Earnings Call Transcript - EZPW Q2 2024

Operator, Operator

Good morning, ladies and gentlemen. Welcome to the EZCORP's Second Fiscal Quarter 2024 Earnings Call. As a reminder, this call may be recorded. I'd now like to turn the conference over to Jean Marie Young, Investor Relations with Three Part Advisors. Please go ahead, Jean.

Jean Young, Investor Relations

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. 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'd like to turn the call over to Lachie Given. Lachie?

Lachlan Given, CEO

Thanks, Jean, and good morning, everyone. For the second quarter of fiscal 2024, EZCORP has produced another very strong set of operating and financial results for our shareholders. Total revenue of $280 million was up 8% and PLO of $232 million was up 13%, both the highest for the second quarter in the company's history. From a bottom line perspective, adjusted net income was up 21%. Beginning on Slide 3, we are a global leader in pawn broking and pre-owned and recycled retail. We operate 1,246 stores in the U.S. and Latin America, having added another 9 stores this quarter. The macroeconomic environment remains challenging for our customer base. With rising living costs, economic uncertainty, and less availability of consumer credit, customers are increasingly using pawn broking services to satisfy their short-term cash needs. In addition, these customers are seeking better value for money retail options and so are purchasing pre-owned merchandise, which also has the additional benefit of being more environmentally friendly. We strive to provide an industry-leading experience for our customers through continuous innovation and excellent customer service. Moving on to Slide 4, we opened 9 de novo stores in Latin America and consolidated 5 stores during the quarter. In the U.S., we acquired 6 stores and consolidated 1. A record-setting Q2 PLO balance of $232 million was up 13%. When comparing the second quarter with the first quarter, earning assets typically decreased due to paydown of balances during tax refund season in the U.S. This year, we saw a mild paydown similar to last year. Our cash balance of $229 million provides us with substantial liquidity to fund additional organic earning asset growth to capitalize on inorganic opportunities as they arise, repurchase shares, and to fund near-term debt maturities if required. Slide 5 shows the continuous and consistent improvement in our financial metrics, with total revenues up 8%, merchandise sales up 6%, gross profit up 10%, and adjusted EBITDA up 7%. Strong consumer demand and excellent customer service continue to propel PLO and PSC both up 13%. Turning to our key business strategy highlights for Q2 on Slide 6, we continue to strengthen our core pawn operations, investing in people and technology. In Latin America, we improved PLO growth by focusing on the fundamentals in our stores and reinforcing business model best practices. We continue to modernize our point-of-sale back end and launched Workday Scheduling to enhance both productivity and efficiency as well as team member work-life balance. EZ+ Rewards' members grew to 4.6 million globally with 1.3 million transacting in Q2, almost evenly split between the U.S. and Latin America. Across all geographies, unique customers increased 2%. Team members are at the core of our operating theme of people, pawn, and passion. We are committed to investing in recruitment, retention, and incentivization to ensure that our team members remain highly engaged. We hosted our second annual career week focused on growth opportunities for all team members across the organization and launched a variety of Workday Talent tools. On the innovation and growth side, online payments grew $9.1 million to $21.8 million in the U.S., and we expanded online payments to all stores in Mexico. The buy online pick-up in store pilot initiative has expanded to 100 stores in the U.S., and we are seeing early success in e-commerce activities in our luxury pawn business in Las Vegas, where this channel is helping drive sales for the category. Slide 7 provides some of our sustainability highlights during the quarter. We sold 1.3 million pre-owned general merchandise and jewelry items and provided critical financial services to customers in need in the hundreds of local communities we serve. At EZCORP, we foster an environment that values diversity, inclusion, and development for all, and we are driving many important initiatives across the organization, enhancing diversity awareness, encouraging inclusive conversations, and more. We launched an EX Pride affinity group and grew all existing U.S. and LatAm affinity groups, EZ Inclusive Conversations, and Internal Conversations. The backbone of the company is our passionate, productive, tenured, and committed team members, and we continue to find new ways to enhance their experience. Community engagement is also critical to the culture we are building at EZCORP. We are working with 9 U.S. charities, and this work closely aligns with our stated goals of supporting financial literacy, eradicating food insecurity, empowering young people to achieve success, and poverty intervention. I would now like to turn the call over to Tim Jugmans, our CFO, to provide more details on our financial results. Tim?

