CURO Group Holdings Corp (CURO) 2021 Q3 法說會逐字稿

Hello, and welcome to CURO Holdings' Third Quarter 2021 Conference Call. (Operator Instructions) Please note, today's event is being recorded.

And now I would like to turn the conference over to Matthew Keating, Investor Relations. Mr. Keating, please go ahead.

Thank you, and good morning, everyone. After the market closed yesterday, CURO released results for the third quarter of 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, Donald 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 our third quarter update, 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.

The third quarter represented another period of strong performance as we continue to make significant progress in several key areas of our business, all of the aim of continuing to grow and evolve our company to drive earnings growth and value creation.

I'll briefly review some of the highlights from the third quarter. Company-owned loan balances grew 77% year-over-year, fueling 15% revenue growth. Canada's rapid growth continued accounting for over 3/4 of consolidated loan balances at the end of the quarter. We started to see significant balance increases in our Canadian POS business related to Flexiti's previously announced signing of LFL Group, Canada's largest home furnishing retailer, which we expect will help us become Canada's largest Buy Now Pay Later POS lender.

Flexiti's loan balances increased 37% sequentially and origination volume nearly doubled versus the same period a year ago. We continue to experience tremendous loan growth in our Canada direct lending business as overall demand returned to pre-COVID levels and loan balances grew 34% versus the third quarter of last year. Sequential loan growth return for our U.S. business as absent the runoff of our Verge credit portfolio, our earning assets in the U.S. grew 9% from the quarter ended June 30.

Our net charge-off rate improved year-over-year, and delinquencies remain their historic lows as customers continue to demonstrate strong credit performance. In addition, Flexiti's rapid growth in primarily prime customers, we anticipate not only faster balance sheet growth but also lower overall loss rates.

Finally, we strengthened our financial position with a highly successful debt issuance. In the U.S., we returned to posting, sequential loan growth that was at the high end of our expectations as we expect to see balances continue to increase. U.S. gross combined loan receivable balances declined 5% compared to the prior year, but increased 4% sequentially. Excluding the runoff of California and Virginia loan portfolios, U.S. gross combined loan balances increased $28 million or 15% year-over-year and 9% sequentially adjusted on the Verge portfolio. The year-over-year increase in U.S. loan balances was expected as the effects of the U.S. federal government stimulus payments from earlier in the year diminished, resulting in increased customer demand. We continue to expect improvements in U.S. originations as the economic recovery continues. Consolidated revenue for the third quarter was $209 million, an increase of 15% from the same quarter last year.

We reported adjusted EBITDA of $38 million and adjusted EPS of $0.15 per share compared to last year's adjusted EBITDA of $36 million and adjusted EPS of $0.27. Our provision for loan losses grew 29% year-over-year, resulting in 9% growth in net revenue. Roger will have much more detail later, but we think that the credit continues to be very strong.

For the quarter, our consolidated net charge-off rate improved by 240 basis points as stable performance in our Canadian Direct Lending segment, combined with the addition of lower net charge-off prime POS book, balances were partially offset by increases in the U.S. driven by portfolio and new customer growth. Canada net charge-off and delinquency rates remain at the low levels experienced during the pandemic, while U.S. net charge-off and delinquency rates began to trend toward pre-pandemic levels.

Normalized operating expenses compared to the prior year pandemic levels, primarily volume-related variable expenses and performance-based compensation and the operating expense base acquired Flexiti in March of 2021, to above $5 million decline in adjusted net income. Recapping the segments. Canada direct lending's growth and loan balances fueled revenue growth of 35% year-over-year. Revenue growth combined with flat net charge-off rates and operating leverage resulting in adjusted EBITDA growth of 68% for Canada Direct Lending. For Canada POS, Flexiti contributed $11 million in revenue during the third quarter, but posted a net loss as expected from provisions on loan growth and an increase in operating expenses primarily to support our LFL rollout. Flexiti's originations increased 174% or CAD 127 million to CAD 200 million compared to the prior year's third quarter driven primarily by the continued addition of new merchant partners, including the initial LFL volume and our newest partner, London Drugs. It's worth pointing out that revenue tends to lag origination volume, more for Flexiti because of its lower yields and the structure of some of its products.

