EZCORP, Inc.

Good morning, ladies and gentlemen, and welcome to the EZCORP third quarter of the Fiscal 2020 Earnings Conference 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 would now like to turn the conference over to Michael Kim, Investor Relations. Please go ahead, Michael.

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.easycorp.com. Before we begin, I would 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 or implied by these forward-looking statements 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 the 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. Now, I'd like to turn the call over to Mr. Jason Koulis. Jason?

Thanks, Michael, and good morning, everyone. I wanted to start off this morning by thanking Stuart Grimshaw for his many contributions and accomplishments over the years and his ongoing counsel and support as we move through the leadership transition. I'm honored and incredibly excited about the opportunity to work with the talented team here at EasyCorp as CEO. We've spent the last few weeks continuing to develop our overall business strategy. We have a large store base spread across diverse markets that are underpinned by attractive demographics, stable regulation, and a runway for growth. We have a team of pawnbrokers who provide a service that is unique and essential for our customers. And I'm more confident than ever that we will emerge from the current crisis in a stronger position as it relates to our business operations, financial performance, and growth profile. So starting on slide four of the investor presentation, at a high level, we strive to be our customers' first and best choice for their short-term cash needs by increasingly leveraging our durable competitive advantages. A key priority for us is creating the most tenured, diverse, and highest performing team in the industry. We recently appointed a new head of diversity and inclusion We are excited about the opportunities we have going forward as we more closely track and measure the progress of our diversity efforts. Furthermore, we remain very focused on the safety and well-being of our team members in these uncertain times, with strict adherence to CDC guidelines here in the U.S. and local government procedures across Latin America. Our team members are working hard every day to serve our customers, and we are committed to continuing to ensure that they are safe while they do it. Encouragingly, employee attrition continues to drop, with store turnover down 10% in the U.S. and 16% in Latin America for the quarter on a year-over-year basis. Turning to our customers, we continue to provide critical and essential financial services. As of July 31st, 99% of our stores remain open, which is key to continuing to meet our customers' needs for cash and providing affordable merchandise for working remotely and homeschooling. Our consistency in this regard, being there for our customers every day, is a big driver of our customer loyalty. Finally, from a financial standpoint, our balance sheet remains a key differentiating factor. Our unrestricted cash balance grew by over $100 million on a sequential quarter basis to $311 million at June 30th and has continued to grow incrementally in July, positioning us well to serve our customers as their short-term needs rebuild over time. The strength of our balance sheet, highlighted by net debt of $6 million at quarter end, no near-term debt maturities, and no restrictive debt covenants, ensures that we remain strong, well-funded, and able to meet large increases in loan demand in all of our internal recovery scenarios. In addition, as I'll discuss further, we are targeting significant cost savings by reducing administrative overhead and operational expenses and rationalizing non-core activities including plans to exit our cash max business in Canada. On slide five, we will walk through some financial highlights for the quarter. Key themes in Q3 included 5% revenue growth driven by strong merchandise and scrap sales, which on the top line offset a decline in pawn service charges versus the prior year quarter. Pawn service charges, a significant driver of our profitability, are down given lower demand for pawn loans reflecting stimulus payments and extended unemployment and forbearance benefits. An important item to note as the federal government prepares for a second round of stimulus funding is that additional stimulus actions could further impact our loan balances and related pawn service charges, although not to the same degree as the first round of stimulus. Additionally, we would not expect pawn service charges to be impacted as much as PLO given the positive trend in yield that we saw in June relative to the quarter on a consolidated basis. Next, we've made considerable progress in managing aged inventory levels here in the US, driven by rising merchandise sales and higher inventory terms. We reduced aged general merchandise inventory levels in the US by nearly 60% year over year, with the percentage of aged inventory dropping to 4.9% as of the end of our fiscal third quarter of 2020, from 6.3% a year ago. We are stepping up our focus on inventory management in Latin America, where levels have trended higher due to a more challenging environment, as well as extended store closures at GPMX. Inventory has declined from high levels due to strong sales, and we have seen the merchandise selection in stores decrease. With lower inventory levels, we expect to see a decline in Q4 from current levels of merchandise and scrap gross profit. In summary, while sales gross profit margins were strong, the tradeoff of higher margin pawn service charges for lower margin sales negatively impacted EBITDA and EPS for the quarter. On slide six, we show updated stats across several macroeconomic indicators. While jobless claims have moderated from peak levels in April, recent trends likely drive increased cash