Timothy Jugmans, CFO

Thanks, Lachie. Slide 9 details our consolidated financial results for the second quarter. PLO ended the period at $232 million, up 13% on a year-over-year basis, which is the highest second quarter in EZCORP's history. PC revenue was also up 13% over last year, with growth driven by both increased same-store PLO growth and new stores. Inventory turnover was strong at 2.9x with aged general merchandise at 2.3%. Merchandise sales were up 6% to $161.1 million. Merchandise sales gross profit was up 4% due to increased sales and flat margins as we focused on increased turnover and keeping aged general merchandise inventory low. It was another solid quarter with consolidated EBITDA of $36.2 million, up 7%, driven by higher PSC offset by a 10% increase in expenses. Turning to our U.S. Pawn segment on Slide 10, total revenues were up 10% to $207.6 million, which was the highest second quarter in our history. Earning assets increased 10%, driven by a PLO increase of 11% and 9% in inventory. Strong pawn demand and excellent customer service continue to drive PLO, which in turn drives over inventory growth. Slide 11 provides a map showing the U.S. states in which we operate. Our U.S. store count has grown to 535 stores with 6 stores acquired and 1 store consolidated in the quarter. PLO jewelry composition is up 100 basis points due to continued operational focus on this category, which also drove the 9% increase in average loan size. Inventory general merchandise composition is up 300 basis points, driven by an increase in handbags, shoes, and tools. Slide 12 provides a snapshot of the U.S. segment financials. PLO growth of 11% drove the PSC increase of 14% year-over-year. On the retail side of the business, merchandise sales were up 6% with merchandise sales gross profit up 2% with a 100 basis point decrease in merchandise sales margin. U.S. Pawn EBITDA for the quarter was $43.2 million, up 7% due to higher PSC, partially offset by a 12% increase in expenses. Turning to our Latin American segment on Slide 13, total revenues were up 4% to $72.6 million, which was the highest second quarter in our history. Earning assets increased 11%, driven by a PLO increase of 19% and inventory increase of 2%. Our store count in Latin America increased further in the quarter to 711 stores in 4 countries. PLO jewelry composition is up 600 basis points with our operational focus on growing this category, especially in Mexico. This jewelry composition increase has also driven average loan size up 9% on a constant currency basis. Our PLO balance increased significantly in the LatAm region by 19%, driven primarily by improved operational performance by our team as well as continued strong pawn demand in these markets. PSC was up 10%, driven by both same-store PLO growth and new stores. On the retail side of the business, merchandise sales gross profit was up 8%, with merchandise sales up 6% in addition to a 100 basis point improvement in sales margin. EBITDA grew very strongly for the quarter to $9.4 million, up 23% on the prior year. This was due to a higher PSC partially offset by a 7% increase in expenses with same-store expenses increasing 2%. Looking forward on a consolidated basis, we should see PLO continue to grow on a seasonal basis with PSC following suit. We continue to focus on strong inventory turnover and limited aged general merchandise. While we remain committed to expense management, we expect to see expenses increase on a sequential basis primarily due to ongoing inflationary pressures, filling vacancies in our stores, and year-over-year store count growth. Our focus on growing quality PLO, optimizing inventory management, improving systems and processes, and delivering excellent customer service should continue to drive strong financial results in our business.