We expect Flexiti growth trends to continue to accelerate as former Desjardin cardholders will lose utility as of December 31 of this year. We estimate that these cardinal has created the potential for an additional CAD 350 million in annual volume across the LFL Group financing program. While Flexiti's focus remains squarely on executing on the considerable LFL opportunity, it also has several other growth initiatives underway, including continually building on its established pipeline of prospective merchant partners as it strives to become Canada's leader in retail payment partnerships.

Investing in the direct-to-consumer channel with plans to launch a D2C digital campaign to further accelerate new customer acquisitions, devising strategies, including the development of a Pay in 4 product to address the sizable small ticket retail market in Canada, which is estimated to include close to 80% of the total retail spend in Canada, investing in programs to serve more non-prime customers.

Cross-selling initiatives between CURO and Flexiti are already underway, but we have plans to roll out a separate FlexitiCard branded card next year that is designed for nonprime customers. Extending Flexiti's historically prime customer base to nonprime individuals represents a true win-win as it provides non-prime consumers but the credit needed to improve their lives, while delivering higher approval rates for our merchant partners, which serves to increase their top line.

We are happy to report that both our Canadian businesses are tracking very well to the upperly revised earnings outlook that we provided in our investor presentation at the end of the third quarter. U.S. revenue was basically flat to the third quarter of last year as loan balances were still down modestly year-over-year. Higher loan loss provisioning on relative sequential loan growth and more normalized levels of operating expenses for variable costs and performance-based compensation resulted in a year-over-year decline in adjusted EBITDA of $8 million.

As mentioned on our last earnings call, we made a difficult decision to close 49 U.S. stores during the second and third quarters to manage local store market density and to respond to our customers' evolving usage patterns. The closed stores represented 25% of our U.S. store footprint, but they only generated 8% of our U.S. store revenue in 2020. The closed stores had annual operating costs of approximately $20 million. The majority of our customers at these impacted locations were able to take advantage of our omnichannel model and transitioned online to an adjacent store or to 1 of our contact centers.

I'm very happy with the work that we've done on our journey to transform CURO either a full spectrum North American consumer lender while reducing risk and creating value by diversifying our product and channel mix. Through both organic success on the Flexiti acquisition, we've meaningfully grown in Canada, which accounted for 79% of our company-owned loan balances at the end of the third quarter. We made the tough decision to rationalize our U.S. store base to best meet customers' evolving usage patterns. We continue to invest in new products such as credit cards, which we plan to launch later this quarter in the U.S., and we continue to invest in our internal technology and risk and analytics platform. The strength of these platforms helps us to quickly migrate customers to our online channel and to continually refine our credit decisioning, creating new product opportunities in all geographies.

Finally, as always, I'll close by thanking our 3,700 team members who continue to meet our customers' financial services needs and to help us execute on all of our strategic priorities.

I'll now turn the call over to Roger.

Thanks, Don, and good morning. Don covered the consolidated and segment loan growth and earnings highlights. So I'll focus my comments on credit performance and a few other points. Starting with delinquency and credit trends and other key drivers for Q3. I'll reference Pages 6 and 9 of our earnings supplement deck.

Looking at weekly delinquency trends by bucket. Both countries continue to see historically low delinquencies although the U.S. began to trend closer to pre-COVID delinquency rates more than Canada. For example, you'll see from the chart that the U.S. past due rate this quarter was 110 basis points lower in the third quarter of 2019, while the Canadian direct lending past due rate was 180 basis points better than the third quarter of 2019.

