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

Greetings, and welcome to the EZCORP Annual Meeting of Stockholders. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jeff Elliott, Investor Relations for EZCORP. Thank you. You may begin.

Thank you, Melissa, and good morning, everyone. During our prepared remarks, we'll be referring to slides, which are available for viewing or download on our website, 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 the 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 SEC. 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. Joining us on the call today are EZCORP's Chief Executive Officer, Lachie Given; and Tim Jugmans, CFO. I'd now like to turn the call over to Lachie Given. Lachie?

Thank you. Good morning, everyone, and thanks for joining us for the 2022 Annual Meeting of Stockholders. We will discuss our corporate strategy and financial results for fiscal 2021. Before we get to that, I'm happy to report that the Board of Directors has appointed me as Chief Executive Officer; and Blair Powell as Chief Operating Officer. As you know, Blair and I have been serving as Co-Interim Chief Executive Officers since January 12 and the Board realigned our leadership structure to leverage and capitalize on our respective capabilities and experiences. In our new roles, I will be responsible for the overall executive leadership and strategic direction, and Blair will focus on continuing to drive the operational performance of the business across all of our geographies. The two of us are looking forward to driving the execution of our mission, which includes delivering value for our stockholders. Our voting stockholder has elected me to serve on the Board of Directors, alongside all of our incumbent directors who have been reelected to serve another 1-year term. Now turning to the presentation. Slide 3 outlines the key components of our corporate strategy, which we announced to the market almost 18 months ago. I'm pleased to say that it continues to gain traction and is driving improved financial results every quarter for our stakeholders. With a deep focus on our team members and a passion for serving customers, our strategy is underpinned by 3 distinct pillars. The first is strengthening the core business down to the store level through superior execution on both the pawn and retail aspects of our business and becoming better managers of inventory. The second is cost reduction and simplification. We achieved cost savings of $14 million-plus in 2021 and continue to deliver a culture of cost consciousness throughout the organization. The third pillar is growth and innovation, which we are driving through a disciplined approach to store growth and rolling out additional digital offerings for our customers. Slide 4 shows that, on a normalized basis, total expenses for fiscal year 2021 were down 7%. Store expenses were down 4% and G&A was down 21%. As we've mentioned previously, as transaction volume continues to grow, we would expect certain expenses to increase in financial year 2022. Our efforts to strengthen the core, addressed on Slide 5, are directly tied to our focus on people and systems. With a strong team and great systems, we can more effectively serve our customers, make good pawn decisions and effectively manage inventory. We are excited about today's announcement that we've named Blair Powell COO with responsibility for all operations worldwide. His focus on people, pawn and passion and on personally driving our enhanced pawn operating model has enabled us to take great strides in the last 18 months. Training, operational talent reviews and performance calibration sessions are in place to allow team members to understand their goals and measure achievements. Inclusion initiatives and cultural transformation remain a focus for us as we ensure our team members are aligned with our guiding principles of leadership, customer service, accountability, respect, diversity and sustainability. We've also updated our proprietary point-of-sale system to support our fully integrated EZ+ Loyalty Program. Process efficiency continues to improve with online initiatives, automatic ID scanning, enhanced telephony, modernizing store networks and deploying enhanced WiFi. IT modernization will continue to enhance operations and productivity. We believe strongly that innovation is an essential driver for sustainable growth. As you can see on Slide 6, in financial year '21, online extension payments grew to 9% of total extensions and over 13,000 online layaway payments took place. We are also pleased to announce that our EZ+ Loyalty Program went live in U.S. stores in October and launched in Latin America earlier this month. Early feedback has been very positive. You will see more consistent use of the EZ+ branding going forward as we streamline the digital customer experience. After launching our inventory showcase test in May, we now have over 18,000 items listed online with over 140 stores currently participating. We believe that this is helping us capture new customers as the search for certain items becomes much more convenient. Store growth is an important element of our strategy. We added 143 stores in fiscal '21 and have continued our inorganic growth in October, investing $15 million in a company that owns more than 20 pawn stores, primarily in the Caribbean. The integration of our recent acquisitions in Mexico and the U.S. are going well, and the acquisition pipeline remains robust. To Slide 7. The very nature of our business, which extends the useful life of millions of items, strongly contributes to the circular economy. According to the EPA, the U.S. had 292 million tons of waste in 2018, that is nearly 5 pounds of waste per person per day. By purchasing secondhand items in a pawnshop instead of buying new, our customers are significantly reducing that waste. In addition to recycling preowned items, there are many other aspects of our business that have a positive impact on the environment. Our stores are located inside the local communities that we serve, reducing customer travel and delivery. We do not have warehouses nor distribution facilities, and our stores have a relatively small carbon footprint. Highlighting other ESG topics, we provide an essential, simple, regulated and transparent financial resource for those who are underserved by traditional sources. For many of our customers, pawn transactions provide an essential and financially responsible lifeline to meeting their unexpected expenses. Their needs for cash and credit alternatives are not met by traditional financial institutions, such as banks, credit unions, credit card providers or installment and short-term lenders. These institutions do not offer small dollar collateral purchasing or lending options and generally require established credit history, credit checks and have extensive loan application and qualification requirements. Pawn transactions are simple, transparent, regulated and safe and funding with approval is based on the valuation of the collateral item, not on the creditworthiness of the customer. The customer is under no legal obligation to repay the amount advanced. We do not engage in collection efforts. We'll take other legal actions against our customers. And we do not report transaction histories to external credit agencies. Pawn transaction are the oldest form of regulated consumer credit and are governed by federal statutes and regulations as well as numerous state and local laws. The way we do business is as important as the business that we do. This is the theme of our code of conduct, and we maintain a strong compliance culture overseen by our Board of Directors. Independent directors hold 4 of our 6 seats on the Board, and we satisfy Nasdaq's recently enacted Board diversity rules. Protecting the privacy, integrity and security of our customers' data and enterprise network is a top priority. That is also monitored and overseen by our Board of Directors. We maintain a separate IT security team that is responsible for the design and implementation of our cyber risk strategy, including deployment of systems, enterprise-wide training, monitoring and reporting of threat incidents and response preparedness. To Slide 8, in fiscal year 2021, we produced -- we've procured over 7 million preowned consumer items and resold over 5 million items, recycling and contributing to the circular economy. We retrofitted 65% of U.S. stores with energy-efficient LED lighting and recycled over 1.8 million pounds of paper in the U.S. We responsibly disposed end-of-life computers, electronics and accessories through recycling and other sound e-waste processing practices. We provided over 26,000 hours of quarantine pay for team members affected by COVID-19 and 4 hours of paid time off to each team member to encourage vaccination. We also implemented a 2-year diversity and inclusion plan. In the U.S., 65% of team members and 55% of managers identify as an underrepresented minority. Globally, 51% of team members and 42% of managers identify as female. In summary, EZCORP is committed to meeting our customers' needs in a responsible manner and have aligned our business strategy and operations with environmental, social and governance sustainability principles. I would now like to turn the call over to Tim Jugmans, our Chief Financial Officer, to provide more details on our financial results. Tim?

