CURO Group Holdings Corp (CURO) 2021 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CURO Q2 2021 Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Matt Keating, Investor Relations for CURO. Sir, the floor is yours.

Thank you, and good morning, everyone. After the market closed yesterday, CURO released results for the second quarter 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 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 to enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in yesterday's press release.

Before we begin our second quarter update, I'd like to remind you that we have again provided a supplemental investor presentation, which highlights key trends through last week. Don and Roger will reference this presentation in their remarks, and you can find it on 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, and thank you for joining us today. The second quarter was a busy one for us, and we made significant progress in several key areas of our business, all with the aim of continuing to grow and evolve our company to drive earnings growth and value creation. We solidified significant growth visibility for our Canadian point-of-sale business with Flexiti signing of LFL Group, Canada's largest home furnishings retailer to a 10-year exclusive contract that in the future will add over CAD 800 million in annualized origination volume and earning assets. This accelerates Flexiti's timeline for achieving profitability at scale.

Secondly, we took action to improve profit margins in our U.S. business by consolidating stores in a number of markets. Third, we began monetizing our tremendously successful investment in Katapult, receiving $146.9 million in cash and 20.7% ownership in the new publicly traded company when the SPAC merger closed on June 9. And finally, we improved our capital structure with the senior notes refinancing that extends maturities to 2028, lowers the coupon by 75 basis points and provides important flexibility for supporting a significant earning asset growth that I mentioned in Canada.

Similar to the last several quarters, our Canadian operations with a growth engine. Our Canada Direct lending and Canada point-of-sale segments posted strong sequential loan growth of 5.1% and 9.9% respectively. Canada Direct lending adjusted EBITDA was up 81.4% year-over-year on 48% net revenue growth. Flexiti's loan originations were up over 117% compared to the same quarter a year ago. In the U.S., we returned to posting sequential loan growth and are bullish on our second half loan volumes. We also 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 represent 25% of our U.S. store footprint, but they generated only 8% of our U.S. store revenue in 2020 and were the stores most impacted by COVID-19.

So this is mainly a consolidation of underperforming stores, not a departure from our belief in the advantages of an omni-channel model. Our customers can transition seamlessly online to an adjacent store or to contact centers. So this consolidation reduces our annual operating costs by approximately $20 million, while maximizing our likelihood of retaining a large percentage of customers from the impact of stores. Our consolidated revenue for the second quarter was $187.7 million, an increase of 2.8% from the same quarter last year. We reported adjusted EBITDA of $50.3 million and adjusted EPS of $0.40 per share compared to last year's adjusted EBITDA of $51.1 million and adjusted EPS of $0.53. In both instances, extremely strong credit performance resulted in much lower net charge-off rates and lower provision for loan losses.

Canada Direct lending loan balances grew 40.7% year-over-year. The sequential loan growth of $17.6 million or 5.1% was particularly impressive since Canada reimposed lockdown measures for much of the second quarter due to a resurgence in COVID cases. Most of these COVID restrictions [were] put in place in the second week of April and also had a modest impacts on Flexiti's merchant base where brick-and-mortar sales make up about 75% of total volume. We'll have more on Flexiti in a minute. Fortunately, with fewer COVID cases and more widespread vaccinations, Canada is reopening.

Canada Direct lending is $29.1 million of adjusted EBITDA for the second quarter represented the single highest quarterly earnings we have reported for that business and was up more than 80% over the $16 million recorded for the second quarter of 2020. With the growth in loan balances, revenue grew 36.9% year-over-year. Net charge-offs for Canada Direct lending declined by $0.6 million or 4.9% year-over-year. Improvements in net charge-off rates and delinquencies resulted in provision for loan losses of $8.6 million compared to $9.2 million in the second quarter of last year and resulting in net revenue of $17.3 million or 48% higher than the second quarter a year ago.

Turning to our Canada POS segment. Since our acquisition of Flexiti closed on March 10, second quarter was our first full quarter of results. Flexiti contributed $7 million in revenue and adjusted EBITDA of $2.5 million in the second quarter. Flexiti's originations increased 117.8% compared to the prior year quarter, driven primarily by the continued addition of new merchant partners. We're obviously excited about Flexiti's expanded relationship with LFL, which operates more than 300 retail stores under multiple banners, including the Leon's and The Brick. Flexiti has begun originating new accounts with the Brick, and we expect the Leon's locations to come online in September.

