Thank you, everyone, for attending our 45th annual Growth Conference. I'm Brian McNamara, one of Canaccord analysts in the consumer space, and we are delighted to host EZCORP and CFO Timothy Jugmans. Tim, you guys recently reported another record quarter. Can you give us a high-level overview of the company, what's driving the strength, and maybe comment on the sustainability of the recent growth?
Thanks. Thanks very much for attending. We've had a great conference so far. Numerous meetings, doubling and tripling our meetings, so the one-on-ones have been great so far. EZCORP is a pawn business that operates in the U.S. and Latin America, and it is the second largest in the region besides FirstCash. We've had outstanding growth in the last couple of years, really off the back of a change in management team, a change in focus, just focusing on the pawn business, which is an extremely great business to be involved with. Some of those strengths are really coming from growing average loan sizes. Obviously, gold increasing and gold being a large portion of what we do continues to be a great tailwind.
We've increased significantly our digital engagement, both the ability to pay online, to view our inventory online, the introduction of an EZ Rewards program, increasing the customer engagement, and encouraging customers to come to us more often than the competitors. It's nice to work in an industry which is the second oldest industry in the world, but nothing much has really happened in the industry for a very long time. Obviously, we've gone from pawn tickets that were handwritten to now printed out, but there's not much else that's happened. This management team is able to take things that are working really well, like a rewards program that's been around forever, and we know that delivers value and apply it to an industry which doesn't have it. Those are the kind of upsides that we will continue to see into the future and very excited about.
Your core customer base is kind of lower-income, unbanked, or underbanked customers. Have you seen any noticeable changes in your customer mix, including kind of middle to higher income customers trading down? How might that influence your merchandise or lending trends?
That's a good question. That description of the customer base is really just focused on the lending side of the business. If we look at the real customer base that's on the retail side and the lending side, it's obviously much, much broader than that. On the lending side, yes, the customer base is definitely a customer base that has a need for cash. They want to come in. They want to bring an item of value. They're going to get in the U.S. about $200 in loan, and they want that cash immediately to be able to use, fill their car with gas, do a repair, pay a medical bill, anything that is really immediate and they need to take care of.
What we've seen in this current cycle is that other consumer lenders are going up the spectrum from a credit scoring perspective and not really coming down, and that's leaving a little bit of an extra gap for us. There is an extra layer of consumer that in other times with low interest rates and more aggressive other consumer lending, we may not be able to get that. Because they don't have that ability, we do have that extra consumers coming in, which has been a great growth perspective. From a general perspective, we have a customer base that is always in need of cash. It doesn't matter what the economic cycle is. We have that in our luxury segment as well. It doesn't matter the income spectrum in the U.S.
You always have people that are spending more money than they earn and always need an ability to get some extra cash along the way to help them out. This is a very easy, very fast way to be able to do that.
How does the company think about the strategic trade-off between lending and merchandise sales? Does that shift seasonally or by market?
Yeah, so when people start talking about sales margins, we actually always go back to lending because how much our sales margins are all dependent on how much we lend on the product in the first place. They are both linked together. Our view is to look at the product lifecycle and try to maximize the pawn service charge that comes off on the loan, as well as the margin, and together to try and build the biggest gross profit. That's the net gross profit or net revenue, whichever word you want to use, is what we really focus on. Certain categories we know are going to be better if we do higher loan-to-values on them because they're more likely to be picked up. Jewelry items, there is much more connection.
If somebody comes in with a gold necklace to be able to pick that up than if you're going to bring in your laptop. That human connection is part of what we do. We also have a system in place to look at prices of what we're selling everything for in all our stores. We also use third-party data on top of that to really understand how much we should be lending. We also, on top of that, layer on consumer behavior. If we've seen you in our stores before, we will use some of those behavioral metrics to understand what kind of range we should be lending to you. These are all at the margin, but you know, if you're lending $205 versus $195, it seems it's only $5. When you're repeating that over so many transactions, it adds up significantly.
With gold jewelry representing, you know, 2/3 of your collateral in the U.S., obviously average loan size, to your point, has increased significantly as gold prices have moved higher. How do you manage the risk if gold prices move meaningfully lower from here?
Yeah, I don't think any investment bank is looking to say that it's going to meaningfully lower from here. It's probably more, I think the last time I was checking, it was probably, there's a big range between probably $3,000 - $4,000, which is a ridiculously large range. I'm telling you, no one really knows where it's going to go. I think that there's probably more upside than downside. Even if it goes the other way, say it drops to $3,000 in the next three months, it'll be obviously an exaggerated look. Our loans are 30 - 90 days. If we saw any meaningful change to the negative, we would start lending significantly less very quickly. We would also look at inventory. From an inventory scrapping perspective, we really look at items that are not going to sell in our store.
