Ezcorp Inc Q4 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the EZCORP Fiscal Fourth Quarter and Full Year 2024 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. I'd now like to turn the conference over to Sean Mansouri, the company's Investor Relations Adviser with Elevate IR. Please go ahead, Sean.

Thank you and good morning everyone. During our prepared remarks, we will refer 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 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; Lachie Given; and Tim Jugmans, Chief Financial Officer. Now, I'll turn the call over to Lachie.

Thanks Sean and good morning everyone. Today, I'd like to begin with a review of our fiscal fourth quarter and 2024 performance and then move to an overview of the progress we've made on our strategic goals we set four years ago. We're excited to report a record-breaking fiscal Q4 and full year 2024, driven by our team's consistent execution of our strategic plan. Total revenue for Q4 reached a record $300.9 million, up 11% year-over-year, while PLO grew 14%, $279.2 million, the highest level in our history. We also delivered strong bottom-line results in Q4 with EBITDA up 15% to $36.7 million and diluted EPS climbing 13% to $0.26 per share. These outstanding operating and financial results demonstrate our commitment to delivering value for our stakeholders. Beginning on Slide 3, we continue to be a global leader in pawn broking and preowned and recycled retail. We operate 1,279 stores in the U.S. and Latin America, having added another 21 stores this quarter. Demand for our pawn broking services continues to grow as economic pressure from elevated living costs and limited credit options drive customers into short-term cash solutions. Additionally, consumers are becoming increasingly value conscious, turning to pre-owned merchandise for its affordability and eco-friendly benefits. We are continuously innovating and providing exceptional customer service to address these evolving needs. Moving to Slide 4. During the quarter, we opened 20 new stores across Latin America and acquired an additional store in the U.S. Our earning assets grew 16% year-over-year, supporting a record PLO balance and leading to a 12% increase in PSC. Our cash balance declined to $171 million due to paying off our convertible note during the quarter, along with an increase in PLO and inventory as well as share repurchases of $3 million. We maintained substantial liquidity to fund PLO growth, expand de novo stores, support inorganic growth opportunities, address near-term debt maturities, and share repurchasing. Slide 5 shows the continued growth of our business across all key financial metrics in Q4 as well as throughout the year. Q4 revenues grew 11% year-over-year, merchandise sales increased 9%, and gross profit grew by 12%, while EBITDA and diluted EPS climbed 15% and 13%, respectively. As noted earlier, strong consumer demand and exceptional customer service continue to fuel PLO and PSC growth. Now, turning to our key business strategy highlights for Q4, which are on Slide 6. We are proud of the progress we've made in strengthening our core pawn operations. In the U.S., revenue continued to grow due to our ongoing focus on development for our team members, serving our customers, and executing on pawn fundamentals. In Latin America, gross profit grew by 20% due to enhancements in automated pricing, loan guidance, and focus on customer service. Additionally, we continue to improve store systems and processes to increase speed of service. Our focus on strengthening customer relationships is evident in the 44% growth of EZ+ Rewards members, reaching 5.4 million members globally. We also captured an increase of 23% in traffic to our core pawn website. These metrics reflect our deepening connections with our customer base and our ability to engage across multiple platforms. We remain committed to fostering a culture that empowers and recognizes our team members who are truly the foundation of our success. In Latin America, we've improved scheduling processes to support a healthier work-life balance. Additionally, we launched comprehensive training on the fiscal 2025 incentive program structure, ensuring team members fully understand earnings potential and performance criteria. To support long-term growth, we've also enhanced our talent and succession planning tools, equipping EZCORP to better identify, develop and retain top talent. Turning to innovation and growth. U.S. online payment collections increased $6.2 million in the quarter. In Mexico, adoption of online payments also grew with 13% of extensions in layaways now handled online. Additionally, Max Pawn's luxury e-commerce sales grew six-fold, primarily through eBay. With that, I'll hand the call over to Tim Jugmans, our CFO who will provide a deeper look at our financial results. Tim?

