Earnings Transcript for CURO - Q3 Fiscal Year 2022

Operator: Good day, and welcome to the CURO Holdings Third Quarter 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Tamara Schulz, CURO's Chief Accounting Officer. Please go ahead.

Tamara Schulz: Thank you, and good afternoon, everyone. After the market closed today, CURO released its results for the third quarter 2022, which are available on the Investors section of our Web site at ir.curo.com. With me on today's call are CURO's Chief Executive Officer, Don Gayhardt; and Chief Financial Officer, Roger Dean. Before I turn the call over to Don, I'd like to note that today's discussion will contain forward-looking statements based upon the business environment as we currently see it, including statements related to our future operational and financial performance. As such, it includes certain risks and uncertainties. Please refer to our press release issued this afternoon and on our Forms 10-K and 10-Q for more information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements included in today's discussion. Any forward-looking statements in this call are based on assumptions as of today, and we undertake no obligation to update or revise these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in today's press release. Before we begin, I'd like to remind you that we will -- we have provided a supplemental investor presentation that we will reference in our remarks and that you can find it in the Events & Presentations section of our IR Web site. With that, I would like to turn the call over to Don.

Don Gayhardt: Thanks, Tamara. Good afternoon, everyone, and thank you for joining us today. Before I turn to our results for the quarter, you probably saw that earlier today, we announced that Roger Dean is retiring as our Chief Financial Officer. Roger has agreed to stay with us in an advisory capacity through a transition period. Roger joined CURO in 2016. He was instrumental in all of the transactions that have transformed our company over the past 5 years. He's worked tremendously hard and leave behind very talented team of finance and accounting professionals. I personally miss Roger's leadership and friendship. And on behalf of everyone at CURO, and those who know him both professionally and personally, we all wish Roger and his family the very best. We commenced the search for Roger's successor and Tamara Schulz, our Chief Accounting Officer, will serve as Interim Chief Financial Officer. Tamara joined us last year from Capital One. She's done a terrific job for us and we are confident to be equally good in this interim role. Turning to our business review. I won't spend a ton of time on macro comments other than to say that we do see a lot of data that suggests some economic weakness in both the U.S. and Canada. In the U.S., our customers are still working in a very tight labor market with consistent wage gains, particularly among lower wage hourly workers, and these gains appear to be offsetting the inflationary impacts of gas, groceries and housing. We should note, as we have in the past, that Canada is seeing some impact on the downside of pandemic-related stimulus, but that stimulus was much more targeted and limited than in the U.S. with resulting inflation running about 150 to 200 basis points lower than in the U.S. Sustaining job market has shown some weakness over the past 3 months, and the Bank of Canada last week slowed their pace of rate increases. So as we plan for 2023, our assumption is that we'll experience some form of a mild recession in both the U.S. and Canada, one that has higher levels of employment and wage growth than in the past, but with higher interest rates, at least for the near-term. One final macro point relates to the Canadian dollar, which after holding steady at about CAD0.80 to the USD for much of the year, depreciating rapidly over the end of the summer and has recently been trading at about CAD0.73 to the USD. It does not have a cash impact on us, but it does hurt us in translation on our Canadian revenue and earnings. And obviously, almost 10% decline during the quarter will meaningfully impact those results. During the third quarter, we completed a series of transactions that dramatically repositioned our company. We discussed these at some length in previous calls. So I won't spend a great deal of time to review other than to note that our results for the quarter are impacted by

Roger Dean: Thanks, Don. Adjusted net loss for the quarter was $12 million or $0.29 adjusted loss per share compared to $0.15 adjusted earnings per share in the second quarter of 2021. The primary drivers of the year-over-year decline in earnings were

Operator: [Operator Instructions] The first question is from John Hecht of Jefferies. Please go ahead.

John Hecht: Hey, guys. Roger, best of luck. Sad to see you go, but I'm sure we will keep in touch. So congratulations on a big move. So let's see just -- I guess, just trying to, I guess, take out some of the noise from the acquisitions and all the moving pieces there, I guess, acquisitions and sales of loans portfolio, can you maybe tell me what organic growth was? I know there's no perfect science to this, so you're going to have to maybe take a gauge at it. Organic growth was quarter-to-quarter, so from Q2 to Q3 in Flexiti and then the Direct business in Canada and then the U.S. business? Just trying to get a sense for what is organic momentum for those three categories.