Broken items or heavily, you know, if Brian in gold necklace was sitting there, we'd probably scrap that because Brian's probably not going to come in and buy it. Those kind of things we relatively scrap pretty quickly. The other stuff we scrap is like 270 days old. If gold prices started dropping dramatically quickly, we'd probably try and scrap, we'd probably look at like six months rather than 270. We kind of have the ability to exit inventory very quickly on a gold side. It's very different to a mobile phone, right? If I want to send a mobile phone tomorrow, I probably have to discount it so significantly to turn it really quickly. Gold, I have these other levers that you can pull. There's obviously some small part for a couple of quarters that you'll have some influence.
From an overall perspective, we don't see any major issue with gold price coming down. The thing to think about is not that, you know, there's a need for cash. Somebody who wants $200, if their necklace, they were getting $200 before, and now we can only give them $180, they're going to find another item to bring in to get to the $200 because they need the $200. That doesn't change the need. It just changes how they get to fulfill that need.
The current management team's been in place roughly five years now. You first turned around the U.S. business, and now you're focused on making kind of similar progress in Latin America. Can you provide kind of detail on the improvements you've made in the U.S. and whether you can use the same playbook in Latin America?
Sure. Why don't you talk about the share price increasing from $5 - $15 in that period as well? Like, where's that question?
It's coming.
Come on, give us some credit. That's right, you know, obviously the vast majority of profit is coming from the U.S. business. In a turnaround situation, you focus on where the dollars are. We spent a number of years just very focused on that, on the U.S. and really coming through. You can see through the double-digit growth that we're having in that business, a big turnaround, and it's traveling really well. These last couple of quarters, you can see the same kind of influence coming through in the Latin American numbers. It's probably still 18 months to two years behind the U.S. We're very excited about where we are pushing this Latin American business. The execution at store level is significantly improved. The team that we have there, we've made some really big improvements, and that team is making big, big changes to the way we operate.
Increasing jewelry in the stores that we operate. Jewelry now represents 40% of the loan balance. It's up quite a lot over the last couple of years. All those kind of things are really working well together. Our online presence is getting better in Latin America. We still haven't rolled out being able to pay online in Guatemala. That's another around 100 stores. We've done it in Mexico. We haven't done it in other places. There's still a lot more upside to go.
LatAm represents roughly 60% of your stores and 30% of your gross profit. How quickly can margins improve there, and are there any structural limitations?
Yeah, the margins continue to improve. We've seen more money, obviously building sale revenue is obviously helping, and a lot of that money is flowing to the bottom line with not as much increase to expenses. There are some structural differences I touched on a little bit. Gold is a big difference. 67% of loans in the U.S. are jewelry and only 40% in Latin America. That really changes the loan size, significant average loan size significantly. You've got an average loan size in the last quarter in the U.S. at $207, and in Latin America, it's just over $80. That's a significant difference. You also see on the general merchandise side in most of the stores in the U.S., like take phones, for example, it'll be all the name brands, iPhone, Samsung, those kind of things.
If you go to Latin America, it's going to be more of the Chinese brands kind of thing in the store. Obviously those are less value and lower value. Those are the kind of things that do make the structure a little bit different. Obviously the cost of operating in Latin America is far lower. We have a slightly smaller footprint in Latin America than we do in U.S. stores as well, lowering the cost. We do see that margin improvements. We don't see it matching the U.S., but we see improvements in both the U.S. and Latin America margins over time.
Despite the nice uptick in the shares, to your point, the stock still trades at a materially large discount to your larger publicly traded peers. What are you guys not getting enough credit for, and how do you close that gap?
I think it takes a little bit of, you know, I think the history of EZCORP, if any of us holders, you know, 10 years ago, I think there's been a lot of change when EZCORP was in other businesses outside of pawn. If you strip out all the other businesses, which I think, you know, FirstCash is a good example of that, until recently, the pawn business is an extremely good business. When you focus on it, it does extremely well. I think that bit, investors, I think, are slowly, over time, understanding that we are concentrating on that business and continuing to grow it, and we're not straying outside of that. I think that helps a lot. I think showing investors that we could get debt outside of the convert market recently, I think that's also helping. It is a lot of discussion.
I think it's just that confidence, and over time, there are definitely people that have obviously got into the stock at that $5 mark. The interest is significantly increasing. We have a great interest in the stock, and our iPhone Elevate is doing a tremendous job putting us in front of a whole lot of other people, new people that are driving much more interest in this stock than ever before.
