EZCORP Q2 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

Key Takeaways

  • The company recorded a 17% year-over-year increase in pawn loans outstanding (PLO), driving a 17% rise in total revenue to $253.8 million and a 4% increase in EBITDA to $33.3 million.
  • Merchandise sales grew 12% year-over-year (8% same-store), reflecting stronger demand for secondhand goods as value-conscious and environmentally minded consumers seek sustainable shopping options.
  • The EZPLUS loyalty program now boasts 2.9 million members (up 19% quarter-over-quarter), contributing to a doubling of online payment collections year-over-year.
  • Store expansion remains a priority with 13 new locations opened this quarter (11 in Latin America and 2 in Las Vegas), supported by a consolidated vacancy rate of below 3% and enhanced employee bench strength.
  • ESG efforts include reselling over 1.4 million pre-owned items this quarter through sound recycling practices, alongside new diversity, inclusion and community initiatives via the EZCORP Foundation.
AI Generated. May Contain Errors.
Earnings Conference Call
EZCORP Q2 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Morning, ladies and gentlemen. Welcome to the EZCORP Second Quarter Fiscal 2023 Earnings 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.

Operator

I'd now like to turn the conference over to Jean Marie Young, Investor Relations with 3 Part Advisors. Please go ahead, Jean.

Speaker 1

Thank you and good morning 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.

Speaker 1

Actual results for future periods may differ materially from those expressed 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. And 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, Lucky Gibbon and Tim Jugman's Chief Financial Officer. Now I'd like to turn the call over to Lachie Gibbons. Lachie?

Speaker 2

Thanks, Gene, and good morning, everyone. Our team's consistent execution of our Strategic plan has again yielded strong financial results with record second quarter pawn loans outstanding and merchandise sales. PLO, the key driver of our business was up 17%, dollars 202,900,000 and merchandise sales were up 12%, 8% on a same store basis. The macroeconomic environment continues to support increased core demand for our products and services, including providing environmentally conscious consumers with a more sustainable way to shop. Our team's relentless commitment to serving our customers with passion and And to excel operationally in all that we do continues to drive our strong operating and financial results.

Speaker 2

Beginning on Slide 3, we are a global leader in pawnbroking and pre owned and recycled retail. We operate 1199 in the U. S. And Latin America with strategic investments in adjacent businesses, expanding our geographic footprint worldwide. The macroeconomic environment continues to be a challenge for our customer base with inflationary pressures and economic uncertainty driving increased demand for pawn loans.

Speaker 2

Consumers are seeking value for money and environmentally responsible alternatives, driving increased demand for secondhand goods. We strive to be the best, Most convenient experience for our customers through continuous innovation, while positively impacting the environment and the communities in which we serve. Moving on to Slide 4. Our Engage team drives our success, so we are committed to investing in recruitment, retention and incentivization. We provide outstanding customer service, an attractive and well positioned store footprint, a differentiated digital platform, a market leading loyalty program a proprietary POS system so that we can offer the best options for our customers.

Speaker 2

Our strong balance sheet gives us ample liquidity Provide core loans across the regions in which we operate through various economic cycles. Slide 5 shows how we have progressed on our 3 year strategic goals. We believe we have the most passionate, productive, tenured and committed team in the industry, And we continue to find ways to motivate and retain them. Our team drives our success and our intense focus on employee training and recognition As a result of installed level vacancies of less than 3% across all geographies. We continuously strive to improve both our team member and Customer experience across all that we do.

Speaker 2

Customers continue to sign up for our Points Based loyalty program, which has grown to 2,900,000 customers. In Mexico, we are improving the retail showrooms to offer an even better shopping experience. Turning to our key financial themes In Q2 on Slide 6. PLO, the most significant driver of revenue and earnings, was up 17% year over year, Which was a record for the Q2 with an associated 19% increase in PSC. Tax season pay down was less than expected this year.

