CURO Group Holdings Corp (CURO) 2022 Q4 法說會逐字稿

Good day, and welcome to the Curo Holdings Fourth Quarter 2022 Conference Call. (Operator Instruction]I would now like to turn the conference over to Tamara Schultz, Chief Accounting Officer. Please go ahead.

Thank you, and good morning, everyone. Before the market opened today, Curo released its results for the fourth quarter 2022, which are available on the Investors section of our website at ir.curo.com. With me on today's call are Kura's Chief Executive Officer, Doug Clark; and Chief Financial Officer, Izzy Dawood. Before I turn the call over to Doug, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it. As such, it does include certain risks and uncertainties. Please refer to our press release issued this morning and our Form 10-K and 10-Q 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 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. Reconciliations 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 have provided a supplemental investor presentation that we will reference in our remarks and that you can find it in the Events and Presentations section of our IR website. With that, I would like to turn the call over to Doug.

Thanks, Tamara. Good morning, everyone, and thanks to you for joining Izzie and I today for our first earnings call here at Curo. December wrapped up a transformational year for Curo. While the first 3 quarters of the year were largely focused on the logistical aspects of the acquisitions and divestiture, in the fourth quarter, we were able to focus on the operational execution of our new businesses and begin to put into motion our playbook to generate long-term sustainable returns for our investors. While I'll leave it to Izzy to run through the Q4 results, let me start by laying out the framework for how we will be managing the business in 2023 and beyond.

In December, we streamlined our organizational structure and created clear alignment and accountability. We will responsibly grow our loan portfolio, but we are taking a disciplined approach, focused on resilient credit and will not chase volume for volume's sake. Turning to Slide 4 of the deck. We ended the year with gross loan receivable balances of close to $2.1 billion. This represents a 10% and 35% increase of where we ended the third quarter 2022 and December 2021, respectively. The fourth quarter growth was largely driven by our Flexiti business coming out of a strong holiday shopping season in Canada. We saw a more modest growth in our direct lending businesses as the step we have taken to tighten underwriting continue to take hold.

Beginning in the first half of 2022, we began tightening credit, particularly in our lower credit tiers and increased pricing on certain products. We did this in reaction both to the growing uncertainty in the macroeconomic environment and rising interest rates. And remember, with our U.S. consumer base, especially in the lower credit segments, they acutely feel the impacts of inflation. Unemployment rates for our customers remain at historically low levels. And while they have notionally benefited from the rise in minimum wages, the macroeconomic impact of inflation on this borrowing base lowers net monthly income, therefore, creating smaller net disposable income margins.

In addition, the excess savings our borrowers were able to build during the pandemic due to the various government stimulus programs has evaporated, and they have since returned to the levels we had seen prior to the pandemic. On the loan collection and servicing front, we have moved later stage servicing out of the branches and created a centralized team with expertise to help these borrowers. We have also rolled out additional loss mitigation tools to help get our customers back on track and minimize our losses. Turning to Slide 5. We expect NCOs to peak by the end of Q1 as the tightening we did across the portfolios, coupled with the improvement in servicing that I just mentioned, takes hold. While it's still early, we are encouraged by the early stage delinquency improvements we are seeing across all of our businesses. And if you look at the top of Slide 6, you can see the improvements in delinquencies across our portfolio segments. In fact, our height large loan portfolios, our current 31-plus delinquencies are showing a 15% to 20% improvement over Q3.

On the small loan side, our 31-plus delinquencies are relatively flat. Of our large loan balances as of the end of December, over 50% were originated in the second half of 2022 post credit tightening. On the first heritage portfolio, recent credit performance is encouraging as early stage delinquencies are starting to come down from where they were in the middle of the fourth quarter. And we expect to see further improvement in 2023 as the loan collection and servicing capabilities are centralized with Heights. In the direct lending business in Canada, we also experienced a decline in Q4 delinquencies. Similar to our U.S. direct lending business, we identified a variety of opportunities to help mitigate delinquencies and charge-offs.