Roger Dean: Sure. Hey, John, thanks for the comments by the way. So I think at the beginning of our earnings release, we added some tables that kind of unpacked the moving parts at a very summary level. And if you look at the loans and ignore what we sold, the U.S. Direct Lending business was up -- obviously up 40% sequentially, but $225 million of the growth -- of the $300 million of growth came from the acquisition of First Heritage. So if you -- Heights grew 8% sequentially organically.

John Hecht: Yes.

Roger Dean: Canadian Direct lending was flat sequentially, but that was currency driven. In Canadian dollars, it was 6% sequentially.

John Hecht: Okay.

Roger Dean: But the reported numbers were flat because of the -- because we took the hit of the weakening of the Canadian dollar on September 30. So -- and then POS grew 10% sequentially.

Don Gayhardt: In U.S. dollars, though.

Roger Dean: Yes, in U.S. dollars. It would have been like 14% in Canadian.

John Hecht: Okay. And given what your -- Don, you mentioned just being a little bit more, call it, surgical from a credit perspective. How do we think -- I guess, seasonally thinking about seasonality and you guys getting a little bit more selective, what would you -- how would those -- what do you think happens to that type of growth for the next few quarters?

Don Gayhardt: Yes. So John, I think obviously, you've got -- particularly in the Flexiti business, right, you've got that merchant base, which is a lot of big ticket stuff is geared to holiday shopping. So I think that our expectation is that, that business, that portfolio in kind of in U.S. dollars is probably going to grow mid-teens, maybe mid to high teens through the end of the year. The balance of the portfolio, I think the U.S. business starting at a base of 7.30% to 7.40%, we could see maybe $20 million, $30 million of portfolio growth there, given kind of where we are from a credit perspective. And then I think Canada Direct Lending will go up probably 3% in U.S. dollars for the fourth quarter. Again, we are kind of adjusting for where the trend was versus some of the credit tightening measures. But then if you go forward to the end of Q1, you will still see Flexiti is still going to grow, although it won't -- it obviously will be coming off of the holiday period. The rest of the portfolio [indiscernible] a little bit, the rest of the portfolio will shrink a little bit. So from Q4 -- from December 31 to March 31, it's very little growth in there because of the -- we still -- the small loan portfolio at Heights has some real income tax impact. So that will be -- we will see the biggest amount of shrink in that portfolio. But that's $200 million of the total earning asset base right now. The large loans will kind of run in place maybe grow a touch. And then, as I said, Canada Direct Lending will grow in touch and Flexiti will grow. But the whole portfolio will be relatively flat December to March. And then it's really hard to -- with the kind of the macro situation, we are anticipating some continued growth in the portfolio sequentially across the balance of '23. And we feel like, as I think I said in the content, Flexiti is going to grow from year-end, it will grow 30%, 35% by the end of Q4 most -- by the end of Q4 of '23 most of that, though, is just within the existing -- the full year of the existing merchant base that they have now does not assume that they sign any more meaningful kind of enterprise merchant partners.

John Hecht: Okay. And then I guess, sort of a similar question, but turning to credit, because you guys do give the NCO rates by channel, I guess, the U.S. Direct Lending, Canadian Direct Lending and POS. Were those are, again, understanding the seasonal considerations, but you're still talking about seeing some weakness or normalization, what’s the kind of normalized level for those three categories of loss rates? Or are we kind of in the zone at this point when thinking about seasonality?

Roger Dean: No, I think we are -- I think as Don mentioned on the call, in the prepared remarks, Heights is still -- it's still above what we expect because of those 21 vintages are still working their way through.