Thanks Lachie. Slide 8 provides a detailed look at our consolidated financial results for the fiscal fourth quarter. As Lachie mentioned, we closed the quarter with a record PLO of $279.2 million, a 14% increase year-over-year. PSC revenue rose 12% year-over-year, primarily fueled by same-store PLO growth. Our inventory turnover rate was 2.6 times with aged GM inventory at 1.7%. Merchandise sales increased by 9% to $165.5 million, while merchandise gross profit grew by 8% from the prior year period. The company posted another strong quarter of profitability with EBITDA increasing to $36.7 million, representing a 15% increase from the prior year period. This growth was primarily driven by higher PSC partially offset by a 10% increase in expenses. Moving to our U.S. Pawn segment on Slide 9. We achieved record fourth quarter U.S. revenue of $212 million, up 9% year-over-year. Earning assets grew by 10%, driven by an increase both in PLO and inventory. Slide 10 includes a map of the U.S. states where we operate, highlighting our robust footprint of 542 stores. Our FY 2024 average U.S. loan size increased by 9%, supported by a 2 basis point rise in PLO jewelry composition as we benefited from rising gold prices. Additionally, general merchandise inventory composition rose by 20 basis points, driven by sporting goods, electronics and tools. Slide 11 provides a more detailed view of our financial performance in the U.S. PLO grew 12% on a total and same-store basis due to improved operational performance and continued technical difficulty. On the U.S. retail side, merchandise sales increased by 7%, while merchandise sales gross profit rose by 4%. The lower gross margin reflects our focus on inventory turnover. U.S. Pawn EBITDA for the quarter was $43.6 million, up 10%, primarily due to higher PSC, partially offset by a 10% increase in U.S. expenses. U.S. EBITDA margin improved by 24 basis points to 21%, underscoring our focus on profitability. Turning to our Latin American Pawn segment on Slide 12. Total revenues increased 17% to $88.9 million, which was a record high for the fiscal fourth quarter. Earning assets increased 33%, driven by a PLO increase of 18% and an inventory increase of 56%. The increase in inventory is driven by a number of factors, including higher PLO and lower than normal inventory in the prior year quarter in which we reduced aged general merchandise. The holiday period during our first quarter provides a great view to increase sales to lower inventory growth. On Slide 13, you can see that we expanded our presence in Latin America and now have 737 stores, opening 20 new locations across three countries during the quarter. PLO jewelry competition increased by 400 basis points, reflecting our strategic focus on growing this category, particularly in Mexico. The higher jewelry composition also contributed to a 10% increase in average loan size for the year at 7% on a constant currency basis. As mentioned, our Latin American region saw a significant PLO growth of 18%, as highlighted on Slide 14, primarily fueled by our team's strong operational performance and increased pawn demand in the area. PSC rose by 19%, driven by same-store PLO growth. On the retail side, merchandise sales grew by 14% and merchandise gross profit increased by 19%, reflecting a 200 basis point margin expansion. EBITDA climbed an impressive 50% to $12.7 million with EBITDA margin reaching 14%, up from 12 basis points. The EBITDA improvement was due to higher PSC, partially offset by a 10% increase in expenses. As we often do at fiscal year-end, we would like to take this opportunity to highlight how we have performed against this multiyear strategy and longer term goals we introduced at the end of fiscal 2020. I'll now pass it over to Lachie to review our execution.

Thanks Tim. Slide 16 highlights our strategic progress over the last four years. In fiscal 2020, we transitioned to a seasoned leadership team, largely promoted from within and deeply experienced in the pawn business. This team initiated a comprehensive review across all functions leading to a new multiyear plan focused on cultural enhancement, team development, and optimizing our core pawn operations. We aim to improve our lending model, increase inventory turnover, reduce costs, and expand both our customer base and store footprint, all while prioritizing exceptional cost of service. These efforts have driven substantial growth on the top and bottom-line, along with strong returns on capital for our shareholders. On Slide 17, our commitment to our core values, people, pawn, and passion, has resulted in record-breaking PLO and revenue growth, along with strong ROEA. We launched a cultural transformation in the U.S. in financial year 2020 and in Latin America by financial year 2022. The outcome of these assets is visible not only in our improved financial and operating metrics but also in our latest company-wide engagement survey, growing an impressive 84 points significantly above the global benchmark. On Slide 18, you can see how the execution of our strategy over the last four years has led to material improvements in profitability and shareholder value. Net income is up nearly four times since fiscal 2020 and EBITDA has more than doubled with the share price increasing 123% during the four-year period, significantly outperforming both the Russell 2000 and S&P 500. Tim will now detail other substantial financial improvements we've achieved over the last few years.

