EZCORP Reports Fourth Quarter Fiscal Year 2019 Results

EZCORP, Inc. (NASDAQ: EZPW) today announced results for its fourth quarter and fiscal year ended September 30, 2019 and the authorization of a share repurchase program.

All amounts in this release are from EZCORP continuing operations and in conformity with U.S. generally accepted accounting principles ("GAAP") unless otherwise noted. Comparisons shown in this release are to the same period in the prior year unless otherwise noted.

HIGHLIGHTS

• In December 2019, the Board of Directors authorized a stock repurchase program for up to $60 million of our Class A Non-Voting common shares over the next three years.
• Total revenues for the quarter were up 4% to $214.3 million. The improvement was driven by continued growth in key pawn operating metrics including pawn loans outstanding (PLO), pawn service charges (PSC) and merchandise sales.
• For the quarter, income from continuing operations before tax was $0.4 million and diluted loss per share was $0.01, representing a $0.01 per share improvement over the prior-year quarter. These results include costs related to certain growth investments, acquisition due diligence and other discrete items. Excluding those items and adjusting for constant currency1, adjusted1 income from continuing operations before tax was $13.0 million and adjusted diluted earnings per share was $0.19 versus $18.5 million and $0.22, respectively, in the year-ago quarter. Full year diluted earnings per share were $0.05 compared to $0.66 in the prior year; adjusted diluted earnings per share improved to $0.90 from $0.86 in the prior year. As previously discussed, PSC and related profits were negatively impacted by point-of-sale system performance issues in the third quarter and a 24-hour system outage in July.
• Enhanced inventory management efforts yielded a significant reduction in aged general merchandise, from 8% of total general merchandise at September 30, 2018 to 6% at September 30, 2019.
• Net cash from operating activities nearly doubled to $38.5 million in the quarter from $19.7 million in the prior-year quarter. For the year, net cash from operating activities increased 16% to $103.5 million from $89.0 million in fiscal 2018.
• Cash and cash equivalents ended the current quarter at $157.6 million ($162.4 million including restricted cash). During the quarter, the company collected $12.2 million under the Alpha Credit / Grupo Finmart notes.

CEO COMMENTARY AND OUTLOOK

Chief Executive Officer Stuart Grimshaw commented, "We saw a continued expansion of our store count, grew total revenues, grew PLO to a record fiscal year-end balance of $199 million ($201 million on a constant currency basis) and increased free cash flow in both the fourth quarter and the full fiscal year. We achieved these results despite fourth quarter headwinds, including newly introduced social welfare programs in Mexico reducing customers’ current need for pawn loans, technology system issues resolved by mid-July, and other investments and non-recurring costs. There have been several key developments since the June quarter.

“First, the Board of Directors approved a three-year share repurchase authorization for up to $60 million that enables us to return capital to shareholders and buy back publicly traded Class A shares at what we believe to be attractive valuations. Second, we completed the rollout of our new point-of-sale system to all stores in the U.S. and Mexico in October, which will further optimize lending decisions, with related improvements over time in yields, pawn service charges, merchandise sales gross profits and margins. Third, we recently implemented several initiatives, including re-aligning field management to increase senior management’s interaction at store level, consolidation of certain administrative functions and other expense control measures to increasingly leverage our scale, driving an increase in the return on earning assets through improved productivity and operating efficiencies. Some of these initiatives will involve incremental expense in the short-term to drive greater sustainable efficiencies. Fourth, our differentiated digital engagement strategy designed to broaden customer acquisition and service levels, enhance retention and drive revenue enhancements remains on track for initial introduction during the first quarter of fiscal 2020 under the name Lana. The introduction will be in Texas and Florida, our two largest markets in the U.S., with incremental expansion planned throughout fiscal 2020. Finally, strong free cash flow and the strength of our balance sheet, with $162 million cash and no substantial debt due until 2024, provides us with the financial flexibility to continue to fund new store openings, capitalize on M&A opportunities as they arise, and invest in the business to drive sustainable growth. As part of that investment, we plan to accelerate new store openings in Latin America in fiscal 2020 to approximately 40 new stores, up from 22 new stores in fiscal 2019. While this will create some short-term earnings drag, new stores in Latin America represent one of our best opportunities for long-term returns on invested capital.”

SHARE REPURCHASE PROGRAM

The Board of Directors has authorized a stock repurchase program that will allow the Company to repurchase up to $60 million of our Class A Non-Voting common shares over the next three years. This decision reflects the strength of our balance sheet, the Board’s confidence in our continued ability to generate significant cash flows and our commitment to driving long-term shareholder value through efficient capital deployment. Execution of the program will be responsive to fluctuating market conditions and valuations, liquidity needs and the expected return on investment compared to other opportunities.