Don Gayhardt: Yes. I think maybe the trailing 12 annualized rate is maybe a couple of 100 basis points above where we would like it to settle. But the -- in Heights business, the delinquencies -- and again, it's not -- I don't think you get a clean cut in the -- because we still had the legacy stuff. But in the Heights business, the delinquencies came down. The early stage stuff came down from June to September. So -- and we feel like the -- if you track the subsequent vintages, you get into the end of last year or the first part of this year, the subsequent vintages, the curves are performing better than the stuff that was being written in sort of, call it, June to October period of last year. So we feel good about our ability to, again, to get the trailing 12 rate down another -- down a couple of 100 basis points.

John Hecht: Okay. And then some of the measures you're taking for expenses in this quarter, how much of the kind of run rate expenses do you think go away once all the dust settles there?

Don Gayhardt: Yes. So I think if you go -- John, if you go to page -- I know it was a lot of words in the script because there were a lot of initiatives. But if you go to in our earnings deck, if you go to Page 14, I think it is, hold on a second. Page 12, I'm sorry, Page 12 on our earnings …

John Hecht: Okay. I apologize that when you started the call, this wasn't up and now it is. So a lot of the questions I have are answered in this.

Don Gayhardt: I know. We had some technical difficulties with Business Wire this afternoon. But anyway, if you look at that page, John, the Canadian store closures have happened. They have been -- and so that will start -- we will start realizing that in November. The Canadian U.S. deferred spend occurs over the course of 2023. U.S. store closures, we said those are going to -- those are starting. Those are starting, three quarters of those. We are talking circa 50 stores. 30 of those will happen in this quarter. The balance will happen in the first, probably by the end of the first quarter of '23. So kind of two-thirds maybe this quarter and the balance in the first quarter next year.

Roger Dean: The first phase suspension, that's tough decision, but the related costs that people have been laid off, and so that happened. The corporate office function consolidation and closures, the closures have occurred. We closed, we consolidated corporate offices, those have all occurred. The corporate office functions, some of that's tech dependent, and that's probably going to get achieved by the first half, by end of first quarter and …

Don Gayhardt: Yes. I would say most of that happens this quarter, though, John. It's -- yes. So there's a little bit of it that will lead into the first quarter of next year. But most of that $5 million to $7 million will normally happen this year.

John Hecht: Okay. Well that’s all very helpful. And I will get back in the queue, because I’ve asked a few questions, but thanks very much.

Operator: The next question is from Vincent Caintic of Stephens. Please go ahead.

Vincent Caintic: [Technical difficulty] taking my questions. And Roger, well deserved and well earned. We are going to miss you, but after 38 years, it's well deserved. So congratulations. So, a couple of follow ups. In terms of the pricing power, I know you were talking about passing on the consumer. On the Flexiti side, and you're talking a bit about the merchants and maybe getting some discount rates. Sort of wondering what you're seeing there and what you're seeing with merchant engagement, especially ahead of the holidays that what the -- maybe opportunities are for getting some merchants? And then if you can talk maybe about the difference since we don't -- I don't cover many Canadian companies, just how the differences are between that Canadian consumer versus a U.S. consumer. Thank you.

Roger Dean: Hey, Vincent, thank you. Just to make sure, Vincent, the first part of the question, you're talking about the new merchants?

Vincent Caintic: Yes. Just in terms of -- so just hearing from the U.S. based guys like Synchrony and Brad talking about, well, maybe the consumers were facing macro headwinds, but actually maybe the merchants are engaging more or maybe there's pricing opportunities there in terms of the discount rate. Just maybe making it a broad question though in terms of what you can do with Flexiti.

