Ezcorp Inc Q2 FY2025 Earnings Call

Good morning, ladies and gentlemen. Welcome to the EZCORP Second Quarter Fiscal 2025 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. We delivered another impressive set of operational and financial results in the second quarter driven by sustained demand for fast and accessible cash solutions and affordable high-quality secondhand goods. We achieved record Q2 revenue of $318.9 million marking a 12% year-on-year increase while PLO also grew 15% to a Q2 record of $271.8 million. Our strong bottom line performance included a 23% increase in EBITDA to $45.1 million and diluted EPS growth of 21% to $0.34. These results again highlight the operating leverage inherent in our business model driven by strong growth, disciplined expense management and enhanced operational efficiency. Together, these factors continue to strengthen our profitability and drive significant value for our shareholders. Beginning on Slide 3, we continue to be a global leader in pawn broking and pre-owned retail with 1284 stores across the U.S. and Latin America. Persistent inflation and economic pressure continue to impact customers who are increasingly turning to EZCORP to secure short term cash and quality pre-owned goods. Our unwavering commitment to innovation and exceptional customer service ensures we can effectively meet value-conscious consumers' evolving needs. On the bottom left of the slide, we have included a summary of the pawn product itself, noting that it's a highly customer-friendly alternative for those seeking short-term cash as these transactions and non-recourse involve no credit checks, collection activities or reporting to credit bureaus whether the loan is repaid or not. Moving to Slide 4, during the second quarter we opened nine De Novo stores in Latin America and acquired one store in Guatemala. We also consolidated nine stores in Mexico, relocating loan balances and inventory to locations with available leases or stronger unit economics where we can continue to serve our customers as well as improve operational efficiency and returns. Our earning assets grow 22% year-over-year, including a record-setting Q2 PLO balance which grew 15% contributing to a 12% increase in PSC. We remain very encouraged by our PLO trajectory which is obviously a critical growth driver for both future revenue and earnings. Our cash balance increased to $505.2 million, up from $174.5 million last quarter primarily due to our $300 million debt financing completed in March as well as cash flow from operating activities. Looking ahead, our significantly strengthened balance sheet enables us to fund our fast-growing earning asset base, pursue inorganic growth opportunities in the markets in which we already operate as well as in potential new markets, and to expand our successful De Novo Store build-out program to drive additional value for our stakeholders. In this period of macroeconomic uncertainty, we also believe it prudent to continue to run high levels of cash liquidity as we balance running a business with exceptionally strong bottom line growth with a strategy of fiscal conservatism to ensure the long-term prosperity of the company. Slide 5 highlights the strong financial performance in the quarter and showcases our consistent track record of growth across four of our fundamental metrics total Revenue, PLO, EBITDA and Diluted EPS. Although not presented on the slide, it's worth noting that we've delivered year-over-year growth across nearly all of these