Thanks Lachie. Over the past four years, we've had substantial improvement in our financial results. Starting with PLO on Slide 19, we reached a low in fiscal 2020 due to COVID impact, but demand has rebounded strongly. At the end of fiscal 2024, PLO hit an all-time high, while PSC increased to $434 million for the fiscal full year. Jewelry pawn demand growing faster than general merchandise has contributed to a higher average loan size, and based on current gold prices, we expect continued growth in this key category. On Slide 20, you will see our progress to more effectively manage inventory. Despite the increase in inventory driven by our focus on PLO, inventory returns remained strong at 2.8 times, while our aged GM sits at 1.7%. It's worth noting that excluding luxury handbags in our three Max Pawn stores in Las Vegas, aged general merchandise remains under 1% of total GM inventory in fiscal 2024. Slide 21 highlights record merchandise sales and gross profit in fiscal 2024, reflecting the improvements made to our operating model over the last four years. Sales gross profit increased to $234 million in fiscal 2024, reflecting a 9% CAGR since 2020, while our merchandise margin after peaking in FY 2021 has now stabilized within our target range at 36%. Turning to Slide 22, we achieved sustained growth in customer engagement driven by our EZ Rewards program, which has led to market share gains and improved customer service efficiency. EZ+ Rewards members surpassed 5 million at the end of fiscal 2024, and those members accounted for 77% of all transactions for the year. We also continue to drive strong growth across a number of key metrics, including online extensions and layaways as well as cumulative reviews, which are highlighted on this slide. Moving to Slide 23. Since fiscal 2020, we've added 274 stores with 160 of those stores added through acquisition and 131 de novos, while consolidating 24 locations that did not meet our growth and profitability thresholds. We've also entered the luxury segment since that time with our Max Pawn stores in Las Vegas. Our strong balance sheet underpins these growth initiatives with $249 million invested in earning assets and $71 million in strategic assets. Since August 2022, we've repurchased 3.4 million shares for $31 million and extended over 68% of our debt maturities to fiscal 2029, maintaining a favorable long-term cash cost of 3.75%. The U.S. Pawn shown on Slide 24, PLO has more than doubled from fiscal 2020 with PLO per store up 87%. Gross profit increased by 39% and EBITDA by 75% and ROEA has reached 156% at the end of fiscal 2024. Turning to our Latin American segment highlights on Slide 25. PLO in Latin America is up 160% since fiscal 2020 with PLO per store up 76%. EBITDA has increased an impressive 150% since fiscal 2020 and the EBITDA margin is up 400 basis points to 14% during the same period. ROEA in fiscal 2020 were 127% and is now 175 driven by our team's focus on customer and operational improvements. Turning to Slide 26 on our strategic investments. Our investment in Cash Converters International SMG through Founders represent a significant strategic and geographic expansion of our core pawn operations. Through Founders, we've gained increased exposure to key regions like the Caribbean, Central America, and Florida. With Cash Converters International listed on the Australian Stock Exchange, we've expanded our presence across 14 countries, including Australia, New Zealand, and the U.K. We are highly optimistic about the growth prospects of these two well-managed businesses. Since fiscal 2021, we've invested $10.7 million to increase our ownership from 34.8% to 43.7% and received $12.3 million in dividends, including $1.8 million in October 2024. On the ESG front, on Slide 27. We remain focused on contributing to a circular economy by providing environmentally friendly retail experiences to our customers through a network of neighborhood e-commerce stores. In fiscal 2024, we sold over 5.2 million preowned general merchandise and jewelry items through pawn purchases and purchases from customers, extending the useful life of these products. We were also recognized for our work-life diversity during the fiscal year and remain very active with our contributions and community engagement. A quick word on our capital stack and allocation priorities. We continue to have a robust liquidity position with $171 million of cash and $333 million of gross convertible notes on our balance sheet as of September 30, 2024. We believe the most effective uses of cash drive shareholder value is to use a balanced approach, which includes reinvestment in our business to drive organic growth, acquisitions, share buybacks and debt repayment. As Lachie mentioned earlier, our 2024 notes were retired in early July. We have $103 million of convertible notes that come due in May 2025, and we continue to explore several options to retire or refinance that note, including by use of existing cash, traditional debt or other equity-linked instruments. Looking ahead, we expect to continue driving organic growth on both the top and bottom-line by a combination of increasing PLO and PSC as well as merchandise sales growth. As communicated in prior quarters, we are likely to see gross margin remain at the lower end of our target range of 35% to 38% as we are focused on strong inventory turns and limited aged general merchandise. With inflation rates coming down, we expect that same-store expense increase will also come down. We also continue to invest in our people, technology, and store network to further drive operational efficiency. Strategically, our pipeline for M&A is robust, and we have demonstrated a strong track record of executing our inorganic growth initiatives, which we expect to continue both in our existing markets and abroad. The combination of these initiatives will be driving forces behind our strong financial and operating performance for years to come. And with that, we'll open up the call for questions.