With the addition of the LFL volume, we forecast Flexiti's origination volume increasing from CAD 292 million in 2020 to a projected CAD 1.9 billion in 2023. Including $221.5 million of loan balances in our Canadian POS Lending segment from our Flexiti acquisition, overall loan balances in Canada finished the quarter 64.4% above the prior year level. You'll also notice from the investors' supplement that the percentage of transactions conducted online in Canada continues to be well above historical averages, likely partially influenced by the reimposition of COVID restrictions. While we can't predict the long-term behaviors of the Canadian consumer, this demonstrates the value of our full spectrum omni-channel platforms.

Our U.S. loan balances declined 4.4% compared to the prior year, but increased 2.5% sequentially. Excluding the Verge credit portfolio, where we are no longer originating loans, U.S. loan balances increased by a very healthy 7.2% sequentially. The year-over-year decline in U.S. loan balances was anticipated due to the U.S. federal government stimulus payments our customers received during the last 2 weeks of March of this year, along with the delayed tax refund that impacted the same period. The stimulus meaningfully increased prepayments and reduced demand for new loans. With that said, we are seeing originations improve as the impact of fiscal stimulus wanes and the economic recovery progresses.

We received a number of questions on the potential future impact of the new U.S. tax credit for families with children. It's early to tell, but because half is received in cash and half is a credit against 2021 taxes, given the relative amounts, we don't believe it will have a similar impact in terms of depressing demand as the previous larger direct stimulus payments.

Looking at the information presented on Page 6 of our investors' supplement. Our second round of significant U.S. government stimulus that started hitting consumers checking accounts in March of this year resulted in higher prepayment rates for current loans, strong recoveries on past due loans and low demand for new loans. Gross combined loans receivable, including CSO loans, declined 4.4% or $10.2 million year-over-year. This resulted in an $18.5 million or 13.5% decline in revenue in the second quarter of 2021 compared to the second quarter of last year. U.S. net charge-offs in the quarter were only $37.9 million, a decline of $27.8 million or 42.3% from the second quarter of last year. Historically strong credit trends limited the U.S. net revenue decline to $10.6 million or 11.1% year-over-year in the second quarter.

It's difficult to forecast when the ongoing economic recovery is likely to lead to a normalization in loan demand from our customers, but we remain confident in our ability to grow our U.S. business as we emerge from this pandemic in the second half of 2021. I'm very happy with the work that we've done to continue moving the company forward. Through both organic growth and the Flexiti acquisition, we've grown our Canadian operations, which accounted for 76%, and our company-owned gross loans receivable at the end of the second quarter.

We've done the work and made the tough decisions to rationalize our U.S. store base. We continue to invest in new products such as credit cards and near-prime loans. We continue to invest in our internal technology and risk and analytics platform. The strength of these platforms has helped us to quickly migrate customers to our online channel and continually refine our credit decisioning, creating new product opportunities in all geographies.

We've also continued to strengthen our management team. I'm pleased to announce that Dan Kirsche joined us this week as our new EVP and Chief Technology Officer. Dan has a great background leading software engineering for digital marketing and consumer lending organizations, and we're excited to have him on board to help us push forward, particularly on the new product front. And finally, as always, I'd like to 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 it over to Roger.

Thanks, Don, and good morning. While Don covered some of the consolidated and segment highlights, I'll provide some more color on details. Consolidated adjusted EBITDA came in at $50.3 million, down just $800,000 or 1.6% year-over-year, as revenue declines from lower loan balances were offset by lower provision for loan loss and cost reductions. As a result, adjusted earnings per share was $0.40 for the second quarter. Canada Direct lending loan balances increased 40.7% year-over-year, including a $105.8 million increase in revolving line of credit balances. Our revolving line of credit book in Canada Direct lending increased 45.6% year-over-year, with related revenue up 45%.

As Don mentioned earlier, despite COVID-19 impacts, Canada Direct lending posted a record quarterly adjusted EBITDA of $29.1 million, up 81% year-over-year, driven by operating leverage on 48% growth in net revenue. In the U.S., second quarter revenue decreased 13.5% from the prior year, and adjusted EBITDA decreased $16.3 million or 46.5%. U.S. loan balances and revenue decreased 4.4% and 13.5% respectively year-over-year, primarily due to the impact of COVID-19 and related government stimulus. Loss rates in the U.S. improved 550 basis points year-over-year, which drove a 19% reduction in the provision for loan losses after related allowance adjustments.