Lachlan Given, CEO

Thanks, Tim. In closing, I want to thank our EZCORP team for delivering another outstanding quarter of operating and financial results for our stakeholders with record Q2 total revenues and PLO. We are very pleased with the strong growth this quarter in our LatAm segment. We can see real momentum building in that business with stronger execution of our enhanced operating model by our teams, producing improving results across almost all financial and operating metrics. It has been an excellent first half of 2024, and we look forward to driving enhanced value for all of our shareholders for the remainder of the year. And with that, we will open the call for questions. Operator?

Operator, Operator

Our first question comes from the line of John Hecht of Jefferies.

John Hecht, Analyst

You've added a few stores each quarter in LatAm and in the U.S., and it sounds like there have been small acquisitions and then some organic build-out, too. I'm wondering if you could give us some characteristics of the pipeline? Are there any consolidation opportunities that are worth noting? What geographies would those be? And then where are you focused on organic expansion?

Lachlan Given, CEO

Thanks, John. I think it's clear that we've been consistent in adding stores. Our pipeline has always been strong, especially in Latin America, where there is still much work to be done. In the U.S., we added stores this quarter, but I don't foresee many large acquisitions ahead; instead, it's more about smaller, steady acquisitions. In Latin America, there are still significant chains we could potentially acquire. We're showing discipline in our approach, particularly regarding pricing, while in the U.S., our strategy is focused on steady, consistent growth through smaller additions.

John Hecht, Analyst

The second question is about the U.S. gross margin in retail, which has shown great consistency. There has been an increase in Latin America over the last few quarters. Is this due to a mix of products or different buying behaviors? I'm interested in understanding the margin trends in that region.

Timothy Jugmans, CFO

Thanks, John. Yes, some of it is to do with mix. We also have had much better pricing in Latin America for the last 6 to 12 months, and that's coming through in the pricing. We also are executing the business model a lot better, especially in Mexico, and it is driving some of that. So a combination of all those is really a great result from the team.

John Hecht, Analyst

Okay. And last question, I'm just kind of worried whether we're interested in customer trends. Is there a way to think about new customers versus recurring customers and any kind of changing behavior on that front?

Lachlan Given, CEO

I don't think there's any changing behavior. I think we're pleased with the organic growth in customer demand. I think it's coming from both sides. We're seeing growth in loan customers, and we're seeing growth in people buying secondhand goods. So I think it's been pretty consistent across all of our regions, just core customer growth in the 2 things that we're doing, in the 2 businesses that we run. But we're seeing some nice growth as well in luxury goods. So luxury handbags, watches, jewelry, we're seeing nice growth there. So I think it's a pretty consistent picture on customer growth, both in the U.S. and in Latin America.

Operator, Operator

Our next question comes from the line of Brian McNamara of Canaccord.

Brian McNamara, Analyst

Congrats on the strong results. We observed, obviously, PLO is really strong again, despite more normal tax refunds coming through, driving loan paydowns. Is that just timing? Or are you still running record PLO in May? Or have you seen that typical seasonal paydown of loans?

Lachlan Given, CEO

Typically, that finishes at the end of March, and you start seeing the increase in loan balances from March. The paydowns definitely do stop. Last year, we saw a very quick turnaround in those numbers. This year, I think it’s probably a little more normal, with a slow buildup through this quarter. However, with our excellent customer service and rewards program, we believe we are gaining market share.

Brian McNamara, Analyst

Okay. Great. And then I'm assuming the buy online pick-up in store test, I think you guys started that in San Antonio, correct me if I'm wrong. I'm assuming that's going well as you're expanding it to 100 stores in Texas and Florida. I guess, what did you see out of that test or pilot or whatever that kind of gave you confidence to roll this out to more stores? And would you expect to roll this out to all your U.S. stores or all your stores in total at some point?

