CURO Group Holdings Corp (CURO) 2018 Q3 法說會逐字稿

Good morning, and welcome to the CURO Group Holdings' Third Quarter 2018 conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Gar Jackson, Investor Relations for CURO. Please go ahead.

Thank you, and good morning, everyone. After the market closed yesterday evening, CURO released results for the third quarter 2018 and revised its outlook for the remainder of the year. You may obtain a copy of our earnings release from the Investor Relations section of our website at ir.curo.com.

With me on today's call are CURO's President and Chief Executive Officer, Don Gayhardt; Chief Operating Officer, Bill Baker; Chief Financial Officer, Roger Dean; and Chief Accounting Officer, Dave Strano. This call is being webcast and will be archived on the Investor Relations section of our website.

Before I turn the call over to Don, I would like to note that today's discussion will contain forward-looking statements based on business environment as we currently see it as of today, and as such, includes certain risks and uncertainties. These statements relate to our expectations regarding: bringing new products to market and the timing and transition of certain stores to LSE products; revenue and earnings for our Canadian operations; ad spend; NCOs and loan growth; timing of contributions from the MetaBank product; LendDirect brand loan offices, currently piloted in Ontario; substance and timing of regulatory activity and expected impact on us; use of our revolver and timing of repayment; our financial outlook for the remainder of the year. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update 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. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in our earnings release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website.

With that, I would like to turn the call over to Don.

Thanks, Gar. Good morning, everyone, and thanks for joining us today. In general, this call will follow our usual format. I'll offer some high-level thoughts on the quarter, a few strategy notes and a few brief comments on the regulatory environment, and Roger will give you much more detail on numbers and then we'll take some questions.

From the top, I think it's important to acknowledge that this quarter fell short of our expectations, and probably your expectations, and quite simply, is not up to our standards. While most of the shortfalls are related to issues that will be resolved rather quickly, meaning this quarter, some will persist as we go into 2019. There's a lot of detail in the release, and Roger will review that with you, but from the standpoint of operating earnings, we're about $17 million or $18 million short of our expectations, and approximately $12 million of that relates to our ongoing Canadian product migration and increased loan loss provisions related to higher-than-expected loan growth. The remainder relates primarily to higher-than-expected charge-offs, but here it's important to note that our overall net charge-offs are meaningfully lower than this same quarter a year ago, at 20.0% for the quarter versus 22.2% in 3Q 2017, so a 220 basis point improvement. And if you look at it by country and product, 7 of our 9 products -- I'm excluding Canadian line of credit, because we don't have comparable data for the third quarter of last year -- but 7 of our 9 products have lower year-over-year charge-offs. Our overall business is still strong, it's still growing, and our customers are in very good shape.

We've also included in our release an update in our situation in the U.K. We don't have much more than what was in the release, but we'll try our best to get you up-to-date on what is a very fluid situation there.

By far the biggest impact to quarterly results was the ongoing product migration in Canada, specifically in the province of Ontario. For reference, Ontario accounts for approximately 2/3 of our Canadian business. From an operating and customer service perspective, this transition is going very well. In fact, I sat at a meeting with our Canada ops team just last week, and I've never been prouder of a business that lost money in this quarter. With our new line of credit product, which we think is unique, as in we're the only small dollar lender in Canada to offer this product, I know it's very well-positioned in the market. We enrolled almost 40,000 new customers in Ontario, approximately 4,200 of which are brand-new customers, just in the quarter. We also funded almost 7,000 line of credit loans on Alberta. We ended the quarter with a total change in line of credit book of $138.7 million, up from $51.3 million at June 30, 2013 -- or 2018, so the sequential quarter, and up from $17 million at March 31 of 2018. All these numbers exceed our expectations and the credit quality on this product is generally in line with our expectations based upon the current delinquency rates. This is a huge undertaking that puts our business on a great footing with a product that customers love and competitors do not offer. The downside, of course, is we're dramatically reducing our Canadian Single-Pay revenue which historically has been our most profitable single line of business, very high yields with modest and very consistent credit losses, but a business line which has been impacted by a steady run of provincial regulatory reviews that resulted in lower fees and a range of other provisions and increased operational complexities and reduced the attractiveness of a Single-Pay product for our Canadian consumers. But in reviewing detail in the release, we did lose money in Canada in the third quarter as an 8.8% drop in year-over-year revenue, coupled with provisions for loan loss as a percentage of revenue at 52.9% versus 31% in the prior year generated an adjusted EBITDA loss of $3.4 million, which is $15.4 million lower than last year's adjusted EBITDA of $12 million and $13.2 million lower sequentially than the second quarter of 2018.

We should note that a significant part of reduction in earnings relates to the allowance builds for line of credit product, which grew $7.5 million sequentially. We expect our Canadian business to generate positive adjusted EBITDA in the fourth quarter as the line of credit portfolio growth will be solid in the range of $20 million sequentially but not at the level that we saw in Q2 and Q3, which will lead to a much smaller build in the allowance and return to profitability.

In terms of full year earnings, Canada had adjusted EBITDA of $54.6 million in 2017, and will probably end 2018 with a full year adjusted EBITDA of less than half that. But absent any new regulatory or macroeconomic changes, 2019 should see very meaningful year-over-year improvement in revenue and earnings from our Canadian operations.

Turning to our U.S. business, we had very good loan growth of 21.8% year-over-year and 15.2% revenue growth, but loan loss provisions of 29.9% and ad spend was 46.9% as we continued to invest in our newer brands. We would expect to see that ad spend number decline sequentially in the fourth quarter.

