Good morning, everyone. Thank you for attending our conference. I'm Brian McNamara, one of Canaccord's analysts in the consumer space, and we're delighted to have EZCORP here and to host, CFO Tim Jugmans. So Tim, maybe you could start us off quickly with a quick overview of your business and kind of key takeaways for following your, recent fiscal Q3 earnings report.
Thanks, and thanks for having us. Really pleasure to be here, and it's a great time to be looking at EZCORP's stock. The business is a pawnbroker operating in the US and in Latin America, and we basically do pawn loans and sell secondhand goods. At the moment, you know, it's with the economic backdrop we have at the moment, it's a very strong demand for the products both on the sales side and on the loan side. And we're also seeing that this management team that came together about three and a half years ago really making good strides in proving up a new business model, which is growing both top line and bottom line growth.
We saw that in the recent quarter. We saw pawn loans growing at 15%, which is a leading indicator of the business. The U.S. same store PLO growth was 10%. And more pleasing for the quarter, what we saw in Latin America was over 20% PLO growth in Latin America. What we've seen, you know, it's a small part of the business, about 20%, but the work that we've put in has really turned around, and we're really seeing it this quarter, so really pleasing results.
Got it. Can you talk about some of the myths about pawn shops, whether it be, you know, you guys sell stolen goods, ripping off customers? Like, why does the industry get a bad rap, and isn't regulation more of a friend than a foe in a lot of these states that you're operating in?
For sure. There definitely those myths exist. In the one-on-ones, I get this question all the time about stolen goods. But in reality, these all come from misconceptions which are driven through TVs and movies and things like that. In reality, you've got, in every jurisdiction in the U.S., each state has its own regulations, which means that you need to provide your I.D. to get a loan or to sell a product to us. And we record that I.D., and as well as that, we record the description of the transaction as well. So if you bring in a 14-karat gold necklace, we will record that as a 14 gold necklace, and it will be sent to the police with your I.D. every single day, and that's a searchable database the police have.
So we actually work closely with the police in ensuring that stolen goods do not go through the system. And so that myth, complete myth, and it's probably the worst place you can go for a stolen good. The comment about ripping off customers is also quite a lot of a myth. You know, regulation means that you can't charge... There's only certain interest rates you can charge, and there's a certain term you can, the length of the term is set by the state, and so that doesn't change. And on a valuation of the good, if we're not providing good valuation, there is a lot of competition out there. There are over 10,000 stores in the U.S. where a customer could go.
And what we're trying to do is provide a long, you know, a long-term relationship with the customer. So if they do have a short-term need for cash, they'll always come back to us. So ripping off a customer makes no sense when you are trying to build this long-term relationship. Now, that's not to say there are, like any industry, there are a couple of players out there that are not quite doing the right thing, but from the vast majority of pawnbrokers out there, they're all trying to do the right thing, provide long-term place for customers to come.
Definitely a great industry, and I really encourage you to go out to visit pawn stores, especially ours, and really see the big difference between what you might see walking down New York, a very small, dark pawn store compared to ours, which are very open, lots of, lots of space. I take my teenage girls there. They love going. It's very, you know, very open and, and very customer-friendly place.
So how does a pawn loan work, and what happens if the customer can't make the payments? Like, why is pricing the product so important, and what are the kind of guardrails you put up for your pawnbrokers to avoid, like, costly mistakes?
Let's just take that one at a time-
Okay
I should say. So typically in the US, pawn loans are under $200. But say we take a gold necklace, just 'cause I used that example before, and say that retails at $800. So it's a larger than normal loan. What we would do is we value that, we would provide a loan at about 50% of that, so we'd provide a loan of about $400. What we're trying to do there is make loans that are not large enough where the customer has will just not come back, but large enough that we are satisfying their need for cash. And so generally, what you'd see is that the majority of customers extend the loan or redeem that loan.
But if they don't, that loan drops into inventory, generally, the terms are 30-90 days. And then we, then we try and sell that good, as quickly as possible. Why pricing is so important? If you, if you're trying to loan the item, you are trying to give a loan on an item, you have to make sure you're satisfying the need for cash for that customer, which means that you can't continually lowball customers 'cause customers are gonna go somewhere else. But on the same side, if you lend too much, you're really saying to the customer, "Well, don't worry about coming back and paying because you've got the max value already." And so it's that in-between that you're trying to do, and that's why we spend a lot of time and effort on pricing, and we continue to get better across all our geographies.
The other, last question was on the guardrails. So, you do have, on larger loans, you do have, you know, the store managers can't sign off on a $10,000 loan. That will be escalated to more senior people to ensure that this loan is good. But overall, you've got to remember, these are very small dollar loans, and so we take a portfolio approach. We're not gonna get 100% strike rate through it, but overall, because we're using a system and we can see those results, we see very good results over the portfolio.
