CURO Group Holdings Corp (CURO) 2021 Q4 法說會逐字稿

Good day and welcome to the CURO Holdings Fourth Quarter 2021 Conference Call. (Operator Instructions) Please note, today's event is being recorded. I'd now like to turn the conference over to Matt Keating with Investor Relations. Please go ahead, sir.

Thank you, and Good morning, everyone. After the market closed yesterday, CURO released results for the fourth quarter and full year 2021, which 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, Don Gayhardt; President and Chief Operating Officer, Bill Baker; and Chief Financial Officer, Roger Dean.

This call is being webcast and will be archived on the Investors section of our website. Before I turn the call over to Don, 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 last night in our Forms 10-K and 10-Q for more information on the specific risk factors that could cause our actual results to differ materially from the 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. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in yesterday's press release.

Before we begin, I'd like to remind you that we have again provided a supplemental investor presentation. We will reference this presentation in our remarks, and 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 Don.

Thanks, Matt. Good morning, everyone, and thank you for joining us today. 2021 was a transformative year for CURO that will dramatically shape our company's prospects and ability to drive shareholder value well into the future. We made 2 significant acquisitions: Flexiti and Heights Finance that diversified our business, enhanced our long-term growth prospects and positioned us to grow our customer base in the U.S. and Canada, all while reducing our exposure to regulatory uncertainties.

We saw very strong growth in our Canadian Direct Lending business, and after a sustained period of weak demand driven by COVID-related stimulus, our legacy U.S. Direct Lending business is now seeing healthy growth. Importantly, our team's focus on executing our strategic priorities meaningfully improved our position in the 3 main consumer credit verticals that we target: Direct-to-consumer, point-of-sale and card-based applications.

Our March 2021 acquisition of Flexiti diversified our channel, loan and revenue mix by adding established point-of-sale financing capabilities and private label credit cards to our Direct Lending capabilities in Canada. We believe Flexiti signing of LFL Group, Canada's largest home furnishing retailer, to a 10-year exclusive point-of-sale financing agreement in June of last year, positioned the company as the largest provider of point-of-sale financing in Canada.

For perspective on Flexiti's recent growth, consider when we closed the acquisition in March, our acquired loans totaled $196 million and by year-end, our gross loans receivable reached $459 million. Flexiti ended 2021 in good fashion as gross loans receivable increased $157 million or 52% sequentially during the fourth quarter, driven by the onboarding of LFL Group volume and seasonal holiday demand.

Our December 2021 acquisition of Heights Finance significantly strengthened our U.S. direct-to-consumer business as Heights primarily serves near-prime and non-prime customers through its network of 390 branches and 11 Southern and Midwestern states. This acquisition accelerated our transition into longer-term, higher balance and lower rate credit products and offers us opportunities to expand into new geographic markets, leverage our omnichannel capabilities and cross-sell our recently expanded set of card products.

We're also excited to launch First Phase, our new credit card that provides eligible nonprime customers with a Visa-branded credit card. We launched in December in select markets and look forward to the rollout of this product across all of our U.S. business channels this year. While we don't expect First Phase to affect our earnings meaningfully in 2022, we expect it to be a solid contributor to earnings growth in 2023 and beyond.

Along with these 2 significant acquisitions, our core business ended the year with very good momentum. Excluding Flexiti and Heights loans, our combined gross loans receivable increased 11% year-over-year and 6% sequentially. If we also exclude the runoff portfolio in the U.S., year-over-year and sequential growth was 23% and 9%, respectively.

During the year, we also completed several key financing initiatives. In July, we refinanced our senior secured notes, reducing the interest rate by 75 basis points, increasing capacity and extending the maturity date to 2028. In the fourth quarter, we added $250 million to our senior secured notes, in part to finance the Heights acquisition. At Flexiti, we increased the capacity of our existing warehouse facility and added securitization capacity, bringing Flexiti's total funding capacity to over CAD 1 billion. We also monetized a portion of our investment in Katapult when it became public in June 2021, receiving $147 million in cash from this highly successful investment. You'll recall that our total investment was $28 million. We also currently retain a 25% ownership stake in Katapult on a fully diluted basis.

