EZCORP, Inc. (NASDAQ:EZPW) Q2 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning, ladies and gentlemen. Welcome to the EZCORP Second Quarter Fiscal 2023 Earnings Call. [Operator Instructions]. As a reminder, this call may be recorded. I’d now like to turn the conference over to Jean Young, Investor Relations with Three Part Advisors, . Please go ahead, Jean.

Jean Young: 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: Thanks, Jean , 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 is the key driver of our business was up 17%, $202.9 million, 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 respect and to excel operationally in all that we do continues to drive our strong operating and financial results.

Beginning on Slide 3. We are a global leader in pawnbroking and pre-owned and recycled retail. We operate 1,199 stores 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 perform. 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 engaged 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 and a proprietary POS system so that we can offer the best options for our customers. Our strong balance sheet gives us ample liquidity to provide pawn loans across the regions in which we operate through various economic cycles. Slide 5 shows how we’ve 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. Customers continue to sign up for our points-based loyalty program, which has grown to 2.9 million 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 second quarter, with an associated 19% increase in PSC. Taxes and paydown was less than expected this year. Total revenue for the quarter was $253.8 million, up 17%. EBITDA was $33 million for the quarter, up 4%. We are focused on better execution in Lat Am to bring down aged inventory and get closer to the levels seen in the United States.

Cash on the balance sheet increased over the first quarter due to increased merchandise sales and the expected paydown of PLO 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.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, implementing processes to improve the bench strength of our field team and improving recruiting strategies that 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 initiatives. We continue to invest in technology and are building out our e-commerce capabilities. On Slide 9, innovation and growth is the third pillar of our 3-year strategy, and we continue to execute our plans. Our EZ+ loyalty program was over 2.9 million customers enrolled versus over 2.4 million last quarter, an increase of 19%. We also collected $12.7 million in online payments this quarter, up $6.5 million from the second quarter of fiscal 2022. Our 1 Million Point giveaway promotion in the U.S. aimed at acquiring and engaging EZ+ loyalty members to 27,000 entries and 200 winners.

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. MaxPawn, our luxury pawn 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. Slide 10 outlines our ESG highlights for the fiscal second quarter. Our business by 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 resold over 1.4 million pre-owned items in the quarter, including toxic consumer electronic products 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 e-waste processing in the U.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 Group groups in the U.S. 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 EZCORP Foundation. Building on our core tenets of people pull 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 Jugmans, our Chief Financial Officer, to provide more details on our financial results. Tim?

Timothy Jugmans: 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% with an 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 expenses related to our loyalty program. G&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 $33.3 million, up 4%.

Turning to our U.S. pawn operations on Slide 12. PLO rose 18%, which led to a 19% increase in PSC 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 labor in-line with store activity, higher store count and to a lesser extent, expenses related to our loyalty program. U.S. pawn EBITDA for the quarter was $40.3 million, up 11% on the prior year. Slide 13 focuses on our Latin American pawn operations. Segment PLO grew 14% for the second quarter or 12% on a same-store basis with a resulting PSC 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.

Store expenses were up 29% and 24% on a same-store basis, mainly due to increased labor in-line with store activity and higher store count. Inventory turnover remains strong at 3.5x. However, Aged GM is up to 3.2%, which reflects an opportunity to improve execution in Latin America. For the second quarter, Latin America and EBITDA improved 11% to $7.3 million. Looking forward, on a consolidated basis, we should see PLO levels continue to hit record numbers as we move our traditionally seasonally low for the year. This also means that PSC and profit for Q3 are traditionally the lowest for the year. As communicated in prior quarters, we are likely to continue to see gross margin to remain at the lower end of our range of 35% to 38% as we remain focused on strong inventory turns and limited age of 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&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 Lachie for a few closing comments.

Lachlan Given: 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 second quarter, opened 13 new stores, 2 of which were in the important market of Las Vegas, 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. And with that, we will open the call for questions. Operator?

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of John Hecht of Jefferies.

Operator: The next question comes from the line of Brian Nagel of Oppenheimer.

Operator: The next question comes from Brian McNamara of Canaccord Genuity.

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

Lachlan Given: 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 one-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 lines.