, our focus is to ensure that we are there to provide those services without interruption and that we get better every day. And so when we talk about our strategy and the areas we're focused on, it's really just about that. And one of the things that we talk about a lot internally and we've shared publicly over the last couple of quarters is we want to present our story in a very simple, straightforward way because we think our business, although we make it very complicated and analytical and those kinds of things, is a very simple, straightforward business. And the reason we like it, we presented these concepts over the past couple of quarters, but we presented this slide in this format for the first time over the last quarter. And we've talked about this being a picture that sort of -- it tells the story because the way these puzzle pieces fit together, without any one of them the puzzle is incomplete. And that's exactly how we look at each of these components when we think about our business, without any one of these things operate in the way that it should, our business is not going to be in a position to reach its full potential. And for us, that starts with our team members. It's our #1 goal in our business to ensure that we -- to ensure that our team members know that they are valued and appreciated and trained and equipped to service our customers. We know that every initiative that we have in our business, whether it's a revenue initiative or a cost initiative or a growth initiative, all of those initiatives, the success of those initiatives begins and ends with our team members, help us carry them out. And we know that everything that we want to do in our business begins and ends with our team members. So that's a big focus. We also know that there's a virtuous cycle that if we have team members who are passionate about the business and feel valued and appreciated, know that they're valued and appreciated and rewarded for what they do, then they're going to treat our customers well, and our customers are going to want to do more business with us. We're very focused on giving our customers choices and how they deal with us. And that's a big part of the effort as we think about an innovation to give our customers choices. We want to make sure that our customers are treated well, and this ties into something we talk about a lot internally, having a culture of compliance, making sure that the process that our customers go through is a fair process and one that leaves them wanting to come back and deal with us over and over again. When you spend time in stores, and this is probably the -- as the executive of the company, one of the things we enjoy doing more than anything else. When you spend time in our stores, one of the things that really sticks out immediately is how much a pawn shop is a community. We have people coming in to transact. They're buying merchandise and their pawning items and they're redeeming their pawn loans and they're conducting business. But they're also walking into a store to say hello to their friends and greet them by their first names and ask about their kids and how they're doing. And that's the environment that we want to continue to grow and foster because our customers appreciate it. And so that's why, for us, beginning with our team members serving our customers, that's why those are at the top of the page. What comes next for us is the 3 big elements of our strategic plan, which we've spent a lot of time talking about, strengthening our core business, focusing on our business down to the store level in all aspects of the operations, reducing costs and doing that continually as part of who we are, not just as part of a onetime effort to cut costs. And then also not forgetting that we have to continue to innovate and grow. On the strengthening the core side, this is the operations of the business. This is making loans, but it's also managing the retail side of our business effectively. So for us, that's on the loan side, making sure we have systems that will help us efficiently and effectively make those loans. As we're pricing more and more of our items in the system, we're seeing that we're getting benefits of having those tighter controls in place and having that more consistent approach to the business in place. And that, combined with the focus of our team members of our trained pawn brokers, the combination of those 2 things is a really powerful combination for us. But it doesn't stop there because we know that -- and also a very important part of our business is how we manage the retail side. So it's looking at the velocity in those first 90 days of moving inventory. It's making sure that we manage our aged inventory in a way that doesn't take us back to places that we've been historically in terms of seeing growth in that aged inventory. And all of this in the name of turning inventory because we know that turning inventory faster, it's cash back into the system and that cash is going to be put to work back with our customers. So it's a really important effort for us to continue every single day focusing on the core business, making sure we have the right people in place and the right technology in place to support that. On the people side, we have an experienced team that knows what good looks like. And it's our effort every day -- our tremendous effort to make sure that we get better every single day with that team. On the cost reduction side, we've come out and talked a lot about costs in 2 different categories. There's a set of costs that we've identified that we think are more on the temporary side and are just lower because our activity has been lower. And as loan demand returns, a lot of those costs will return. And there are also costs that we have identified that