In terms of loan losses, overall net charge-offs for our U.S. owned and managed loans were essentially flat to last year at 22.1%, so we're not at all worried about credit in the aggregate, but we did see higher than forecasted net charge-offs in our line of credit in CSO portfolios. Line of credit net charge-off increases are mostly related to growth in Virginia, which is a new state with a loan book that needs to season, and Tennessee, where we offered credit line increases to certain of our better customers, and while net revenue in Tennessee has increased, net charge-offs on this book were higher than forecast. We do expect to see these trends persist into the fourth quarter on the line of credit book before moderating in 2019.

Quarterly net charge-off rates in our CSO book came in lower than last year, about 500 basis points lower on a year-over-year basis. But we expected a reduction -- a further reduction as last year's quarter was impacted by Hurricane Harvey, where we forgave about $3 million in customer payments in the quarter, which elevated the 2017 charge-offs. NCO rates improved even after adjusting for Harvey. The problem there, just to be blunt, is that our forecast simply assumed more improvement than historical and seasonal trends would indicate, really just kind of an unforced forecasting error here.

Finally, in our Avío Credit brand in the U.S., which we launched in the second quarter of 2017, while it's exhibiting good loan and revenue growth, we're still seeing net charge-offs coming in at a level which is keeping us from looking to grow the book substantially as we move into the end of the year, which had been our plan. We're still confident that in time, we'll get credit right in this book, but our exit rate for '18 will give us a lower contribution from Avío than planned in 2019. Roger will have more detail but the remainder of our U.S. business are Unsecured Installment, Secured Installment and Single-Pay lines, all delivered revenue and net charge-off performance very much in line with our expectations and our U.S. Single-Pay revenue fell to under 10% of our total revenue which is an important milestone as we continue to grow and shift the mix of our business to longer-term Installment and line of credit products.

Finally, in the U.K., we were again hit with very high costs for legacy redress claims, almost $4 million in the quarter. As we said in the release, claims at this level are simply not sustainable given the limited scale of our U.K. operations, and as such, we're working very hard with advisers and regulators to find a solution. We have had ongoing, and we think, fruitful discussions with both the Financial Conduct Authority and the Financial Ombudsman Service, and we're grateful for their time and attention. As a first step in the process, we have, with FCA's approval, retained Huntswood as a skilled person to review the options that we're considering. We hope that all of this will lead to a good resolution with our customers, our business and our employees in the U.K. We'll look forward to reporting back more on this when we know more.

As a quick aside, our business continues to perform very well in the U.K., and in September, we had record new customers, almost 11,000, the highest number of active customers in good standing at 57,000, and the highest quarterly origination volumes for the third quarter, which came in at GBP 23.3 million.

So just a couple of notes here. On the aggregate, obviously, a pretty disappointing number, but I would reiterate again that we think much of the shortfall relates to issues that may well be rectified in the near term. Second, the most significant parts of our domestic businesses are performing very well. And for those areas where weakness may persist, we're focused on limiting the financial impact and remedying the root causes.

Just a couple of other operational notes. Our VERGE CREDIT, powered by MetaBank product is quite close to launch. We're doing test loans right now and we're very happy with the product development, IT and credit scoring work that our teams have done with our partners at MetaBank. We're a little behind in our rollout schedule but the finish line, at least in terms of product launch, is very much in sight. We don't have any more updates in terms of financial impact other than to reiterate that we don't expect any meaningful impact from this relationship until the end of 2019 and the beginning of 2020.

Finally, on the operations front, we're pleased with progress that we've made with our new LendDirect brand loan offices we're piloting in Ontario. We currently have 9 locations open and 2 will open by the end of the year. These stores have smaller format, desk and chairs environment, only offer the line of credit and do not handle or distribute cash. We've tested a variety of sizes and layouts and will be evaluating the early returns and formatting -- formulating development plans for 2019 and beyond.

A few regulatory comments, and then I'll wrap up and hand it over to Roger. In Canada, we completed the transition to line of credit in Ontario and Alberta and may transition our British Colombia stores during 2019. This would cover 174 of our 190 cash money brand locations in Canada, so have limited exposure to any further changes in provincial regulation of Single-Pay lending. In the U.S., this is a quiet time of the year in terms of state legislation. We think we had a good season in our key states with no new significant negative legislation passing. Just a couple of developments we're watching. In Colorado, we only have 3 stores there, but there's a 36% APR cap initiative that's on the ballot there in November. At this point, we would expect this measure to pass, and albeit our current product offering, we mentioned we have only 3 stores and a minor online presence, so not material from an earnings perspective, but we're evaluating several options for those stores and the products that can be offered there to consumers. In California, as most of you have seen, we talked to a lot of you about it, the California Supreme Court found that loans made by one of our competitors could be found to be in violation of the unconscionability standards in the state finance code and sent the case back to a lower court for further consideration. This case will take some time to play out and is subject to further appeal, so kind of a long way to go there. In Ohio, as we talked about on our last call, began winding down our CSO lending book and relationship in advance of the May 2019 effective date of the new regulation there. We're all working on an alternative product we hope that we can offer to customers as we get to the May date -- closer to the May date. This is important because even though Ohio is a fairly new market -- it will not generate any meaningful earnings for 2018 -- we were expecting a growing and seasoned loan book there to contribute as much as $6 million to $8 million in operating earnings in 2019.