Lachlan Given, CEO

I think it's still early. We're currently operating in 100 stores across three markets. At this stage, we have the pilot test in a good position, with our photography working well and our teams trained. The pilot is now fully underway. By the end of this quarter, we should have clarity on whether we have a successful test. I believe we can potentially expand it to more stores, as customers have responded positively so far, and we're seeing some initial success. This quarter is crucial for determining if this can become a viable business that we can roll out. E-commerce in the Max Pawn segment is performing well, despite being relatively small, with strong early results. Overall, we feel optimistic, but I think by this time next quarter, we will have a clearer understanding of our progress.

Brian McNamara, Analyst

I appreciate the detailed information about the rewards program; it's very helpful for investors. Are you surprised by the success of digitizing a business that has traditionally been very physical, requiring in-store visits and negotiations? How is the overall digitization progressing, knowing that it remains a largely physical business despite the initiatives you've implemented?

Lachlan Given, CEO

If I am being honest, I am quite surprised at how well it’s going. We have nearly 5 million rewards customers, which has exceeded our expectations. It is a very large and successful program with strong engagement. As we have mentioned to our shareholders multiple times, it is now essential to figure out the best ways to engage this customer base and provide them with the best benefits we can offer. In response to your question, the digitization has improved significantly beyond our initial beliefs. I believe we are leading the industry, but now we need to focus on how to effectively engage that customer base and achieve meaningful growth for both them and us.

Brian McNamara, Analyst

Got it. And then perhaps one for Tim. Costs were a bit higher than we expected. What's driving that? And how should we think about costs in Q3 and the back half of the year?

Timothy Jugmans, CFO

Yes, we continue to invest in our teams, driving some of the costs, obviously. In Latin America, there's also the costs that the government is instituting with increased minimum wages. A little bit on rent renewals as well, causing some of that cost to come through. Well, we see the successful advertising rewards program is also being successful. So the cost is also increasing. So there's a couple of those things driving those costs. We do expect the costs to sequentially rise through the quarter, through Q3 and Q4. These inflationary effects are still in play as we've seen the U.S. government still keeping rates steady with the inflation still out there.

Brian McNamara, Analyst

Got it. And then finally, probably our most important question relating to capital allocation. What drove the decision to pay the principal amount of your 2024 convertible notes in cash? And would you expect to do the same for the 2025? And what other options would you consider absent kind of repeating that? Would you consider straight debt or something like that?

Lachlan Given, CEO

Thank you, Brian. I mean, look, I think we've been really consistent in the way we think about capital. I think as a Board, as a team, we're always looking at all alternatives. We look at equity, debt, equity linked in the capital stack. So look, I think it's a really consistent message. We are conservative in the way we think about the balance sheet. We like to be very liquid because we're growing quickly. We've got lots of potential acquisitions that we can do at the right price. We're buying back shares. So look, we're trying to balance all of those competing initiatives and we've been very clear with our investors and our shareholders that all alternatives are always on the table. But look, I think our financing strategy has been an excellent one. I think we are very liquid. We're very conservative, and we've got plenty of capital to go after what we think is a truly global big opportunity and all alternatives are on the table. And I think this quarter has been a really strong one. I think you're continuing to see strong growth in the U.S., but I think really pleasingly, we're seeing fantastic results in Latin America. And I think that's been a real highlight for this quarter where we're seeing great loan growth, sales growth and the team who are driving, particularly Mexico and Guatemala, obviously, are having some really sustained now strong growth. So I think it's been a really great quarter for both businesses, the U.S. and Latin America. And I think on your question on the balance sheet, the strategy is showing that we've got the right amount of capital to grow the business both organically and inorganically. So we're really happy with the quarter. And one of the big highlights is Latin America. So we're really pleased with what the team has been able to achieve down there, and we're looking at driving even stronger growth in the coming quarters.

Operator, Operator

I would now like to turn the conference back to Lachie Given for closing remarks. Sir?

Lachlan Given, CEO

Thank you, everyone, for joining. To our team at EZCORP, thank you very much for delivering a really strong quarter, particularly down in Latin America, and thank you all for joining the call, and we look forward to our one-on-ones for the rest of the day. So thanks, guys.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.