This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Half of the business is pawn

“The bricks-and-mortar business is a classic secured lending, commonly referred to as pawn loans. These loans average about $120 a piece, running over from 60 days to four months in length, secured by merchandise where customers come in 7 out of 10 times, redeem that merchandise and then put it back into the pawn cycle over many, many years.

On the 3 out of 10 times that those loans aren’t redeemed, we own the merchandise. We sell that merchandise. We make a gross profit. So, basically, we’re the only lender I know that has a positive recoveries-to-liquidations ratio, that’s why we underwrite every loan that we make as if we will loan the merchandise.”

Unsecured lending is other half

“At that time, we acquired a company called CashNetUSA, which was quite small, basically a breakeven business, and began offering unsecured loans over the Internet. The basis of that offering is a very complicated analytical model, high proprietary analytics that we think makes it a very defensible product longer term. Since that period of time, that company has gone from breakeven to, on a trailing 12-month basis, right at $200 million in EBITDA. High growth rate over the last four years as a CAGR operating in – or EBITDA, adjusted EBITDA rate of roughly 30%. On a level of, as I’ve said, roughly $1 billion, just under $1 billion in total revenue.”

Payday loans are only 30% of ecommerce business

“Whereas the single pay product was about 90% of revenue three or four years ago; today, it’s less than 30% of revenue from just the e-commerce business and comprises less than 24% or about 24% of the e-commerce assets which were roughly about $400 million in loans. So in addition to diversifying internationally, it’s diversified its product set, and I think it continues to give an industry leadership opportunity.”

The two businesses are very different, so we’re splitting them in a spinoff

“So the question becomes why did the board feel like it made sense to split these two businesses? Well, the key here is that you have a high-growth, Internet-based, leading market share business housed within what’s been a classic bricks-and-mortar pawn lending operation. One is a very routine cash cow performance with retail lending services.

In the past, historically, it grows at a slower rate. There’s awful a lot of cash but produces a nice level of growth versus a very innovative, high-growth product set on the e-commerce side, as I said, with impressive growth rates both on revenue and operating income over the last five years.

What we found is that an investor group which is now conflicted between the classic bricks-and-mortar environment with essentially an e-commerce opportunity. And the best solution, from our perspective, would be to allow the shareholders to decide which of those two businesses they want to hold.”

Haven’t seen any sign that this consumer is in better shape

“I don’t think this consumer is overall in better shape than it was in the past. I think the pay check-to-pay check activity continues to exist, access to capital continues to be limited. There aren’t competing products stepping into our space.

Serving this customer, whether it’s payroll taxes, entitlement reform, healthcare cost, all are more expensive, real wages aren’t rising. So the need for capital continues to exist and the defensibility of a significant pawnshop operation which reaches a variety of customers throughout the United States will continue to be a key for us to grow in the future.”

Higher gold prices do not dictate demand for pawn loans

” I tell people, gold prices don’t dictate demand. The need for money dictates demand. The ability to pay the light bill, the need to make – to finish out and make the final rent payment or the mortgage payment is what drives demand. So higher gold prices gives you more collateral value but it doesn’t drive your need.”

e-commerce customer is really more of a middle market customer with limited access to credit

“Moving slightly over to the e-commerce business, more of middle market group, we’re seeing a very strong growth in the U.S. business from a demand perspective. And we think that’s because of limitations that have been placed on our – some of our competitors, whether it’s the commercial bank’s ability to lend on an unsecured basis for their deposit advance product, whether it’s the CARD Act and the credit card reform activities. Again, more and more customers seeking unsecured loans, which is classic middle market America.

So this is a group that already deleveraged but now needs credit for whatever the short-term requirements and really to, and this is the most important thing, avoid a higher cost penalty, whether it’s a late fee on a credit card. Obviously, missing a mortgage or payment has many penalties. So, that customer seems to have found a solution in the Internet as a convenient access to capital and one that has driven significant growth in our U.S. business. So from a U.S. perspective, whether it’s the secured side or the unsecured side, we are seeing nice growth in both sides of that business”

Pawn customers were way ahead of the curve in buying used merchandise

“the pawn business is the ultimate discount retailer. At the end of the day, pre-owned merchandise, which has been made extremely popular due to the popularity of products – after eBay or Amazon, the acquisition of pre-owned goods kind of got demystified.

Now, the pawn customers understood that from the beginning. Because from a pawn customers’ perspective, they know that television works just fine when they pawn it and so they see no reason to pay retail prices for a television or piece of electronics, whether it’s a smartphone or a tablet, whatever, or a piece of jewelry or a lawn mower for that matter.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Our customers are feeling more confident

“First and probably most importantly is the strengthening of consumer confidence of the demographic segment of the population we serve in our shops. Again, I think our customers are feeling better about the economic world they live in and seem to be more active in our shops both at the loan counter and at the retail counter.”

Strong loan growth

” really good, strong pawn loan growth, which we haven’t seen in a while.”

Comps get easier

“this second quarter of 2014 should be the final quarter of very difficult year-over-year comps on profits from the sale of scrap gold.”

