CURO Group Holdings Corp (CURO) 2022 Q1 法說會逐字稿

Good day, and welcome to the CURO Holdings First Quarter 2022 Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Tamara Schulz, CURO's Chief Accounting Officer. Please go ahead.

Thank you, and good afternoon, everyone. After the market closed today, CURO released its results for the first quarter 2022, 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; and Chief Financial Officer, Roger Dean.

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 this afternoon and 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. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release.

Before we begin, I'd like to remind you that we have provided a supplemental investor presentation that we will reference in our remarks and that you can find it in the Events & Presentations section of our IR website.

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

Thanks, Tamara. Good afternoon, everyone, and thank you for joining us today. I'll start with something we haven't been able to say since the fourth quarter of 2019. This quarter seemed more normal and points to the tremendous long-term growth and value creation opportunities from our strategic repositioning of CURO. Our loan book more than doubled versus the same quarter a year ago partly because of the acquired Heights in the fourth quarter of last year, which added approximately $470 million of loans. But unpacking the year-over-year loan growth at the business level, Flexiti was up 16%; Canada Direct Lending was up 30%; legacy U.S. direct lending, excluding the runoff portfolios, was up 34%. And consolidated loan balances were up a very healthy 5.2% sequentially, with Canada growing and the U.S. impacted by the Q1 tax refund season.

Tax season came in mostly in line with our internal forecast as we expected slightly smaller refunds than in years past due to the taxability of certain pandemic-related benefits. Smaller refunds reduced our collection rates modestly but, of course, led to a smaller reduction in loan balances than in years past. I should also note that Heights customers, who have higher income and credit scores, are much less likely to receive tax refunds, in particular the larger earned income tax credits. As a reminder, tax refund season is not a phenomenon that we or our customers see in Canada.

Of course, with this growth comes upfront and normal loan loss provision. We pointed out in our release and at the top chart on Page 4 of our investor presentation but normal loss provisioning in this quarter compared to government stimulus impacted provisioning in the first quarter of 2021 produced a $28.7 million pretax earnings swing year-over-year. And we have included additional charge-offs and provision detail for each of our business units. Roger will cover the numbers in more detail later.

You'll see on Slide 8 of our investor presentation that we have revised our 2022 and '23 outlook for our Canadian businesses. It's important to note that the revised outlook reflects updated high-level thinking on the macro environment and recent trends mostly in more cautious view of revenue growth and net charge-off levels.

Expanding on this a bit, both the U.S. and Canadian economies are performing fairly well right now with job and income growth. However, both central banks are increasing base rates at meaningful clips in an effort to tamp down inflation and engineer a soft landing. We expect rising inflation and interest rates will impact our consumer spending and borrowing habits but to what degree remains unknown as we are facing a set of converging factors.

Typically, when we see rising inflation, coupled with positive employment trends, this is a sweet spot for our business where we see good demand along with good credit performance. The unknown factor facing this scenario is that the U.S. and Canadian economies dipped into recessions and we started to see job growth slow. Many forecasters have increased the probability of recession in late '22 or '23, so this has caused us to temper some of our top line and credit performance expectations.

Also, rates are rising and it's far too early to tell where the Fed and the Bank of Canada end up on their benchmark rates. Using the current forward rate curves, which has steepened meaningfully in the past month, we will see an impact of approximately $8 million in 2022 and $15 million in 2023. Put another way, each 25 basis point increase in the benchmark rates result in about $2.5 million of additional annual interest expense using current debt balances. A reminder here that of our current debt balance, approximately 50% consists of fixed-rate senior notes and the rest in variable-rate asset-backed facilities in the U.S. and Canada.

With respect to our Flexiti business, we're very pleased with the work being done by our whole team in Toronto to scale and support a business that is tripling its year-over-year rate on originations. But overall retail sales in Canada have seen some softening as well as a shift from larger ticket hard and white goods, which are Flexiti's primary channels, to apparel and cosmetics as well as a further shift to travel, dining and other service-based expenditures.

Finally, I should note that we share some of the optimism as being expressed in some of the earnings reports about the overall health of consumer balance sheets and wage gains that is driving more loan demand. However, in our view, a bit more of a balanced approach is called for, and we try to reflect that in a revised outlook. And I continue to remain confident in our outlook given the strength of our businesses and consistent focus on disciplined long-term execution and prudent credit management.

I'll now turn the call over to Roger to review the details of our first quarter 2022 results.

Thanks, Don, and good afternoon. Adjusted net income for the quarter was $6.3 million or $0.15 adjusted diluted earnings per share compared to $0.69 adjusted diluted earnings per share in the first quarter of 2021. The primary driver of the year-over-year decline in earnings was stimulus impacted compared to normalized loss provisioning that Don mentioned earlier. Interest cost was also higher by $18.8 million because of the senior notes tack-on that we did in the fourth quarter to finance in part the acquisition of Heights and higher utilization of nonrecourse asset-backed facilities to support loan growth, including the related facility assumed in the Heights acquisition.