2022, we are focused on a number of key objectives, primarily first, continuing to scale Flexiti's originations and investment in infrastructure to accommodate strong growth. We expect Flexiti's revenue to grow more than threefold in 2022 and to double again in 2023. Second, growing and executing on combined synergies of Heights Finance. Third, sustaining the growth and margin expansion of our Canadian Direct Lending business with a focus on building on our 2021 success in growing LendDirect, both online and through the opening of new LendDirect Branches. Fourth, continuing to evaluate the cost structure and opportunities for our legacy U.S. Direct Lending business as this segment continues to recover from 2 years of pandemic-related impacts. More on this in a moment. Fifth, remaining very disciplined across all of our business units with our underwriting and customer acquisition and ad spend decisions. Finally, to remain conservative and careful managers of our capital.

Markets for larger, longer-term and lower-yielding loans have better growth prospects and less regulatory risk but these products and business lines are, by definition, more capital intensive and require us to stay ahead of the growth curve to continue to secure stable and cost-effective funding.

Next, I'll provide some additional details on a few of these objectives. Let's start with Flexiti where our 2022 plans center on supporting the company's strong origination growth. When we announced the LFL partnership in June, we forecasted originations increasing to CAD 660 million in 2021 from CAD 292 million in 2020. Our 2021 originations came in at CAD 711 million, exceeding our projection and growing 143% year-over-year.

Flexiti's originations in the fourth quarter alone totaled CAD 322 million positioning us very well for continued strong growth this year. Flexiti exceeded by CAD 3 million our publicly disclosed 2021 revenue and by CAD 9 million our pretax earnings outlook.

While Flexiti remains focused on executing on its considerable LFL opportunity and capitalizing on the full exit of Desjardins, we have several other visible growth initiatives underway, including rolling out the distinct Flexiti wave branded card designed for nonprime customers; developing a pay in 4 option to address its merchant partners' sizable small ticket retail market in Canada, which is estimated to include close to 80% of total retail spend; investing in the direct-to-consumer online channel to further accelerate new customer acquisition; and finally, Flexiti continues to have a very strong sales pipeline, and we're hopeful that new merchant relationships could drive even better growth than our current forecast implies, but will include our standard reminder that new merchant wins are likely to be dilutive in the near term while being accretive over the long run.

Moving next to our plans to grow and execute on combined synergies for Heights Finance. We closed the Heights acquisition on December 27, 2021, so it had an immaterial impact on our fourth quarter financial results. Although the Heights team only joined us recently, we're very pleased with how quickly they've acclimated to our culture and the meaningful opportunities we see to grow our combined operations. They have outstanding leadership and a collaborative, hard-working culture.

Heights accelerates our transition into longer-term higher balance and lower rate loan products. The company provides us with an upmarket product that complements our legacy U.S. Direct Lending business and positions us to serve a larger addressable market and potentially retain CURO customers as their credit profiles improve.

Approximately half of the Height's loan balances are comprised of loans with APRs less than 36%, reflecting their customers' stronger credit profiles. The average Heights customer makes around $10,000 to $12,000 a year more than an average CURO customer and has a FICO score that's about 40 or 50 points higher.

The acquisition meaningfully diversifies our U.S. product revenue, customer and geographic mix and opens the door for further geographic expansion. In fact, we already have plans to offer Heights products in 4 new states in 2022 and meaningfully expand the store count at Heights' existing footprint. As I'm sure everyone understands, the speed of investment in market expansions determines how dilutive the opportunity is in the near term.

Our plans for our high-performing Canadian Direct Lending business are not dissimilar to Heights in terms of market expansion. 2021 was a great year for our LendDirect brand and we see opportunities to drive more growth through branch and online expansion. We paused opening new LendDirect branches during COVID, but we've signed leases for 12 new locations and are evaluating additional sites.

Finally, for our U.S. direct lending business, during COVID, our results have been impacted by elevated repayment rates and increased competition at the top of the nonprime funnel. In addition, portfolio runoff related to regulatory change will create year-over-year headwinds of close to $30 million of pretax earnings. The balance of our U.S. Direct Lending business is expected to grow at healthy levels, but we will see some higher allowance build.

Turning to our outlook for 2022 and beyond. Starting on Slide 9 of our earnings supplement deck, we are increasing our previous Canada Direct Lending 2022 revenue outlook and raising our 2022 pretax earnings guidance. We are also increasing our 2023 revenue and pretax earnings guidance for this business.

For Canada POS lending, we are maintaining our pretax earnings guidance while modestly lowering our 2022 revenue guidance. On that front, a couple of developments are worth noting. First, a portion of the reduction is related to an accounting change related to merchant rebates, which are now deducted from revenue instead of being classified as an operating cost. No change to the bottom line, but it does slightly lower revenue.