we plan to be permanent cost reductions. And our intention is to continue to find new areas that we can announce are part of that. So for us, we came out in the last quarter and said we identified a little over $13 million in those types of costs that we've been able to save. And as you saw with the press release this morning, we continue to find new ways. So with this annualized $1.2 million in the Board savings, but still also left with a very strong Board that can help us manage and direct and ensure that we have the right things in place for the company. So cost reduction, but also making sure that our business is just simple and easy and straightforward. On the innovation and growth side, for us, that's -- it falls into several different categories. One, obviously, avenue of growth for us is our de novo strategy. We have announced that we'll open fewer de novo stores in Latin America in fiscal 2021 than we did in fiscal 2020. But that area will still be a big focus for us. And we'll continue to have growth through de novo locations. It's also M&A for us. We're constantly looking for ways to increase our pawn footprint because we know that over time, that's something that's a value-adding initiative that continues to pay dividends for us going forward. And we're very active there. We -- our plan is for M&A to continue to be a part of our story and in the future to be able to communicate that we've had some success from these efforts that we're putting forth right now. Innovation and growth for us is also, though, continue to focus on the digital side of our business. We have one of our most tenured and experienced and best executives leading this area for us. And we're excited about what we have so far, but also what potential we have in this area. So a lot of fits directly in this area. So we now have a -- as we've talked about many times, a digital pawn servicing platform, where our customers have the option to interact with us digitally to service the pawn loans, to service their layaways, which is the most recent addition to that product set. And we're excited to be able to offer that as an option. The idea here is that we want to give our customers choices in how they deal with us. Maybe it's choices out of convenience, maybe it's choices out of necessity because they don't have the ability to get into the store for any reason at any given time. But we want to make sure that as part of providing an overall outstanding customer experience that we're giving our customers those choices. So there'll be more to come from us incrementally on the digital side of the business as time goes on. And we'll be excited to continue to talk about that going forward. And all of these pieces, starting with our team members moving quickly to our customers in these 3 big elements of the strategy, they all lead to better and more consistent financial performance. And for us, it's -- that's how we're going to -- that will be our report card. That's how we're going to prove that all the things that we're doing are going to make a difference and that's how we're going to increase shareholder value. And it's -- at its core for us, it really comes down to the efficient use of capital. We want to make sure that we continue to have discipline in place for -- on the operations, things like aged inventory, capital is not free. So if inventory has gotten too large and it's aging, that's an asset that's tying up capital and that's not an efficient use of capital. If we're looking at capital expenditures, which are critical for both maintaining what we have, but also investing in growth, we're looking at the return we're getting for those investments and being very rigorous about that process to make sure that, that we're allocating dollars in a smart and consistent way. And in some cases, on the cost-cutting side, we're cutting costs to be more efficient and realize operating leverage as the loan balances come back, which we know they will over time. But in some cases, it's cutting to invest because we know that finding those dollars to invest in growth is going to be something that creates value over time. So I'll pause there and turn it over to Tim Jugmans, our Interim CFO, to go through our recent financial performance before we turn it over to questions.

Thanks, Jason. Turning to our consolidated financial results for the fourth quarter on Slide 8. The ending PLO balance of $134 million was down 33% year-over-year, primarily driven by ongoing COVID-19 impacts, which is also driving lower pawn service charges. PLO increased $18 million on a sequential basis during the quarter, reflecting strengthening loan demand, which we continue to see in Q1. Merchandise sales were up 1% year-over-year for the quarter, which were less. Gross profit was down 7% due to lower margins, reflecting aged inventory reductions in Latin America, partially offset by further inventory management improvements in the U.S. This is shown by the 39% increase in inventory turns to 2.8x. This has led to consolidated EBITDA for the quarter down by 38% for the quarter at $12 million. As we have previously said, looking ahead, we expect to incur additional operating losses in fiscal 2021. The scale and pace of recovering pawn loans outstanding and inventory levels as well as the size and mix and implementation of potential further stimulus packages will determine the trajectory and timing of our return to operating profits. However, we are very excited about the future. As Jason said, we are heavily focused on improving the core business and reducing costs to lessen operating losses in the near term and enhanced earnings growth and profitability over time as revenue rebuilds. Before we open the call for questions, I'd like to turn it back to Jason for some closing comments.