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spk02: Good morning, ladies and gentlemen. Welcome to the EZ Corp second quarter fiscal 2023 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 Jean Marie Young, investor relations with three part advisors. Please go ahead, Jean.
spk01: 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'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 Easy Corp's Chief Executive Officer, Lockie Gibbon, and Tim Jugman's Chief Financial Officer. Now I'd like to turn the call over to Lockie Gibbon. Lockie?
spk07: 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, 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 three, we are a global leader in pawnbroking and pre-owned and recycled retail. We operate 1,199 stores in the US 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 for pawnbrokers. 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 four, 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 porn loans across the regions in which we operate through various economic cycles. Slide five shows how we've progressed on our three-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 has resulted in store-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 six, 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. Tax season pay down 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're focused on better execution in LATAM to bring down aged inventory and get closer to the level seen in the United States. Cash on the balance sheet increased over the first quarter due to increased merchandise sales and the expected pay down of PLO during tax season. On slide seven, EBITDA margin was 13% for the last 12 months ending March 2023, versus 12% in the last 12 months ending March 2022, with the US driving the growth. Recently, EBITDA margins flattened due to inflationary pressures. On slide eight, 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 initiative. We continue to invest in technology and are building out our e-commerce capabilities. On slide nine, innovation and growth is the third pillar of our three-year strategy, and we continue to execute our plan. Our EasyPlus loyalty program has 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 one million-quiz giveaway promotion in the US aimed at acquiring and engaging EasyPlus loyalty members, so 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. MaxPorn, our luxury porn website, saw an 86% increase in daily website visitors over the previous quarter. We opened 11 de novo stores in Latin America, with eight in Mexico and three in Guatemala. In the Las Vegas area, we opened two de novo stores, one Max Porn Store and one Easy Porn Store. Slide 10 outlines our ESG highlights for the fiscal second quarter. Our business, by its 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 items such as computers, TVs, and phones, as well as tools, musical instruments, household goods, and jewelry, saving them all from landfill. We use sound recycling and e-waste processing in the US. 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 groups in the US and our women's empowerment affinity group in both the US 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 EasyCorp Foundation. Building on our core tenets of people, porn, 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?
spk06: Thanks, Lachie. Turning to our consolidated financial results on slide 11, PLO rose 17%, driving PSE 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 labour in line with store activity Higher store count, and to a lesser extent, expenses related to our launching 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. In staff for the quarter was $33.3 million, up 4%. Turning to our U.S. port operations on slide 12, PLO rose 18%, which led to a 19% increase in VSC year over year. On the retail side of the business, merchandise sales were up 9%, with merchandise sales growth 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. US porn EBITDA for the quarter was $40.3 million, up 11% on the prior year. Slide 13 focuses on our Latin American porn operations. Segment PLO grew 14% for the second quarter, or 12% on the same store basis, with the resulting PSE up 21%. Merchandise sales were up 22%, 16% on the same store basis. Western Isles gross profit was up 32% due to increased sales and margins up 300 basis points. Store expenses were up 29% and 24% on the same store basis, mainly due to increased labour in line with store activity and higher store counts. In-ridge return over remains strong at 3.5 times. However, HGM 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 PLA levels continue to hit record numbers as we move out of tax season, traditionally seasonally below for the year. This also means that PSE 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 remain at the lower end of our range of 35% to 38% as we remain focused on strong inventory terms and limited age general merchandise. Also, as we've 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.
spk07: Thanks, Tim. In closing, I want to thank our EasyCorp 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, two 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 a platform to capitalize upon increasing demand for our two core products, and an exciting pipeline for corn store acquisitions across the regions in which we operate and beyond. And with that, we will open the call for questions. Operator?
spk02: If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of John Hecht of Jefferies. You may proceed.
spk03: Morning, guys. Thanks very much for taking my questions. I'm just wondering kind of what you're seeing in terms of the retail mix at the stores. I remember, you know, a year ago or two, you guys, you know, had a good mix of like secondary shoes that might've even been considered luxury, but obviously value luxury. But now that we're kind of in a different economic climate, are your customers seeking different types of merchandise from you considering the value proposition you offer? Good morning, John.
spk07: And thanks for the question. Look, I don't think we're seeing anything that's materially different from the customer in the mix. We are seeing nice growth in the luxury items, handbags and shoes, but they're still relatively small. But really exciting growth numbers. And we're obviously concentrating a bit more on the luxury strategy now, which is super exciting. But I think generally speaking, there's been no material changes in the mix.