So I'll close by reiterating because as I said, the numbers aren't where we'd like, but I'm still grateful to our employees for all their dedication and effort. We're still making great progress in a number of areas, and look forward to seeing that progress improve our earnings performance, starting with this quarter we're in right now, and we'll report back on that progress in January. And with that, I will hand it over to Roger.

Thanks, Don, and good morning. Consolidated revenue for the quarter was $283 million, up 10.9%, with that growth rate affected by the product mix shift in Canada that Don discussed earlier. U.S. and U.K. revenues rose 16.2% and 27.1%, respectively. Adjusted EBITDA came in at $300 -- $38.4 million, down 25.4% versus the same quarter a year ago. The decrease was driven by, as Don talked about, elevated loan growth, related loan loss provisioning and higher ad spend, that Don talked about earlier. All other operating expenses grew at low single-digit rates year-over-year.

In terms of comparing adjusted EBITDA for the quarter to our expectations for third quarter, the U.S. business fell short by approximately $4 million, revenue was well above expectation because of related loan growth, but the combination of the above expectation loan growth and the NCO rate variances for CSO and line of credit that Don mentioned earlier, drove the miss in the U.S. The Canadian business missed adjusted EBITDA by $12.1 million on loan portfolio mix shift and upfront provisioning on acceleration of Open-End in Ontario. The U.K. was slightly behind after adjusting for redress costs, mostly on provisioning on loan growth. Adjusted net income was down similarly year-over-year from $14.2 million to $10.9 million, and we incurred a GAAP net loss for the quarter of $47 million because of $69.2 million of debt extinguishment costs in connection with our previously-announced high-yield refinancing.

Next, I'll comment on advertising customer accounts and cost per funded loan before moving to the loan portfolio. Consolidated advertising expense was up 48.2% year-over-year and that's about -- almost an $8 million increase, and was 8.5% of revenue compared to 6.5% of revenue in Q3 of last year. As we've talked about in the past, acquisition spend to revenue tends to be highest seasonally in Q3, and as Don mentioned, we'd expect that rate to tick down a bit in Q4, resulting in ad spend in the 6% to 7% of revenue range for the full year. We added almost 235,000 new customers globally this quarter; that's up 14.9% versus Q3 of last year. I'll break it down a little bit by country with the related advertising spend. U.S. advertising rose 46.9% year-over-year. Of this $5.6 million increase, nearly $2 million supported the ramp-up of our new Avío Installment loans. U.S. new customer accounts were up 10.1% year-over-year, fueled by 21.9% growth in Internet new customers. U.S. store new customers were down modestly year-over-year even though our site store capability added 36,000 new customers this quarter. That 36,000 compares to 25,000 in the same quarter last year, and 22,000 in the second quarter of this year. Because of the Avío and Internet mix shift, U.S. costs per funded loan was $101; that's up $27 year-over-year. U.S. advertising as a percentage of revenue was 7.9%, which was in the range we expected given the ramp-up of Avío and the mix shift to online. Canadian advertising rose 28.2% for 3 reasons. First was mix. We were acquiring more Installment and Open-End customers versus Single-Pay. Two, the marketing channels. We've expanded cable TV and direct mail spend and other media spend, especially in July when we launched -- when we introduced Open-End in Ontario; and three, new product expansion, including our LendDirect stores. Canadian new customer accounts were up 1.1%, but that comp, as we've mentioned in the past, that comp is distorted by mix. Last year, a much, much higher percentage of new customers being acquired were 2-week Single-Pay customers. And because non-Single-Pay customers are scored more extensively, we do have more declines. As a result, Canadian costs per funded was $112, that's up $24 from the same quarter a year ago and up sequentially from $87 last quarter.

U.K. advertising rose $1.4 million year-over-year and new customer accounts were up almost 80%. The U.K. cost per funded was $86; that is up $10 compared to the same quarter a year ago, but the cost per funded in the U.K. has been flat sequentially since the fourth quarter of 2017.

Next, I'll spend a little time covering overall loan growth and portfolio performance. Don already covered loan growth by country and the dynamics there so I'll cover a few highlights at the product level. Company Unsecured Installment loans grew to $211.6 million; that's up $29.7 million or 16.3% versus the same quarter a year ago. But even at that 16% growth rate, loan growth was affected by the mix shift from Installment to Open-End in Canada, where -- in Canada, Unsecured Installment balances were actually down $30.2 million year-over-year. U.S. Unsecured Installment was up $46.7 million year-over-year or 39%. And U.K. Unsecured Installment was up 100%, that's $13.2 million. Open-End loan balances finished the quarter at $184.1 million, an increase of $151.9 million year-over-year and $93 million sequential. U.S. Open-End balances grew $13.2 million or 41.2% year-over-year, and that's fueled by growth in our seasoned markets, like Kansas and Tennessee, up 13.2% and 11.3%, respectively and, as Don mentioned earlier, the impact of credit line increases there, and introduction in Virginia in Q3 of last year, so we have a new state year-over-year. Canadian Open-End balances grew $138.9 million year-over-year -- we didn't have any Open-End in the third quarter of last year -- and $87.4 million sequentially.

CSO loans grew 10.7% year-over-year. That was a bit ahead of our expectations. Now our CSO loan growth going forward will be affected by Ohio as we approach the May effective date for law changes there. We had $6.7 million of loan balances outstanding in Ohio at quarter end. We've curtailed spending on customer acquisition, so those balances will likely trail off approaching May. As we've indicated, we're working on potential direct loan replacement products for Ohio and our VERGE product will also be used -- will likely be used to replace the existing CSO model in Ohio. Single-Pay loan balances declined 14.4% versus the same quarter a year ago, concentrated in Canada, where the Single-Pay balances declined $14.2 million or 28%. U.S. Single-Pay loans grew $2 million or 5.1% versus the same quarter a year ago.