In Q4, we rolled out additional tools for our consumers, including partial payment options and making it easier for them to make payments using debit cards. Beginning in January, we changed our charge-off policy to 180 days to align with the rest of our charge-off policies across the company. The charge-off policy change in Q1 2023 will result in a onetime lower charge-off for the first quarter as only loans will be charged off will be for legal reasons such as bankruptcy or fraud. However, charge-offs will revert to a more normalized rate beginning in the second quarter.

We are excited about these changes that are being made to the way we service our Canadian direct lending customers and believe that this will have a meaningful benefit to delinquency and net charge-off rates in later 2023 and into 2024. I'll now turn it over to Izzy to run through our Q4 results, and then I'll close with some thoughts about our business and where we will be focusing our efforts in 2023.

Thanks, Doug, and good morning. Let me start by taking you to our Q4 results on Slide 7. We -- for the fourth quarter, revenue was $217 million. The year-over-year decrease was 3% despite an increase in receivables. The decrease was primarily driven by a sale of our legacy business and transition towards a lower risk and more sustainable business model. This is further evidenced by the decrease in net interest margin post charge-offs from 39% to 18%. Interest expense of $55 million was up 93% over the prior year, representing an increase in debt to support receivable growth and an increase in interest rates. Operating expenses was $126 million in Q4 and included $13 million of restructuring expenses, primarily associated with our previously announced store closures in Canada and the U.S. and other cost-saving initiatives. Other expenses of $148 million primarily represents a goodwill impairment associated with our U.S. direct lending and Canada point-of-sale segment. Net charge-offs was $74 million, representing a charge-off ratio of 15%. The charge-off ratio was sequentially higher as expected, driven by higher delinquency rates in the second and third quarter.

As Doug shared in his earlier comments, recent delinquency trends point to lower charge-offs in the future. Provision build and other credit changes were $21 million for the quarter. Our net loss for the quarter was $186 million or $4.60 per share compared to a net loss of $29 million or $0.72 per share in the fourth quarter of 2021. Excluding the impact of goodwill impairment and restructuring expenses, our pretax loss ex provision was $48 million. Pre-provision income will be a key metric for us as we move into 2023 because I believe it to be a good measure to evaluate the underlying performance of our company without the quarterly volatility caused by loan loss provisioning, especially as we will be adopting CECL in the first quarter of 2023.

Before we move off the page, I want to highlight some additional metrics that we will also be focused on in the future. First, we added net interest margin post charge-offs. Quite simply, this is a risk-adjusted return on our assets. We like this metric because it holds us accountable to ensure we are getting the appropriate returns commensurate with the credit risk we are underwriting while also balancing out the cost of funding. Another metric we are introducing is an OpEx ratio. I'll speak to that later in the presentation. Turning to Slide 8. You can see how the business results for our segments build up to these key metrics I just mentioned. As Doug discussed earlier, internally, we really don't differentiate between the direct lending businesses. By that, I mean we have the same teams developing strategy, managing and running those businesses fit in the U.S. segment.

These expenses should be looked at on a total direct lending basis. This does not apply to our point-of-sale or Flexity business, where their operating expenses are largely self-contained. The net charge-off ratio is 21% for our direct lending business and 4% for our Canadian point-of-sale business. Net interest margin post charge-offs are 25% and 7%, respectively. On Slide 9, you will see the allowance bill this quarter. This is largely driven by loan growth and credit normalization we discussed. Also, I'll note on January 1, we adopted the CECL allowance model for credit losses. This will replace our current incurred loss accounting model. While we are still finalizing the details, we expect the adoption of this accounting requirement to result in a day 1 allowance build of between $130 million to $140 million. We will recognize this noncash accounting adjustment through our opening retained earnings. Turning to Slide 10.