Our third quarter consolidated net charge-off rate improved 240 basis points year-over-year, while increasing 70 basis points sequentially. The Canada direct lending's net charge-off rate was basically flat to the same quarter a year ago and improved 20 basis points sequentially. Canada Direct Lending's net charge-off rates remain significantly below pre-pandemic levels, and we expect that trend to continue because of portfolio seasoning, improvements in underwriting and servicing and the underlying financial health of our other customers. The Canada POS net charge-off rate was flat sequentially as expected.

Finally, loss rates in the U.S. increased 440 basis points year-over-year and sequentially, bouncing off historic lows because of loan growth. You'll see in the MD&A section of our earnings release that the increase was concentrated in Texas CSO loans, where balances grew 17% sequentially. The jump-started growth along with the related higher ratio of new to returning customers and origination mix shift from stores to online, all caused higher net charge-off rates for Texas CSO volume, which would be expected. It's due to demand, mix and growth, not deterioration in underwriting standards or underlying consumer credit quality.

Let's turn next to the provision for loan losses. Allowance coverage rates declined from the fourth quarter, more so in Canada on sustained overall improvement in net charge-off rates. Based on the trends we are experiencing, we would not expect to see additional reductions in allowance coverage rates in Q4.

On Page 10 of our earnings supplement, you could see that for the third quarter of 2021, our consolidated loan loss provision was $7 million higher in the net charge-offs. Last quarter, that is Q2 of 2021, the loan loss provision was $7 million less than net charge-offs. So sequential earnings were affected by that $14 million swing from Q2 to Q3.

Looking ahead to the fourth quarter of 2021, I'll again point out that we expect sequential loan growth and generally stable credit quality through year-end. So we also expect continued normalized provisioning relationships where the loan loss provision on loan growth will exceed net charge-off dollars likely to a greater extent than in this third quarter with continued sequential loan growth improvement in the U.S. and increases in operating expenses for advertising in Flexiti. Q4 earnings will likely be lower than any quarter this year. We'd expect the more normalized provisioning dynamic to extend for the U.S. business through 2022.

We also included on Page 11 of our investor supplement, a recap of run rate operating expense levels to assist in analyzing Q4 and forward. We posted an investor update to our IR site on September 28, 2021, where we raised our 2022 and 2023 revenue and earnings outlook for our Canadian businesses. These revisions are also recapped on Page 8 of this quarter's supplemental investor presentation. Our update was based primarily on better-than-expected loan growth, resulting in higher average loan balances exiting 2021 and continued strong credit quality trends for Canada Direct Lending.

Our revised outlook calls for Canada to contribute pretax income of CAD 210 million in 2023. We also pointed out that based on this contribution from Canada and the anticipated post-pandemic recovery of U.S. earnings by 2023, we believe we have visibility to adjusted EPS north of $3 per share in 2023.

Turning to the balance sheet. On July 30, 2021, we closed our successful offering of $750 million of 7.5% senior secured notes due 2028. The new issue replaced our former $690 million of 8.25% senior secured notes due 2025.

In addition to upsizing the offering, lowering the coupon by 75 basis points and extending maturities by 3 years, we achieved important flexibility and improvement on several indenture items, most notably additional flexibility to finance the growth of Flexiti. We ended the third quarter with $206 million in cash and $377 million of liquidity and including undrawn capacity on revolving credit facilities and current borrowing base levels. We believe this provides more than sufficient capital to execute on several different organic growth opportunities in the U.S. and Canada, while we continue to evaluate M&A opportunities and maintain return of capital to shareholders through quarterly dividends and share repurchases.

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

(Operator Instructions) The first question today comes from Moshe Orenbuch with Credit Suisse.

All right. Great. I was hoping you could talk a little bit about the Flexiti non-prime card and the rollout. Just to talk about the scope of the product and maybe also perhaps the Pay in 4 for product in Canada seems like 2 interesting kind of new potential products.

Yes. Moshe, this is Bill Baker. Hope you're doing well. Yes. So we think it's a great opportunity with the Flexiti non-prime card. And the reason to have a separate card is really just the customer experience because if they're applying for a 0% financing for 12 months, and get declined, but then are offered something in the mid-20s or high 20s, we think it's a better customer experience just to be upfront with the offerings, so they understand what they're applying for and then just have a higher approval rate. We think acceptance will be better.

