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F4Q12 Earnings Call

November 6, 2012 4:30 PM ET


Mark Kuchenrither – EVP and CFO

Paul Rothamel – President and CEO


John Rowan – Sidoti & Company

John Hecht – Stephens Inc

Bill Carcache – Nomura

Bill Armstrong – CL King & Associates

Bob Ramsey – FBR Capital



Welcome to the EZCORP Fiscal Year 2012 Fourth Quarter Earnings Release Conference Call. My name is Adrian and I’ll be your operator for today’s call. (Operator Instructions) Please note this conference is being recorded. I will now turn the call over to Mark Kuchenrither. Mark, you may begin.

Mark Kuchenrither

Thank you, Adrian, and good afternoon, everyone. This call will address our fiscal fourth quarter and 2012 year-end results. We issued a press release earlier today with supporting documents that are available on the Investor Relations portion of our website at www.ezcorp.com. I’d like to remind everyone that this conference call will contain certain forward-looking statements, including statements about our expected financial and operating performance in future periods. These statements are based on our current expectations, actual results in future periods may differ material from current expectations, due to a number of risks, uncertainties and other factors, which are discussed in our press release and in our filings with the Securities and Exchange Commission.

On the call with me today is Paul Rothamel, our President and Chief Executive Officer. I will review our results for the quarter and fiscal year and will provide our guidance. Paul will then provide some commentary regarding our overall strategy and outlook before providing an opportunity for questions.

I want to set the agenda for this and future earnings calls. I will not spend much time reciting financial information that you can retrieve from the financial statement schedules attached to our earnings release. Rather, I will spend my time providing commentary and color around the factors that drive the results that are reflected in those schedules. In addition, we have provided supplemental information on our website to help you better understand our business.

I also want to take a few seconds to talk about guidance. We are rightfully proud of our record consolidated results over the past quarter and year, but we are disappointed in our ability over the past year to accurately forecast our operational results. That will change. As you will see in a minute, we are moving to both quarterly and annual guidance. And I will commit to you that I will provide you the most accurate guidance possible based on the circumstances as we see them. Please remember that ours is a dynamic and fluid business, circumstances change, sometimes daily, but we will always try to give you our best view of the future. And with that, I will review our segment performance.

We’ll start with U.S. and Canada, which includes our 919 stores in the U.S. offering pawn, buy/sell, and/or financial services, and our 68 cash advance and buy/sell stores in Canada. For the quarter, U.S. and Canada delivered a segment contribution of $55 million, a $9 million decrease compared with prior year’s quarter. The segment is facing two significant challenges that more than account for this decrease, the continued adverse impact of gold related transactions and the decline in consumer loan fees in Texas. The first significant challenge and the greater of the two is the impact that gold had on the U.S. business.

We obtain gold in two ways. First, we provide loans where jewelry is used by the consumer as collateral. In dollar terms, jewelry as a percentage of the total U.S. pawn loan balance has remained largely unchanged. In terms of grams, it has declined as gold values have risen. The jewelry redemption rate has, however, increased over time, reaching 84% at quarter end, resulting in less jewelry dropping out of the loan portfolio into inventory for disposition.

This happened even as we increased our loan and buy tables multiple times. Second, we purchased gold and jewelry directly from consumers. The volume of jewelry purchases in the quarter decreased 19% in total and 28% on a same-store basis. With less forfeited gold collateral and fewer purchases, jewelry and gold dispositions were also down.

As a reminder, we dispose of gold and jewelry in two ways. First, we sell gold and jewelry at retail to our customers. Jewelry sales in the U.S. decreased 17% in total and 24% same-store. Second, we scrap gold and jewelry. For the quarter, jewelry scrapping sales were down 10% from last year, while margin dollars from jewelry scrapping were down 31%. These declines were driven primarily by a 1,000 basis point decline in margin rate with the remainder attributable to reduced gram volumes. The effect of this cost was roughly $11 million in net revenue in the quarter compared to last year’s fourth quarter. I’ll refer you to our website for supplemental information regarding the historical impact by quarter that scrapping has had on our business.

Despite the gold challenges, other elements of our U.S. Pawn business showed continued strength, offsetting to a large extent the challenges in the gold and jewelry environment. Sales of general merchandise increased 18% in total and 7% on a same-store basis. This reflects our focused efforts with regards to category management. Pawn service charges increased 10% in total and 4% on a same-store basis, underpinned by a 9% growth in total pawn loan balances or 1% on a same-store basis. With the exception of jewelry sales and scrapping activities, our U.S. Pawn operations are strong and growing.

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