key metrics for more than 15 consecutive quarters, reflecting a clear and consistent strategic plan and the relentless focus on operational execution by our store teams. Second quarter total revenues increased 12% year-on-year, merchandise sales grew 8% and we delivered gross profit of $185 million, reflecting a 10% increase. In terms of the bottom line, EBITDA increased 23% with EBITDA margin increasing to 14.1%. As noted earlier, elevated consumer demand, operational execution and exceptional customer service continue to fuel our top and bottom lines. Slide 6 provides further detail on our consolidated revenue and gross profit performance. On the gross profit slide, we often emphasize that our focus is on driving overall gross profit in dollars as well as margin, regardless of whether that comes from merchandise sales, scrap or PSC. As we have consistently delivered revenue and gross profit growth, maintaining a gross margin in the high 50s. On this page you can also see that the majority of our economics continue to be derived in the U.S. which accounted for 72% of gross profit during the quarter. Now turning to our key business strategy highlights for the quarter on slide 7. We continue to strengthen our core pawn operations through investments in our people and technology with a focus on enhancing customer experience through accessible and flexible financing solutions aligned with our customer-centric approach. Our EZ+ Rewards program continues to gain strong momentum with membership growing 34% to 6.2 million and accounting for 77% of all transactions this quarter. We believe the program will continue to drive customer loyalty in the local neighborhoods in which we serve and broadened engagement across platforms, including through our core pawn website traffic which increased 5% to 1.7 million this quarter. Additionally, the introduction of a long-term layaway option last year resulted in a 15% increase in new layaways made during the quarter. As a reminder, layaway sales are recognized as revenue upon final payment and now that customers have extended periods to complete payments, a portion of sales will shift to future quarters, impacting both current revenue and traditional inventory turnover ratios. This enhanced layaway offering underscores our commitment to accommodating our customers' financing needs, particularly in the jewelry category. We continue to advance our innovation and growth initiatives this quarter. In the U.S. online payments increased by $7 million reaching $29 million, a reflection of the growing adoption of our digital channels. In Mexico, EZ+ adoption is gaining momentum with 17% of extensions and layaways now completed through online payments, demonstrating our customers' growing preference for seamless tech-enabled solutions. Consumer interest in affordable luxury remains strong. Max Pawn's e-commerce platform delivered a 25% increase in sales, reinforcing our position in this attractive and growing market. We also expanded our view online purchase in-store experience to over 30% of our U.S. retail locations, enhancing convenience and creating a seamless connection between digital discovery and in-store service. Across all these efforts, our focus remains clear to deliver the most convenient customer-centric experience in the industry while continuing to make a positive impact in the communities we serve. With that, I'll hand the call over to Tim Jugmans, our Chief Financial Officer who will provide a deeper look at our financial results.