Speaker 2

Total revenue for the quarter was $253,800,000 up 17%. EBITDA was $33,000,000 for the quarter, up 4%. We are focused on better execution in LatAm to bring down aged inventory and get closer to the level seen in the United States. Cash on the balance sheet increased over the Q1 due to increased merchandise sales and the expected pay down of Peer Loy during tax season. On Slide 7, EBITDA margin was 13% for the last 12 months ending March 2023 versus 12% in the last 12 months ending March 2022 with the U.

Speaker 2

S. Driving the growth. Recently, EBITDA margins flattened due to inflationary pressures. On Slide 8, we talk about strengthening our core by focusing on people and technology to ultimately drive earnings. We are focused on recruitment, retention, inclusion and incentivization to ensure that our team is highly engaged.

Speaker 2

Implementing processes to improve the bench strength of our field team and improving recruiting strategies have resulted in a vacancy rate of less than 3%, as I mentioned earlier. We believe that we are leading the industry in technology and process efficiency. Our store network and system upgrades are complete and are improving stability and supporting our digital initiative. We continue to invest in technology and are building out our e commerce capabilities. On Slide 9, innovation and growth is the 3rd pillar of our 3 year strategy, and we continue to execute our plan.

Speaker 2

Our EZY Plus loyalty program has over 2,900,000 customers enrolled versus over 2,400,000 last quarter, an increase of 19%. We also collected $12,700,000 in online payments this quarter, up $6,500,000 from the Q2 of fiscal 2022. A $1,000,000 quote giveaway promotion in the U. S. Aimed at acquiring and engaging EZ Plus loyalty members So 27,000 entries and 200 winners.

Speaker 2

Improving the customer experience and growing the customer base remain key to our strategy. We have increased website visits to our core brands by 13% over the previous quarter. MaxPorn, our LuxuryPorn website, saw an 86 increase in daily website visitors over the previous quarter. We opened 11 de novo stores in Latin America with 8 in Mexico and 3 in Guatemala. In the Las Vegas area, we opened 2 de novo stores, 1 Max Pawn Store and 1 EZ Pawn Store.

Speaker 2

Slide 10 outlines our RESG highlights for the fiscal Q2. Our business by its very nature makes us a neighborhood recycler and a compelling component of the local circular economy. We are a significant recycler of secondhand goods in hundreds of local neighborhoods. We resell over 1,400,000 pre owned items in the quarter, including toxic consumer electronic items such as computers, TVs and phones, As well as tools, musical instruments, household goods and jewelry, saving them all from landfills. We use sound recycling and waste processing in the U.

Speaker 2

S. We do not use factories, distribution facilities or heavy trucking. Importantly, we provide an essential, simple, regulated and transparent financial resource for those who are underserved by traditional sources. Diversity and inclusion are a significant focus, and we continue to have excellent engagement in our Black empowerment affinity groups in the U. S.

Speaker 2

And our women's empowerment affinity group in both the U. S. And Latin America. In addition, we launched a working parents affinity group in Latin America during the quarter. We celebrated employee appreciation day globally and we have revamped the mission of our EasyCorp foundation.

Speaker 2

Building on our core tenants of People, Paul and Passion, our mission is to improve the quality of life in the communities where we live and operate Through supporting financial literacy, food security and financial stability. I would now like to turn the call over to Tim Judgments, our Chief Financial Officer, to provide more details on our financial results. Tim?

Speaker 3

Thanks, Lachie. Turning to our consolidated financial results on Slide 11. PLO rose 17%, driving PSC up 19% year over year, primarily driven by higher average PLO growth and improved yields. On the retail side of the business, merchandise sales were up 12% with merchandise sales gross profit up 5% We've expected 200 basis points drop in sales margin. Store expenses increased 16%, primarily due to labor in line with store activity, Higher store count and to a lesser extent expenses related to our loyalty program.

Speaker 3

G and A expenses increased 28%, primarily due to the reversal of incentive compensation for the previous CEO last year and to a lesser extent the increase in accrued incentive compensation. EBITDA for the quarter was $33,300,000 up 4%. Turning to our U. S. Port operations on Slide 12.