Second, Omicron impacts, as most provinces started 2022 with modified retail restrictions that are just now in the process of being lifted. This led to some slower revenue growth in certain categories in December and January. And finally, a higher percentage of our customers in Flexiti's business are continuing to pay off in full at the end of their promotional period versus moving to revolving and interest-bearing balances. This results in lower portfolio yield, but is partially offset by lower charge-offs.

We're starting to see early trends towards moving to revolving balances. And as that returns to pre-pandemic levels, yields and revenue will increase over the corresponding uptick in loss rates.

In the Flexiti business, overall expenses are in line, with better credit being offset by higher spending from merchant support and investment in our new buy-now-pay-later, pay in 4 product.

To close on Canada, we're extraordinarily pleased with the financial performance, market position and prospects for both of these segments. You can find the details on Page 9 of our investor deck, but we are now forecasting combined 2022 revenue and pretax income, respectively, of CAD 571 million and CAD 109 million. And for 2023, we see revenue of CAD 774 million and pretax income of CAD 230 million.

Next, you'll see in Slide 10 of our earnings supplement deck that we are affirming our previous 2022 guidance for Heights and introducing our 2023 outlook. With the visible opportunity to expand footprint and store count, we believe Heights can achieve the loan growth necessary to support the 2023 revenue guidance, and acquisition synergies and operating leverage drive our expectations for the related growth in pretax income. For 2022, we affirm our guide at $275 million in revenue and $55 million in pretax income. For 2023, we see revenue increasing to $303 million and pretax income to $76 million.

To close, we recognize that the full potential of large-scale acquisition is only achieved through careful execution and by ensuring a strong culture is maintained throughout the expanded organization. Accordingly, in 2022, our focus is on realizing the considerable value creation opportunities presented by these acquisitions and on making sure that urgency, passion and teamwork, all hallmarks of the CURO culture, are shared by our new colleagues. We're already off to a strong start and are excited to continue executing on our strategic plan to drive growth and deliver long-term value for our shareholders.

As always, I'd like to close by thanking our team members who are so critical to delivering on our strategic priorities and to meeting the needs of our expanding customer base.

I'll now turn the call over to Roger to review the highlights from our fourth quarter and full year 2021 results.

Thanks, Don, and Good morning. Consolidated revenue for the fourth quarter of 2021 was $224 million, an increase of 11% from the same quarter last year. Adjusted EBITDA was $17 million, and we reported an adjusted loss of $0.29 per share compared to last year's adjusted EBITDA of $34 million and adjusted earnings per share of $0.20.

Fourth quarter earnings were at a low point, and it's pretty easy to summarize the drivers. First, we had the impacts of upfront loan loss provisioning on high levels of sequential loan growth with expected upticks in net charge-offs for credit normalization; second, sequential spending increases at Flexiti to support LFL's onboarding and a really good holiday season for Flexiti's merchant partners increased our sequential expenses.

Net revenue for the fourth quarter decreased $2 million or 1% year-over-year and decreased $8 million or 6% sequentially. The sequential decline in net revenue reflected upfront loan loss provisioning on accelerated sequential loan growth and higher net charge-off rates from new customer mix and originations, seasonality and channel origination mix shifts.

Our consolidated provision for loan losses exceeded net charge-offs by $15 million in the fourth quarter of 2021.

The chart at the top of Slide 5 of our supplemental earnings presentation illustrates the loan-loss provision, tailwinds and headwinds by quarter and is useful for thinking about 2022. Consolidated operating expenses for the quarter increased $34.7 million or 32% compared to the prior year.

Excluding the increase in operating costs related to the Flexiti acquisition, transaction costs associated with our acquisition of Heights and onetime store closure costs related to our second and third quarter U.S. store rationalization, adjusted operating expenses increased just $4.7 million or 4.4%, aided by cost savings from the store closures. The $4.7 million increase was due to the timing and level of performance-based variable compensation and higher variable costs, primarily due to collection and financial services fees on higher volume year-over-year, particularly in Canadian Direct Lending.

2021 loan growth was significantly influenced by our acquisitions of Flexiti and Heights. To illustrate, our gross combined loans receivable increased by $985 million or 165% year-over-year. Don mentioned earlier that excluding Flexiti and Heights, gross combined loans receivable increased by $66 million or 11% in 2021. Excluding the U.S. runoff portfolios, gross combined loans receivable increased $121 million or 23% in 2021.