Your pawn loan balances have some material seasonality. How does a typical tax refund season impact loan balances, and why have the last two seasons been so different in your view?
Yes. In the US, what we see is during February and March, there is pay down once the customer has a lump of cash from a tax refund. I think a large majority of consumer finance companies see the same thing occurring. What we've seen, if I look at the data over the last five years, and I say, "Okay, look at the average tax refund up to the end of March," that has grown by about 5% or 6% in five years. Now, we look at the cost of living over those five years, and that's considerably larger growth on how much the cost has gone up.
And so in the last two, especially in the last two years, what we see is that tax refund as a percentage of cost of lifestyle is much less. When the consumers come during that time, they can't apply as much of the tax refund to paying down loans. It's more like we need actually that money to fund our lifestyle. Now, that's our current view of what's been happening. There's different press out there pushing at different things, but that's our current view of where things are for that one.
So you reported in your recent earnings that your EZ+ Rewards program, I think you're now over 5 million members in less than three years there, which is pretty tremendous given your store count. Could you give a brief overview of the program and your focus on now on improving member engagement?
Definitely. This program has been better than we envisioned. In the last 12 months, that number has actually doubled. So we went from 2.5 last, this time last year, to 5 million now, across all our geographies. The program is based on if you do a transaction with us, you have the ability to earn some points. In the last quarter, we saw that 76% of customers transacting with us in the quarter were EZ+ Rewards members. So at the beginning, all we were concentrating on was: how do we grow this base of EZ+ Rewards customers getting to the 5 million? Now, that we've got to a really good participation, what we want to do is increase engagement.
So how do I get a customer that was only coming to visit once a year to come three or four times a year? So we've made some recent changes to the program. We've made it a little bit easier to redeem the points, so we've lowered the minimum threshold that you need to get to before you can redeem some points. We've also changed the program so that the points now expire after nine months, which means that customers are now can't just keep holding their points for a long period of time and are forced to come in and use them. This gives us the ability to continue to reach out to customers who have points expiring and also telling people when they've reached the threshold. And so that kind of engagement, through, you know, text messages, emails, in-store, is driving other conversations that didn't occur before.
So the current management team has been in place for roughly four years now. Your first objective was kind of turning around the US business. You've made strides there. Now you're focused on making similar progress in LatAm. Can you provide detail on the improvements you've made in the US, and whether or not that playbook can apply to LatAm, or if there's differences in the markets?
For sure. We've been, you know, looking at pawn across all geographies around the world, for a while. And what you see in the center of well-run stores is good people. And so the biggest change that we made, coming in almost four years ago, was really about making sure our people were at the center. Looking after customers, and driving the bottom line, which drove the bottom line growth. It's very, very simple playbook. Obviously, it's all about the execution. So we implemented better incentives, more aligned to what we wanted the business to achieve. We changed the business model, so it would focus both on lending better, but also selling better. Historically, EZCORP wasn't selling as quickly as it needed to, which caused issues.
We also put more money into investment in our POS system, especially on the pricing, and I think we discussed the pricing already. So those delivered very well in the last couple of years for the US, and we're copying the same thing in Latin America right now. And what we saw in the last quarter was this tremendous PLO growth that we hadn't seen in a long time out of Latin America because all these things are now starting to line up. Now, we see... If we go to any single store today across the US and Latin America, is there more improvement? Yes. Is there more improvement available in Latin America than the US? Yes. There are some differences in Latin America compared to the US. Some of that is jewelry.
So the percentage of jewelry in the US is over 60%, and it's just, it's about 35% in Latin America. Jewelry obviously is a high-dollar item and generally stays in portfolio a little bit longer. There is some more competition in Latin America on the jewelry side. There's some nonprofit organizations throughout Mexico, which specialize in lending on jewelry. Now, those companies generally lend a little bit less than we would at a slightly lower interest rate, but they are embedded in communities for a very long time. So our concentration, especially in the last 12 months, is really proving out to neighborhoods that we are a leader in jewelry lending and showing that we do lend more.
And that to be able to satisfy somebody's need for cash, which is the most important thing for that customer, we can do better than the competitors.
LatAm represents nearly 60% of your stores and roughly 20% of your EBITDA. How quickly can you improve margins there, and are there any structural limitations?
So some of that, improving that business is some of this jewelry that we just talked about there. Really improving the way that the neighborhood sees it, and just executing better at the store level. We do see that the average loan size is half that in Latin America compared to the U.S. So say it's about $180 in the U.S. and $90 in Latin America. A lot of that is driven because on the general merchandise side, there's just you just have cheaper goods that people are coming in.