Our fourth quarter net interest margin post charge-offs was 18%. The large year-over-year decrease is attributable to the strategic shift we made in early Q3 when we sold our high-yielding yet higher credit loss legacy U.S. business. The decline from last quarter is due to credit tightening across all of our businesses and a mix shift in our U.S. offerings as large loans became a bigger percentage of the overall portfolio as we focus on better credit quality in the face of macroeconomic uncertainty. On Slide 11, we will turn our attention to expenses. For the fourth quarter, our reported expenses were $126 million and includes $13 million of restructuring charges that I mentioned earlier. In the fourth quarter, we took actions that eliminated $20 million of expenses and are reinvesting these savings in 2023 to improve the capabilities in our operations to help support execution of our strategy. On the right-hand side, you can see our operating expense ratio.

The Canadian point-of-sale business continues to build scale and the direct lending platform is starting to show incremental progress. This will be a key metric for us going forward to measure improvement on the efficiency of our operations. Turning to Slide 12 is a summary of our debt facilities and interest rate sensitivity. Effectively, 2/3 of our debt is fixed, but still impacted by the increase in base rates. Our corporate debt has a fixed rate of 7.5% and maturity 5 years from now, and our lending activities are supported by various facilities with multiple counterparties in the U.S. and Canada. To note, in the first quarter, our Canadian revolver was terminated. On Slide 13, we will focus our attention on our leverage and liquidity.

Our leverage has continued to increase as we transition our business model and continue to grow our balance sheet. Our interest coverage ratio has also decreased over the last several quarters with lower profitability and higher interest expense. In the appendix, we have provided the details of how we view the calculations. With the growth in our business, we have also seen our debt facility capacity decrease. We're actively working on adding an additional $100 million in liquidity and capacity in Q1. Finally, on Slide 14 is a quick overview of our outlook for first quarter. Until Doug and I get more familiar with the company, we will provide an outlook for the upcoming quarter and focus on key areas where we are driving results. For Q1 2023, we expect receivables to end at between $2 billion and $2.05 billion and revenue of $195 million and $215 million. Net charge-offs are expected to be 15% to 17% on a normalized basis. Our reported charge-off amounts for Q1 will be lower by approximately $20 million or 14% to 16% as we harmonize our charge-off ratios and policies across the direct lending businesses. Our reported operating expense in Q1 is expected to be flat versus Q4 2022. With that, I will turn it back over to Doug to share closing remarks.

Thanks, Izzy. As I've just passed my 90-day mark as CEO, I wanted to share my thoughts on our overall business and what excites me about the path we are laying out for long-term value creation for our investors. Our direct lending business comprised of hikes first heritage in our Canadian segments provide a tremendous platform for growth. As we continue to mature our capabilities in each of these segments, we anticipate attractive growth, improving delinquencies and charge-offs and expanding margins. We have a terrific team of talented professionals in place, and I am highly confident in our ability to execute our strategy and deliver meaningful results to our shareholders and investors.

The Flexiti has built a great product and platform in Canada. However, as a largely prime book that operates on high volumes with thinner margins in our core business, it may benefit from lower cost of funds. As such, we continue to evaluate all options as it relates to our Flexiti business to help increase profitability. 2022 was the tumultuous year for Curo as we completed our strategic transformation. We did not deliver on the results that we intended and that our investors deserve. We understand that we must perform better. On Slide 15, we've laid out our long-term vision for Curo. Across all of our lines of business, we will be focused on ensuring steady yields on our lending products, stabilizing losses, improving our cost structure and strengthening our overall liquidity.

Both Izzy and I need to spend more time with our businesses before we are ready to share our long-term targets. So, the bullet points on this slide captures our areas of focus and where we will be leading the company as we continue to formulate our longer vision. This concludes our prepared remarks, and we'll now ask the operator to begin Q&A.

[Operator Instruction] the first question today comes from Moshe Orenbuch with Credit Suisse.

Thanks, and welcome, gentlemen. Thanks and especially Izzy good to talk to you again. The first thing, I guess, I was hoping to get a little more clarification on is, when you said talking about additional or other options with respect to Flexiti, are you talking about options with respect to funding you're talking about options with respect to kind of ownership of the business? Can you kind of give us a little more flesh that out a little bit?