Turning to our business segments. Canada Direct Lending loan balances increased by $97 million or 29% during 2021 and 9% sequentially. Flexiti continued to grow rapidly throughout 2021, particularly beginning in July 2021 when its exclusive POS financing partnership with the LFL Group began.

In addition, the holiday season resulted in $114 million of Canadian POS lending growth in November and December alone. Excluding the impact of the Heights acquisition, our U.S. gross combined loans receivable decreased $31 million or 12% in 2021, primarily due to COVID-19 impacts and runoff portfolios. However, excluding runoff portfolios and loans acquired with Heights, our U.S. gross combined loans receivable increased $24 million or 13% versus a year ago and 7% sequentially.

Interest expense for the fourth quarter increased $10 million or 53% year-over-year primarily related to interest on nonrecourse debt to support the loan growth at Flexiti and the additional $250 million tack-on issuance of 7.5% Senior Secured Notes to finance in part the Heights acquisition.

Turning next to credit. Our credit metric trends in Q4 were consistent with what many of our peers have seen overall, what is being termed as a trend towards normalization but still favorable to pre-pandemic run rates. Our consolidated quarterly net charge-off rates for the fourth quarter improved year-over-year by 220 basis points primarily from the relative growth of Canadian POS lending, which shifts our portfolio mix to lower loss rate products.

Sequentially, consolidated quarterly net charge-off rates increased 100 basis points due to the relative loan growth, new customer mix and originations, seasonality and channel origination mix shifts.

U.S. quarterly net charge-off rates increased 340 basis points year-over-year and 275 basis points sequentially, primarily driven by new customer mix, growth, origination channel mix and diminishing COVID-19 impacts. Notwithstanding, U.S. net charge-off rates remained 80 basis points below the fourth quarter of 2019.

U.S. past due rate, including loans guaranteed by the company, improved sequentially by 75 basis points or 3%, which was better than we expected.

Canada Direct Lending net charge-off rates increased 85 basis points year-over-year and 110 basis points sequentially as provisioning fully normalized with no noise from allowance releases or adjustments. Canada Direct Lending net charge-off rates remain 240 basis points below the fourth quarter of 2019. The Canada Direct Lending past-due rate increased sequentially 200 basis points due to growth and seasonality.

Don already covered the 2022, 2023 outlook for several of our businesses. I'll close with some color on Q1 expectations. We were encouraged by January's loan growth. Consolidated balances grew approximately $34 million, with both Canadian businesses leading the growth. Flexiti continued to grow in January, bucking what is normally a seasonal decline for post-holiday merchant seasonality. Customer behavior through the U.S. federal income tax season is a big uncertainty for the next 6 weeks, and it affects the way we think about Q1 expectations.

In thinking about Q1 earnings, I'd also point everyone to Slide 5 of our earnings supplement deck, especially the upper right chart. You'll see that in the first quarter of 2021, allowance release driven primarily by the second round of major U.S., COVID-19 government stimulus resulted in the loan loss provision being $17 million less in net charge-offs. In other words, $17 million of pretax earnings benefit with historically low net charge-off rates.

As we saw in the back half of 2021, loan loss provisioning normalized with loan growth and net charge-offs are bouncing off of unsustainable levels. And also remember that we acquired Flexiti at the end of Q1 2021. So we are comping against no operating expense base for Flexiti in Q1. This should result in Q1 earnings significantly below Q1 of 2021, but meaningfully improved versus Q4 of 2021. We will continue our practice of updating you on our outlook for the quarter next month.

We ended the year with $63 million in unrestricted cash and $214 million of additional liquidity, including undrawn capacity on revolving credit facilities and borrowing base levels. We continue to work on several opportunities to expand capacity to support growth and capital return. And finally, our Board authorized our quarterly dividend of $0.11 per share and authorized a new $25 million share repurchase program.

This concludes our prepared remarks, and we'll now ask the operator to begin Q&A.

(Operator Instructions) Today's first question comes from Bob Napoli at William Blair.

So just a question on the 2023 outlook. And I kind of -- as you've owned Flexiti now for a while, your confidence level in the revenue and pretax earnings for the Canadian businesses in particular. Canada Direct Lending, I would imagine you have much higher visibility and confidence given the longer history there, the Canada POS lending and Flexiti.

So I'm just -- I was curious, I guess, on your confidence level, what you've learned in owning Flexiti for a year and the profit model -- the long-term profit model, the confidence in that?

