CURO Group Holdings Corp (CURO) 2023 Q1 法說會逐字稿

Good day, and welcome to the CURO Group Holdings First Quarter 2023 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Juan Erie, CURO's Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. CURO released its first quarter 2023 results before the market opened today, which, along with supplemental information, are available on the Investors section of our website at ir.curo.com. With me on today's call are CURO's Chief Executive Officer, Doug Clark; and Chief Financial Officer, Izzy Dawood.

Today's discussion will contain forward-looking statements based on the business environment as we currently see it. As such, it includes certain important risks and uncertainties. Please refer to our press release issued this morning and our Form 10-Q and Form 10-K for more information on the specific risk factors that could cause our actual results to differ materially from the matters described in today's discussion. Any forward-looking statements made 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 present in the supplemental materials 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 appendix to the supplemental materials.

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

Thanks, Juan. Good morning, everyone, and thank you for joining us today on our first quarter earnings call.

During the first quarter, we remained laser-focused on executing our business plan consistent with our stated road map. We successfully executed on key capital priorities that we laid out on our prior earnings call. Consistent with our previous discussions, we continue to progress in our efforts to find a strategic option for Flexiti and hope to have an update in the not-too-distant future. We also navigated current macro headwinds and delivered favorable results relative to our guidance expectations. Lastly, during Q1, we completed our leadership transformation and have an extremely talented and energized team to execute our strategy.

On Slide 4, you can see details of how we strengthened our liquidity position and funding capacity. We're very pleased that, amidst a challenging liquidity environment, we entered into new debt arrangements for over $230 million of gross capital following quarter-end. Of this amount, $150 million was in the form of commitments for our first lien senior secured term loan and CAD110 million, or approximately $83 million in commitments for a Canadian SPV facility.

The transaction is expected to close shortly. We are confident in our business model and believe this funding provides growth capital, which is a key step to executing our plan to profitability over the long-term. It also demonstrates continued access to capital markets and strong support from all our lending partners, all of whom identified the strong underlying opportunity in our business. We now have the runway to drive responsible balance sheet growth and capitalize on the opportunity to further strengthen our position as a leading consumer lender in both the U.S. and Canada.

As noted with the Canadian SPV facility, we expanded borrowing capacity, which provides opportunity for us to drive growth and further expand our Canadian business. We continue to see a significant opportunity in Canada even with anticipated regulatory changes and believe our Canadian direct lending business is an attractive point of differentiation for CURO relative to our U.S. peers.

Turning to Slide 5 of the deck. We [ended] the first quarter with nearly $2.1 billion in total gross loan receivable balances, relatively flat on a sequential quarter basis. Consistent with our responsible growth approach, we had already tightened our underwriting standards and were significantly more cautious on lending, given the increasingly uncertain macro environment. We also pulled back on marketing in Q1 as we were engaged in a systems conversion in our U.S. branches while moving to a single robust technology platform.

During this transition, we suspended certain marketing activities to allow branches appropriate time to focus on the conversion. We anticipate completing the systems conversion by mid-2023. The conversion of the branches to a single loan management system should benefit our longer-term growth while enhancing our cost efficiency, as it allows us to optimize loan originations, servicing and performance monitoring. Our efforts in 2023 will be focused on maturing CURO's direct lending capabilities, including scalable omnichannel acquisition, credit and automated underwriting, and centralized servicing and collections.

We will also remain focused on driving growth through selected branch expansion, new secured product offerings, and the application of improved credit and fraud tools to expand product availability for new, current and even former customers. We will continue our gradual mix shift to more secured versus unsecured lending by leveraging our current product suite while also introducing new auto-secured products later this year for our U.S. and Canadian direct lending branches.

Importantly, we will always prioritize resilient credit quality over balance sheet growth particularly through an uncertain macro environment. While our portfolio is almost evenly split between Canada and the U.S., specific macroeconomic factors that impact our U.S. customers do not necessarily impact our Canadian customers to the same degree, and vice-versa. Currently, we are not seeing unexpected trends relative to our typical customer base, particularly as the employment picture remains generally supportive in both the U.S. and Canada. However, we acknowledge that macro headwinds, including inflation and a general decline in personal savings rates, impacts consumers, which could ultimately lead to industry-wide lower demand for lending products and an uptick in credit quality stress.