Well, Moshe, this is Doug. Thanks. Great talking to you again. Certainly, we are considering all alternatives for the business. It's clear that with our cost of funding, we are not necessarily the best partner for Flexiti. As said, they have a fantastic platform, and we really want them to be able to realize everything that they've got in their strategy. And so we're actively seeking a partner for them that can help them grow.

Got it. And there was some discussion over the last couple of quarters about trying to enhance the yield, both from this kind of hoping that some of the existing customers would be borrowing and then kind of migrating into the non-prime consumer. Is there any change there? Has that happened at all? Can you give us a little bit of an update?

There's been a slight increase in the number of consumers going to the revolving product in the Flexiti business, but nothing material as of yet as we think about long-term yield on that product.

Got it. And then I guess I was sort of hoping that there would be a reduction in expenses as opposed to flat. You talked about reinvesting the savings, I guess, can you kind of give us a thought about how to think about the evolution of your operating expenses a little bit past Q1.

Yes, sure. And Moshe, good to talk to you again. I'm sure we'll be chatting later in the day as well. Yes, in terms of our expenses, kind of what we have done, we announce the store closures, we've taken some corporate expenses out. So that is helping our overall expenses be lower in 2023 by roughly $20 million. We have done that. The reinvestments are primarily in terms of collection operations. It is in store wages for our employees. It's investment from the -- moving from data center to cloud. But overall, our goal is to ensure that, that OpEx ratio improves, 90% of our expenses are fixed or close to it. So as a result, the structural changes in those expense reductions are just going to take longer than just going in and cutting expenses right and left. That being said, we feel pretty good that OpEx ratio over time. will and needs to improve. And we'll probably discuss that a little bit more on our next Q1 call when Doug and I have been able to spend more time going through the expense base in the business.

Got it. Then last one, I guess, I was trying to understand the comments about kind of improving delinquency. The guidance in the first quarter for losses, which you said -- you said fourth quarter was $15 and that on a normalized, if you kind of hadn't made the change 15 to 17 for the first quarter. So I guess, in kind of squaring that, I thought you had said that fourth quarter was sort of peak. So maybe could you just kind of discuss how you're thinking about those charge-offs? And since you're kind of only giving guidance one quarter out, like what will it take to see reduced charge-offs? And when can we -- what's the time frame?

Moshe, this is Doug. The -- I think the 31-plus delinquency is your best indicator of future charge-offs, which is why we shared those charts. So obviously, with a 180-day charge-off window, what's rolling into Q4 was the Q3-ish-type delinquencies oftentimes. So, if you track our delinquency chart, that's why we would say charge-offs seem to be peaking in Q1, and then we would -- as those 31-plus delinquency buckets come through, roll through, we would anticipate lower charge-offs beyond that.

The next question comes from John Hecht with Jefferies.

Doug and Izzy... Good to chat. Thanks good to check I guess just making sure I understand the moving parts of the provision in Q1. I mean you have your CECL build, I think you said $130 million to $140 million, that's the capital charge is not a provision -- and the and then we should just think beyond that, the provision will account for charge-offs? And then as well as any maybe loan growth. Is that kind of the way to think about provision...

In total, yes. So, it's a combination, John, of charge-offs and the allowance build, right? And on the allowance build, we're transitioning to CECL, as you can imagine, I'm trying to get comfortable getting my arms around it, how that will perform as our business mix changes. So, we're not providing any guidance on it. But the way you're thinking about it is correct. The allowance build going forward will roughly be based on loan growth or even the changing our expectations, good and bad in the -- on the portfolio.

And -- and then I just want to make sure a sense the 15% to 70% net charge-off rate you're guiding to, it's actually going to be the results on a -- I guess, on a reported basis, they're going to be $20 million below that because of the change in the timing... Okay. And so will Q2 then be a catch-up quarter whether it's elevate like -- they'll be elevated for that change in timing? Or will that just get balanced over the course of the year?

