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F1Q 2014 Earnings Conference Call

January 28, 2014 05:00 PM ET


Mark Kuchenrither - EVP and CFO

Paul Rothamel - President and CEO


Bill Carcache - Nomura

John Rowan - Sidoti & Company

John Hecht - Stephens, Inc.

Bob Ramsey - FBR Capital Markets



Welcome to the Fiscal Year 2014 First Quarter Earnings Release Conference Call. My name is Adrian, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mark Kuchenrither. Mark Kuchenrither, you may begin.

Mark Kuchenrither

Thank you, Adrian, and good afternoon, everyone. I’m Mark Kuchenrither, EZCORP’s Executive Vice President and Chief Financial Officer. On the call with me today is Paul Rothamel, our President and Chief Executive Officer. Today’s conference call contains 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 uncertainties and other factors including fluctuations in gold prices for the desire of our customers to pawn or sell their gold items, changes in the regulatory environment, changing market conditions in the overall economy, and in the industry and consumer demand for the company’s services and merchandize.

For a discussion of these and other factors affecting the company’s business and prospects see the company’s annual, quarterly and other reports filed with the Securities and Exchange Commission.

Also we have provided supplemental information on our website. The information gives more detail on the impact of gold and jewelry scrap on earnings per share and net earning assets by segment. These materials can be found at ezcorp.com in the investor resources section.

Now I would like to turn the call over to Paul Rothamel, our Chief Executive Officer for his opening comments. And then we will open the call to your questions, Paul?

Paul Rothamel

Thank you, Mark and good afternoon everyone. I want to take a few minutes and share with you what we’re seeing in our business and marketplace today and ultimately what the impact of that is on our consolidated company. In the United States where we operate our two largest businesses, the recent changes in the gold market and regulatory environment are well documented, so I won’t spend a lot of time on that here.

On the pawn side of the business, our largest, let’s talk about the consumer for a minute, we continue to see strong demand for both our loan and retail offerings, as evidenced by our growing loan transaction accounts and positive sales trends. There are clear shift to general merchandize for collateral and retail is in full swing as our pawn loan balance is now 60% gold and diamond jewelry, down from 70% as recently as three to four years ago. More significant swing is in retail sales where general merchandize now accounts to nearly three quarters of our sales versus 60% over the same timeframe. That confluence of change demands that we be better retailers in order to be better lenders, as general merchandize substantially electronics has a shorter shelf life than gold, and unlike gold it is always deflationary so sophisticated pricing and promotions must be in place every day.

The additional online selling channel is another key to our long term ability to move significant inventory of strong margins. In less than 18 months, we’ve grown our capacity rapidly, we expect that explosive growth to continue, as we add additional websites to highlight our products, introduce our own website in the coming months and gain further brand awareness that comes with time in our growing business. Hence the need to strong point of sale pricing, loan management, inventory management systems and more importantly the expertise to run them. Those are the investments we’ve made at EZCORP and we feel very confident that our team can deliver strong financial results overtime. Here, we believe our skill and talent will consistently win in the marketplace.

We do expect the impact of gold volume declines to moderate beginning in Q3 of this year and should we continue to drive strong gold retail sales of 30 plus percent year-over-year growth as we did in the quarter, we expect to see that merchandize return to our loan portfolio as future collateral.

At some point, gold will generate year-over-year improvements. With our improved ability to execute general merchandize in concert with that we’ll continue to be a leader in the U.S. pawn market. All of this, points to our ability to leverage the investments we’ve made here and turn U.S. pawn into a growth business again.

Turning to U.S. financial services our second largest business, roughly 20% of segment contribution, the regulatory environment is again well documented, somewhat less documented is consumers response to our products today.

The fact is like U.S. pawn the demand is growing. Our overall loan balance grew again in 2013 even with regulatory changes as to the number of customers that we served. You all know that over 90% of our customers use our products exactly as intended and their acceptance of our products has not waned, in fact it is strong as ever. So the choice is simple to us you are either in or you are out. Our customer wants this product and we want to provide it although this wrapping out we’re in. The second choice is how are we in. again we’ve chosen to give them options between our storefronts and online channels.

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