Turning to Slide 6. We're pleased that credit quality continues to show signs of stability. Total direct lending net charge-offs declined sequentially to $47 million, primarily driven by the changes to the charge-off policy in our direct lending business in Canada, which we discussed on our last earnings call. On the right side of the page, you can see our direct lending charge-offs by geography. U.S. charge-offs increased at a slower pace in Q1 '23 on a sequential basis than they did the prior quarter.

In Canada, charge-offs declined sequentially due to a change in charge-off policy from 91 to 180 days. Even if the change in net charge-off policy had not been implemented, credit trends would still be encouraging as total direct lending charge-offs would have been flat sequentially, and charge-offs in Canada would have been slightly down sequentially.

Moving to Slide 7. You can see that delinquency trends, a leading indicator of future net charge-offs, are also encouraging. Total direct lending 31-plus delinquency stabilized during Q1, remaining relatively flat at $100 million versus $96 million in Q4 '22 and $100 million in Q3 '22.

In Canada, delinquencies increased primarily due to the change in our charge-off policy, which rolls charge-offs back to the delinquency status and gives us an opportunity to work with the customer. Excluding this policy change, total direct lending delinquencies would have declined sequentially to $81 million in Q1 '23, and delinquencies in Canada would have been up modestly versus the prior quarter. In the U.S., 31-plus delinquencies declined sequentially for the second quarter in a row.

Turning to Slide 8. You can see that the Canadian point-of-sale charge-offs and delinquencies increased due to overall growth and maturity of the portfolio. While we are not immune to continued industry-wide credit normalization, we believe the changes we made to our servicing and collections process in direct lending across our U.S. and Canada regions should drive improved recoveries and lower charge-offs over time.

Specifically in the U.S., we began tightening credit underwriting in 2022, deployed new debt mitigation tools in Q4 '22 and established a centralized collections team in Q1 '23. Moreover, as noted earlier, we anticipate continuing to remix the portfolio gradually towards more secured lending later in 2023, which should result in lower NCOs, going forward.

In Canada, we also tightened credit underwriting in 2022, changed our servicing platform to replicate traditional consumer lending platforms, deployed new net debt mitigation tools replicating capabilities in the U.S., and updated our charge-off policy, as discussed earlier. In Canada, we also anticipate deployment of new credit and fraud capabilities later in 2023.

On Slide 16, we are providing you with a growth strategy framework, including ranges for KPIs that align with the 3 pillars that we laid out for you last quarter. Izzy will provide you with more detail in his section, but I want to highlight a few takeaways from this framework that we believe puts us on a path to profitability.

First, we believe the framework provides a good sense of the strong underlying opportunity embedded in our business, as well as an understanding of our strategic vision for driving profitable long-term growth. Second, we remain very confident with our business model and the opportunity to grow receivables and revenue. Third, we continue to see an opportunity for operating efficiency improvement through strong cost management. And fourth, we are encouraged by the early signs of credit stability at CURO, given the actions we took.

Let me end by providing a little bit more context regarding the recently proposed Canadian rate cap, which includes proposed legislation to reduce the maximum allowable rate of interest. We continue to closely monitor developments and remain focused on managing our business to serve our customers while maintaining an appropriate level of risk-adjusted returns.

However, it's important to note that the proposal could ultimately exclude a substantial portion of hard-working Canadian borrowers from access to credit. Our current understanding, based on how the 2023 draft budget is currently written, is that the rate cap would impact new originations, consistent with our experiences in the U.S. with similar legislative change.

Currently, over 90% of our line of credit portfolio falls above the new rate. Correspondingly, post-implementation, we will tighten our credit box sufficiently to manage overall risk-adjusted returns. We would also anticipate increasing utilization of our single-pay product following the credit tightening. Lastly, we will also be introducing a secured product later this year and will remain focused on our loan servicing and cost efficiency efforts.