Bob, I'll talk a little bit about Flexiti and a couple of kind of broader comments and maybe let Bill comment on sort of the Canadian Direct Lending business. But -- so we've owned Flexiti since March of last year. It seems like -- it feels like a lot longer than that. But I think we -- and we spent pretty much 9 months in somewhat intensive diligence on that. So I think we got to know the team there very well and really got to understand the business. And obviously, the merchant side of the business, the B2B side of the business, I think we had some really good exposure with that, with our ownership and activity and Board service with Katapult here in the U.S. So it wasn't a -- it's obviously different than a B2C company. I think it wasn't a completely new animal from that perspective.

I would say, I think what ultimately was compelling for us was that they were not only -- Desjardins, which is kind of an uber credit union, a 600 -- $700 billion asset credit union, but also TD Bank and some of the larger banks up there had really been getting out of the point-of-sales space. [You didn't] think the market was big enough, et cetera, et cetera. So we saw an opportunity for smaller players like Flexiti to sort of take share as the larger players exited and that thesis has proven, I think, very, very true.

And then the big win for us was getting LFL. And we basically kind of tripled the origination base. We felt during diligence, we had a decent chance to get it. It wasn't until after that -- we had a decent chance to get some of it. And I think we were able to sort of get all of it.

So I guess -- in terms of like where the numbers kind of roll out from here, there aren't any -- there's some new business in there, but there aren't any sort of major new wins that are in the numbers. It's basically kind of some growth in the existing merchants, some kind of a category of smaller wins, but there aren't any kind of, as we like to call them, earthmoving kind of merchant wins that are baked into the '22 and '23 forecast.

So I think from a confidence level, I mean the drivers of that business are going to be -- and we talked about yield. Yield's been a little lower -- was a little bit lower in '22. Volume was a little better. Yield was a little lower just because -- these are promotional periods, pay no interest for 90 days, 180 days, whatever. And then if you pay the obligation off in that period, we get our merchant discount, but that's -- and maybe some -- a little bit of fee income, but it doesn't flip into an interest-bearing account. Like in the U.S., a lot of the card business, you probably (inaudible) -- but a lot of people paying off their -- certainly during '21, [by] more people paying off their balances more because they had more sort of disposable cash.

And that's starting to -- and I think, card balances in December -- November, December started to come back. So we're starting to see more of a normalization in terms of the rate at which consumers -- remember, these are prime customers with 740 FICOs, the rate at which they let the promotional period kind of roll into an interest-bearing obligation.

So -- and then from there, we've got credit and credit's been very, very good, and these are very high-quality customers. We're trying to add some nonprime to it. But by and large, it's still a prime customer base.

And then it's OpEx. And there, I think the issue is just we're trying to make sure we invest in the right areas to continue kind of building. We mentioned we -- they have a bunch of different formulation they can work on with merchants. But a sort of we call them, more robust pay in 4 product, a real buy-now-pay-later product, we think supplements that, that our merchant base is really going to like, and in some cases, I think it's going to -- from a competitive standpoint, it's going to give us a nice leg up and one that's more sort of easily integrated for online merchants. So we're putting some real investment dollars into that. We started that in the back half of this year of '21, and that will continue into '22.

And then funding costs. And I think we -- obviously, we spent -- and Roger and his team spent a ton of time adding a securitization. That deal got priced in -- and I think Roger (inaudible) probably November, December and closed. So we started borrowing under that, putting stuff in the warehouse in the securitization in December and that's going to lower our overall funding cost.

So I think, by and large, those are kind of the big drivers. I think we feel good about our ability to manage those. Some of them, again, the externalities for how -- the rate at which people pay off obligations not -- that's -- we're waiting for that. That's -- it's -- and I think we say, that will normalize but also probably credit quality ticks up a little bit. Or credit losses tick up a little bit as more balances -- because obviously, if somebody pay -- somebody just pays it off in the promotional period, you have no charge-offs. So there'll be a little bit of a -- but we want a reasonably high percentage of those to roll into a balance.

So -- but I'll just say, from a market position, we think they're a market leader in point-of-sale in Canada. We think in Direct Lending, we're a top 3 provider in the kind of direct-to-consumer space. And maybe I'll let Bill talk a little bit about sort of our confidence levels in Direct Lending.

Sure. For us, it's a few things, and I'll be brief. But I think the first is the experience and tenure of our operating team. We've got a really good team who understands, which is the second driver, I think, is the product. And I think it's our confidence in the stickiness and predictability of that open-end product. I think we've got the models really well refined. I think our team is very experienced in explaining it and helping customers use it properly. And you can see that in the numbers as far as just how long the customers keep that product open and draw on it.