Roger Dean: Yes. I think we said probably a bit of --overwhelmingly, the merchant base contractually, we have -- and again, it works a little bit differently with each contract, so almost I'll give you a blank answer. But we generally have the ability to pass along interest rate increases, so base rate increases and the [indiscernible] in the form of higher discounts. So I think that some of it is consolation to make sure, just as a reminder on that point. So -- and then there are -- within each merchant there's -- if you're from Synchrony Brexit, you have a variety of different sort of promotional programs that are being run with merchants. And so may be 90 days same as cash, 12-month, equal monthly payments. And all of those are going to have kind of different economics, different discount rates et cetera, with the merchants. And a lot of the hard work in that business is working with merchants to help align these promotional programs with -- advertising spending have as well as sort of product introductions and initiatives. In some cases, we have multiline retailers that have different brands. They may have an appliance store but also opening some mattress stores and trying to work with them on rollouts and new promotions. So there's a whole -- and that's, I think the team up there that's what they're really, really good at is working across this and making sure that we are both maximizing the opportunity for the retailers to sell through, so they get higher -- more financing, higher conversions, but also doing it in a way that doesn't -- in an environment where gross margins have been strained at the retail level, shipping costs. And again, for furniture retailers and lumber, et cetera, so it's been a tougher -- inflation environment, the supply chain environment has caught them as well. So I guess what I would say is it feels like the supply chain pressures and the gross margin pressures are abating to an extent. And that given, I think the economic climate and certainly, there's a lot of demand for -- demand for consumer credit remains pretty good in the U.S., likewise in Canada. We feel like it sets us up for a pretty good holiday season with the merchants, and we've -- I think most of the work to set up new programs has kind of been [indiscernible] they involve new discount rates, et cetera. That's already been worked out with the retailers. So I think we're just doing everything in CURO to make sure we're supporting the merchants, so they can sort of finish the year strong and what's been -- and I will sort of get into the next question, which is Canada did not see the run-up in retail fed by stimulus that we did in the U.S., but they did see some of it. And if you track the bigger, LFL Group is our biggest partner up there. They're a publicly traded company. So they've seen sales kind of bounce [indiscernible], but generally kind of keep moving in the right direction and not sort of see a big sort of whiplash effect from the -- certainly some of the online bigger ticket retailers, the furniture retailers that have seen in the U.S. So I think the consumer in -- the environment in Canada, the economy is generally pretty good. I mentioned that the labor market isn't quite as tight as it is in the U.S. So you're not seeing the 1.7 job openings for every applicant kind of thing. But the flip side of that is inflation is lower, and the Bank of Canada last week sort of surprised everybody by -- at least most people by only raising 50 basis points and signaling, hey, we want to make sure we are balancing strength and ongoing strength in the economy with the need to contain inflation. And again, I haven't had a little in of time to read today's going on in the Fed world, but it does seem like the Fed -- what I read is the Fed quickly is -- the Fed is going to continue to raise. So there's a little bit of a divergence there. I think almost in my view, entirely owing to the amount of stimulus that was spent in the U.S. and the effect that, that had on inflation. So we feel good about the Canadian consumer, I've said a million times. An average Canadian consumer, similarly situated, similar FICO, similar income, all the same kind of ability to repay metrics that you'd run in the U.S., that customer is going to pay -- payment rates over time are going to be 15% to 20% higher than what you see in the U.S. And the flip side, obviously, is delinquencies and charge-offs for similarly situated customers are going to run lower. There's a million reasons and theories about why that happens, but it's certainly just in my 25 years of experience doing business up there.

Vincent Caintic: Okay, great. Very helpful. Thank you. Separate question, last question. Just on the capital structure, your funding structure, how should we think about that in terms of a rising rate environment, perhaps if you can give us some sensitivity? And is there a -- are you comfortable with your current capital structure? Or should we maybe see it evolve? Thank you.

Roger Dean: Yes. I think it will evolve. What's most immediate is we are -- you might have saw that we posted a deck because we were at the ABS Conference launching a U.S. securitization transaction that we expect to close just after the first of the year. And deals are still getting done. Regional just priced, I think, last week and -- opportunity. So the ABS markets are still -- they're not as -- certainly not as attractive as they were 6 months ago, but deals are still getting done. So we expect to, for the U.S. business to do a securitization, just sometime in the first quarter. Flexiti will tap securitization markets again middle of next year. And we are evaluating some potential opportunity even for the Canadian Direct Lending business for similar securitization as we start to put the Flexiti non-prime assets collateral into -- combining that Flexiti non-prime collateral with our Canadian Direct Lending collateral. So that's really the biggest thing we have on the plate. We will continue to work to expand our senior revolver and more bank participants in that. But the big thing is securitization of the U.S. -- the Heights large loan portfolio.

Don Gayhardt: Yes, first up in the Q, yes.

Vincent Caintic: Great. Perfect. Thanks very much.