Thanks, Lachie. Slide 9 provides a detailed look at our consolidated financial results for the second fiscal quarter. As Lachie mentioned, we closed the quarter with a record-setting Q2 PLO balance of $271.8 million reflecting a 15% increase on total and same store basis. PSC revenue rose 12% year-over-year primarily fueled by same store PLO growth. Our inventory increased 32% year-over-year driven by both increased PLO as well as lower inventory turnover at 2.5 times compared to 2.9 times which is still a healthy turnover rate. Lower inventory turnover during the quarter was partially attributed to the expansion of our layaway program in the U.S. as well as a greater composition of jewelry inventory which typically has a longer sales cycle. While these factors contribute to the trend, we remain focused on improving inventory turns and are prioritizing efforts to optimize sales velocity and inventory management. Merchandise sales increased by 8% to $177.4 million while merchandise margin contracted by 150 basis points due to increased price negotiations at the counter. Despite lower merchandise margin, we posted another strong quarter of EBITDA margin expansion increasing 130 basis points to 14.1% reflecting our ongoing focus to drive operating efficiencies and fixed cost leverage. Moving to our U.S. pawn segment on slide 10, revenue for the quarter was up 7% to $221.4 million. Earning assets grew by 21% driven by significant PLO and inventory growth. Approximately half the increase in inventory is due to the increase in customer layaways where sales get recognized in future quarters. Slide 11 includes a map of U.S. states in which we operate highlighting our significant footprint of 542 stores across states. From this page, I also want to call out a 15% increase in average loan size for the quarter across the U.S. with approximately three quarters of that growth driven by higher prices of jewelry and the remainder due to higher prices on general merchandise. Slide 12 offers an in-depth look at our U.S. financial performance, highlighting a 15% increase in PLO both on a total and same-store basis. This was driven by high average loan size, enhanced operational performance and sustained growing demand for pawn services. With respect to tax refund season to the end of March this year, the IRS has seen the average tax refund increase by $120 or 3.9%. Even with this increase, we saw the same 9% sequential PLO decrease from quarter one as seen in FY '24. PSC revenue rose 9% year-over-year primarily driven by the same store PLO growth, partially offset by lower PLO yield. In the U.S. we have seen our average loan size increase, but we have seen lower yield due to markets such as Texas where the state regulations mandate lower monthly interest rates as loan size increases. While this still benefits absolute PSC dollars, it does contribute to lower PLO yields. This is driving the disparity between PLO and PSC growth this quarter. On the U.S. retail side, merchandise sales increased by 2% and were up 1% on a same-store basis while merchandise gross margin decreased 58 basis points. U.S. pawn EBITDA for the quarter was $49.8 million, up 15% primarily due to higher PSC, with EBITDA margin up once again expanding 173 basis points to 22.5%, underscoring the team's focus on profitability. Turning to our Latin American segment on slide 13, it was again a very strong quarter. Total revenues increased 25%, $97.5 million. Earning assets increased 28% driven by strong PLO growth of 17% and a 44% increase in inventory compared to historically low levels in the prior period. We continue to evaluate and execute actions both systemically and operationally that we have worked well in the U.S. to drive further improvements across Latin America. On slide 14 you can see that we've expanded and acquired our presence in Latin America with 742 stores, opening nine De Novo stores, acquiring one store in Guatemala and consolidating nine stores in Mexico. PLO jewelry composition increased by 400 basis points reflecting our continued focus on growing this category, particularly in Mexico. And from an inventory perspective, jewelry composition was down 90 basis points due to increased scrapping. As shown on slide 15, Latin America experienced 17% PLO growth and was up 14% on a same-store basis resulting in a 19% PSC increase. Strong results were driven by our team's execution to drive operating performance as well as robust loan demand from our customers. On the retail side, merchandise sales grew by 21%, up 18% on a same-store basis. Merchandise gross profit grew 11%, partially offset by a 274 basis point margin contraction due to increased price negotiations at the counter. EBITDA grew an impressive 36% to $13.6 million with EBITDA margin increasing by 99 basis points to 13.9%. A quick word on our balance sheet and capital allocation priorities. We are well positioned for the future with a very strong balance sheet and robust liquidity. As Lachie mentioned, during the quarter we completed a $300 million debt financing and as of March 31st we had approximately $505 million of cash. As part of this transaction we received a first-time credit rating of Ba1 from Moody's, clearly reflecting the strength of the company's financial position. Slide 28 of our quarterly earnings presentation provides a pro forma view of our debt and convertible note obligations to account for the expected retirement of our May 2025 convertible notes. The pro forma assumes that convert holders do not convert their convertible notes into common stock, which would be done at a share price of $15.90. However, if all the holders do elect to convert their notes, the total number of shares underlying these notes is 6.5 million shares, which we already shown in our diluted EPS calculation. If this were to occur, the $103.4 million of cash that was earmarked to redeem these notes would remain available to the company for other uses. Looking ahead, we believe our focus on growing PLO combined with disciplined inventory management, streamlined systems and a commitment to exceptional customer service will be the driving force that sustains our strong momentum through 2025. While consumers continue to navigate macroeconomic pressures, EZCORP remains committed to meeting our customers' evolving needs and consistent long-term financial results. From an M&A standpoint, our pipeline remains strong with opportunities in both the U.S. and Latam. Our acquisition strategy remains grounded in rigorous due diligence and disciplined execution focused on identifying high-quality accretive targets that support long-term growth and deliver attractive returns to our shareholders. Now I would like to turn it over to Lachie for a few closing remarks.