Speaker 3

PLO rose 18%, which led to a 19% increase in PUC year over year. On the retail side of the business, merchandise sales were up 9% with merchandise sales gross profit down 1% due to the drop in sales margin of 300 basis points. Store expenses increased by 12%, primarily due to late rent line of store activity, higher store count and to a lesser extent Expenses related to our loyalty program. U. S.

Speaker 3

Born EBITDA for the quarter was $40,300,000 up 11% on the prior year. Slide 13 focuses on our Latin American Pawn operations. Segment PLO grew 14% for the 2nd quarter or 12% on the same store basis, the resulting P and C up 21%. Merchandise sales were up 22%, 16% on a same store basis. Merchandise sales gross profit was up 32% due to increased sales and margins up 300 basis points.

Speaker 3

Store expenses were up 29% 24% on the same store basis, mainly due to increased labor in line with store activity and higher store count. Inventory turnover remains strong at 3.5 times. However, HGM is up to 3.2%, which reflects an opportunity to improve execution in Latin America. For the Q2, Latin America EBITDA improved 11% to 7 point $3,000,000 Looking forward on a consolidated basis, we should see PLO levels continue to hit record numbers as we move Our tax season, traditionally seasonally low for the year. This also means that B2C and profit for Q3 are traditionally the lowest for the year.

Speaker 3

As communicated in prior quarters, we are likely to continue to see gross margin remain at the lower end of our range 35% to 38% as we remain focused on strong inventory turns and limited aged general merchandise. Also, as we have seen this quarter, store expenses have increased and will do so on a sequential basis as inflationary pressures continue to affect the business. We also expect G and A expenses to increase sequentially for the same reason. Our focus on growing PLO, Selling what we own and investing in technology to gain efficiency and enhance customer service continue to drive our improved financial results. I will now turn it over to Lafi for a few closing comments.

Speaker 2

Thanks, Tim. In closing, I want to thank our EZCORP team for yet another excellent quarter. We are consistently delivering strong operating and financial results for our stakeholders. We grew PLO and merchandise sales to record levels for the Q2, opened 13 new stores, 2 of which were in the important market of Las Vegas, We enhanced our bench strength in the stores and the support center and we continue to buy back shares, returning capital to our shareholders. We achieved these milestones with a robust balance sheet and strong liquidity, providing the platform to capitalize on increasing demand for our 2 core products And an exciting pipeline for pawn store acquisitions across the regions in which we operate and beyond.

Speaker 2

And with that, we will open the call for questions.

Operator

As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of John Hecht of Jefferies. You may proceed.

Speaker 4

Good morning, guys. Thanks very much for taking my questions. I'm just wondering You kind of what you're seeing in terms of the retail mix at the stores. I remember a year ago or 2, you guys had a good mix of like Secondary shoes that might have even been considered luxury, but obviously value luxury. But now that we're kind of in a different economic climate, Are your customers seeking different types of merchandise from you considering the value proposition you offer?

Speaker 2

Good morning, John, and thanks for the question. Look, I don't think we're seeing anything that's materially Different from the customer in the mix. We are seeing nice growth in the luxury items, handbags and shoes, but they're still relatively small, But really exciting growth numbers. And we're obviously concentrating a bit more on the luxury strategy now, which is super exciting. But I think, Generally speaking, it's there's been no material changes in the mix.

Speaker 4

Okay. And then retail margins, I mean, you're in the range. I think you guys mentioned maybe the lower end of the range. But then again, this is Now we're kind of back to a normal range relative to the historical context. Any comments there that is that a function Of consumers being more selective or maybe bargaining again just because they're under more pressure?

Speaker 4

Or is it just things have settled back to normal, the mix is normal and that's Scott, the outlook, given the set of circumstances.

Speaker 2

I think it's more the latter. Our kind of enhanced operating strategy over the last couple of years is to be far more focused on turn. So making sure that we're getting rid of Inventory as quickly as we can. And I think the margin falls out of that strategy. So maybe in past years, It was more margin first, but when you do that, you clearly get an aged problem.

Speaker 2

So our pawn operating strategy now is Concentrate on loans at the counter and to dispose of inventory as quickly as we can at an appropriate margin. So Look, I think the outlook remains the same. It's at the low end of that range as we continue to make sure that the turns remain strong.