No. It just gets back to normal in Q2. So it's Maybe, John, if I describe the change, effectively, it's harmonizing our policies first heritage from a 90-day charge-off to 180-day charge-off. So effectively, there is a period where you're going to have the balance to stay on the receivables and not be call it, go through charge-offs. -- sorry, on the CD first heritage. I was corrected. And it's just the first Heritage platform. Sorry, Canadian... The Canadian Direct lending platform. That's it. Okay. That's all.

And then it sounds like you rightsized some branches in the -- I mean, how do we think about branch versus non-branch activity now in terms of mix as well as kind of yields and overall performance?

John, are you saying as far as number of branches? Or -- can you clarify your question?

Just sort of -- I guess, the mix of the different channels, the branches, I guess you changed some of the products that you've got the Canadian business and a couple of different legacy U.S. store platforms. Is the mix now kind of in the branch network, is that pretty much the way you see the channels going forward? Or should there be other changes that we should think about?

Well, no, I think it's predominantly a branch-based business. We have a small portfolio in Canada that is online only. As we -- you've heard the word I've used mature, we mature our credit risk, fraud capabilities, we anticipate growing our online channel in Canada, but that is not in the next 2 Qs. So overall, it will remain a primarily branch-based business in 2023.

Okay. And then my last question is just you talked about your goals for liquidity in the near term. But just thinking about overall, the changes in interest rates, I mean, I know that the forward curve expects to see more smaller rate hikes, but has the impact of the changes in the rate market, whether it's on yields of products, and/or your cost of capital, has that largely been embedded in your margins? Or are there other things to consider that we should be thinking about over the next few quarters?

No, it's largely been embedded, John, good question. Most of our rate exposure is fixed, like 1/3 of it is exposed if you think about roughly a little over -- close to $2.5 billion in debt, $800 million would be still exposed to variable rates. So, it takes a pretty meaningful increase in where we are now for that to meaningfully impact margins.

I really appreciate that

The next question comes from John Rowan with Janney.

Welcome... So, I guess I'm just trying to wrap my head around kind of the path to profitability and how that relates to Flexiti. I had -- I won't have been under the impression, but thought that one of the paths of improved results was just a slowdown in growth in Flexity and getting more customers into the portion of the contracts that are actually paying. Is that now kind of not on the table because Flexiti just wants to continue to grow and they need a better funding source than what Curo can provide? I'm just curious between the 2 options of slowing growth, one and basically looking to offload the business, too, is one now off the table?

I wouldn't necessarily say that, John. I think we're evaluating the first option, which is finding a strategic partner for them to continue to accelerate. Again, they just -- they have a great solution that they've built. And I think with the right partner, they can continue to accelerate that business. So that is our priority. If that's unsuccessful, then of course, we're going to have to look at how to -- how to return to profitability in a more quicker manner on our Flexiti platform.

Okay. And then just one question on the guidance. You said operating expenses would be flat sequentially, but there were a bunch of restructuring expenses. If I look at the adjusted earnings table and the financial supplement, are we talking about operating expenses on a normalized basis? Or are you talking about operating expenses, including the restructuring costs?

On a reported basis...

So that includes all the restructuring that's is the restructuring going to continue? Or is there just -- is that the run rate?

No, we're going to have a little bit more remaining in the first couple of quarters here. John kind of working through that. I would say the abundance of caution, I would just assume a flat operating run rate into Q1.

Next question comes from Vincent Caintic with Stephens.

Good to talk to you again. So I wanted to focus on the U.S. business. So understanding that there's a lot of moving pieces and you've been in the seat for a short period of time like that, Doug, having come from the Heights business. Maybe if you could kind of talk about where we are now and where you see that path to profitability and sort of what a normalized business looks like for the U.S. side.