And again, the customer journey will be better. So -- but we're really excited about how that positions that product on that card. On the Pay in 4 component to it, that's really a competitive move because a lot of the competitors offer that. We hear that from the merchants that they would like to offer that to customers. And we think it's a good way to not only retain the merchants that we have today, but attract new merchants in the sales pipeline by having that offering. And also I should mention that it's a much smaller purchase. Pay in 4 is typically going to be a -- maybe a $300 or $400 purchase where in the core Flexiti product, you're closer to $1,000.

Right. And just...

Apparel and cosmetics and stuff, some of those are better suited for a smaller check-in Pay in 4 application. So that's in development up in Canada right now, so.

Just out of curiosity, would you have to like resign each merchant or your agreements with them where you could just roll it out? Like how would that work?

I think it's covered in the agreements we have from -- I mean, think about that we do same as cash programs at the very length. So it's really -- it's a bit of a variation. And we have -- we already have a longer-term installment product as well. So it's kind of -- it's covered under the agreements we have. I just think the thing for us is to make sure that we work with the merchants that we (inaudible) that product to the right kind of items that there is because obviously, something that's 180 days same as cash, except you're talking about furniture, larger appliances, et cetera. That may work for a longer-term installment program.

And this is some of the stuff that a firm and some of the bigger Buy Now, Pay Later companies in the states do a lot as well. So really, it's working with the merchant partner and tailor a Pay in 4 product to the right kind of product that they're offering -- that they're selling.

Perfect. That makes sense. And Roger, maybe just kind of any -- a little bit more sense as to how to think about the credit normalization and their provisioning normalization over the next several quarters. I mean you talked a little bit about Q4. Just how do we think about it kind of over the course of the next few quarters?

Yes. I think this quarter was kind of -- was indicative of kind of a return-to-normal for the U.S. business. for the Canadian -- 2 Canadian businesses, we're not seeing anything even with growth, but the growth has been more steady. So we even get that crazy dynamic of allowance release and negative provisioning in Canada. So Canada is kind of steady. The relationship between the provision and loan growth should be stable through next year.

For the U.S., this quarter was indicative -- quite frankly, as you know, the more we grow, the more upfront provisioning we're going to incur. So I think that -- and I talked about it in the prepared remarks, the delinquencies are -- have trended back towards 2019 levels, and that was concentrated in Texas and was driven by just, quite frankly, the mix shift to online and the percentage of originations to new customers.

I think the third quarter is -- if you take the third quarter relationships between provisioning net charge-offs for the U.S. extend that through next year. I don't -- we don't see anything that would indicate that we're going to, by next quarter, return to 2019 levels, but we're trending that way in the U.S.

And the next question comes from John Hecht with Jefferies.

So real quick on that '23 guidance, should we be thinking about kind of the, call it, the net revenues as a percentage of total revenues, so minus the provision, consistent with kind of pre-COVID levels? Or does the Flexiti acquisition change that mix a little bit?

I think yes, I think it changes a lot, John. Flexiti's allowance rate is 6% and the charge-off rates are in the 4s, whereas the rest of the Canada direct lending is in the low teens on the charge-off rate in the U.S. runs in the 60% -- 50%, 60% range, so on a quarter -- on a quarterly basis. So yes, John, to your point, if you look at the relative revenues on the '23 guidance, and apply those -- the implied provisioning on that. It does change the net revenue. It doesn't -- it takes the net revenue margin down slightly but not a lot.

Okay. And then U.S., can you tell us like what the mix of the new customers versus, call it, recurring customers was? And anything going on with customer acquisition costs?