Following the retirement of your 2024 convertible notes last year, and now the settlement of your 2025 May converts, your balance sheet now carries roughly $100 million in extra liquidity that you didn't have prior. How should investors think about your capital allocation priorities, specifically share repurchases?
Yep. We've had this question for many years in a row, and I'm going to say the same answer as we've always done. We're going to run a balanced approach to this business. We do see scale as a major thing to achieve. We've seen in larger competitors, scale allows you to produce significantly more cash flow, get better debt deals, and obviously significantly better EBITDA margins. There's a certain corporate cost to run the pawn stores, and you can spread that across a number of stores to get that EBITDA margin. We see that we need more scale, and that is going to come through both building new stores, which we're doing 30 to 40 a year for the last couple of years in Latin America. I think acquisitions are becoming more and more paramount for us to be able to achieve that scale.
With the liquidity on the balance sheet over $400 million, we're really looking to deploy that capital to grow the business. Not to say that we're not doing buybacks, but we see that for the long term, the purchase of stores is going to be much better for the long-term value of the company.
As a follow-up there, how do you see the M&A opportunities that are evolving over the next, call it, 12 to 18 months? Could capital deployed for M&A significantly increase over that time period?
Definitely going to try. We obviously have that much cash on the balance sheet to do something with. Obviously, there are no guarantees. Externally, you get a lot more interest when you show that you're doing acquisitions. Doing the acquisition we recently announced of just over 40 stores in Mexico brings people out and come towards you and say, "Okay, how about you buy our stores as well?" There is some of that. Prior to taking care of the $25 million converts, we always wanted to make sure we had the cash on the balance sheet to be able to take care of the converts if we needed to use cash. That's now freed up and we don't have any near-debt maturities, which allows us to really focus on that acquisition pipeline.
Give me a dire scenario for your business. What keeps you up at night?
Really, the only time that this business, from an external perspective, hasn't done well is when the government has just handed out money. COVID, obviously, was one of those periods where loans, the American consumer has excess cash, pay down the loans, buy everything in the store. Obviously, the loan balance is the leading driver of the business. That's really one. I don't think anyone's really predicting any mass handouts from any government at the moment. I think we're very, very good there. In consumer finance, you're always looking at regulation as a potential, it's outside your control. In the U.S., it's state-by-state regulation. It's been very stable in the states we operate for a very long time. The only real change has been in Illinois, where they really hampered down on consumer lending in Illinois to, I think, around 30% per annum rates for all consumer lending.
They had an exception for pawn. The only real change there was to stagger the interest rates above a loan of $500, where our average is $200, not much effect on our business at all. We've run staggered rates. The staggered rate system is also the one that's implemented in Texas law as well. What keeps me up at night is more stuff in our control, making sure that we continue to have a loan balance, quality loan balance, and we continue to turn the inventory and continue to keep aged general merchandise low. We continue to achieve that. The focus on the stores is that every single day. That's most of what we talk about.
The last two questions we're asking all consumer-facing companies at the conference. Number one, how healthy do you think the consumer is today compared to a year ago? How do you see consumer spending shaping up as we head into the back half of the year and into 2026?
Yeah, we would say that the demand for loans continues to increase. That would say the consumer base that we're dealing with is hurting more this year than last year. We do see that there's more negotiation when people are buying our goods at the counter. That would say that the consumer is hurting a little bit more. I think there's nothing, you know, do interest rates come down soon? Unemployment looks like it's potentially going to go up. Is there more hurt to come? It does look like that. Either way, we don't think there's going to be a massive change to the majority of our customers, especially on the loan side. Anytime soon, interest rates change is not going to really make much of a difference.
Tariffs have been obviously a recent investor focus, particularly in consumer, just given significant China sourcing in the primary market. While we haven't really seen these broad-based price increases on the shelf yet, they're likely coming. Overall, do you expect tariffs to be a net positive or a net negative for your business, at least as it relates to pricing shifts in the primary market?
I think it's probably a net positive if you see it initially. From a consumer perspective, the used market and new market will have an extra 10, whatever tariffs you want to say, at least 10% difference extra. Now used looks even cheaper. That's definitely an advantage on day one. As time goes on, the general merchandise becomes more expensive. When they bring it into loan, we're probably loaning a little bit more. Average loan size goes up. That's going to drive loan balance. It's going to drive pawn service charges as well. Those are going to be the positives. On the negatives, obviously, buildings, building stores, buying steel and jewelry cases, those kind of things, air conditioners, those kind of things for maintaining our stores are going to be more expensive. Obviously, the revenue drivers are going to far outweigh the negatives on the expenses.
Great. We'll leave it there. Thanks very much, Tim. Appreciate it.
Thank you very much for attending. Thank you, Brian.