Yes. Thanks, Vincent. So, we have 2 platforms in the U.S., first heritage in HEIGHTS. And you'll continue to hear me talk about maturing our capabilities. Those business models are both immature in many ways, and I kind of introduced the -- we introduced late-stage collection centralized collections teams. We're still refining our underwriting capabilities. We're still implementing a single platform for the business. So, we have a lot of technology work, and we will be expanding our secured lending business. So, what I would say when it comes to Heights in particular, there's growth through product mix, but there's also growth through improved NCO margins. We talked about the declining delinquencies. I do believe that we'll continue to have a stabilization of that and improve our margin in that business. And in Heights case, we opened up, I believe, 39 branches last year. So, we'll continue to look and work towards a branch expansion program.

On the first Heritage business platform, it is -- it was, I guess, more immature than heights and so that creates that many more opportunities. So, aligning their underwriting philosophies to height, if you go back to Heike's historical information when prior to Ciro's acquisition, HEIGHTS grew their portfolio by, I believe, it was about 30% in 2021 over 2020, something like that. And a lot of it was addressing the underwriting philosophy and making sure we right size loans to risk. And so that's a huge opportunity for first heritage. And then, of course, secured lending, as I mentioned, for HEIGHTS will be an opportunity to expand and eventually potentially branch expansion.

Okay. Great. That's super helpful. And then switching to liquidity to kind of follow up there is. So, if you could talk about kind of the environment out there for getting liquidity, what do you think is sort of the right size for where you want to position the liquidity and balance sheet going forward?

Yes, Vince, great question. And it's definitely something we've been thinking about. One of the -- I'll answer in the following way before I get to the punch line. One thing you do see in the disclosures we made and you follow the company, the unit economics are strong, right? So, in terms of making a loan, we can generate good excess spread. Doug's outlined where we can see improvement in that as well as we mature some of the operations and collections processes across our U.S. businesses. That's number two. I think the biggest thing is making sure that when we expand and grow our business, we have the capacity to do that via our lending partners. That being said, our performance are still within the covenants and within acceptable limits with our facilities.

So, talking to all our lending partners, we are seeing that we will have access to liquidity and capacity to grow the business in a way that makes sense. And that's important because as you probably are thinking through it, that's our path to profitability, right? We -- I will say that right now in Q1, my goal is to raise $100 million in capacity/liquidity. We're making good progress. We have great support of our lenders and our bondholders. They see the performance of the asset. So, fingers crossed, we should be able to execute on that at least in the near term. And then in Q1, on our Q1 call, as Doug laid out, we will talk about a net leverage kind of goal for us down the road, which will encompass kind of where I see like long-term liquidity and capacity needs to be.

[Operator Instruction] the next question is a follow-up from Moshe Orenbuch from Credit Suisse.

Great. Just wanted to follow up on that CECL commentary. In the first quarter, it likely would -- you'd probably -- after having the day 1 add, given you expect loans to be lower that unless there's an adverse change in credit quality, you would probably see that reserve falling in Q1, right?

I mean that's... Happens otherwise. There's a mix also, right? So even though overall loans are falling, I think we see growth in one versus the other. We're still kind of working through that. But that's a fair -- I mean, you can reach that acquisition.

Right. Okay. All right. I just wanted to clarify that. Good...

The next question comes from John Rowan with Janney.

Sorry, guys. Just one follow-up here. Obviously, it sounds like you're tasked with generating some liquidity for the company I mean is selling Flexiti or possibly selling Flexiti part of that liquidity equation. Just forget about whether or not that creates earnings. I mean, is that part of the model to generate liquidity?

Yes. Not -- John, it's. Not in the near term. Near term, we're clearly working with our lenders to create the right capacity for growth. One of the things we think about Flexiti the biggest thing is making sure we have the right advanced rates and the right capacity because it is a prime business with lower losses. So, in the first Q outlook and everything, that is not considered as part of our liquidity-generating initiatives.

Thank you...

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Clark for any closing remarks.

Yes. Thanks, everyone, for joining us this morning. As stated, is and I look forward to sharing more of our plans in the upcoming Q1 earnings call. Hope everyone has a great day. Thanks.

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