Thank you. Our first question comes from John Hecht with Jefferies. Your line is open.

Good morning everyone. Thank you very much and congratulations on all your achievements over the past few years. My first question is regarding the tax rate, which was higher. I'm curious to know if this was a one-time occurrence or if there is a mix of factors at play. Were there potentially higher tax rates from Latin America that might be a concern in the intermediate term, or should we expect a return to a more stable tax rate in the future?

Thank you, John. Yes, it was slightly higher. There were a few one-time items affecting the tax rate for both the quarter and the year, including transferring some funds out of Guatemala, which is a temporary item. Looking ahead, as Latin America contributes more to our net income, we may see slight increases in the tax rate, but it should return to a more typical level. If you consider the full year, the adjusted tax rate will align more closely with what we expect moving forward.

Okay. You mentioned EZ Rewards and EZ payments, which seem to be gaining good adoption. Is there a way for us to consider how much penetration these may achieve and what impact they could have on the efficiency of the business over time?

Thank you for the question, John. On the EZ+ side, we now have 5.4 million members, which is a level we did not anticipate reaching this quickly when we launched the program. We're really pleased with its progress. However, we do expect growth to slow down. The focus now is on engaging that 5.4 million members through targeted marketing initiatives to enhance key metrics. Moving forward, engagement will be our priority rather than acquiring new members. Regarding online payments, this system is allowing our team members to devote more time to customer service instead of handling manual processes. This program is also performing well and is expected to grow, but similar to the EZ+ program, the emphasis now is more on engagement than on bringing in new customers.

Okay.

Regarding online payments, that's been operational in the U.S. for quite some time. We have recently introduced it in Mexico and need to implement it in our other markets. Therefore, we haven't seen that development yet. There is still substantial growth potential from a company-wide perspective. However, in the U.S., it has been in place for several years, so we do not anticipate significant changes.

Okay. And then any comments on kind of the ongoing effects of the hurricanes in Florida, just because I know you guys have a lot of stores there?

We experienced several days of store shutdowns due to the hurricanes. However, our team has become quite efficient in getting those stores back up and running, and we were among the first to resume operations and assist our customers. Overall, we feel optimistic about the situation. There has been a slight slowdown as people return to normalcy in those areas, but we see this as more of a short-term issue rather than a long-term impact.

Okay. And then my final question, I appreciate you guys answering all these, I guess just as inflation steadies in the U.S., I don't know if that's quite occurred in LatAm as much as the U.S., but are you seeing any changes in customer behavior in terms of transaction size or loan demand or foot traffic? Or is it fairly steady?

I'd say it's been fairly steady. We’re seeing pretty robust demand, as evidenced by the Q4 numbers, both on the loan side and the sales side. Across all regions, we continue to experience really strong customer growth, which is exciting. Jewelry has clearly been a significant driver of that as well. As Tim mentioned, we're really optimistic about growth going forward. It's an exciting time to be an investor at EZCORP.