I will now turn it over to Izzy to give you more details on our Q1 results, and then I'll close with some final thoughts.

Thanks, Doug, and good morning, everyone. As Doug mentioned earlier, CURO is off to a good start in 2023, evidenced by our Q1 results being favorable relative to our expectations. First quarter gross loan receivables of $2.1 billion were relatively unchanged versus the prior quarter and towards the high end of our guidance.

Slide 9 shows the summary results for the quarter. Revenue was $209 million, a 4% sequential decline and towards the high end of our expectations. The modest decline was driven mainly by continued product mix shift, in line with our strategic shift to longer-term, lower-yielding but lower-risk credit products.

Our net interest margin post-charge-offs, a key indicator of our risk-adjusted return on our assets, remained flat sequentially at 18%. Net revenue post-provision expense was $147 million, up 20% sequentially, primarily driven by a lower provision for loan loss expense as our net charge-off rate declined in the quarter.

Interest expense continues to be impacted by rising benchmark rates, though at a slower pace. For the first quarter, interest expense increased to $59 million from $55 million sequentially. Operating expenses of $118 million decreased a little more than 6% sequentially from $126 million, driven by decreases in restructuring charges recognized in Q4; which, as we indicated, were part of operating expense reduction through store closures and headcount reductions in the U.S. and Canada.

Our operating expense ratio improved to 23% from 25% sequentially. Other expenses of $8 million primarily represent gain on sale adjustments, Flexiti earn-out and catapult losses. Net charge-offs of $59 million decreased sequentially from $74 million, and our net charge-off rate improved 326 basis points sequentially to 11.5%. This was driven by a charge-off policy change in our direct lending business in Canada, standardization of charge-off policies for First Heritage and improved credit performance. Excluding this policy change, net charge-offs would have been $18 million higher, or $77 million in Q1. As Doug noted earlier, the actions we have taken on collections, along with our focus on responsible asset growth, should continue to drive stable credit quality.

Net loss for the quarter was $59 million, or $1.46 per diluted share. Including a valuation allowance impact on our deferred tax asset, $18 million related to the net charge-off policy items, and a $10 million restructuring expense, our pretax post-provision loss was $47 million. Pre-provision income, which we highlighted last quarter as being a key metric for us, going forward, was $24 million this quarter compared to a loss of $112 million in the prior quarter, mainly driven by the $145 million goodwill impairment charge in 4Q 2022.

Turning to our segment results on Slide 10. As we discussed last quarter, we run and manage our direct lending business cohesively, with the only practical difference being which side of the board or the consumer lives. As such, we have realigned our external presentation with this perspective and combined our U.S. direct lending and Canada direct lending into one direct lending segment, and also removed the reporting of adjusted net income. Going forward, we will continue to provide performance detail by geography. We believe this also simplifies the process of modeling the company, going forward.

On Slide 11, you can see more detail on our allowance. As a reminder, we adopted CECL on January 1, which resulted in a noncash accounting adjustment that we recognized in our opening retained earnings. Including the CECL allowance adoption, our allowance increased to $260 million this quarter. This increase is largely driven by the change in our net charge-off policy in our direct lending business in Canada, along with our cautious view on the macroeconomic environment and our view of unemployment rates.

Turning to Slide 12. Net interest income post charge-off modestly increased sequentially due to the charge-off policy change during the quarter. This was partially offset by lower revenue due to product mix, as well as an increase to interest expense due to rising benchmark rates. As noted earlier, our net interest margin post charge-offs remained flat at 18% versus last quarter.

Let's turn to Slide 13 for a bit more detail on operating expenses. On the left side of the page, you can see our consolidated operating expenses on a reported basis declined in Q1 to $118 million from $126 million sequentially and includes $10 million of restructuring expenses that we called out earlier. The sequential decline was driven primarily by lower restructuring charges this quarter versus during Q4, as well as a benefit from lower stock-based compensation. On the right-hand side of the page, you can see our operating expense ratio trends by business. Positively, our operating expense ratio in both direct lending and Canada point-of-sale businesses continue to improve.