Turning to the first full quarter of Canada POS results. You will see in our earnings release that Flexiti added revenue, net revenue and operating expenses of $7 million, $4 million and $10.4 million respectively in our first full quarter of ownership. As we explained in detail in our earnings release, Flexiti's reported results in the near term are affected by the purchase accounting and other adjustments required for the opening balance sheet as of March 10, 2021. Most notably for merchant discount revenue, MDR associated with the acquired loan portfolio.

The unrealized MDR that would have normally floated to revenue over the life of the portfolio had to be written off in the opening balance sheet. So the resulting yield on the acquired portfolio is lower than for loans originated after March 10, 2021. We have provided details on this impact in various places in our MD&A section of our earnings release. This effect burns off by the second quarter of next year, and we included the supplemental disclosures to assist in modeling run rate yields thereafter.

One more comment on Canada. Looking at Page 17 of our investors' supplement, you could see that outlook. Based on this quarter's performance, we think Canada Direct lending revenues and adjusted pretax income will now approach CAD 310 million and CAD 100 million respectively compared to Page 17. Flexiti's second quarter was lighter on revenue because of the aforementioned resurgence lockdowns that affected its merchant partners and customers. However, strong credit performance more than offset the effect on earnings. So we think the adjusted pretax results will be a little better than the outlook on Page 17. We plan to provide more formal updates later this quarter as the reopenings after the Q2 2021 COVID resurgence lockdowns progress and Flexiti continues to onboard LFL.

I'll now expand on the trends and key drivers of Q2 results. First, demand and loan volume. Pages 5 and 6 of our supplemental earnings presentation recap the weekly trends through last week indexed to the week ended March 7, 2020 for the Canadian Direct lending and U.S. segments. In Canada, application volumes, approval rates and originations have been relatively stable this year. In the U.S., transfer application volumes, approval rates and originations showed fairly consistent improvement as we move through the second quarter. Through last week, July 24, loan balances in Canada rose $7.4 million, and the U.S. rose $2.8 million from quarter end. As we move through the second quarter, the percentage of loans originated to new customers averaged 9.9%. That's down slightly from 10.5% in the first quarter of 2021 and higher than the 6% in the second quarter of 2020.

Second, I'll talk about delinquency and credit trends. Staying on Pages 5 and 6 of our earnings supplement and looking at weekly delinquency trends by bucket. Through July 2021, both countries continue to see stable and historically low delinquencies. Our second quarter consolidated net charge-off rate improved 750 basis points year-over-year and 25 basis points sequentially.

Third, just a moment on the provision for loan losses. Moving to Page 8 of our earnings supplement deck. Allowance coverage rates declined from the fourth quarter, more so in Canada on sustained improvement in net charge-off rates and delinquency levels. For the second quarter of 2021, consolidated loan loss provision was $7.1 million less than net charge-offs. The favorable impact on provision of reduced allowance rates was nearly offset by provision on loan growth. For perspective, in the same quarter last year, loan loss provision was $28.4 million lower than net charge-offs, adding $20 million to net revenue last year versus this year and creating a really tough comp, obviously.

Last quarter, that is Q1 2021, loan loss provision was $16.8 million less than net charge-offs compared to this quarter's $7.1 million. Since we expect sequential loan growth and stable credit quality for the second half of 2021, we expect more normalized relationships where the loan loss provision exceeds net charge-offs. With solid sequential loan growth improvement in the U.S., Q3 and Q4 earnings will be meaningfully lower than what we have posted so far this year because of advertising and loan loss provision. Loans modified under our customer care program made up 3.8% of our company-owned installment balance in the U.S. at the end of second quarter, which is down from 5.9% at the end of the first quarter. We ended the second quarter with $276.4 million in cash and $435.2 million of liquidity, including undrawn capacity on revolving credit facilities.

Don mentioned earlier, the refinancing of our 8.25% senior notes due 2025. We were very pleased that bond investors recognize the magnitude by which we have transformed CURO in the 3 short years since the previous bonds were issued. We lowered the coupon. We extended maturities and importantly, we got the flexibility we needed to support Canadian loan growth, specifically in the Flexiti business. Strong demand allowed us to upsize the offering from $700 million to $750 million, and we took that extra capacity to maintain flexibility for M&A, investing in upmarket loan products in the U.S. and with an eye towards the rapid growth and scale we are expecting in Canada.

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

(Operator Instructions) Our first question comes from Moshe Orenbuch.

So you talked about the loan growth that you're seeing both in the U.S. and Canada kind of quarter-to-date. Can you talk a little bit about just how you see, in case you did, kind of also alluded to expecting strong sequential growth in Q3? So what's the pattern? What's happening? Is it that you're going to approve more customers? Is it the application flow is going to be better? Can you just talk through that a little bit?