Under the stock repurchase program, the Company may purchase Class A Non-voting common stock from time to time at management’s discretion in accordance with applicable securities laws, including through open market transactions, block or privately negotiated transactions, or any combination thereof. In addition, the Company may purchase shares pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934.

The amount and timing of purchases will be dependent on a variety of factors, including stock price, trading volume, general market conditions, legal and regulatory requirements, general business conditions, the level of cash flows, and corporate considerations determined by management and the Board, such as liquidity and capital needs and the availability of attractive alternative investment opportunities. The Board of Directors has reserved the right to modify, suspend or terminate the program at any time.

CONSOLIDATED RESULTS

• Total revenues grew 4% on a GAAP basis and 5% on a constant currency basis, contributing to the increase in cash generation. PSC was up 1% to $83.1 million reflecting a 2% increase in the average monthly PLO balance for the fourth quarter combined with a slight improvement in yields. Consolidated merchandise sales gross profit declined 10% to $34.9 million, with a 2% increase in merchandise sales more than offset by higher cost of goods sold. Adjusted merchandise sales gross profit declined 9% to $35.3 million and sales margins decreased 411 basis points to 33%, reflecting the effective liquidation of aged general merchandise. The net impact of these factors was a 3% reduction in net revenues to $120.9 million on a GAAP basis and a 2% reduction to $121.7 million on an adjusted basis. Although the aged inventory liquidation impacted margins, it contributed to the overall increase in cash generation. For the full year, free cash flow1 increased 32% to $77.9 million. Cash receipts on the AlphaCredit notes receivable provided an additional $34.1 million for the year.
• Consolidated operations expenses rose 3% in the quarter to $88.8 million. Total pawn store count increased 3%, consisting of a net 31 stores acquired or opened since the end of the prior-year quarter (27 new and acquired stores in Latin America and seven acquired stores in the U.S., net of three store closures in the U.S.).
• Administrative expense increased $2.9 million to $16.9 million in the quarter principally as a result of a $2.7 million strategic investment in the development of the Lana (previously "Evergreen") customer-centric digital platform and $1.7 million in acquisition due diligence costs.
• Net interest expense decreased $0.6 million, driven by the June 2019 repayment of our $195.0 million cash convertible senior notes, offset by lower interest income on the declining balance of notes receivable from AlphaCredit as principal collections are received monthly. The first $6 million installment of the $14 million deferred compensation fee on the notes receivable was received in September 2019 with the remaining $8 million due in fiscal 2020. Interest income in the period does not reflect the majority of that cash receipt, as it has been recognized under GAAP over the life of the loans.

SEGMENT RESULTS

U.S. Pawn

• Same store PSC rose slightly, with ending PLO per store of $307,000, up 1% on a year-over-year basis. The growth reflected disciplined lending practices and a focus on meeting customers' need for cash. The ending per store average is the highest since 2011.
• Merchandise margins remained within our target range but declined 359 basis points year-over-year to 35%, largely reflecting the effective liquidation of aged general merchandise inventory. Scrap sales increased by 32% to $17.5 million on a step up in volumes and higher gold prices, though lower diamond prices pressured related margins.
• U.S. Pawn's net revenues decreased 2% to $93.8 million, with a $1.9 million increase in expenses and depreciation. Same store operations expense increased 2%, primarily due to higher labor and benefit costs, including a $1.3 million increase in workers’ compensation costs. The current period included a single large claim and the prior year period reflected a $0.8 million credit. Although the segment’s cash generation increased significantly, the segment contribution decreased 13% to $22.2 million.

Latin America Pawn

• Net revenues increased slightly to $26.6 million ($27.1 million on a constant currency basis).
• PSC rose 1% to $19.4 million ($19.7 million on a constant currency basis). Ending PLO decreased 4% to $41.6 million (down 1% to $43.1 million on a constant currency basis), with ending PLO per store of $87,000, down 8%. As previously discussed, recent social programs in Mexico involving transfers to low-income individuals have impacted demand for pawn loans.
• Merchandise sales increased 9%, to $26.8 million (9% to $27.4 million constant currency), while merchandise margins declined to 25% reflecting an ongoing focus on optimizing inventory and sales gross profits along with reducing aged inventory and increasing free cash flow.
• Operations expense totaled $19.5 million compared to $16.7 million in the prior year period reflecting higher store licensing requirements, rent costs, labor-related expenses, and robbery and related security costs. In addition, year-over-year trends were impacted by stores acquired or opened since the prior-year quarter and stores expanded or relocated, for which the revenue improvement is expected to lag the incremental costs.
• We added 22 de novo stores and acquired five stores in the year. Ten of the new stores were opened in the fourth quarter. New stores drive attractive long-term profit enhancement and represent one of our highest returns on invested capital but create a short-term drag on earnings as they ramp. Acquired stores are generally less efficient than our existing stores until fully integrated, but typically are accretive in their first full quarter of ownership.
• Segment contribution totaled $5.8 million compared to $9.1 million in the prior-year quarter. Adjusted segment contribution totaled $6.5 million versus $9.1 million as a result of new and acquired stores, recently expanded and relocated stores, and the operations expense increase previously described combined with administrative costs to support the growth.