Going forward, maintaining operating efficiency will continue to be a top priority for us. We will continue our work on lowering expenses where we can, and we'll remain intensely focused on identifying opportunities for improvement. We have already done some headcount rightsizing given the business outlook, and our newly established procurement team is diligently working to continue to enhance our processes with an eye on further streamlining and improving efficiency of third-party spend. As we are executing with the new team, we continue to find opportunities to lower expenses to improve profitability and provide capacity to invest in future growth, as well.

On Slide 14, you can see our leverage and liquidity summary. Net leverage declined in Q1 due to a sequential increase in adjusted pretax income. Total cash increased sequentially while capacity declined due to funding of portfolio growth. Restricted cash increased by $32 million due to an increase associated with the SPVs of $40 million and offset by a decrease in restricted cash associated with our bank card products and reinsurance.

Pro forma for the announced capital transactions, we will have a total of over $460 million in cash and available borrowing capacity, including $195 million in unrestricted cash. This provides a solid foundation of capital that we can use for growth purposes. By year-end 2023, we expect it to have $100 million to $140 million in unrestricted cash as we support growth in our direct lending business.

Moving to our outlook for the second quarter on Slide 15. For Q2 2023, we expect receivables to be in the range of $2 billion to $2.1 billion and for revenue to be in the range of $200 million to $210 million. Net charge-offs are expected to be between 13% to 16%. Our operating expense is expected to be in the range of $112 million and $120 million on a reported basis.

Finally, on Slide 16, let me give you a bit more detail on our growth strategy framework. Doug provided the strategic drivers, and I will spend some time on the KPIs. While this is not guidance, it does provide a reasonable view of how we plan to drive sustainable profitability and create a path to deleveraging.

We see multiple opportunities to do this. Grow responsibly. Over time, we believe we can achieve consolidated receivables growth of 8% to 10%. We plan to scale in Canada, where we see great opportunity for growth even with anticipated regulatory changes. We also intend to improve our small and large loan mix in the U.S., expand our product offering, including secured lending, and selectively target new geographies.

We also believe we can reach a net interest margin post-charge-off of 17% to 20%, inclusive of direct lending net interest margin post-charge-off of 26% to 31%. Our net interest margins will benefit from improving charge-offs, and we should also benefit from an improving interest rate environment over time and more efficient funding sources, such as securitizations, though we are currently not factoring that into these ranges.

Execute with excellence. We will continue to improve our operating efficiency and believe we can reach a consolidated OpEx ratio of 15% to 17% over time. We plan to manage our expenses effectively and improve operating leverage by continuing to align our expenses with our business outlook, further centralizing the automating operations and through new procurement programs.

To strengthen our foundation, we plan to enhance our liquidity position and manage to a robust minimum liquidity level while also establishing new capacity. Recall that our notes have general maturity dates 5 years out. With that in mind, we believe we can ultimately reach a net recourse leverage of 5x to 6x and successfully refinance our recourse debt.

To help you gauge progression, we believe we can achieve these ranges as we start to approach loan balances of nearly $3 billion. We will also provide you with an update on these ranges once final language is available on the Canadian rate cap situation.

With that, I will turn it back over to Doug for some final comments.

Thanks, Izzy. The CURO team accomplished quite a bit this quarter, which makes me very enthusiastic about our long-term opportunity. We strengthened our capital base. Our business trends are moving in the right direction. We laid out a detailed and reasonable path for long-term profitable growth, and our highly experienced and energized new leadership team will work diligently to execute our plan.

With that, I would like to open up the call for Q&A. Operator?

(Operator Instructions) The first question will come from John Hecht with Jefferies.

Thanks for all the detail in the presentation here. The first one is just, within the growth strategy framework, thinking about the 8% to 10% receivables growth and the maturity of the loan and your target leverage of 5x to 6x, it just sort of seems like you're targeting getting down to that level certainly before maturity. And so number one, is that accurate? And number 2, should this be a linear decline in net leverage? Or is there different kind of pivot points we should be thinking about along the way?

John, thanks for the question. I'll take the mechanical part of it, and then I'll turn it over to Doug to talk about what we're doing to drive that growth.