Okay. Thank you guys very much.

Thank you, John.

Our next question comes from Brian McNamara with Canaccord Genuity. Your line is open.

Good morning, everyone. Thank you for taking my question. Congratulations on your continued strong results. First, I wanted to ask about the acquisition you announced in September regarding an auto pawn business. Can you provide some insights on that? I believe it is expected to close on the 31st of October. I'm interested in the rationale behind this move and the potential opportunity you see in it.

Thank you, Brian and good morning. Look, we announced the acquisition of 53 stores down in Mexico. We'd expect to have closed it by now, as you said. We're just continuing to work on closing diligence items. So, there will be more to come on that. The strategic rationale is that, that business is becoming a larger part of the customer's collateral down in Mexico. Our competitors are doing it pretty well across the for-profit businesses as well as the government non-for-profit businesses, and we've been a little behind in that take-up. So, it's got to be a focus going forward. This one is the clear market leader. So, as I said, we continue to work on diligence to get it hopefully closed.

Got it. That's helpful. Obviously, the election last week, a Red Wave per se, 60% plus of your stores are in two red states. Can you guys comment on your expectation of regulatory change, if any, that you expect with the new administration and remind us how friendly this administration was to the industry in its first term?

Thank you. Look, the regulatory regime has been pretty steady in the U.S. for a long period of time. Sometimes you see things happen in certain states like we saw in Illinois a couple of years ago that our investors and shareholders are aware of. But this has been quite a steady regulatory regime. It was during the current administration. It was in the former Trump administration. So, we don't expect to see any real wholesale change. But that said, we continue to invest in the area. We make sure we're on top of it from a state and federal level. But across all of our markets, the U.S. and Latin America, it has been stable, and we expect it to be stable in the future.

Got it. The last few years have been quite unusual regarding typical seasonality. As you plan for 2025, are you anticipating the return of typical seasonality? How should investors view PLO, considering its significant impact on your business?

Tim, you want to take that?

Sorry, my phone just blanked out there a little bit. Can you repeat that, sorry?

Yes, no problem. Tim, on PLO seasonality, I mean, it's been wonky the last couple of years, as you know, the typical paydowns you didn't see with tax refund season and that's kind of played out for the whole year over the last couple of years, like as you plan the business for 2025 and your financial outlook, like how should investors be thinking about PLO seasonality you think it will return or steady as always kind of thing?

I think using what we saw in 2024 seems to be getting back to more normal seasonality. Obviously, tax refund season has been a little bit more subdued in the last two years than prior to COVID. So, we think that is probably going to continue, but we've got to see what happens this year in that period. But otherwise, I think we're back to the more normal seasonality in the numbers.

Got it. And then maybe, Lachie, can you comment on kind of what you guys are doing down in LatAm with Blair and folks kind of turning around that business similar to what you guys did a few years back with the U.S. We saw a nice improvement there this year. Where are we in terms of that turnaround? And should we expect continued margin improvement there in fiscal 2025?

It's a good observation, Brian. As you noted, Blair has been exceptional in leading his operations team with a relentless focus on execution every day in our stores. This journey has really been driven by our people and culture. We began this effort in the U.S. and expanded it to Latin America around financial year 2022. The most encouraging aspect of the results we've announced is the ongoing momentum in Latin America across all metrics. Our earning assets are growing notably, and this is supported by extremely strong growth numbers in EBITDA. The focus on an enhanced operating model and cultural approach that we established in financial year 2022 is clearly paying off, evident in the consistent and strong growth numbers across that business. Moving forward, I believe there is still much for us to accomplish. The macro environment remains very supportive in both Latin America and the U.S., and I think there is still plenty of potential for loan and sales growth. There is definitely room for improvement on the margin side as well. However, we are primarily focused on ensuring better lending practices because with the strong PLO growth we are experiencing, we need to avoid creating any inventory issues that could lead to significant challenges down the line. Therefore, our main focus is on enhancing lending at the loan calendar, maintaining strong PLO growth, and achieving solid inventory turns, which will ultimately drive margin improvement. While we would like to see increased margins since they significantly affect our bottom line, our primary concentration remains on PLO growth and inventory turns.