Before I move on, I'll pause and recap the moving parts of Canada's sequential loan growth, kind of just -- kind of what happened in the quarter in Canada. The total loan book went from $122 million to $193.6 million, an increase of $71.5 million just in the quarter. Open-End balances grew $87.4 million and almost 90% of that growth was in Ontario, where we introduced the product in July. Unsecured Installment balances declined $4.6 million, but most of our Unsecured Installment balances are in Alberta, where cannibalization by Open-End is stabilizing, so we'll maintain some of that book, but we don't expect it to grow. And in the Single-Pay, loan balances declined $11.2 million during the quarter, entirely because of conversion of Single-Pay customers in Ontario to Open-End. Non-Ontario Single-Pay balances grew sequentially by just under $1 million.

Moving onto loan loss reserves and credit quality, really important piece of this quarter. As Don covered earlier, loan growth obviously affected loan loss provision comps. Loss provision exceeded net charge-offs at the consolidated level by $17.8 million in the quarter. We had $132.7 million of sequential loan growth from Q2 to Q3 this year. Last year, that was $52 million. For company-owned Unsecured Installment, the NCO -- the net charge-off rate for the quarter and past-due percentage both ticked up about 300 basis points, entirely because of mix shift. At the country level, unsecured net charge-off rates improved year-over-year in all 3 countries. The net charge-off rate for the U.S. was 10 basis points lower year-over-year, and the net charge-off rates in Canada and the U.K. declined 260 basis points and 150 basis points, respectively, compared to the same period last year. However, I mentioned earlier, the Canadian Unsecured Installment balances declined $30.2 million from the shift to Open-End and U.S. balances grew $46.7 million year-over-year. So the U.S. share of the Unsecured Installment loan portfolio rose from 66% last year to 79% this year. Since the absolute level of the net charge-off rates in the U.S. book are higher than Canada, this geographic mix shift results in an overall increase in the consolidated net charge-off rate, even though each country's rate declined or improved year-over-year. Provision exceeded net charge-offs for Unsecured Installment by $7.6 million.

For CSO loans, the net charge-off rate improved 430 basis points, while delinquencies were flat year-over-year and sequentially. The net charge -- as Don mentioned earlier, the net charge-off rate for comps for CSO were affected in the prior year by Hurricane Harvey. Excluding the effect on the prior year from Harvey, the CSO net charge-off rate improved 124 basis points. For Secured Installment, the net charge-off rate and past due percentages rose modestly, primarily in California. For the Open-End portfolio, the net charge-off rate declined significantly year-over-year at the consolidated level, but that's distorted by Canada. U.S. Open-End net charge-off rates were up because of the aforementioned credit line increases in Tennessee and Kansas and the immaturity of the Virginia book.

Closing out the discussion of the P&L. Our adjustments for adjusted EBITDA and adjusted net income are explained in detail on Pages 9 and 10 of our release. The only additional thing I'll point out there is that the duplicate interest expense we incurred in the quarter in our high-yield refinancing, the actual loss and extinguishment from the high-yield refinancing was $69 million, as indicated in the P&L. Our adjustment -- the adjustment for adjusted net income, includes $3 million of duplicate interest for the redemption notice period on the redeemed senior notes and the U.S. SPV. The U.S. SPV facilities were extinguished at the end of the required notice periods in October, resulting in Q4 debt extinguishment costs of $9.7 million.

Looking at the capital structure, we announced earlier in the quarter the details of our very successful high-yield bond refinancing and our attractive Canadian dollar denominated SPV facility, so I'm not going to reiterate that this morning. As I mentioned, we also have now extinguished the U.S. SPV facility in October. Our U.S. revolver was drawn at the end of the quarter because of the large cash outflows over the past 3 months in connection with refinanced debt extinguishment and high loan growth. We expect to use the revolver through year-end with repayment and early in Q1 and at this point, don't expect to need to use it across periods next year.

Finally, I'll close with our full year outlook for 2018. Based on third quarter results and expectations for the next couple of months, we are revising our 2018 adjusted earnings guidance; that's a non-GAAP measure that excludes onetime items like the aforementioned loss on extinguishment of debt and share-based comp and U.K. redress costs. We anticipate revenue in the range of $1.90 billion to $1.95 billion, adjusted EBITDA in the range of $215 million to $218 million, adjusted net income in the range of $88 million to $91 million, and adjusted diluted earnings per share in the range of $1.84 to $1.88. With that, this concludes our prepared remarks and we'll now ask the operator to begin the Q&A.

(Operator Instructions) And the first question comes with John Hecht with Jefferies.

I guess focused on Canada a little bit, I understand the migration's impacting the business. I wonder, can you just give us the characteristics of the type of portfolio or book of loans you're migrating into. What would you consider kind of the long-term loss factors there and compare those to the previous loss factors in margins as well? Just so we get a sense for that, as well as when should this migration, based on the current trends, when should the effects of that wane?

Yes. So just the Open-End product in Canada, the lending yield on the product is just under 50% annualized. And then we offer a true credit protection insurance product there. It's optional, the customers opt in. And based on the acceptance rates, that -- the insurance product drives the total financial yield on the product, so something in the 60% -- 60% to low 60% range on an annualized basis. Right now, our expectation would be that, as the portfolio seasons, the losses on that portfolio would be in the low 20s, so you got 60 -- low-60s yield, low 20s losses. They're much -- they're higher than that now because of -- because the portfolio is immature. And we probably think it takes 6 months to 9 months for those -- for the losses to start to stabilize down in that range that I just mentioned.