Jewelry back to 60% of asset base

“In the fourth quarter of 2011, the jewelry component of our collateral base peaked at almost 73%. At the end of this second quarter of 2014, jewelry accounts for approximately 60% of our asset base, which is closer to the traditional mix we experienced prior to 2009.”

Decided to spin off ENOVA

“management has recently determined that the most attractive separation option is currently a tax-free distribution of the shares of Enova to our shareholders, a technique commonly referred to as a spinoff.”

CEO leaving next year

“I’d like to comment on the press release issued last night announcing my planned retirement as CEO when my current contract expires at the end of April next year”

People are feeling better

“by and large, our entire base of business in the U.S. is being impacted by similar trends. And we had to conclude, Bill simply that consumers are feeling better about the economic environment that they’re in with respect to a similar employment situation and the overall economic prospects for them. We’re seeing them back borrowing money at a higher rate than we’ve experienced for the last couple of years. And they’re also spending with us at higher rates than we’ve seen for the last couple of years. So you really can’t conclude much other than the fact that people are feeling better about their economic situation.”

Also some impact from larger banks restricting credit to lower end

“You also have the impact of — recently, you had large banks, Wells Fargo, Fifth Third, U.S. Bank, who quit offering their direct deposit advance on their checking accounts. We think that’s had the probably bigger impact on our online U.S. business than as in our storefront, but clearly, anytime that there’s disruption in the availability of other forms of credit that people can’t get to, falling back on secured lending is always something that they have an option to do. So we are perhaps seeing a little bit of that activity as well.”

Main issue UK regulators are reviewing is affordability

“I mean the big issue that they’re dealing with is affordability. And we’re adjusting our — have been adjusting our activities very significantly with respect to the process around affordability”

It means we’ll be writing fewer loans to higher quality customers, which is what the regulator wants

“that will reduce — significantly reduce the volume of business and new loans that we’re writing in the U.K., which means we’re going to be writing fewer loans of higher-credit-quality customers, which then means the impacts of CPA and rate change are going to be less impactful because we’re starting with a lower base of business and a higher-quality customer, which is what the FCA is trying to drive the industry towards.’

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“the general trends for our business have not changed much from the trends that we’ve been discussing for the past several quarters. Mainly, the retail services segment continue to work its way through the transition of our U.S. pawnshop business, precipitated by significantly lower volumes and margins on the commercial sale of scrap gold, coupled with ongoing soft demand for both pawn loans and the consumer loan offered through our storefronts, which have kept our same-store loan growth in check.”

“I got to admit that at this point that the transition the U.S. pawnshop business has been a bit more abrupt and dramatic than I anticipated when I first began discussing this topic around this time last year. And, for me, that’s both good news and bad news. It’s obviously bad news from the substantial impact that it’s had on our year-over-year profitability comparisons. But good news in that it has seriously motivated us to make some operational changes that will better equip our field personnel to succeed in what I refer to as a new normal of a post gold rush period.”

“In addition to soft demand we are experiencing for our secured pawn loans, which continues to be an issue throughout the country, you also notice continued soft demand for our unsecured consumer loan products in retail services segment.”

“we’re being very cautious with our outlook on the business. Quite frankly, until we begin to see strengthening loan demands segment we have shifted to consumer behavior, we will not be forecasting our traditional growth rates for our retail services segment.”

“these acquisitions reflect our absolute confidence in the long-term prospects of the pawnshop business in the U.S. In our view, the transition is underway in the industry today is a momentary blip in what otherwise has been a stable and positive trends of the U.S. pawnshop business since starting with our first shop in 1984.”

“Increasing healthcare cost, higher payroll taxes and potential entitlement reform could bring well add to the basic consumers, seeking help from non-bank financial institutions in the future periods.”

“t’s pretty clear today that our — with our unsecured lending products regardless of what form they take will likely always be subject to regulatory scrutiny whether be here in the U.S. or international markets.

Enforcing I finally found the wisdom to quit lamenting that reality and embrace it as an aid in helping us create more attractive products for our consumers than as a gateway for claiming competitive advantage. Also, I recognize that the new regulatory scrutiny has consistently and equitably enforced will ultimately eliminate many of the French competitors that remain a nuisance for both us and the consumers.

From day 1, we’ve always been committed to playing by the rules in an honorable fashion. While that approach has consistently cost us market share, we always believe it would pay off for us in the long run. It’s a rewarding to now see some of the noncompliant lenders in both the U.S. and U.K. fall out under a more intense regulatory regime. I want to downplay the degree of difficulty we and our customers must face in adjusting to periodic changes introduced by the regulatory agencies, but I do continue to believe we are better equipped to absorb those changes and leverage them as a competitive advantage than most other lenders in the market”

“quite frankly, I’m not seeing a lot of available alternatives that work for our secured customer, secured loan customers out there. So I’m not aware of any new bank products that would compete with our secured loan products. And clearly, I guess, there is some movement in the subprime auto space. But basically, our demographic profile in our surveys with customers, I don’t really believe that’s having an impact on this consumer. ”

“we believe that the consumer just very cautious right now.”