John, it's Bill. So the current AR mix in the U.S. is 18% new customers, and that compares to 15% last year and 20% in '19. And I mean, as far as credit goes, I mean, I think as Don said in the prepared remarks, credit is strong. There's no question. You do see some mix because of the AR increase year-over-year. also channel mix, so about 71% of revenue in the U.S. is coming online. That compares to roughly 50-50 and '19. But I should mention that back in '18, '19, there was a bigger delta in credit between store and online. And we've done a lot of work to close that gap. And I think it's really now just a modest difference. But nonetheless, that's a big increase going from 50-50 to 71%, which contributes to some of the way you see there.

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

This is Spencer on for Bob Napoli. I appreciate the color on gross margins. Could you guys provide any comments on operating margins looking out through the forecast period you guys provided?

Operate -- I'm sorry, pretax or which margin are you asking about, Spencer?

Pretax operating margins relative to 2019 levels?

By 2023, we're back at 2019 levels. 2020 -- Yes. So 2020 was -- pretax margin was about 12%. This year, we're going to run in the high single digits. We'll get back -- I think we'll get back to 2019 pretax margins certainly by 2023, probably not in 2022.

Okay. Appreciate it. And then I appreciate you guys have provided some revenue mix for Flexiti in the past, the different components, interest income versus fees. What percent of that revenue is recognized at the time of origination?

Well, the yield -- the annual yield is about in the high teens, 18%, 19%, and it depends on the merchant what the mix of that is. At the time of origination, you're not -- in the first month of origination, you're recognizing 1 month's worth of that 18%. I mean it's not -- there's nothing -- the accounting doesn't front-load or backload the revenues. It's even -- for lack of better words, it's even recognition on the -- whether it's merchant discount or interest or fees. There's nothing really front-loaded or backloaded on the revenue side.

It is worth pointing out in Flexiti, though, that such a -- to the extent that the merchant discount is spread -- is basically earned up -- or you get it upfront from a cash perspective, and it's amortized over time. It does make a difference between the GAAP earnings for Flexiti and the cash earnings for Flexiti. This quarter, around Flexiti's -- that difference was about CAD 10 million, almost the entire amount.

If you took the -- and it's about half and half, the difference between cash and recognized merchant discounts was about $5 million for the quarter, and the excess provision over net charge-offs was about $5 million. So if you added those 2 back, Flexiti was about breakeven on a cash basis for this quarter. Just lost a little bit, but almost breakeven.

And the next question comes from Vincent Caintic with Stephens.

It was nice to see the sequential loan growth this quarter across all the different products. And I was wondering if you can maybe describe sort of what you're seeing in terms of customer appetite and customer behavior. And any sort of changes you're seeing or trends you're seeing with these customers. So you talked about the AR of percentage mix. I guess wondering in terms of originations, how much of that is new? And is there anything specifically that's driving it sort of maybe just the government stimulus ending or something else?

Vince, it's (inaudible). So in terms of, kind of, general trends, I think we feel -- and obviously, we felt really good about the quarter and just with respect to the U.S., really good about the quarter. Certainly, we've been putting more money into the advertising channels. And we would expect to see the continued kind of recovery of balances as we roll through '22. And I think it -- by and large, we feel really good about that and really kind of have a pretty high level of confidence in that. I think that just the things that we're kind of keeping an eye on is -- we've said a lot that the best time to be in this business is -- and this goes for a lot of lending businesses is the first 2 to 3 years after a downturn, and we obviously had a really severe downturn and we're recovering back from that. The difference about this downturn is that it didn't come with a credit cycle downturn. So obviously, between stimulus and customers sitting at home and not spending money on discretionary like travel and dining out. You had a severe downturn, coupled with historically great credit quality pretty much across the board for every lender prime, non-prime, et cetera. So -- and that's clearly a very anomalous occurrence to say the least.

So we're coming out of -- not -- it's not kind of a normal economic cycle, credit cycle recovery. So we're just kind of watching how that could influence consumer behaviors coming out of that. And then the second thing is just if you look at -- I saw (inaudible), such a related show how -- serving consumers, how they feel about the labor market versus the economy. And we surveyed those separately. And then typically, those 2 run together. And what that means is if people are feeling good about labor market, good about the economy that's going to drive a higher level of consumer confidence, which is what we kind of most closely think that loan demand is kind of tied to.

