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Q3 2008 EZCORP Inc Earnings Conference Call - Final.

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Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good afternoon, ladies and gentlemen, and welcome to the EZCORP third quarter earnings call.

(OPERATOR INSTRUCTIONS)

I will now turn the call over to Mr. Joe Rotunda. Mr. Rotunda, you may begin.

JOE ROTUNDA, PRESIDENT, CEO, EZCORP: Thank you, Kim. Good afternoon, everyone. Welcome and thank you all for joining us today.

With me on the call is Dan Tonissen, our Chief Financial Officer.

I'm going to begin with a high-level overview of the quarter's performance, including some commentary on each of the business segments. I'll also bring you up-to-date on our store development program thus far and for the balance of the year.

Dan will follow and provide more detail with our financial statements.

We'll conclude with an update on the final quarter of the year, before providing an opportunity for questions.

Overall, quarter three was a great quarter for EZCORP. It's also the 24th consecutive quarter of year-on-year earnings improvement for the company.

We grew our net income to $10.8 million, an improvement of $4 million or 60% over the same period a year ago. On a diluted earnings per share basis, we grew to $0.25 from last year's $0.16. That $0.25 compares favorably to the guidance we provided in April, which was $0.21, and it's dead on with our July 8th update.

It's noteworthy that these results are after a $0.02 per share impact of two nonrecurring charges, the closing of 11 EZMONEY stores in Florida, and the settlement of a lawsuit with the Texas attorney general.

Before we look at the segment results, I think it's appropriate to make a comment about the macroeconomic environment. A new element was introduced during this quarter when the government began issuing economic stimulus checks.

These began in May and they continued through the middle of this month. These stimulus checks have been both good and bad for our U.S. business. The adverse impact has been a slightly lower than expected seasonal demand in new loans in both of our domestic businesses, and the upside has been a favorable impact on retail sales demand and loan redemptions in pawn, as well as improvements in bad debt in payday lending.

As I walk through each segment, I think you'll see that the moving parts complement one another in such a manner that our businesses are favorably impacted in some manner when external factors move in either direction.

You also note that, once again, our growth in earnings reflected a solid contribution from all business segments.

I'm going to begin with our largest segment, U.S. pawn. From a net revenue perspective, our domestic pawn operations grew by 25% over this quarter last year. This is a healthy acceleration of the 19% growth through the first two quarters of the year.

The major difference is much stronger sales and the resultant gross profit it produced. This sales gross profit, without scrap, increased 12% over last year as compared to 5% for the first half of the year.

Our scrap gross profit grew by $2.7 million and that's pretty close to the average that we had for the prior two quarters. And our pawn service charges continued as a primary driver, with 26% growth over last year.

I should point out that even with the increased liquidity that the stimulus checks provided our customers, we still had 10% same store loan growth in the quarter. However, that's 6 percentage points less than the first half of the year.

From an expense perspective, U.S. pawn had a relatively modest increase, most of it in labor and performance-related bonuses. This drove outstanding operating income dollars, which grew by 47% over last year, and the resultant operating income margin grew to 44% from 38% a year ago.

All in all, it was an excellent quarter that was driven by the U.S. pawn operations team.

Now, for a look at our second segment, EZMONEY payday loans. From a net revenue perspective, defined as fees after bad debt, we grew by 33% over the same quarter last year.

Now, let me frame this against what happened back then. In this quarter last year, we relaxed underwriting coming out of the tax season. Our intent was to maximize our payday loan volume during that peak period of natural demand.

The result was extraordinary loan growth with fees up more than 50%. However, bad debt grew even faster. The net revenue result was growth of 40% during this quarter last year.

Now, back to this year. We grew those net revenues by 33% this year on top of that 40% last year, but with...

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