And that compares to what range of losses in the prior portfolio?

John, this is Don. The Single-Pay book, I don't want to mix apples -- the quarterly charge-offs in the Single-Pay book -- the annual charge-offs in the Single-Pay book run about 50%. So the yield -- now again, the yield was higher than that. Obviously, the yield will come down a lot as the provinces lowered the lending caps. So this product, you'll get higher average balances, lower yields, lower losses. So losses as a percentage of revenue in this book will still run higher. They run about 20 -- low-20s as a percentage of revenue in the Single-Pay book, but as Roger went there, if you get 60-ish -- low-60s yield, low-20s charge-offs, you're going to get about a 30% to 35% losses as a percentage of revenue.

Okay, that's helpful.

But much higher in assets.

Going back to the average. The average line is about $2,400 in Ontario, with the average amount drawn about $1,800 and that compares to the average Single-Pay loan of about $600. So it's meaningfully more money. And as far as the conversion goes for that question, I think we're largely inverted at this point. We would just expect to convert new customers into product. So we'll use the higher yielding Single-Pay as sort of an upfront underwriting exercise and then once they pay 1 or 2 of those loans successfully, we then would offer them the line of credit. So I -- we think we largely did migrate the existing portfolio in the third quarter.

Okay. And then any comment -- I assume this is flushing out a little bit of the competition as the less skilled market participants have a tough time here. Any effects that you see there in terms of customer activity at this point?

We're the only lender in this space that offers the line of credit in Canada, so we do see advantages to that. We certainly have seen locations in Alberta begin to close since that provincial regulation has gone into place, and I think we see that some of the smaller players in Canada struggle with just looking at regulations, and that could be extended payment plans and reduced rates, I mean it just -- it does flush some of them out. Although largely, our large competitors, the 1 or 2 that we have there, we have the majority of the market share. So I do think that the product is beneficial. I think the way that we're offering it is beneficial, and this has actually ignited the online business, which now accounts for about 15% of originations compared to just 5% or 6% a year ago. So, as we've said before, we think the U.K. is sort of 5 years ahead of the U.S. on online adoption and in financial transactions online and Canada has kind of run 5 years behind the U.S. but we are starting to see that catch fire and I think we have validated over the last few years our ability to operate a very successful and profitable online business.

Yes, and John, I think it's probably worth noting that we got our confidence to do Ontario by testing early in the year at Windsor -- in our Windsor stores. And the other -- the thing that -- one of the things that relates to your question is, as we saw the unique customers in our Windsor stores have not been growing. And since we've converted, the number of unique customers in our -- in the Windsor stores are up about how much? Double digits.

Yes. I mean, I think, so we started that process in February. So that test bed is a few months ahead -- a number of months ahead of the July launch. But just last month, when we looked at Windsor, just -- revenue was up 23% year-over-year. But it does -- to the point that Don and Roger mentioned, that does take a little time to work through the provision and get the revenue built, but because the loans are so much higher and the risk is so much better, you do start to see revenue build over time, and I think we will get year-over-year revenue growth despite the far lower yield.

Okay. I appreciate the color and then final question is a little bit higher level. You guys talked about customer acquisition and marketing expense and obviously, those were influenced in part by the migration in the quarter and you seemed to have accomplished much of that. Just any commentary on how we should think about those factors in the intermediate term?

This is Bill. I think you'll see it tempered a bit. I mean, I think that -- I think it's important to note we have absolute control of our marketing spend. I mean, there's not a dime that doesn't get spent that Don and Roger and I don't approve and we've got -- again, I think we've got a world-class marketing team. A lot of the spend was related to the new brands, and the reason to spend that much, but an elevated cost per funded, is to get the data, which really allows us to then model the credit risk and the acquisition models for a more sustainable brand launch, which is exactly what we did. I think we've got that data, we're going to -- we go back and we focus on credit risk, particularly with Avío, in terms of the marketing spend a bit and also make sure that we're focusing the right marketing dollars on the core business which is more seasoned, more mature and returns a higher yield. So I think not only in the fourth quarter, and again, not giving guidance for next year but I think you'll see that across the quarter and next year be tempered as a percentage of revenue certainly, and return, not just costs per funded, but as a percentage of revenue, to more historic levels.

And the next question comes from Moshe Orenbuch with Crédit Suisse.

You had mentioned that in a couple of the states -- I think you had mentioned Virginia and Tennessee, you had kind of expanded credit lines. Maybe could you just elaborate a little bit on what you learned and how -- over what period of time that situation will normalize? And I've got a follow up after.

So this is -- I'll just give you a couple of highlights. Bill can fill in some of the details. So a little bit different situation. We'd been in Tennessee with a line of credit product for -- since they changed the state law there, probably 3 years ago. What we did there was -- which we'd done in other places, is just offer increased credit lines to some of our better customers. As I mentioned, that's been -- if you look at risk-adjusted revenue, we've seen improvements there, but it does -- it did come with some higher charge-offs, and probably higher charge-offs, a little bit higher charge-offs than we had forecast. Virginia is just a new state for us, which we've been in, what, 5 quarters now?

About a year.