Yes. Moshe, it's Don. I'll give you a couple of comments in those, but Bill, chime in as well. I'll start with Canada. So we're -- obviously, we thought the growth there was really good, given the fact that there were some lockdowns sort of reimposed, which although this is like knock wood, it looks like those are -- the case flows, they're going to come up a little bit recently with some of the delta stuff that they do look like we're going to be in a period where some of the retail stuff will be open again. So but even in that kind of a period, we thought we had really good growth in the direct lending side of the business. I mean, a lot of that, that's one of the beauties of having the line of credit product, where people have an open line and they can -- they could take a draw on the line without having to go in and either online or into a branch and take out a new load. So that -- the product structure really helps us there a lot.

On the Flexiti's side, we're really just getting growth in the existing merchants like Sleep Country and Staples. And then we started onboarding sort of The Brick side of the Leon's or the LFL relationship. And that's -- we're really just in a -- that's just a complete -- no pun intended to Canada, but it's a complete hockey stick right now. I mean they're going to do as much volume in July in the Flexiti business as they did in the entire like year of 2017. So that's just the scale of that relationship that says. So they're -- the thing we mentioned in the comments that they have and The Brick is -- they're converting all The Bricks (inaudible) the Leon's side of the business so had that -- the plan is to have that going in September. So that will be -- I think, it'll probably take another month or so. But by the -- sort of by the end of the third quarter, we should have that -- all of those properties, all those locations, both brick-and-mortar and online originated on the Flexiti platform. But a lot of work to do given the ramp there to make sure that continues to go as well as it's gone so far.

In the U.S. side, I'll just -- I'll get Bill to talk a little bit more about sort of what we're doing in the advertising environment and all that kind of stuff. But I think we're just -- we are really starting to see demand. And we talk about internally as we -- the card data suggests that people are spending money. Obviously, they're shifting the spend from like furniture and appliances and in electronics to travel and leisure and the dining, et cetera. And all that's positive. And obviously, the job growth in those areas -- at this point, job -- the initial job numbers came out, that ticked out a little bit again, which is good. So I think that's just -- it's the reopening. Now we need that to continue. And hopefully, the mask mandates and what's going along with the virus doesn't interdict the progress that's been made so far.

But I -- say we -- I'll give you one more data where we're -- we were about extra Verge portfolio, which is running off. We had -- I think we said we'd be 7.2% sequential growth in the June quarter, just year -- month-to-date, so probably got a couple of days left in the month. We're up in the -- U.S. experts were up 5% just through the month of July. So getting sequential growth -- quarterly growth above that 7.2% number that we saw in the June quarter looks -- again, the externalities side. It looks like that we're pacing to see sequential growth that is improving at an improving rate. And Bill will talk about some more components of that.

Yes, sure. I think Don covered a lot of it, but I'll just quickly talk about Canada. And it's really -- it's interesting. If you look at the -- just the new customer growth and how it paces with the different phases, as the lock down ease. There really is a correlation there. So as that continues to accelerate, we'll continue to invest in marketing dollars because we're getting a better response and getting a good return on that investment. In the U.S., it's very much about, I think, back-to-school, and Don covered a lot of that. But we're continuing to see weekly progress, but really very much looking forward to the back-to-school season, having children back in class, which means they'll need backpacks and shoes and school supplies. And it also, for many families, serves as a form of child care, which means people can get back to work and feel confident in taking them. So those are really the things that we're monitoring on the demand side.

Got it. Just as a quick follow-up, is there any change in the competitive dynamics in Canada? I mean any -- you've seen given those category results? Anything else going on there from your competitors?

Not that we've seen. We kind of like where we are. And obviously, the -- on the Flexiti side of things, those are contractual relationships. And then on the direct lending side of it, I think, the -- again, the -- our ability to offer that line of credit product, there is some -- with goeasy and Fairstone. There's some companies of scale that are in the larger installment loan space. But I think our -- we like the competitive advantage we have, as I just mentioned, the ability for customers to have a lot of credit and make it draw on that line of credit without having to come originated, and it's not in a declining balance as you pay down installments. And we just like the -- and then customers really continue to respond well to that product. I don't see anybody -- any new entrants in that end of the market.

(Operator Instructions) Our next question comes from Bob Napoli.