Thanks, Tim. I'd like to extend my genuine appreciation to our team for delivering another impressive quarter with strong growth across nearly all of our key financial metrics. Guided by our core values of people, born and passion, the company remains well positioned to continue to drive sustained growth for our shareholders well into the future. And with that, we will open the call up to questions.

Your first question comes from the line of Brian McNamara, Canaccord Genuity. Please go ahead.

Good morning everyone. Thank you for the question and congratulations on the strong results. Regarding the tax season, I believe this was likely the most typical one we've seen since around 2019. Your U.S. PLO decreased by 9% sequentially, which I understand is generally a mid-teens sequential decline historically, but please correct me if I'm mistaken. In your opinion, does this represent a new normal, or is it more indicative of the macro environment and its effect on your customers?

Tim, you can take that.

Yes, sure. That 9% decrease was similar to last year. The average return only grew like 4% and so it does look like a new normal. It does look like the American consumer's costs have gone up more than that 4% of the refund and so there is a lot more costs going in than compared to the refunds. So the last couple of years we've had less than 10% drop. And as you said, it was between a 15% and 20% drop prior to 2019. So it does look like a new normal if things remain the same.

Great. And then secondly, it's been tariffs, tariffs, tariffs, obviously, recently in the news. Are you guys seeing a tangible impact from tariffs on the positive side yet with price increases either widely in effect or widely expected in the primary market? And are you continuing to see new faces in your stores, perhaps middle and upper-income folks trading down?

Tim, do you want to take the tariff one?

Sure. From a tariff perspective, new items don't appear in our stores right away, so that takes a bit of time. However, we are noticing inflationary effects on general merchandise. Last quarter, the average loan size was composed of 50% jewelry and 50% general merchandise. This quarter, it's shifted to 75% jewelry and 25% general merchandise. The average loan size continues to grow due to increases in gold prices and the rising costs of general merchandise, which are becoming more valuable. Consequently, people are obtaining larger loans for single items.

We are seeing new customers, and while some are trading down, we consider it a significant strategic initiative to increase traffic to our stores, both physically and digitally, where we believe we are leading the market. There is definitely growth in transactions, and it will be a key focus for us over the next 6, 12, and 18 months as we aim to see even more progress.

Great. And then your merchandise margins in the last few quarters have been a bit lower than what we would have been accustomed to so 34% is below your targeted range. I'm sure there's a bit more negotiation in the stores, but why wouldn't that be a bit better, particularly as your larger competitors kind of are doing that merchandise margin consistently in the low 40s range? Is that simply you guys prioritize the loan counter?

Back for Tim.

Yes. Our focus is on maximizing gross profit. We evaluate both the projected sales contributions and the gross profit margin together to achieve this goal. At this stage, we believe that meeting customer needs with additional cash might increase the sales contributions slightly, even though it could result in lower profits per sale if prices drop. Overall, our aim is to enhance the gross profit figure. As shown in our slides, we have maintained strong gross profit margins consistently over a long period.

Great. And then just the last one on the $300 million in senior notes. Clearly, you have a lot of cash on the balance sheet. Now I'm curious what you intend to do with the extra cash? And if you could remind us of your capital allocation priorities. Thank you.

Thank you, Brian. The situation remains unchanged. Our main focus is scaling the business, which has always been our top priority. We believe there is a significant opportunity for our company even in the markets where we currently operate. We're committed to scaling while maintaining a conservative balance sheet, valuing liquidity as our shareholders know. We aim to achieve a good balance in our approach. We have a solid pipeline, and having extra cash provides us with more flexibility in pursuing opportunities. It's not a new beginning for EZCORP; we will continue our disciplined mergers and acquisitions in our existing markets and products. While we will consider new markets, we believe there is ample work and significant opportunities in Mexico, the U.S., and other areas of Latin America where we can invest. Essentially, it's more of the same, but we are in a stronger liquidity position. I believe, as I mentioned earlier, that the current world and macroeconomic situation necessitate this approach. Our shareholders and potential investors, along with many analysts, emphasize the importance of liquidity right now, which the market rewards. Therefore, we're in a strong position, and you can expect to see consistency in our operations.

I’m done. Thank you guys.

Thank you. Operator, next question.

Your next question comes from the line of Alex Howell from Stephens Inc. Please go ahead.

Hey guys, good morning. One for Kyle. Congrats on the quarter and the recent private notes offering. I think most of my questions have actually been asked. I'm just curious how you guys are thinking about your Latin American acquisition strategy going forward and just what you're really seeing out there currently. Love to get your thoughts.