spk03: Okay. And then? Retail margins, I mean, you're in the range. I think you guys mentioned maybe the lower end of the range. But then again, this is now we're kind of back to a normal range relative to the historical context. Any call-ups there? Is that a function of consumers being more selective or maybe bargaining again just because they're under more pressure? Or is it just things have settled back to normal, the mix is normal, and that's kind of the outlook there? given the set of circumstances?
spk07: I think it's more the latter. Our enhanced operating strategy over the last couple of years is to be far more focused on terms, so making sure that we're getting rid of inventory as quickly as we can. I think the margin falls out of that strategy. Maybe in past years, it was more margin first, but when you do that, you clearly get an aged problem. Now, our poor operating strategy now is concentrate on loans at the counter and to dispose of inventory as quickly as we can at an appropriate margin. So, look, I think the outlook remains the same. It's at the low end of that range as we continue to make sure that the terms remain strong.
spk03: Okay. And then, I think you've added about 40-ish stores in the last year. any call outs there with respect to how these stores season or mature relative to what they would have done a few years ago?
spk07: Look, we're really excited about that strategy. The De Novo's in Latin America, both Mexico and Guatemala, it's a really exciting strategy because the market is so large. So I think you'll, you'll see more of that from us. I think, you know, it's, These stores come on quicker than they do in the U.S. because you're putting less capital in, expenses are lower, and, you know, so you move to profitability quite quickly versus the U.S. So, yeah, I think it's very much on plan. The results have been on plan, and I think you'll see us do more of them.
spk03: Great, guys. Thanks very much for taking my questions. Thanks, John.
spk02: Thank you. The next question comes from the line of Brian Nagel of Oppenheimer. You may proceed.
spk05: Hi, this is William Dawson on for Brian Nagel. Congrats on a nice quarter and thanks for taking our questions. So our first question is bigger picture in nature and it's on the overall palm backdrop. Can you describe how your core customer has been holding up, you know, through fiscal Q2, but also here in the early months of the spring? You know, and there's also been a lot of discussion around like a recession later in the year. So we wondered if there's been any notable shift to changes or any shift to buying patterns or traffic or just general consumer demand for pollen loans lately.
spk07: Thank you for the question. Look, I think it's a very positive outlook for porn. You can see our core growth for our two products, which is obviously porn loans and secondhand goods. You can see that we're really up pretty strongly this quarter again. The core demand for these products continues to grow. In terms of a recession later in the year, historically that would usually mean more growth in porn loans and you know, sales get tougher. But what we're seeing is that, in fact, sales remain strong as we think customers are looking for value for money and are more environmentally conscious. So we're looking for secondhand goods. So, look, it's a good question in terms of the quarter itself. We saw strong growth and we think that that's going to continue in both products. And, you know, in general, recessionary environments are... a good time for pawnbroking businesses.
spk06: But adding to that, we did see in quarter two, definitely less of a pay down during tax season. I think a lot of companies reported seeing their customers with less money during tax season, which really meant that from a loan balance perspective, on a much higher than expected loan balance at the end of the quarter. And that puts us in really good stead for the rest of the year.
spk05: I appreciate that, Keller. Our next question was in respect to the loyalty program. Congrats on the strong adoption here in Q2. It's 2.9 million members versus 2.4 last quarter. And so we just wanted to get your opinion on how this program is helping you connect better with core consumers? And also, while it's still early, have you seen any financial benefits thus far?
spk07: Look, it's a good question again, and it is certainly early. So, you know, first phase has been to sign up as many customers as possible and get the message out to our customer base that there is benefit here for them. Next step is to, you know, to maximize the the success of it, you know, to get consumers more engaged, coming back more often, using their points. But anecdotally, you know, lots of customers are talking about it when they come into the store. They always want to talk about their points. So we think that it is just generally engaging our customer base in a much better way. You know, the hope is that it wins, it helps win share going forward. But I think financially speaking, it's still very, very early to, We've just engaged an outside agency to help us to come up with more innovative strategies around it. But I think you can see that clearly our customer base loves it. I think in the coming quarters, you'll see us do more around it and I think drive more revenue. But for now, it's still pretty early financially.