This is Spencer on for Bob. I just had a one on the longer-term plans for the 2 businesses geographically. Given the higher valuations for installment loan businesses in Canada, would you ever consider spinning off the Canadian business or conversely selling the U.S. business?

Yes. I mean, we're -- as Bill mentioned, we're -- in Canada, the process of -- our direct lending business is growing. Growth is strong. We've upped our guidance there that Roger talked about. Flexiti is actually in the middle of just -- it's not just -- I said in the last call, these kind of things just all kind of fall out of the tree. I mean, you really got to go execute. So we're in the process of -- the origination ramp is very strong, but we need to -- we're working hard and helping. Like one of the good parts of the relationship there is in our call center, our CURO call center in Mississauga, we're hiring customer service and collections rep to help support this growth. But they're Flexiti employees, but they're -- we're helping in that process. And what I think, we're going to be -- we're going to be onboarding about a 100 new teammates to support that (inaudible) by the end of the year.

So our focus is really on executing as best we can to -- and that's a huge relationship and essentially kind of triples the volume in the business. And as we said in the -- we gave some long-range guidance when we announced an LFL deal, we think those combined businesses could generate in the neighborhood of CAD 180 million pretax in 2023. But our focus right now is really executing to make sure we can get there. And we'll -- we think we -- certainly, our hope is that investors in the current structure will appreciate that growth and the word -- the company appropriately. And if that doesn't happen down the road, we'll -- we obviously -- we'll have a lot of options on the table.

Okay. And then one follow-up. I know you've gotten this question before, but I just want to ask. Any update on capital allocation? I know in the last quarter, you enhanced returns to shareholders. Any update now that you have the cash and the balance sheet from Katapult?

Yes, Spencer. So I think we're emphasizing flexibility right now. And kind of the priorities are evaluating M&A opportunities, organic investment and upmarket products. And we're also very mindful of how big the [LFO] relationship is and how fast that Flexiti is going to get big. So we're kind of -- right now, we're keeping an eye on flexibility. And then as we move into next year, we'll reevaluate that.

Our next question comes from John Rowan.

Can you remind me how -- again, the earn-out? I know the charters are 12 and 14 on the Katapult deal. But can you remind me the time frame at which it would need to achieve? I know it's an average over a certain time. I sort of -- given the reduction in the stock price, I just want to make sure I understand kind of when that calculation period ends.

Well, there's 2 of them. You mentioned one -- 20 out of 30 days above $12 and 20 out of 30 days above $14 triggers the 2 pieces, and the period is 6 years. So if that happens any time in 6 years.

It's a full 6 years is the…

Yes. Yes. Yes, 6 years from the merger close…

Okay. Don, anything you want to talk about regarding the hearings today on the rate cap bill?

Yes. I think, we've obviously been monitoring directly and through our trade associations. I think we're -- I think, continue to I think made you good case and got a lot of good support that rate caps are simply a way to -- are certainly just an easy reason to cut off credit for a lot of consumers. There is -- it's just that the simple math on that small dollar loans, small dollar, short duration loans and an APR cap just doesn't -- just not the right way to sort of think about the product and think about the regulation. So as I said, I think we've got a lot of good support on that front. And we'll kind of go from there. As I said, we do it both kind of on our own and through a coordinated effort through the trade association. But we'll certainly monitor what goes on to that.

And then, can you give any guidance on interest expense for next quarter? Just -- obviously, there's a lot -- something going with the bond deal. So I just want to see if you can provide some type of framework for what you think interest expense is, the run rate going forward?

Yes. The bond deal doesn't move it very much because we upsized and the coupon was 75 basis points lower. So -- but Flexiti, the only thing that will change will be Flexiti borrowing on their ABL. And I think, I see interest expense the next quarter barely inching up, but because of the Flexiti -- both the onboarding of LFL, it's probably -- there's probably an additional -- next quarter, it's up slightly. And then by fourth quarter, it's probably -- you could see a $2 million or $3 million increase sequentially.

Okay. And then the guidance for the back half of the year. I just want to make sure I understand it correctly. You're saying that earnings per share per quarter will be below the $0.40 mark here in the second quarter, correct?

Correct. Well -- yes, well below because of that. We've had provision tailwinds. We've got provision tailwinds like everybody else for so long. We're not -- nothing we're seeing success. We're going to be able to sustain those provision tailwinds because of loan growth.

And that was our final question. I'll turn the call back over to Don for concluding remarks.

All right. Great. Thank you, operator. Thanks, everybody, for joining us, and we look forward to talking to you again after our third quarter results. Have a good day.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.