And then the third is the growth in LendDirect. LendDirect had a terrific year last year on growth to the point where it was generating as many online customers as the Cash Money brand and obviously, with a much smaller footprint which led us to the decision to expand that footprint to the point Don made by at least 12 locations, perhaps more. Those would all be in the Ontario province, which gives us even more operating leverage and helps our marketing dollars go further.

Just a follow-up question. The First Phase credit card, what is the -- I mean, how aggressive is the rollout? What is -- how much testing have you done? So what should we think about as far -- what is the near-term and long-term opportunity for that business, near-term cost, long-term opportunity?

Yes, I'm happy to take that one as well. So we really are in a pilot phase right now, testing all the workflows, making sure credit works, and we'll continue to do that for the next couple of months. But at that point, just based on the structure of the product, we have the ability to ramp pretty quickly. So I think we want to make sure that everything works right, the customer experience is right, that our bank partner is comfortable with everything, that everything is buttoned up. That has gone reasonably well thus far. We've got a lot of good experience on the team at this point with -- from a credit card experience perspective.

So I think you'll see the first quarter be -- continue to be a rollout, opening new marketing channels, evaluating those. And then really in the middle to back half of the year, you see us get more aggressive with volume as we have the confidence to do so.

The costs are really -- it's internal from a team perspective. And of course, you've got your bank costs and processing costs. But I think those are all -- we've got those all baked into the model and understand the targets that we need to hit for that product to be successful.

And our next question today comes from Moshe Orenbuch with Credit Suisse.

Great. And a lot of detail on the call on the Canadian business. Maybe you could -- and you did kind of talk a little bit about the U.S. side and maybe just expand a little on what you think it's going to take to get that back to where you're -- I mean -- or maybe just tell us what your plans are and what you think it can get to within a kind of a 2-year time frame?

Moshe, it's Don. I'll give you a little color. Maybe the other guys can chime in. But so we saw -- if you ex out the -- sort of the run-off portfolios from regulatory change, the biggest ones will be the California, Virginia and then the Verge credit bank product. We saw 9% sequential growth in balances. I think last year we said we'd like to see 8% to 10% sequential growth, absent the runoffs, in sort of the core portfolios for some extended period of time. So I think we're -- the first quarter so far is tracking well.

I think -- there's a lot of people in our space have talked about -- this is going to be a very different tax season. So that's part of our caution on guidance on the U.S. business, is just with the child tax credit payout last year, how that's going to impact tax refund season and what that does to paydowns and credit, et cetera. So that will really get a little bit of a -- we have some thoughts about it, and we've kind of prepared for a bunch of different outcomes, but it's certainly going to be a different year than what anything we've seen in a long time.

So -- but that -- the tax season aside, I think that if you can -- if we can continue to see good sequential growth, and if -- tax season is going to obviously have an impact. So maybe for the year, you're still looking at balanced growth that's going to be well past 20% for the year in the U.S. And I think a lot depends on the macro, the factors in the U.S., but we're still 2.5 million -- 2 million, 2.5 million jobs, depending on whose numbers you believe, short of the number of people that were working before COVID in the U.S.

Actually, that says Canada -- Canada is actually, there's more people working in Canada now than were working in pre-COVID. The U.S., we're still sorting -- a lot of those jobs in the U.S. are in retail, restaurant, hospitality jobs. And there's a lot of -- that's a key kind of customer base for us.

So provided that, that gap continues to close, we feel -- you said a [kind of] of a 2-year horizon. I think we see a 2-year horizon. But remember, we still have portfolios in California, Virginia, Verge that -- those from a regulatory standpoint, that business, we just -- we're going to have to kind of build back and that, even without sort the benefit of some pretty nice pieces of business there.

So I think it is -- I think it's a good question though is it is kind of a 2-year build to kind of -- build back from the sort of the COVID impacts because these balances pay off the smaller higher-yielding products where the products have paid off and stayed kind of depressed from a demand level more so than the larger ticket. The larger balance, [the] lower-yielding product. So I don't know if Bill, Roger, you have any comments on that?

I think over -- sorry. Yes, and I think the other thing that's obviously worth noting is we have to continue to be diligent on evaluating the cost structure of that business because of those trends and because with more -- obviously, with more volume going online and also we're not going to have an installment product in California in the future. So that runoff portfolio influences a lot of decisions around evaluating cost structure as well.