Speaker 4

Okay. And then, Uvadim, I think you've added about 40 ish stores in the last year. Just Any call outs there with respect to how these stores season or mature relative to what they would have done a few years ago?

Speaker 2

Look, we're really excited about that strategy. The de novos in Latin America, both Mexico and Guatemala is That's a really exciting strategy because the market is so large. So I think you'll see more of that from us. I think it's these stores come on quicker than they do in the U. S.

Speaker 2

Because you're putting less capital in, expenses are lower and So you moved to profitability quite quickly versus the U. S. So yes, I think it's very much on plan. The results have been on plan. And I think you'll see us do more of them.

Speaker 4

Great, guys. Thanks very much for taking my questions.

Speaker 2

Thanks, John.

Operator

Thank you. The next question comes from the line of Brian Nagel Oppenheimer, you may proceed.

Speaker 5

Hi. This is William Dawson on for Brian Nagel. Congrats on a nice quarter and thanks for taking our questions. So our first question is bigger picture in nature and just on the overall Palm backdrop. Can you describe how your core customer has been holding up through fiscal Q2, but also here in the early months of the spring?

Speaker 5

And there's also been a lot of discussion around like a recession later in the year. So we wondered if there's been any notable shift to changes or Any shift to buying patterns or traffic, or just general consumer demand for pawn loans lately?

Speaker 2

Thank you for the question. Look, I think it's a very positive outlook for pawn. You can see our core growth for our 2 products, Obviously, poor loans and secondhand goods. You can see that we're really up pretty strongly this quarter again. The core demand for these products continues to grow.

Speaker 2

In terms of a recession later in the year, historically, that would usually mean More growth in polymer lines and sales get tougher. What we're seeing is that, in fact, sales remain strong As we think customers are looking for value for money and are more environmentally conscious, so we're looking for secondhand goods. So Look, it's a good question in terms of the quarter itself. We saw strong growth and we think that that's going to continue in both products. And in general, recessionary Environments are good times for pawnbroking businesses.

Speaker 6

But adding to that, we did see in quarter 2 The definitely less of a pay down during tax season. I think A lot of companies reported seeing their customers with less money during tax season, which really meant that from a loan balance We are on a much higher than expected loan balance at the end of the quarter And that puts us in really good stead for the rest of the year.

Speaker 5

Appreciate that color. Our next question was in respect to the loyalty program. Congrats on the strong adoption here in Q2. It's 2,900,000 members versus 2,400,000 last quarter. And so we just wanted to Your opinion on how this program is helping you connect better with core consumers?

Speaker 5

And also, while it's still early, have you seen any Financial benefits thus far?

Speaker 2

Look, it is it's a good question again. It is certainly early. So our first phase has been to sign up as many customers as possible and get the message out to our customer base that there is benefit here for them. Next step is to maximize the success of it to get consumers more engaged coming back more often using their points. But anecdotally, lots of customers are talking about it when they come into the store.

Speaker 2

They always want to talk about their points. So we think that it is just generally engaging In a much better way. The hope is that it wins it helps wind share going forward, but I think Financially speaking, it's still very, very early. We've just engaged an outside agency to help us To come up with more innovative strategies around it, but I think you can see that clearly our customer base loves it. I think in the coming quarters, you'll see us do more around it and I think drive more revenue.

Speaker 2

But For now, it's still pretty early financially.

Speaker 5

Excellent. Thank you. And our last question, If I can squeeze this in, is that you've done a lot to invest and staff well your stores here in the past year. And so our question was, excluding new stores or acquisitions, is your current expense infrastructure in place So that we should really think about any incremental SG and A as largely wage inflation related. And Considering this and also we recognize you haven't given long term guidance, but Any updates to the way that we should think about the long term operating margin profile of your business?

Speaker 2

I think, Tim, we'll have some comments here. But I think on the store based question, we said in our remarks just now that I think vacancy is a bit less than 3%. So that's and that's on a consolidated basis. I would say to you that in the U. S, we are pretty much fully staffed now in the stores.