Yes, about a year. So there, it's just going through the process of the loan book building, the provision growth, the upfront provisioning and then just kind of a seasoning of the book. So I would expect that it was probably -- I would say middle of next year, we'll see -- maybe by the second quarter of year we'll see charge-offs in the Virginia books moderate to where our line of credit book kind of runs in the rest of the U.S. and likewise, some of the elevated charge-offs in Tennessee, that'll probably, I think, that'll come in a little sooner, because it's just not a big percentage of the overall book there. So that's probably another quarter or so. So we would expect to see, as we get into sort of -- and again, we haven't done a full bottoms-up kind of budget for next year, but I would expect that we'll start to see provisioning here or charge-off rates on our line of credit book in the U.S. come back to kind of normal levels in 3Q and 4Q of next year. So it'll persist a little while longer, but not that much longer. A couple of quarters.

Just as a follow up with respect to that, I mean, when you think of kind of overall earnings levels, and I understand you haven't done your budget and certainly aren't giving guidance, but what are the sort of things that you can do, kind of elsewhere in the P&L, you talked a little bit about advertising expense. But are there other things that you could do to kind of mitigate some of the impacts on the overall P&L for that period of 2 quarters or 3 quarters?

Yes. So we're -- we really want to do this in with our operating folks, but we have 420 stores-or-so in North America. I think the cost base there is somewhere in the $100 million and $170 million range or something on an annual basis. So -- and I think we've talked about it a lot. Our stores, because we are -- and you convert to the multi-pay products, the line of credit product, your installment products -- a lot of those customers are on auto pay, whether it's ACH or a debit transaction. So if you just -- if you've been in our stores on a regular basis over a period of time, the stores are just noticeably less busy and where the single product customers they kind of have to come in every couple of weeks, it's just that dynamic is just kind of different with these products. So we've done a lot of work to shift sort of the -- kind of repurpose the stores, and the biggest -- where you see the biggest benefit of that is in the leads to stores program. So our customer advocates are making calls and store managers and assistant store managers are making calls to customers who we can't approve online and setting up essentially appointments for them to come into the branches and [rifling] through those numbers. And it's still -- there's still a lot of growth, there's still a lot of runway left in that program. Now having said all that, if you looked at our store expenses, payroll expenses, et cetera, they're up a little bit year-over-year, but there are some opportunities maybe there to sort of look at the scheduling and the hours. I mean we just haven't -- and we want to be careful about that, because I think customers appreciate that we are open a lot -- we generally open longer hours, we open earlier and close later than our competition. We have 24-hour stores in a lot of markets. So we've got to be careful about how we do that because there's a lot of -- and beyond that, the contact centers, I think, we've got a lot of efficiency there. We really improved the technologies there. You know, cloud-based buyer solutions, et cetera, to really help the individual. If you look at the individual -- if you look at the number of accounts that an individual collector can manage, the yield on those accounts, all of our collection metrics have improved really meaningfully so we've been able to grow the business at a lot of contact centers. We'll take a look at all that. Now on the corporate side, the thing that -- is you probably start to see is there are a lot of expenses in the kind of probably $4 million-plus-range that we have to incur as part of going public, that were new expenses in this year. I don't think those are going to reduce but you won't to see kind of year-over-year growth there and we'll take a look in general at the rest of the P&L. We know what you've said and so we're probably going to have to harvest a little more, we don't do as much new product development, et cetera, but we've built -- we spent a lot of time in '17, '18 building Avío Credit, building LendDirect in Canada and building Juo Loans brand in the U.K. So some of that is -- and the focus on '18 operationally obviously, and that is a tremendous opportunity. So there's not going to be as much new product work and associated IT credit modeling, et cetera, that you'd be doing around new product stuff in 2019 because we have a full pipeline of stuff to execute on.

And the next question comes from Bob Napoli with William Blair.

Just -- I mean, what is the -- within the guidance in the fourth quarter, I think, taking a guess, it's $0.49 to $0.53 of adjusted earnings. What is the interest expense, and what is -- I mean, what is -- what are you looking at for 2019? How should we think about interest expense? In other words, you [haven't paid down], but go ahead?

So we had duplicate -- I mentioned duplicate interests in Q3 plus the U.S. SPV facility goes away. So right now, the interest expense for Q4, our expectation would be about something -- a little around $17 million. $17 million to $17.1 million. And then it's pretty easy to model going forward. The high-yield bonds, obviously, are easy to model and then for the Canadian SVP facility, if you look at the relationship of that -- those loan balances to the Open-End loan book in Canada, and just -- and model that -- those balances going forward. Our interest expense probably stabilizes next year in the range of -- [can you pull the number for me]? About $17.5 million a quarter.

Okay. And then what is the game plan now with the bank product? And over what timeframe and what should we expect?

So listen, we've been sort of -- we're kind of in the test loan phase, just making sure from a systems standpoint, the underwriting stuff, the approvals, funding, loan management, all that stuff kind of works, and we're going to run out for, I'd say, a couple more weeks, before we begin to do mailings. And as I think we've said, it's going to be a pre-screened direct mail offering in the beginning to kind of -- to be able to control credit so you won't be able to just come to the website and apply. You'll have to have a reservation code that you'll get in the mail after we've done, an incentive -- a credit screen, a preapproval -- pre-qual as we call it. And now, that will start to hit and ramp up in December. The way the -- we expect to see the book build a lot, but with the rev share and the way the sort of waterfall works, as we've said, we get a lot of asset growth, but don't expect to see any kind of meaningful earnings contribution in '19. We don't think it's going to be dilutive, but we don't think it's going to be accretive in any -- as we're looking at it right now, we're a little behind our timelines, but not -- we're talking about like weeks, but we don't expect it to be -- we expect it to be neither accretive or dilutive to earnings. It will be, obviously, accretive to the earning asset growth, but those assets will be on the MetaBank balance sheet, not on our balance sheet. But then in 2020, it should be really meaningfully accretive. And as I said, I think that's probably -- hopefully we'll have some more -- I'm a little hesitant to sort of give a lot more color on it on the specifics until we actually kind of get fully launched. But we should be fully launched with a couple months under our belt by the time we report in the end of January, and have some more color about the earnings contribution in '19, essentially '20 as part of kind of overall guidance.