Got it. And maybe just as a follow-up, I mean your delinquencies overall were relatively stable in the fourth quarter and you've talked about credit normalization. Like just -- I understand the trends that you talked about kind of year-over-year differences in provisioning. But maybe just in terms of just the delinquency performance, are they at roughly normal levels? Is there more of that to come? Like how do we think about that into 2022?

This is Bill. Maybe I'll just say a few things and I'll let others chime in. But I think if you look -- in the prepared remarks, we talked about the things that drive a lot of that, which is the channel mix, the new customer mix. But if you just look at it on a per unit basis, and then those that do go into delinquency and the liquidation levels, we continue to be -- to perform well above where we were pre-pandemic. And I think a lot of that is -- a lot of what we learned through the pandemic, both from a credit risk model perspective and just our recovery tactics. And we would expect to maintain a significant portion of those efficiencies as we move into a more "normal" period.

Our next question today comes from John Hecht at Jefferies.

Don, I think -- I can't remember if it was the last call or the call before, you talked about -- you intimated kind of impacts of inflation and how that might affect things. I'm just kind of interested in update because, yes, I think we're now seeing it in real-time action, and how does inflation impact the different segments? I mean, I would assume the lending segment has a different impact than point-of-sale. Are you seeing any changes that are worth noting at this point in time as that develops?

Yes. I mean, I'll try to do this in a way that's not -- because I think it's -- you just hit on some of the complications, right, that it's different -- it has different impacts in different segments. So obviously, in the point-of-sales side, your AOV, your average ticket, is going to go up because you're talking about furniture and appliances, stuff with either lumber or -- but chips in certain appliances, et cetera. So you're seeing some inflation in the AOV. And I think that it's something that from a credit quality standpoint that we've got to be pretty mindful about how we adjust the underwriting side.

I would say, again, as I said -- remember, that's a prime customer. So a 740. Now we are adding some nonprime to that, and we're working closely with our partners at Flexiti on the nonprime stuff, including the underwriting. But for now, overwhelmingly, that's a prime customer. So with more sort of flex and ability to absorb price increases. And when I'm talking about price increase, meaning they are -- just how much net disposal income do they have?

So Canada is seeing -- wage inflation in Canada was about 2.7% for '21, but it's expected to kind of keep going up from there this year. And in the U.S., I think it was 4.7%, but the rate -- the sequential rate fell in the fourth quarter. And I think a lot of the forecasts are maybe that we're sort of going to see some moderation there.

So I think in the direct-to-consumer side, the thing for us is always, if the inflation is sort of -- if prices are going up at a -- on a kind of -- something of a normal -- again, we haven't seen inflation like this since I was in high school, I think.

So I don't have a lot of experience with this in my business life. But I think in my experience, so, is if - as long as there aren't sort of shocks and the one I use -- the example I use is gas prices during Katrina. Katrina hit -- obviously disrupted all the refinery capacity, et cetera and gas prices went in the period -- and I went back to look at them. After 90 days, the gas prices were up $2.11 to $3. And that's the kind of spike that -- and I remember in my prior job, that did have a credit impact because we had -- there was that big a spike.

So -- and again, gas prices are up again. But I said I think if the prices are moving up in a normal fashion, it gives our customers more ability to sort of adapt because, again, they live on tight budgets generally. And I think they have kind of an ingrained ability to sort of manage it more tightly than customers that have more sort of flex in their disposable income.

So we're not seeing -- I would say we were not seeing any -- I don't think we're seeing any of that bleed over into NCO and delinquency [performance.] I think more of what's happening there is like you just kind of -- is kind of returned to normal post COVID as bank balances and excess cash starts to burn off.

Okay. That's very helpful commentary. And then 2 quick questions kind of related to modeling. Is the runoff of like California and Verge, where are we in that whole -- that whole spectrum? And then where are you guys putting up new branches? I think you talked to a dozen or so new branches?

Roger, do you want to talk about the portfolio runoff?

Yes, sorry, I was muted. Forgive me. Yes, John, for those runoff balances, just for perspective, those balances ended 2021, in total, at about $55 million. So it started -- would have started '21 at about 80 -- about $85 million. And so the -- obviously, one thing that sticks out because of how long -- and that includes California, Virginia. And Illinois was tiny, and then the Verge product, the bank product. So $55 million of receivables running down. We still think that by the end of the year, by the end of 2022, we still probably have a 1/4 of that left.