But what's happening now is if you look at the survey data, consumers were really good about the labor market, but there's a big gap in how they feel about the overall economy. And if you look -- dig into that, it's some of it sort of uncertainty by government policy. And a lot of it, it's uncertainty about inflation. And so wage growth is great. But if wage growth was coming as a result of inflation as opposed to just economic recovery in a labor market, the tightness in the labor market, that's going to make people a little bit uncertain. And certainly, energy prices, et cetera, are -- and prices at the pump are going to play into that grocery prices, et cetera.

So I think those are the 2 things we're kind of watching both from a -- kind of, a credit standpoint on a demand standpoint. But again, those are -- I'm just -- those are the, I guess, the kind of qualifiers, but I don't want to detract to the point that we do feel really good about where demand was in the third quarter where it's trending in the fourth quarter and how we feel about '22 for the recovery of the U.S. business.

So I don't -- on your second part of your question about origination, new customer origination. So I don't know if we have that follow-up on that, Bill.

Yes. So right now, if you look at the accounts receivable, 18% of the accounts receivable is true new customers that we have never seen before, so not returning, but truly new. And that compares to 15% a year ago and then 20% in '19. So getting much closer from a percentage of accounts receivable to where we were pre pandemic.

Okay. Great. Appreciate it. And that's very helpful detail. Separate question and switching over to Canada and Flexiti. So nice to see -- hear about the different products. Nice to see the list of the different merchants you have on your slides. If possible, if you could talk about, say, the potential pipeline of merchants that you're working on? And maybe even going beyond that, when you think about the potential, I guess, gross merchandise volume that you might get out of Canada and what the addressable market is. If you could talk about that as it relates to Flexiti, that would be helpful.

Yes. So this is Don. So there are -- continued to be some merchants that are like LFL Group that were previously with Desjardins and our sort of up for grabs as Desjardins winds down their point-of-sale business, so we continue to pursue some of that, obviously. LFL was the biggest piece of their -- of that -- of the Desjardins business, and we've captured that. So it won't be anything on that kind of scale.

I think we have really good potential. And there's a couple of things. One is Calgary-like jewelry, which -- and I think it's really important for us to keep kind of a healthy mix of merchants and merchandise that we're financing. So we're not overly levered to one category. But do you think something like jewelry where it was during the pandemic was -- a lot of jewelry stores were closed. It's not stuff that sells as well online versus in the certain items, certainly as in the retail stores. So there's good recovery there. There are some opportunities there for us to -- we think that wins of business in that category.

I think that as well online, we do -- we have a nice program with Wayfair. In Canada, we continue to work with them to increase some of the promotional programs that we can run with them. And we do spot the wave for our car is actually -- is a branded Wayfair card in Canada as well. So we're happy with our relationship and hopeful of that, that -- just the organic growth of that business will be good for us in Canada. I think the other part is we talked about the both the wave card and the nonprime card and giving us an appeal for more sort of brands that are not as high end of brands. And particularly in some of the furniture and electronics categories, helping the sell-through of more kind of middle market brands with the Wave card is important.

And as I mentioned, the smaller ticket stuff, again, apparel, cosmetics, having a Pay in 4 product or maybe even if it's -- you extended a little bit beyond Pay in 4 depending on the promotion, it's going to help us. So we think 80% of increment -- about 80% of retail spend in Canada, which should cost kind of small ticket. So I think there's a lot of opportunity in the small ticket world for us with a Pay in 4 product or maybe it's a Pay in 6 or Pay in 8. You can run a different kind of promotions once you have that kind of functionality in the system.

And this concludes the question-and-answer session. I now would like to return the call to Don Gayhardt, CEO, for closing comments.

Yes. Great. Thanks, everybody, for joining us this morning. We look forward to talking to you again when we report our year-end 2021 results in early February 2022. Thanks. Bye.

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