Okay. Last question, a big picture question, I'm not sure if you're ready to answer it, but the full year EPS for this year at $1.84 to $1.88 adjusted, looking at next year, do you expect that to be meaningfully up from that level, or -- without adding new products, the provisions should normalize versus what we saw this quarter? Are there offsets? Any thoughts, any big-picture thoughts you can give before you give your clear guidance next quarter.

Yes. I'll try to be careful. Other than -- we absolutely think that next year is going to have really meaningful earnings growth. Canada, we mentioned, it did $54 million, and I would urge everybody to spend some time with -- and we do give this segment and -- by country down to the adjusted EBITDA, and the detail will be released in the Q. And so, if you look at Canada, we said for the year, it was $54 million -- I don't have it exactly, we're talking about $54 million adjusted EBITDA last year, it's going to be less than half of that this year, and that includes this year being negative $3.4 million for the quarter versus $12 million or something for the quarter a year ago. So I think we're going to get back to those levels, maybe even in the low teens from an operating and adjusted EBITDA per quarter in Canada. You run out a full year, and that could happen in 4Q, 1Q of '19. 4Q this year, 1Q '19. If you run that out for a full year, that's a lot of earnings improvement just in Canada. The U.S. business, again, we're a little behind where we'd like to be with Avío. We've had -- charge-offs in the line of credit book are running a little higher than we thought. Everything else is running in good shape. CSOs, the charge-offs weren't as low as we forecast, but they were better than last year. So if you just run out the business even if -- if charge-offs are the same level in the U.S., in '19 as in '18, you'll see meaningful earnings improvement in the U.S. And then in the U.K., as I mentioned, we're working hard to find a solution there. Now that business is -- absent redress costs, will be a nice earnings contributor in the fourth quarter. It's kind of a breakeven in this quarter just based on the provision build. But just the sequential revenue growth we're getting there, and it's part of what -- if we can find a solution -- the whole market's being impacted by all these redress claims. If we can find a solution there, we have a business that's going to be a -- it probably is a low double-digit in U.S. dollars, a low double-digit contributor from an EBITDA standpoint if we can find a solution. But this is -- that solution's not in place yet. So that's a little speculative. But I think if you put all those together, you can see your way to a really, really strong positive '19.

And the last question comes from Vincent Caintic with Stephens.

So I want to focus on the 2018 EPS guidance, and also what that implies for 2019. So first off, maybe if you can just give a retrospective here of the differences between your prior guidance and your updated guidance? And what changed intra-quarter, understanding there's a lot of [community and] growth here, maybe if you can kind of parse out what changed in your thinking between what changed?

It's Roger. No, I think as I mentioned in my prepared remarks, we missed our expectation by $17 million, $18 million, something -- for the quarter. 2/3 or 3/4 of that was with Canada, and the combination in Canada was not just with the provisioning on the loan book, but I also mentioned that our Single-Pay balances, we liquidated or converted almost $12 million of Single-Pay balances. So the revenue -- in the quarter, the revenue was well below our expectations from that conversion and the provision was much higher. And in the U.S., it was -- the miss was about $4 million relative to our expectations. That was partly loan growth, because loan growth was higher sequentially than we expected in year-over-year. But also because, as Don mentioned, we didn't forecast the CSO net charge-off rates adequately either. So that $4 million miss, probably 2/3 of it was CSO net charge-off miss, and the rest was loan growth.

Okay, got it. And how much of that do you think kind of persists from here going forward in terms of those trends?

I think, as Don mentioned, in Q4, we expect Canada to rebound meaningfully in Q4. Q3 for Canada was in the $10 million range of contribution, and we expect -- just to give you perspective on how fast we think it's going to rebound, our current guidance would suggest that that -- we'll rebound to that rate -- to that kind of quarterly run rate in the fourth quarter. And then, I think it takes a little longer. The CSO -- we'll obviously adjust our forecast for the NCOs we already have, but also, the Open-End net charge-off rates are higher in the U.S., and that's not going to -- that won't improve that quickly, but probably, as we move into the middle of next year, those come back into the seasoned range as opposed to where they are today.

I mean, if you just look at Canada, and we're sensitive to the earnings impact, and doing what we say we're going to do. But I think if you just look at the loss in the quarter, I mean, the majority of that actually came in July when we did it. It does rebound very quickly, and I think one option would have been to kind of grind through this over a quarter or 2, which may have, short-term, lessened the earnings impact but, I think, long-term, we're all going to be very happy that we put the focus and effort into the conversion.

Just real quickly, we had $80 million of assets for percentage roughly sequentially in Canada -- what Roger, about a 9% provision rate on that. So you can do the math, that's $8 million of provision build -- allowance build there. If you -- we've said, this quarter, we'll probably get $20 million of -- so just the improvement in the reduction in that upfront provisioning is probably going to be in the $6 million range, a little bit more than that in the sequential quarters. Then the net charge-offs will come down as the book seasons, and then you just have revenue because it's a product and you provision 9% in the first -- well when you make the loan, the product yield's about 5% a month. So it's a money loser. The day you make the loan, the product's a money loser and takes you kind of 6 weeks to 1.5 months to have it sort of begin to contribute in the black.