Operator: [Operator Instructions] The next question is from John Rowan of Janney. Please go ahead.

John Rowan: Good afternoon, guys.

Roger Dean: Hey, John.

John Rowan: Roger, echo everyone's sentiment. It's certainly been nice to work with you over the last few years. Certainly, keep in touch.

Roger Dean: Thanks, John.

John Rowan: As far as closing stores, I mean, you're basically closing stores, I assume that you bought from Heights and First Heritage, right? And there's no other stores that you have in the U.S. Am I correct?

Roger Dean: Sure. In the U.S., yes.

John Rowan: Okay. And just to be clear, you're pulling the $2 to $2.40 guidance for 2023?

Roger Dean: Well, we gave it as an outlook. John, we just said, we feel like given where we are in the macro does -- giving forward outlook it doesn't make sense for us right now.

John Rowan: And a lot of that goes back to interest expense? I'm just -- the ramp-up in interest expense has been pretty steep, and it seems to be almost one-for-one with changes in the Fed funds rate? I mean, just how sensitive are you? I mean, what's the percentage of your funding that's fixed versus floating in nature?

Don Gayhardt: So John, I will just -- [indiscernible] again. No, we did -- as we said, it's about $40 million of increase from -- once the curve started moving up kind of in March of last year, that's our '23 outlook, that $40 million pre-tax and then currency, which is -- we don't move money back and forth. So it's not a cash issue for us, but certainly it will translate into that EPS number that we gave. But Roger, give you the breakdown. But obviously, part of -- as we just talked about vintage move -- having portfolios that we can moving out of the warehouse in the securitization transaction helps both from a duration standpoint and a fixed versus diverse floating standpoint as well.

John Rowan: Okay.

Don Gayhardt: Roger, what's the breakdown, do you know?

Roger Dean: It's about half. We have $2 billion in debt and half of it is fixed rate and half of it is floating.

Don Gayhardt: Right. And that's why I say the base rates have gone up 350, 400 basis points. That's kind of that $40 million number right there.

John Rowan: And then you said 30 to 35 -- I think it's 30% to 35% growth in the point-of-sale business for next year. Is that correct? And you said you would end this year about where you expected. Can you remind me where you expect it to end this year and refresh my memory, if I'm correct, on the 35% growth for '23?

Don Gayhardt: So the question is where are we on just the point-of-sale portfolio?

John Rowan: Correct. [Indiscernible] gave guidance for 35% growth in '23?

Don Gayhardt: Yes, that's just going to -- just get you the number here.

Roger Dean: We also said it's going to grow about -- it's going to grow. They're going to have -- the next 6 weeks, it will be the holiday season. So -- and then -- go ahead, sorry.

Don Gayhardt: Okay. So we expect that portfolio, which is about U.S., about 690 now will end in the $800 million range U.S. dollars at the end of the year.

John Rowan: And then 35% growth on top of that. That’s [indiscernible].

Don Gayhardt: 35% growth next year. Yes. And again, I make the point that's part of why we're talking about sort of the yield stuff, which is there's that maturation business, and you start to look at what you get in '23, where we think the business will move from being -- so it's kind of a cash P&L profitable business. Now if you add back depreciation and amortization and provision impact and the MDR, which isn't -- we don't disclose that separately, but we do it in that -- there's a denim to -- in the earnings deck. So we think it will move -- it should be a GAAP profitable business at the pre-tax line early in, we hope, early in '23. But even with, because of that growth, an ongoing healthy dose of provisioning of a major [indiscernible].

John Rowan: Does the revenue yield in that business still go to about 5% as you get past kind of that cohort of consumers that are in the promotional period?

Don Gayhardt: Yes. I think it should grow pretty ratably over the year and exit by the time you get to Q4, you should have that whole 500 basis point increase.

John Rowan: Okay. All right. Thank you very much.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Don Gayhardt for closing remarks.

Don Gayhardt: Great. Thank you, everybody for joining us. Again, we'll talk to you. Look forward to speaking to you again for our year-end call, and I will add my thanks and good byes and good wish to Roger and his family as well. So thanks, everybody. Have a good evening.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.