needs from non-bank sources, including POM, post any subsequent stimulus actions. In light of this backdrop, we took the opportunity to reframe our strategic initiatives to position the company for optimizing both top and bottom line long-term growth, which we detail over the next several slides. So on slide seven, at a high level, we've mapped out three key initiatives. First, we are committed to reducing administrative overhead and operational expenses and rationalizing non-core activities to optimize our cost structure and generate significant annualized cost savings. Second, we are continuing to focus on strengthening our core business operations through fostering high performance and tenured store members, continuous optimization in pricing and lending, and ongoing modernization of our technology and data assets. And third, we remain focused on more fully leveraging innovative payment solutions across curbside, LANA, online, and paid by phone options, digital marketing to capture new customers, as well as selectively pursuing de novo and M&A opportunities to grow our store count and expand our footprint. As we highlight on this page, all of these efforts are underpinned by the quality of our team members, a relentless focus on our customers, and a strong balance sheet that allows us to execute. So digging a bit deeper on optimizing our cost base in slide eight, we plan to reduce both corporate costs and operational expenses to maximize profitability and better align with near-term PLO trends. Initial areas of focus include increasing the efficiency of our operations and selectively reducing expenses related to our digital efforts, as well as shutting down the non-core cash max business in Canada over the next few months. These efforts are expected to add an even greater level of resiliency to our business through the current environment and future economic cycles. Furthermore, we're taking a balanced approach to growth and maintenance capital expenditures, ensuring that we remain committed to funding key strategic initiatives over time. We're still in the early stages of identifying and mapping out cost savings, and we'll be providing more detail and regular updates on subsequent quarterly earnings conference calls. We do not expect these efforts to have a significant impact on Q4 results, but we will begin reporting on our progress in our fiscal fourth quarter and beyond as we identify these additional measures to reduce costs from current levels. Next, on slide nine, we lay out a number of initiatives centered on continuous optimization and modernization of our IT infrastructure to strengthen our core business operations and drive more consistent profitability as well as a better balanced cash-to-cash cycle. More specifically, we continue to invest in system-generated pricing to improve the overall customer experience, team member productivity and profitability. On the lending side, we are increasingly implementing automated guidance systems to generate a higher and more consistent return on earning assets over time. Early results of these efforts are showing in loan-to-value ratios on forfeited collateral, having decreased by 12% in the U.S. and by 15% in Mexico, paving the way for higher merchandise sales margins. In addition, we believe these enhanced systems and processes will help us develop new team members and professional pawnbrokers, increase productivity, and improve team member retention. On the IT side, Efforts to modernize our infrastructure include the ongoing rollout of POS2, with El Salvador and Guatemala to be completed in the fourth quarter of this fiscal year, enabling increased standardization across geographies. In addition, we are focused on broader use of store tablets and digital engagement across key customer interactions and centralized data management, with the goal of enhancing the growth of our core POM business, as well as increasingly penetrating new channels and bringing new products to market. Turning to our innovation and growth initiatives on slide 10 and 11, our customer-centric culture continues to enable innovation through the crisis. For example, we are expanding customer choice across pay-by-phone and cross-door payments, thereby enhancing convenience and the customer experience. As temperatures have increased and store staffing has been impacted by COVID-19, our curbside offering has been pulled back, but we fully expect that to continue to be an important service going forward. Next, we remain focused on leveraging our differentiated digital capabilities to capture new clients. Our efforts are focused on driving higher social media engagement, online activity, search engine optimization, and online reviews. Focusing on Lana, we continue to increasingly penetrate existing stores and customers. With the platform currently available in 374 stores, more than double the 159 stores at March 31st, and with over 40,000 customer accounts at the end of July compared to just over 8,000 at the end of our fiscal second quarter. Functionality is also on the rise with over 10,000 extensions processed in July or more than six times the number of extensions in March. While we expect customer debit card payment and layaway capabilities to come online in the next six months or so, reinforcing LADA as the digital loan servicing platform for our customers. Turning to growth, we maintain a large and growing store base spread across diverse markets underpinned by attractive demographics, stable regulation, and strong prospects. On de novo opportunities, despite the challenging backdrop, we remain on track to open 23 new stores in Latin America this fiscal year, with plans to open another 25 next year. And from an inorganic perspective, we remain disciplined in scanning the market for pawn store acquisition opportunities across core markets and potentially new geographic regions. As shown on slide 12, while more recent