Sure. Yes, sure. So Latin America is obviously a massive highlight of this quarter that we've just reported on as well as 2 or 3 before that. We've seen extremely strong momentum down there across all of our metrics. So across lending, sales, margin, and it's really down to some fantastic operational leadership led by Blair and his operating team in Mexico. We've told the market that we invested heavily in the U.S. business first and that Latin America we will do the same and I think the market can see now the results of those efforts. So I think Latin America is an extremely important part of our business and getting more important given the organic performance. I think in terms of the inorganic opportunities, absolutely right down there in Mexico and beyond. I think there are small opportunities of 5 to 15 stores, and there's the middle size up to 150 and then 5-plus opportunities above that and when I say opportunity, I just mean operators down there. So it's a very large market. It is a very interesting market for us. But again, we will take a disciplined approach to acquisitions down there. So I think we have made sure that our balance sheet is strong enough to move on opportunistic acquisitions down there, which there are, as I said, a long list of independent operators down there, but we will do it in a way that our shareholders get an appropriate return, that we acquire good management teams and that we think we can improve those businesses. So all-in-all, I think it's more of the same down there, lots of opportunity we've got a really strong balance sheet to go after it, but we'll do it in a disciplined way.

Thank you, guys.

Your next question comes from the line of Craig Irwin from Roth Capital Partners. Please go ahead.

Hi, good morning and thank you for taking my questions. So to step back into the big picture, right, you obviously are executing really well on some of these initiatives you've put in place, like I guess the one that jumps out to me is the longer-term layaways and the 15% increase in layaways that's delivered in the quarter, right? Then you also have other tailwinds that are sort of non-discretionary like the price of gold going through $3,000 an ounce. Lachie, can you maybe just talk us through how these discretionary and non-discretionary tailwinds are materializing in your business? Is the benefit from things like the longer-term layaways already in? Or is it still building? And should we see a similar impact from gold prices benefiting the jewelry business, does that come through over time? Or does it come through much more quickly in an individual quarter?

Thank you, Craig. Good morning. Tim and I will divide this question a bit. It's important to take a step back, and you are correct. Our internal initiatives are significantly enhancing operational execution and performance. Additionally, external macroeconomic factors, including the gold price, are also contributing positively. Both of these elements are driving our strong performance. Regarding the layaway program, we need to remember that we do not recognize sales until those layaways are fully paid. As a result, we have effectively postponed some sales into the upcoming quarters. While we haven't recognized those sales yet, this should position us for robust sales down the line. There are many other internal initiatives fueling this performance, such as our efforts on pricing at the loan counter and refining our loan-to-value ratios across categories. We also have numerous marketing initiatives running both digitally and in-store. Under Blair's leadership, we maintain a highly disciplined operating format that is not reactionary. Our balanced approach, built on a straightforward strategy of operational execution over the past few years, has been vital in driving financial performance and boosting the stock price. Regarding external factors, the gold price is a major influence on average loan sizes. We are experiencing remarkable loan growth—last year, I would have considered 8% growth fantastic, but now we are seeing 15%. This exceptional lending growth is at the core of our business. The rising gold prices are indeed beneficial for lending. On the selling side, there are various competing external factors. Consumers are facing challenges, and as gold prices climb, purchasing may become less affordable. Therefore, we need to be disciplined in our discounting strategies to effectively move inventory. Currently, we are pleased with our sales progress in the U.S., while we still have work to do there. With the layaway program set to launch, we anticipate driving good sales. In Latin America, performance is strong. Overall, we have two key components at play: our internal strategies and macroeconomic factors. The financial results clearly indicate that it is a favorable time to be in the pawn business. Tim, do you want to add anything?

Yes, I'll provide more detail on the layaways. You're right that this is continuing to build, and those sales haven't come through yet. They will begin to show up in the next few months, and you'll see the full impact of the layaway program reflected in the sales figures. Right now, it's primarily visible on the balance sheet and in the growth of the layaway balances. Regarding gold, it's important to note that we don't adjust our loan amounts daily based on gold price increases. We focus on longer-term trends in gold. We monitor this continuously, but we are not lending against gold at current prices; rather, we are using prices from a few months ago. Therefore, even if gold prices decrease, we have some leeway.