And just one more for me. Thanks. Appreciate taking a bunch of questions here. Just on capital allocation priorities. I know, Tim, you kind of mentioned in your prepared remarks that you're exploring kind of any and all options for your 2025 converts. I think it's a big issue for some long haul as trying to get involved here. When should we expect, I guess, a decision on that? I think you announced that at the general meeting last year, is that kind of the timeframe investors should be looking at?

I believe we will keep as much flexibility as possible. As Tim mentioned earlier, we have various options available since our operational performance is improving. Financial institutions are indicating that our terms are becoming more favorable due to our stable performance and management team. We have until May for the bonds to mature, and we have sufficient cash to pay them off, which is certainly one possibility. We also have options for straight debt and convertible debt. Fortunately, we are not pressured to make a quick decision because of our solid liquid balance sheet. We will take the necessary time to determine what is best for the long-term success of our business and our shareholders. There is no urgency concerning the timing of the AGM, as we have five to six months to decide. The encouraging part is that terms are improving, and we have a variety of alternatives. We will reach a decision between now and May.

Excellent. Appreciate the candor guys. Best of luck.

Thanks Brian.

Our next question comes from Kyle Joseph with Stephens. Your line is open.

Hey, good morning guys. Thanks for taking my questions. Actually just one for me, really. Going back to the election, any sort of other implications you see or any other impacts on the business in terms of whether it's immigration or FX movements or anything? Just kind of how your initial thoughts there?

Thank you for the question. I believe there are no significant tailwinds or headwinds from the new administration affecting us. Our customers need cash, and we offer great value for secondhand goods. This sector typically functions independently of political influences. The macroeconomic situation remains favorable, although we still face inflation, high interest rates, and rising gas prices. Our customer base tends to spend within their means. With our internal initiatives, we are excited about our growth prospects. Overall, I don't anticipate any major macro changes from the new administration that would impact our performance.

Got it. Thanks for taking my questions.

Thanks.

Our next question comes from Andrew Scutt with ROTH Capital Partners. Your line is open.

Hey, good morning guys. Thank you for taking my questions and congrats on the continued progress. A lot of my questions have been answered here. So just one quick one for me. But can you guys just kind of talk about the store pipeline as you kind of head into 2025 year?

Sure. On the acquisition side?

Yes, on the acquisition side.

Thanks for the question. The pipeline remains strong. We view it in two ways: in the areas where we currently operate and where we can acquire new talent through M&A. In the U.S. and Latin America, particularly Latin America, the pipeline is solid. Mexico presents a significant opportunity with many large independent chains. In the U.S., we continue to pursue small acquisitions, having acquired 14 stores this year, which is a good outcome, and there are more opportunities available. One of the most exciting aspects of our pipeline is our strategic investments, particularly in Cash Converters and Simple. We have invested significantly in Simple, which is performing well and could be a future acquisition. Overall, the pipeline looks robust. Additionally, the global pawn industry presents tremendous opportunities over the next five to ten years, with significant potential in markets like India, the Philippines, South America, and the UK. For now, we believe our primary focus should be on growing in our existing markets while exploring new opportunities. We're also planning to open 40 new stores in Latin America in 2024, and we are improving our execution in this area. This could yield strong returns, especially in Mexico. I'm optimistic about our inorganic pipeline, and it's crucial that we have the right staffing and management for these new stores. It's an exciting time ahead.

Perfect. Well, thanks for the detail and congrats on the strong results.

Thanks. Thanks for the question.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Lachie for any closing remarks.

Thank you, operator and thank you everyone for joining. On behalf of Tim and I and on behalf of our Board, I just really want to thank again the EZCORP team for what was probably our best every year. It's some really strong operating results, the momentum in the U.S. and now in Latin America is obvious for everyone to see. So, we're not done. We've got a lot of work to do yet. We're excited about the growth that we can produce for our shareholders. So, thank you to everyone for joining. Thanks to our shareholders also for a really good year and we look forward to talking to a lot of you through the course of the next few days. Thanks a lot.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.