Speaker 2

Based on the current activity. So it's really strong progress against The period last year where the it was very, very tough to get people into the stores in terms of staff members. So The question is really good about the staffing level now. So yes, it will be about inflationary impact on that store base. Tim, I don't know if you want to add anything on that or just move to the longer term kind of operating margin question.

Speaker 6

Yes. We definitely we will see some inflationary pressures hitting next quarter On a sequential basis across the store network and G and A, but the The sequential rises in expenses is slowly diminishing as these inflation Represses are really all almost all set in, but there is still a little bit more movement to go. And on a margin our total margin perspective on a bottom line, We definitely see that we've still got room to move on the revenue line, only a little bit more Room on the expense lines to move up. And so as that revenue goes up, we think the margins We'll start improving next year, but at this stage of this year, it's probably relatively stable.

Speaker 5

Perfect. I appreciate all the color. Congrats on a nice quarter again.

Speaker 2

Thank you. Thanks for the question.

Operator

Thank you. The next question comes from Brian McNamara of Canaccord Genuity. You may

Speaker 7

proceed. Hey, good morning, guys. Congrats on the strong results and thanks for taking our questions. So first off, I'm curious if you guys are seeing any tangible benefit from the recent high profile regional bank failures and the tightening of lending standards. While your core customers likely, unbanked or underbanked, is this leading to some new customer acquisition of folks perhaps on the fringes?

Speaker 2

Perhaps. It's a good thought. Look, you can see that our core demand is increasing. You can see that Our loan balance is significantly up. And I think there's a whole variety of reasons, including the macro environment, inflationary pressure, interest rates, gas prices, Definitely, the tightening of credit from competitive products like the installment lending payday title, Whether or not it's the failures of First Republic and Silicon Valley Bank, I don't know.

Speaker 2

Usually, that is a it's probably a different customer base, but it's not out of the question that we would be seeing some incremental growth. But I think it's probably those other factors that are really driving it. And I've got to say truthfully, our store people and our strategies in our store and our Rewards program and our customer service, I think, is probably the biggest driver of all.

Speaker 7

So secondly, PLO is down less than 2 sequentially compared to your typical kind of minus double digit given seasonality, which is an incredible result in our opinion. Is that just tax refund timing or is there underlying strength on top of that? And I guess, for example, how would that look today from a seasonality standpoint?

Speaker 2

Yes. I think tax season is the largest issue at play. You see a lot of other companies have announced the same thing. So I think that is the largest reason. But yes, all of our strategies, our operating strategies, our initiatives to get a loan at the counter to retain customers, I think it's definitely taking hold.

Speaker 2

But yes, usually, it's much bigger pay down from tax season. So that was definitely a benefit for us this quarter.

Speaker 7

And then finally, are you seeing any improvement in the acquired stores in Mexico? Are you cited some weakness in Q1 in terms of aged inventory and merchandise margins? Thank you.

Speaker 2

Yes, we're definitely thank you, Brian, and thanks for the questions, Matt. Definitely seeing progress in the Mexico acquisitions. We've got new leadership down there. We are seeing better retention of people in our stores firstly, and That is usually the leading indicator to improved financial results. So concentrating so much on bench strength, The promote ability of store managers or assistant managers and really retaining team members down there is starting to See some significant traction.

Speaker 2

So we're confident that that then as it did in the U. S. Last year, that then Transfers into better selling of aged inventory, better lending at the counter. So on most metrics, we're seeing improvement You know, it's acquisitions down there. So we're pretty excited about it.

Speaker 7

Okay. Best of luck, guys.

Speaker 2

Thanks.

Operator

Thank you. And with that, we will conclude our time of Q and A. I would now like to pass the conference back over to Lachie Given for any closing remarks.

Speaker 2

Thanks, operator, and thank you all for joining the call. It's obviously a very good quarter again, and we look forward to talking to you all in the 1 on ones later on today and tomorrow. Thanks all. Bye bye.

Operator

And with that, we will conclude today's call. Thank you for participating. You may now disconnect your

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