“the customers that we talk to, they were out in the field, in our shops and surveys just indicate there, they’re very cautious about getting extended right now, they’re very cautious about letting go of any collateral, letting go of money to purchase items as well.”

“I hear more from our store managers than I’ve ever heard about, when we talk about loan balances and some of the challenges that they have, how customers are not taking the full collateral value of the merchandise. So obviously, when someone comes in and we’ve got the update loan amount. Say $150 on a piece of jewelry, they’ll — in many instances, they won’t take it. They’re going to take something less than that. And we obviously let them know that their collateral can cover more than that, than the amount that they ask for, in the extent that they are going to come for it, but I’m hearing that more and more that it’s all the customer really wants, they’re being cautious about how much their borrowing against our collateral. Again, I think that’s also reflected in our redemption rates. The jewelry the people have left, they want to hold on to it. And they’re not borrowing quite as heavily on it, and are not forfeiting it at the same rates that historically we’ve seen over last 4 or 5 years.”

“in some regions of the country, we’ve seen some of those independent gold buying stores begin to close. I think it was the new reality of where we are in the gold business today. It’s going to be very, very difficult, I think, for those people to continue to be in business. So that’s my personal view. And again, I think the key aspects, that I think many people miss in this analysis, is it’s not so much what happens with price of gold, quite frankly, my belief is that there has been a significant amount of gold volume that has been scrapped over the last 5 or 6 years and people don’t have excess stuff to bring in. So even if gold went $2,000 an ounce, I would expect a margin of profitability will be aided by that. I don’t expect to see significant jump in overall gross profit associated with the big jump in the price of gold, just because I don’t believe in volume of gold people would be willing to dispose of is anywhere near the level than it was in 2006 and ’07 when this process began.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“While I admit being disappointed with our results, I can’t say that I’m really shocked by the outcome this quarter.”

“the ongoing weakness in loan demand in our U.S. storefronts throughout the quarter made June a particular tough month for us, causing our quarterly results to fall short of our expectations.”

“I think some of our followers were surprised that we did not attribute a large portion of the guidance shortfall to a further decline in gold prices. And while Tom will soon confirm to you that the decline in net revenue from the commercial sale of scrap gold certainly had a significant negative impact on a year-over-year basis this quarter, I can tell you that we had factored a large portion of that decline into the Q2 guidance ”

“Also, the net revenue from over-the-counter retail sales actually beat our forecast for the quarter by an amount that was actually large enough to offset a significant portion of the higher expense levels that we mentioned in our pre-release.”

“we would have been on target had we gotten the growth we had forecasted for loan asset”

“We don’t believe our customers are finding new sources of short-term credit other than perhaps some migration to the Internet, nor do we believe we are losing share to our competitors. I don’t know that our storefront customers are consciously trying to deleverage but we don’t see any indication that our traditional customers have regained enough confidence in their personal financial situation to risk additional personal leverage at this time.”

“This dynamic is particularly evident in those states with persistently high unemployment rates where we have large footprints”

“the challenging environment for our U.S. pawn business is not new news”

“I don’t have any further insights into what, if anything, the CFPB may do that could affect our business here in the U.S., but I will say that it’s one of very few online lenders in the U.S. operating a state-by-state license model. We would welcome any efforts the CFPB may take to address those lenders who have elected to operate outside the state regulatory environments.”

“I think it takes some time to transition customers. It’s not as convenient, it’s not as easy to take your TV or your Xbox or your iPad that you’re using on a daily basis and — where if you had an excess piece of jewelry, it’s a lot of easier to — and more motivating perhaps to go in and use those items.”

“I’m not hearing a lot of anecdotal things that people have come in and say, “Oh, we noticed the price of gold has dropped $300 an ounce or we’re in here to buy things.” I don’t think our consumers operate on that basis. ”

“anecdotally, I keep hearing from our store managers around the country that our customers are self-regulating to a large degree. While we have an opportunity on the value of their collateral to loan more money. And clearly, we offer them what we think is a fair loan amount for their items. A lot of customers are taking a lot less. Again, they’re trying to regulate their budgets and make sure they come back and pick the items up. I think the jewelry in particular, that we haven’t pawned today are things people don’t want to forfeit, which is one of the reasons our redemption rates continue to be up year-over-year”

“My expectation is that competition will probably shrink, particularly in the pawn business, in future periods here. Part of what we’ve been dealing with for the last few years has been competition from these gold-buying shops that pop up quickly in the shopping centers and corners around the country that are just buying and selling gold. You can drive down the streets of a lot of the neighborhoods where we have shops, and over the last couple of years, you see a lot of these businesses and weren’t doing anything but buying and selling. They weren’t licensed to do loans, et cetera. I think the — that business can become much more difficult and, quite honestly, if you’ll recall, other comments I’ve made on previous quarters’ calls, it’s really somewhat a function of the gold value but it’s also significantly a result of lower available scrap gold for disposition. Again, I think we went through 2000 — and late ’10 and 2011, early 2012, where, if you look at our business, and I think it existed throughout the country, people were unloading a lot of excess gold. And I think that game is over, to a large degree, and I think that those folks who have been competing with us in the gold business are going to have a difficult time remaining in business.”