But yes, we are effectively going to try to hit -- we will be trying to hit that target before the maturity date. That is the goal. And the reason we laid that 8% to 10% out, it's through the cycle. If the opportunity is there, we may push the accelerator on it. But if things feel like they are getting a little tight or we don't see performance, we may pull back. So it's tough to model it linear. But as Doug will talk about, we believe that growth is pretty attainable.

Yes, I would agree with Izzy. We have a lot of levers that we're still working with that we think we have sufficient opportunity to drive that responsible growth, everything from our credit and fraud capabilities to product diversification to new marketing campaigns, and even branch expansion. So I think as we look, notwithstanding the macroeconomic impact, we think we have a lot of, again, levers that we can continue to drive and enhance to deliver that growth over the long-term.

And then you did see favorable DQ trends in direct lending. Maybe can you guys unpack this? I mean, how much do you guys attribute that to the mix change versus tightening versus just, call it, the overall conditions of your borrowers?

Let me kind of deconstruct that in a couple of pieces. So if we first start with the U.S. delinquency, which is where you saw the greatest improvement, I think we signaled in our Q4 earnings call that we were seeing some encouraging trends. And I would say most of that improvement is attributable to the actions we have taken on underwriting. It takes a while for the secured element to work its way through the portfolio. So that's more of a long-term play. So most of it is the actions we took last year on our underwriting and on delinquencies and, more recently, centralized collections.

So as far as the consumer goes, obviously, as mentioned, we're hyper-focused on the macroeconomic and monitoring it. We continue to see really basically solid demand. It's important to always bifurcate the Canadian consumer from the U.S. consumer, and the tech layoffs we read about in the U.S. really isn't affecting our business model. But we also get real-time feedback through payment rates, through insurance claims unemployment insurance that we sell on what's going on with the consumer. And to date, we're still not seeing any kind of alarming trends developing. So, so far, so good on that, but we'll continue to monitor it closely.

And then the post-CECL ALL of 12.6%, I mean, does that fluctuate seasonally? Is there any kind of macro overlay that you want to talk about in there? Is that just sort of a good target for us to think about from a modeling perspective?

Yes. John, I'll answer the last part first. I'd say it's a good number to model. There really is no seasonality. The uptick we had is primarily based on the macro factors. We rely a lot on the Fed forecast, and the last one had unemployment ticking up over 5%. So that informed any sort of macro overlay in terms of how we look at our CECL allowance.

The next question will come from John Rowan with Janney.

In your prepared remarks, you called out a percent of your portfolio that is above the Canadian rate cap, or above what the proposed Canadian rate cap is. I didn't get to write it down. Can you remind me what it was?

It was 90%, currently is over that rate cap, John.

But you listed several other products that you were looking to introduce into the market, which presumably would not be subject to the rate cap?

Well, I wouldn't say it wouldn't be subject to the rate cap. I think, in particular, the secured lending product, which carries a much lower charge-off rate, would allow us to maintain net interest margins as we move customers into that product. So we're going to be introducing that product later this year.

Izzy, do you have a pro forma tax rate for the quarter?

John, let me follow up with you offline. I don't have the pro forma tax rate.

Yes, offline, if you want. I'm just trying to get an apples-to-apples relative to prior adjusted earnings. So pro forma tax rate, stock-based comp and an intangible amortization figure would be helpful, if you could get that to me.

Yes. The stock-based comp, intangible amortization, you'll see in the appendix that's laid out. So I'll get a tax rate for you.

And then just last question for me. Izzy, you mentioned refinancing specifically recourse debt. Can you just remind me if you have any nonrecourse debt and if there's a separate plan for refinancing nonrecourse debt?

So the nonrecourse debt, again, I must apologize, we get into all the debt terminology. The nonrecourse debt, effectively all our SPVs that are funded by our assets, so that is just a normal 2- to 3-year maturity that we refinanced or expand as time comes right. It is a recourse that's the senior debt we have that we really are focused on making sure that we're able to refinance when maturity comes up in 2028.

(Operator Instructions) This concludes our question-and-answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.