And then, John, to the question on the branches, a couple of moving parts. One is LendDirect, and those will all be in the Ontario province, mostly outside the Greater Toronto area, filling out some of the surrounding markets. We're going to open a couple of Cash Moneys again in some of the outside markets this year. And then the Heights expansion will be primarily 4 new states for us.

And our next question today comes from John Rowan at Janney.

I missed the very beginning of the call. 2 questions. So Don, did you kind of address the longer-term guidance? We haven't had an update of that $3 a share number for 2023 since pre-Heights. I'm wondering if there's an update to that number, where you think it is inclusive of Heights? I just wanted to get an update on that.

Yes. I mean, John, we didn't really address it specifically. And I think the -- we addressed sort of the component pieces other than the U.S. Direct Lending business. As so we talked about Heights and introduced a guide for Heights for '23. And then we talked about the guide for -- modestly higher guide for the combined Canadian businesses in '23.

So I would say that -- if you heard me answer about sort of the recovery of the U.S. business, if we can see -- and again, this is not an official, we're just saying if we can see a real recovery in that business over the next couple -- again, a 2-year kind of -- where we see sort of pretty consistent sort of sequential growth in earning asset balances and pretty decent credit performance, our feeling is that you can kind of add up the numbers from the subsidiary pieces. And we think we can plug in a number for -- if we get some growth and the kind of growth we're talking about over a 2-year period, I think we're certainly of the belief that Heights -- the $3 plus Heights in 2023 is absolutely achievable.

But again, the piece of that, that we're still a little cautious on for a bunch of factors we talked about is going to be the recovery of the U.S. business.

Yes. I mean obviously, the U.S. business is still losing money on a -- not on adjusted EBITDA, but on an operating basis. There was a lot of noise in the quarter in the U.S. business because of the Heights acquisition. Realistically, exclusive of that, I mean, how unprofitable is the U.S. business? And kind of where do you see that tipping point of it turning profitable again?

So the other thing Roger said, I'm a little -- I think in terms of sort of specific numbers, I just -- I think we're going to -- we'd like to see things kind of spool out and get through the first quarter, which I had just talked about the tax season impact. But I'll just say that the other thing we are continue -- Roger mentioned, continue to evaluate is the cost structure in that business.

We closed -- I'm going to get the exact number wrong probably, but somewhere in the neighborhood of 40 branches during last year. Some of the dynamics in terms of consumers' willingness, ability to do transactions online, which obviously have -- into that kind of variable cost lending model are still there.

So to give you like a more precise answer, I think we need to sort of be a little bit more precise and come to some conclusions about additional moves we're going to make on the cost structure of that U.S. Direct Lending business. The non-Heights U.S. direct lending business. So -- and obviously, if Roger, Bill have comments, by all means.

Yes, John, I would -- it might be helpful, and we can talk about it offline. Just Page 16 of our earnings release has the segment P&L for the U.S. and the segment operating loss for Q4, including -- look, obviously, we capture the interest on the Senior Notes in that segment, John. But we have the operating loss for Q4 for that business on Page 16 of our earnings release is a little over $28 million.

Okay. And then just last one, I want to make sure I understood 1Q guidance. It's weaker than 1Q '20, but better than 4Q '21, correct?

Correct.

(Operator Instructions) Today's next question comes from Vincent Caintic with Stephens.

Most of my questions have been answered. But one question about marketing and customer acquisition cost trends that you're seeing. Your growth has been great. I think some of the other fintechs have pointed to higher acquisition costs and some concerns about low-end consumers starting to maybe slow down their spending. Just wondering what you're seeing and how your particular growth, have you been able to generate that while keeping marketing efficient?

This is Bill. And so I think it's -- for us, as we've long said, the fact that we have a very diversified marketing funnel gives us the ability to very quickly throttle up or throttle down based on what we're seeing in almost real time. And I think that was the case in the fourth quarter.

In addition, we actually tested some higher cost per funded channels to see what that did for demand. And of course, now we'll evaluate what the credit looks like and just how it performs as a vintage. But not to say that there aren't pockets where you see increased marketing costs. Our ability to move that to a more reasonable cost channels and based on performance, I think it has been and continues to be a real differentiator for us.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

It's Don, thanks, everybody, for joining us. We will talk to you again after we report our first quarter. Thanks very much, and have a great day.

Thank you, sir. This concludes today's presentation. We thank you all for your participation. You may now disconnect your lines, and have a wonderful day.