So, you know, in the U.S., you know, we're lending on iPhones and that kind of caliber of phone, and in Latin America, you're lending on, less well-known brands, because that's what the consumer has. And so there's always gonna be that difference. But that doesn't, that's what drives the average, average size of the stores to be a lot smaller in profitability. But that doesn't mean that we. But we still see major growth in Latin America, even though they are smaller stores. The ability to build more stores, acquire more stores, is much greater in Latin America than it is in the U.S.
We've walked several of your stores in Texas, and one thing that struck me was the tenure of your store managers. I think it's 12 years, which is absurd in retail. Why do they stay so long?
This industry does deliver a lot of tenure for people who fall in love with this business. Our COO has been in this industry for over 30 years, and with EZCORP, you know, since it was 16 stores. And so you have that working through, you know, every operating position to get to COO. Now, that's that story I could have told about my grandfather. I don't think that that kind of story exists in many places today. But what you see is, it is a very neighborhood community business. And so store managers become known, and you have somebody come in, then their uncle comes in, their cousin comes in, and they get to know people around the neighborhood. They also see it as, you know, helping people at difficult times.
You know, if you need $100 to fill your car with gas to get to work, you know, you're feeling very vulnerable at that time. And to be able to help people at that time, you know, people get a lot of enjoyment out of that. Also the ability to earn incentives. You know, you sell something, you get a, you make a loan on something, and you get paid extra. And they're, you know, at a very entry-level job, you're able to earn these incentives in our stores. The other thing is, you know, that you have the ability to grow through the organization. We talked about the COO going from pawnbroker all the way through the organization. We've also recently introduced various tenure payments.
So similar to an LTI for senior management, we've got cash, long-term cash incentives for people that stay in the, in the business longer at the store manager level. We also, in this quarter, introduced other awards across the organization for tenure. So if you're here for one year, five years, et cetera, you're gonna get some EZ reward points, so you can go spend some money in our stores. And these... And we really work very hard on increasing tenure. What we see is a tenured team in a store produces better results. I think it's pretty obvious when I say it out loud.
Right.
When you make it a center of what you do, you can achieve these kind of results.
Got it. So last month, the company paid about $34 million in cash, issued about 77,000 shares in relation to its convertible debt that matured in July. You have roughly $103 million in 2025 converts due next year. What options are you guys considering in terms of retiring or refinancing that debt?
Yes. So we have over, you know, as we said, $200 million in the bank. So we have the cash to be able to pay those converts out. They convert at $15.90. Obviously, out of the money at the moment. But as we have produced better and better results, what we are seeing is more financiers coming and approaching us with various options. As we have no pressure, because we have the cash, we will continue to evaluate those options, whether or not it's using cash, you know, loans from a bank, or equity, equity/debt, type, types of finance. We're looking at all of those. And we'll, as time ticks on, we will always put those up to the board and discuss them and see which one is best for us at the time.
So this stock has been listed on the Nasdaq for 30-odd years. I joke sometimes it's a very well-kept secret. I guess, what does the market underappreciate about your business, and kinda what are the mileposts in terms of achieving that recognition?
So I think that the stock used to have a lot of people investing in it. You know, their stock was over $30 at one stage. Obviously, a slightly different business at that stage. But what the market saw was that this company invested in a whole lot of things outside of pawn, and I think lost its way a little bit. So in the last since this management team came together, we really focused back just on pawnbroking, and what we're seeing is that we are starting to deliver those results. So every time I talk to different investors, especially investors that only come talk to me once a year, what they say is, like, "Tim, this, this story's incredible now."
Like, "You're saying what you're doing, you're delivering the results." This stock price has gone from just over $5 to over $11 now in the last 3.5 years. It's just about ensuring that we continue to improve those results, and people will start paying attention. I think you got on board quite early and have been looking at this stock for quite a while and seeing it. We agree that I think investors will slowly see the price, how cheap this stock is, and there's definitely a price differential, especially compared to our major competitor, and this is a stock that needs some more love.
Just a last question for all of our consumer companies, particularly applicable to you guys, obviously. How healthy do you think the current consumer is relative to this time last year, and how do you see that health evolving as we enter 2025 and in the back half of this year?
Yeah, we've been talking about the consumer hurting for quite a while. Consumer, the demand for loans has definitely increased over the last year. You can see that in our results, as well as demand for second-hand goods. You know, the sales in our stores remain very strong. And the only way that can occur is for consumers to come down. Somebody that was shopping at Best Buy, Walmart, is now saying, "Well, maybe I need second-hand. I need a better deal." It's also environmentally friendly consumers are increasing, so they're saying, "Well, I want something better for the environment." So, you know, I think I don't see big changes occurring.