EBITDA growth and margin trends have softened, largely a function of the stimulus fuel pay down of bond loans, we know how this story ends and expect pent-up lending demand to drive a return to and beyond pre-COVID levels of bond loans outstanding over time. Now turning to our financial results for the quarter. On a GAAP basis, we reported diluted earnings per share of negative 10 cents, a decrease of 16 cents from the prior year. On an adjusted basis, we report diluted earnings per share of negative 1 cent for the fiscal third quarter compared to 18 cents in the prior year quarter. Adjustments for the quarter included a loss of $1.8 million in inventory, $400,000 in loan restitution losses, and $200,000 in property, plant, and equipment due to lootings that occurred in 30 of our U.S. stores during riots in late May and early June. as well as our typical exclusion of non-cast interest expenses related to our convertible debt and adjustments for foreign exchange fluctuations. Focusing on our consolidated financial highlights on slide 13, total revenue was up 5% driven by a 31% increase in merchandise sales and 15% growth in scrap sales on a year-over-year basis. Sales gross profit was up 25% reflecting stepped-up demand for shelter-at-home merchandise and higher inventory terms. As a result, inventory was down 28%, and we made significant progress on liquidating aged inventory to expand related margins and optimize cash-to-cash cycles. However, our ending PLO balance of $117 million was down 39% year-over-year, largely related to the impact of stimulus payments and COVID-19 headwinds, thereby driving lower pawn service charges in net revenue. Despite the offset of a 0.5% decline in total operating expenses, These factors pressured EBITDA and margins for the quarter. Turning to U.S. Pond on slide 14, trends for the quarter were similar, with higher merchandise sales and gross profits on stepped-up inventory terms and effective inventory management driving strong revenue growth, and with lower PLO and PSC pressuring net revenue. Ending PLO was down 42% on a year-over-year basis, reflecting ongoing COVID-related headwinds. Though PSC was off 30%, given a lesser decline in average PLO for the quarter and an uptick in yields also driven by higher redemption rates. We continue to leverage our enhanced point of sale system to optimize loan-to-value decisions and drive higher pawn loan redemption rates and yields. More favorably, merchandise sales margins held steady versus the prior year quarter, with age general merchandise inventory down to 4.9% compared to over 6% a year ago, In addition, jewelry scrap gross profit increased 86% with related margins of 840 basis points to 24.8%. Much of the step-up reflected our decision to capitalize on higher gold prices, and we do not expect the same level of scrap sales, profits, and margins in the fiscal fourth quarter. And finally, operating expenses remained well managed, with costs in line with prior year, though segment EBITDA was down 17% on lower pawn service charges. Next on slide 15, Latin America results were more challenging with decreased EBITDA contribution reflecting lower PSC and merchandise growth profit, partially offset by reduced expenses. Store closures and reduced operating hours outside of Mexico were a big driver of the expense reductions. Similar to the U.S., PLO declined, largely reflecting COVID-19 headwinds. While stores in Mexico generally remained open, COVID-related closures persisted through the quarter at GPMX. With many stores operating under reduced hours, restricted business activities, or in locations with limited public transportation. As a result, PSC declined by 35% year-over-year, driven by lower average PLO for the quarter and a lower yield. Merchandise sales were down 2%, reflecting reduced in-store traffic and store closures at GPMX, with related margins contracting 700 basis points compared to the prior year quarter. As mentioned earlier, we are increasingly intent on optimizing LTVs and more effectively managing aged inventory levels across Latin America to drive improving yields and merchandise margins over time. Finally, to follow up on a few of the forward-looking statements made this morning, while we started to see demand for PON loans begin to pick up in the U.S. starting in June, it will take time for PLO and PSE to rebuild, and we expect the trends to temporarily reverse with a second round of government stimulus payments. And while we're focused on right-sizing our cost structure and recognizing significant annualized cost savings, we are still early in the process with material expense savings more of a fiscal 2021 story. All that said, we remain confident that demand for PON loans will meaningfully pick up over time, driving accelerated revenue growth and building earnings power, particularly as we increasingly rationalize expenses and invest in value-added initiatives. Related to that, we also remain focused on delivering more consistent financial performance and plan on providing regular updates and metrics to the market on our progress against key strategic initiatives we have laid out. Put very simply, we are going to focus on efficiency, operations, and growth. We will optimize our cost structure in the coming quarters while we continue to enhance our store-level operations and give our customers more choices and conveniences. and we will do all of that while continuing to look for ways to grow both organically and inorganically. Underpinning these initiatives is a relentless focus on the safety of our team members and on providing outstanding and safe service to our valued customers while maintaining a strong balance sheet and excess liquidity to invest in our growth. We know that if we execute on these initiatives, we will emerge from the COVID-19 crisis in a position of strength and we will be in a position to meet our customers' needs for cash