Thank you, Lachie. Turning to Slide 9. We look at the financial results of 2021. PLO ended the year at $174 million, up 32% on a year-over-year basis, which is within 16% of FY '19 same-store PLO balance. In Q1, this improved to 14% of FY '19, and in Q2, we expect to see a pay down of PLO with the normal seasonality of tax season. So PLO ended higher for the year. The average PLO was lower in fiscal 2021, which led to a 5% decrease in PSC revenue. Merchandise sales gross profit margin was 42% compared to 33% in fiscal 2020. These improvements reflect the commitment to improving the core business by driving down aged merchandise, now less than 1% of total general merchandise inventory compared to 6% last year. Our focus on selling inventory in the first 90 days has improved inventory turnover to 2.9x from 2.4x. In our first quarter investor presentation, we stated that in late December and through January, stores had been affected with the spike of COVID-19 with approximately 10% of stores reduced hours due to staff shortages due to COVID. With few team members in stores, we are seeing negative effects on sales. For the year, EBITDA was $67.5 million, up $1.2 million. When taking this into account, the incentive compensation accrual in fiscal 2020, EBITDA was up $22.1 million or 49%. We have an exceptionally strong balance sheet as we maintain liquidity that is essential for growing our pawn books across all our regions and to pursue substantial opportunities for pawn store expansion across the globe in a disciplined and focused way. We've performed well through a difficult economic cycle for the industry, and we'll continue to execute on our strategic initiatives throughout fiscal 2022. That concludes the end of our presentation today, and we'd like to open it up for a few questions. Operator?

[Operator Instructions] Our first question comes from the line of John Lynn with Discovery IP.

Lachie, congratulations on the move. My question is the following. You guys have -- you had $31 million of EBITDA in the first quarter. You're clearly going to go over $100 million of EBITDA for the year even taking into consideration seasonal things in the third and fourth quarter. Your enterprise value is just about maybe a little bit less than $400 million that includes the market cap, cash, debt and the value of cash converters. So you trade at a little bit less than 4x EBITDA. You trade at a huge, huge, one more huge, discount to First Cash. And yet you're going out and doing M&A elsewhere, but it appears to me that the cheapest -- some of the cheapest pawn stores in the world are your own. Can you -- are you -- do you have any plans to go back and restart the stock buyback to help the long-suffering shareholders?

Look, thank you for the question and it's a point that we speak a lot about both to investors and internally. And what I'd say to you is it is firmly on the Board's agenda to assess our capital management options. As you pointed out, we have done a buyback pre-COVID so it's not that we're fundamentally opposed to doing buybacks. But the issue that we grapple with is when you take your argument, which is perfectly sound and provides a strong return on capital, and then we try to balance that with the fact that our goal at EZ is to scale this business up. And it's a global opportunity that's very, very, very large. And to go after that opportunity, we need a sound capital base. So it's a -- believe me, it is a firmly debated agenda item for our Board and for the management team. We see both sides of this argument. We have done a buyback before. But as I said, we are truly trying to scale up our cash flow, our earnings, our store footprint and the size of this opportunity is, I'll use your words, huge, huge, huge. So we're certainly not saying we're not going to do a buyback or that we're going to do a buyback. It is firmly on the agenda. But as I said to you, we're trying to balance that with scale.

[Operator Instructions] Thank you. It seems there are no other questions at this time. I'll turn the floor back to Mr. Given for any final comments.

Thank you very much, operator. Thank you all for joining the call this morning. We very much appreciate it, and look forward to talking to you all again soon. Thanks.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.