spk05: Excellent. Thank you. And our last question, if I can squeeze this in, is that You've done a lot to invest and staff well your stores here in the past year. And so our question was, excluding new stores or acquisitions, is your current expense infrastructure in place so that we should really think about any incremental SG&A as largely wage inflation related? And then considering this, and also we recognize you haven't given long term guidance, but Any updates to the way that we should think about the long-term operating margin profile of your business?
spk07: I think Tim will have some comments here, but I think on the store-based question, we said in our remarks just now that I think vacancy is a bit less than 3%, and that's on a consolidated basis. I would say to you that in the US, we are pretty much fully staffed now in the stores based on the current activity. You know, it's really strong progress against, you know, the period last year where, you know, it was very, very tough to get people into the stores in terms of staff members. So, look, we're feeling really good about the staffing level now. So, yes, it will be about inflationary impact on that store base. Tim, I don't know if you want to add anything on that or just move to the longer term kind of operating margin question.
spk06: Yeah, we will see some inflationary pressures hitting next quarter on a sequential basis across the store network and G&A. But the big sequential rises in expenses is slowly diminishing as these inflationary pressures are really almost all set in, but there is still a little bit more movement to go. And on a total margin perspective on a bottom line, we definitely see that we've still got room to move on the revenue line, only a little bit more room on the expense lines to move up. And so as that revenue goes up, we think the margins will start improving next year. But at this stage of this year, it's probably relatively stable.
spk05: Perfect. I appreciate all the color. Congrats on the nice quarter again.
spk02: Thank you. Thanks for the question. Thank you. Thank you. The next question comes from Brian McNamara of Canaccord Genuity. You may proceed.
spk04: Hey, good morning, guys. Congrats on the strong results, and thanks for taking our questions. So first off, I'm curious if you guys are seeing any tangible benefit from the recent high-profile regional bank failures and the tightening of lending standards. While your core customer is likely unbanked or underbanked, is this leading to some new customer acquisition of folks perhaps on the fringes?
spk07: Perhaps. It's a good thought. Look, you can see that our core demand is increasing. You can see that our loan balance is significantly up. And I think there's a whole variety of reasons, including the macro environment, inflationary pressure, interest rates, gas prices, you know, definitely the tightening of credit from competitive products like, you know, the installment lending payday, title, whether or not it's, you know, the failures of First Republic and Silicon Valley Bank, I don't know. You know, usually that is a customer, you know, it's probably a different customer base, but, you know, it's not, Not out of the question that we would be seeing some incremental growth, but I think it's probably those other factors that are really driving it. And I've got to say, truthfully, our store people and our strategies in our store and our rewards program and our customer service, I think, is probably the biggest driver of all.
spk04: So secondly, PLO is down less than 2% sequentially compared to your typical kind of minus double digits given seasonality, which is an incredible result in our opinion. Is that just tax refund timing or is there underlying strength on top of that? And I guess, for example, how would that look today from a seasonality standpoint?
spk07: Yeah, I think tax season is the largest issue at play. You see a lot of other companies have announced the same thing. So I think that is the largest reason. But yes, all of our strategies, our operating strategies, our initiatives to bet a loan at the counter to retain customers, I think is definitely taking hold. But usually it's much bigger pay down from tax season, so that was definitely a benefit for us this quarter.
spk04: And then finally, are you seeing any improvement in the acquired stores in Mexico? Are you sighted some weakness in Q1 in terms of age, inventory, and merchandise margins? Thank you. Yeah, definitely.
spk07: Thank you, Brian, and thanks for the questions, man. Definitely seeing progress in the Mexico acquisitions. We've got new leadership down there, we are seeing better retention of people in our stores firstly, and that is usually the leading indicator to improved financial results. So concentrating so much on bench strength, on the promotability of store managers or assistant managers, and really retaining team members down there is starting to see some significant traction. So we're confident that that then, as it did in the US last year, That then transfers into better selling of aged inventory, better lending of the counter. So on most metrics, we're seeing improvement in those acquisitions down there. So we're pretty excited about it.
spk04: Thanks a lot, guys.
spk02: Thanks. Thank you. And with that, we will conclude our time of Q&A. I would now like to pass the conference back over to Lockie Given for any closing remarks.
spk07: 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.
spk02: And with that, we will conclude today's call. Thank you for participating. You may now disconnect your lines.
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