Thank you for that. So my next question is about the luxury market and Max Pawn. This is one, I guess, that kind of piques my interest because I can see a fairly substantial opportunity for expansion of your customer base. Can you maybe just update us on Max Pawn? I guess last quarter; you said sales were up 50%, which is phenomenal. What would it take for you to look to grow the storefronts or look to grow the online presence around Max Pawn and drive more revenue through this channel?

Yes, it's an exciting aspect of the business. We are currently ahead of our initial expectations as we began this process, which is a positive start. The business is gaining momentum, operating in Vegas under the leadership of an experienced pawn broker, Michael Mack. We are pleased with the progress. We are demonstrating success in Vegas with a multi-unit approach, having expanded from one store to several. We are also exploring new markets, identifying several promising candidates across the United States. Our management team has a track record of taking a disciplined approach, focusing on return on capital. I appreciate your focus on expanding our customer base, and I anticipate that in the next few years, this business will grow. While it is currently a small part of our overall operations, I believe it can significantly increase in the next five years. Additionally, we are leveraging the expertise gained from this business and applying it to many of our other stores. Although these are not full luxury stores within the easy pawn business, we are supplying numerous stores with luxury goods that we are sourcing from the Max Pawn category as well as items we already possess. Therefore, while the luxury category is small today, it presents an intriguing opportunity for us over the next two to five years.

Excellent. Well, congratulations again on a really solid quarter. And I’ll go ahead and hop back in the queue. Thanks.

Thanks, Craig.

Your next question or your final question comes from the line of Raj Sharma from Texas Capital Bank. Please go ahead.

Hi, thank you. Congratulations on the solid performance. Thank you for taking my question. After the completion of the debt offering and the expected takeout of the converts, could you remind me what the shares outstanding would be? I also have a couple of follow-up questions.

Yes, yes. So there's a good summary on that effect in the back of that presentation. On Page 28 and 29, we go through that detail of the debt refinancing. So there's 6.5 million shares associated with the 2025 converts, depending on what holders elect to do will depend on how many get converted.

Got it. Can you provide more details on the founders group and their performance in this environment?

Yes, Simple is performing very well. They have 100 stores across Florida, the Caribbean, and parts of Central America, and they are reaching a scale that is impressive. They are experiencing strong growth in lending, sales, and margins, which makes us very pleased with their progress. We currently hold a preferred security in what is now the third largest bank broker in the United States. Overall, we are very satisfied with their performance. The business is doing well with a solid and stable team. We will continue to evaluate our future involvement with them, but for now, we are very happy.

Thank you for that. I have one last question. You have a growth vehicle that is not on the balance sheet, which is a smart structure. Are there plans to pursue further growth around that structure? Could you provide some details? Also, what was the mention of $50 million?

Yes. Look, we designed that structure specifically for Simple, for the business that we've just talked about. I think it's been a really successful structure as we've been able to see that business scale very, very quickly using off-balance sheet debt. And we have a preferred in that business. And look, it's not a vehicle we thought of to do other things in or anything like that, doing more partnerships in that vehicle. This is specifically for that situation, which I think has worked really well. But yes, every quarter, we're always considering how we can help Simple more, what their needs are, what their shareholders' needs are. But it's obviously very strategically relevant for us as the third largest operator. We've worked with their management team for many, many years and know them well. So in time, with them, we will think about how our future looks together. But for now, we like being a preferred holder of that security and staying close to the situation.

Thank you again for taking my questions. I’ll take it offline. Solid results. Thank you.

Thank you.

I will now turn the call back over to Lachlan Given for closing remarks.

Thank you, operator. Thank you, everyone, for joining today. We're really proud of another fantastic quarter. So looking forward to talking to many of you during the day and over the next week or so. Thanks, everyone.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.