Got it. That's very helpful. And touching on that point. So you saw a lot of -- some great growth in Canadian line of credit. I know there's always tension between the growth rate and meeting guidance. And I'm just kind of wondering if you could take us through your kind of decision process when you see an opportunity like that and your decision process about taking that opportunity? I think you've had these sort of decisions in the past as well. And then also, when you think about the dilution that, that makes the 2018 guidance, what sort of accretion should we expect in 2019? And then the pace of that accretion?

So I've sort of give a little bit of answer, I gave it to Bob in the last -- we'll see Canada adjusted EBITDA -- it's all U.S. dollars for the year, kind of in the mid- to high-20s versus 54. So kind of half -- roughly half of last year. I don't really bring it all the way back to 54 for the full year next year, but it's a possibility because the snapback to a double-digit quarterly EBITDA -- and Canada is much less seasonal because you don't have the tax refund issue that we have that distorts kind of 1Q and 2Q in the states. It's much more sort of level throughout -- you do get some holiday borrowings and stuff, so 4Q is a little bit better. But it's much more sort of evenly spread across the 4 quarters. So if you -- again, just doing the basic math, you've got to get to, whatever, about $14 million a quarter or something, you get to -- back to EBITDA where it was in '17. I don't think we'll quite get there in 1Q or 2Q, but I think we've got a shot to get back there in the back half of '19. But regardless, you're going to have really good earnings growth. And if you look at that really good earnings growth for the product that customers love, it takes you -- the regulatory risk around the Single-Pay product is dramatically reduced. It's -- from a competitive standpoint, it's something that most people just from a capital standpoint, I mean, the ability to put $140 million of loans out and to finance that, really, there is only 2 or 3 companies in the market that can support that kind of an earning asset base. So I think that regulatory risk, competitive positioning and as I said, just the product itself and then the scale of the operations, tipping the favor -- tipping the balance of the market in favor of larger competitors, that's stuff that all benefits us in '19 meaningfully and positions us in the market there going forward in a much better place versus the Single-Pay. As I mentioned, it was our best -- singular best-performing product over a long period of time, but nothing lasts forever, and I think we've done a good job of putting the business on a footing to really perform well for a long period of time up there. So I think it's -- and look, I will absolutely -- I think it's a very fair criticism that we did a less than stellar job of explaining in our -- probably our July call or even back into our April call, what was going -- the impact of this on sort of -- in the near term. It accelerated faster than we thought, the people up there did a great job with customers, et cetera, but we probably didn't lay it out for everybody as explicitly as we probably should have. And we'll try not to make that mistake again.

And we have time for one more question, and that comes from John Rowan with Janie.

Can you just remind me what you said about marketing spend in 2019, if you gave any guidance?

Yes. I think -- sorry, Bill. As Bill said, he thinks the growth rate is going to be muted relative -- we won't see the same year-over-year growth in marketing spend in '19 that we saw in '18. I think Q4 will definitely, as a percentage of revenue, will be lower than Q3, and this was a year where we spent on Avío launch, we spent a meaningful amount at a much elevated level in Canada in July when we launched Open-End. So that growth rate is going to be much -- will be considerably lower as we move into '19. But seasonally, John, I think the seasonal -- by quarter as a percentage -- it will behave similarly at the full year growth. Even the quarter-over-quarter and the full year growth rates will be much lower. We expect them to be much lower in '19 than in '18.

I don't expect the actual dollars to go down, but I mean, I think, very flat would be a -- so obviously, based on the percentage of revenue, that may come down a bit but as far as actually raw dollars coming, I think the expectation of a fairly flat budget would be accurate. We're still working through that, as Don said, there's a lot to do from a planning perspective but that's -- those are the conversations we've had and that still leaves us plenty of budget to go -- grow the business and find the right customers. As Roger said, I mean some of the money that we put into Avío and LendDirect was important to get the data to make those businesses scalable from a long-term perspective. So you go out and you have a higher cost of funding, you do some loans that you wouldn't do long-term but you've got to have the data to build those models and I think we achieved that mission.

And then just quickly on the U.K., Don I think you mentioned something about absent changes in the regulatory front. What changes would that be, whether or not these claims competition companies are going to be regulated? And to what extent you're willing to incur the current operating environment to a certain extent to survive this issue and then get to a point where revenues are better, given the exit of one of the major players in the market?

John, I'm going to be a little cautious on the comments, because I don't want to kind of speculate too much. I mean, there have been a lot of conversations going on. As I said, we're really grateful the regulators have been giving us a lot of time to sort of -- I get that they understand the magnitude of the issue. With $4 million in quarterly redress claims, given the scale of operation, it's just not something that's sustainable. We're willing to kind of keep working on it in the near term, but if there -- as I said, I don't even -- I mean, it hasn't kind of defined what near-term is. But we're not going to abide this for another year-or-so. It's going to be -- we're talking about weeks and months, not quarters and years here, so in terms of how much longer we can -- we feel we can kind of let this keep going. But beyond that, I'd really just like to leave it with what's in the release and what we've said in the script so far.

Thank you. As that does conclude the question-and-answer session, I would like to -- I'm sorry, I would like to return the call back over to Mr. Donald Gayhardt, for any closing comments.

Great. Thank you again. We appreciate everybody's time and attention and we look forward to talking to you again after the year-end. Thanks very much.

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