FORM 10-K

EZCORP’s Annual Report on Form 10-K for fiscal 2019 has been filed with the Securities and Exchange Commission. The report is available in the Investor Relations section of the company’s website at http://investors.ezcorp.com. EZCORP shareholders may obtain a paper copy of the report, free of charge, by sending a request to the investor relations contact below.

CONFERENCE CALL

EZCORP will host a conference call on Thursday, December 5, 2019, at 4:00pm Central Time to discuss fourth quarter and fiscal year-end results. Analysts and institutional investors may participate on the conference call by dialing (877) 201-0168, Conference ID: 3248107, or internationally by dialing (647) 788-4901. The conference call will be webcast simultaneously to the public through this link: http://investors.ezcorp.com/. A replay of the conference call will be available online at http://investors.ezcorp.com/ shortly after the end of the call.

ABOUT EZCORP

Formed in 1989, EZCORP has grown into a leading provider of pawn loans in the United States and Latin America. It also sells merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers. We are dedicated to satisfying the short-term cash needs of consumers who are both cash and credit constrained, focusing on an industry-leading customer experience. EZCORP is traded on NASDAQ under the symbol EZPW and is a member of the Russell 2000 Index, S&P SmallCap 600 Index, S&P 1000 Index and Nasdaq Composite Index.

FORWARD LOOKING STATEMENTS

This announcement contains certain forward-looking statements regarding the company’s strategy, initiatives and expected performance. These statements are based on the company’s current expectations as to the outcome and timing of future events. All statements, other than statements of historical facts, including all statements regarding the company's strategy, initiatives and future performance, that address activities or results that the company plans, expects, believes, projects, estimates or anticipates, will, should or may occur in the future, including future financial or operating results, are forward-looking statements. 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 operating risks, liquidity risks, legislative or regulatory developments, market factors or current or future litigation. 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. The company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

1”Adjusted” basis, which is a non-GAAP measure, excludes certain items. “Constant currency” basis, which is a non-GAAP measure, excludes the impact of foreign currency exchange rate fluctuations. “Free cash flow,” which is a non-GAAP measure, includes certain adjustments to cash flow from operating activities.

For additional information about these calculations, as well as a reconciliation to the most comparable GAAP financial measures, see “Non-GAAP Financial Information” at the end of this release.

Non-GAAP Financial Information (Unaudited)

In addition to the financial information prepared in conformity with accounting principles generally accepted in the United States ("GAAP"), we provide certain other non-GAAP financial information on a constant currency ("constant currency") and adjusted basis. We use constant currency results to evaluate our Latin America Pawn operations, which are denominated primarily in Mexican pesos and other Latin American currencies. We believe that presentation of constant currency and adjusted results is meaningful and useful in understanding the activities and business metrics of our operations and reflect an additional way of viewing aspects of our business that, when viewed with GAAP results, provide a more complete understanding of factors and trends affecting our business. We provide non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. We use this non-GAAP financial information primarily to evaluate and compare operating results across accounting periods.

Additionally, we provide free cash flow which represents net cash provided by operating activities less net funding of loan originations and maintenance capital expenditures which is commonly used by investors as an additional measure of cash generated by business operations that may be used to repay scheduled debt maturities and debt service or, following payment of such debt obligations and other non-discretionary items, may be available to invest in future growth through new business development activities or acquisitions, among other things. These metrics can also be used to evaluate our ability to generate cash flow from business operations and the impact that this cash flow has on our liquidity. However, free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for cash flow from operating activities or other income statement data prepared in accordance with GAAP.

Readers should consider the information in addition to, but not instead of or superior to, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.

Constant currency results reported herein are calculated by translating consolidated balance sheet and consolidated statement of operations items denominated in local currency to U.S. dollars using the exchange rate from the prior-year comparable period, as opposed to the current period, in order to exclude the effects of foreign currency rate fluctuations. We used the end-of-period rate for balance sheet items and the average closing daily exchange rate on a monthly basis during the appropriate period for statement of operations items. The end-of-period and approximate average exchange rates for each applicable currency as compared to U.S. dollars as of and for the three and twelve months ended September 30, 2019 and 2018 were as follows:

Our statement of operations constant currency results reflect the monthly exchange rate fluctuations and so are not directly calculable from the above rates. Constant currency results, where presented, also exclude the foreign currency gain or loss.

Miscellaneous Non-GAAP Financial Measures