Total revenues in the first quarter increased $94 million or 48% year-over-year. Heights added $66 million of revenue, and we also had a full quarter of Canada point-of-sale lending, which contributed $20 million of revenue this first quarter compared to $1.6 million in a partial quarter of the first quarter of 2021. Canada Direct Lending revenue rose 22% year-over-year. And U.S. direct lending, excluding the runoff portfolios and excluding Heights, grew 12% versus the first quarter of last year. Our U.S. runoff portfolios -- and if you recall, those portfolios are comprised of California and Illinois installment loans, Virginia open-end line of credit and Verge. Those contributed $6.4 million of net revenue in this first quarter compared to $14 million of net revenue in the first quarter of 2021.

Consolidated operating expenses for the quarter increased $46.2 million or 43.1% compared to the prior year, driven entirely by the expense base that we acquired with Heights that was $33.8 million, and a full quarter of Flexiti this year, adding $15.5 million. Excluding the lack of year-over-year comparability for the Heights and Flexiti acquisitions, operating expenses were flat as cost savings from store closures in the middle of last year offset normal growth in variable cost and compensation. Sequentially, recurring operating expenses, excluding Heights, decreased by $4 million.

Don already covered loan growth by business, so I'll talk a little more about credit quality. Our credit metric trends in Q1 were consistent with what many of our peers have seen overall: continuing trends towards normalization but still favorable to pre-pandemic run rates. Our consolidated quarterly net charge-off rates for the first quarter improved year-over-year by 90 basis points from portfolio mix shift to lower loss rate products.

Looking at it by business, U.S. net charge-off rates improved 150 basis points year-over-year while past due rates increased by 90 basis points to a year ago. Sequentially, U.S. net charge-off and pass-through rates also improved meaningfully. Both comparisons are affected by our Heights acquisition at the end of December. So if we take Heights out of the numbers, U.S. net charge-off rates were 440 basis points higher year-over-year, while pass-through rates were 240 basis points higher. But sequentially, U.S. net charge-off rates were down 380 basis points and the pass-through rate was down 30 basis points.

Canada Direct Lending net charge-off rates increased 170 basis points, and the pass-through rate was up 160 basis points compared to Q1 of last year. We saw a more normal post-holiday seasonality in the Canadian direct lending portfolio in the middle of Q1, but as we moved through Q2, so far, we've seen delinquencies trend back down comfortably.

For Canada point of sale, we've had very stable and consistent net charge-off and past-due rate trends over the past 3 quarters.

We had $60.2 million in unrestricted cash and $118 million of additional liquidity, including undrawn capacity on revolving credit facilities and borrowing base levels at March 31, 2022. We are currently working on a very attractive refinancing and expansion of Heights nonrecourse asset-backed warehouse facility and accessing asset-backed securitization for that business in the second half of 2022. We also announced earlier this quarter that we expanded the capacity under our Canadian SPV facility by CAD 50 million.

Finally, during the quarter, we repurchased just over 824,000 shares, and the board authorized our quarterly dividend at $0.11 per share.

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

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

First was just, Roger, you did mention that from an expense perspective, not a lot of comps just given some of the new kind of divisions you guys have bought and are growing. Is this a good kind of base case for expenses? And then any comments on kind of inflation or just sort of growth expectations with respect to expenses this year.

Roger, you're on mute.

Sorry. Forgive me. I was on mute. Sorry about that. No, I think -- John, I think Q1 was a pretty good run rate from a quarterly perspective. There wasn't anything -- if you take the recurring expenses, which are reconciled back in the appendix of the deck, Flexiti's expenses were a little lower than they were -- the total expenses were down sequentially.

If you take Heights out -- I'll come back to Heights in a minute. But if you take Heights out, total expenses were down sequentially from Q4. That's largely variable compensation. We did have -- we did overachieve our plan. That's all in the proxy. And so we had some backloaded a little bit more variable compensation expense in the fourth quarter than the normal run rate and a couple of other things.

And by the way, Flexiti -- seasonally, Flexiti's expenses in the fourth quarter to support the holiday season are a little -- are higher than they would be in the first quarter. So if you look at our numbers, I think I said excluding Heights, the expenses were down $4 million sequentially. But if you kind of establish that as the run rate ex Heights and then Heights was about $33 million, $34 million and -- I think there's going to be some -- that's -- the Heights number is not -- is certainly not going to go up materially. And there are some -- there continues to be -- we'll be working through some combined cost synergies there that we look like -- as you know, we've only owned them since the end of December. So we're on our way but not all the way there.

So overall, again, I think that -- I think Q4 -- or Q1 is a good run rate proxy for the quarter release for the rest of this year.

Okay. That's helpful. And then I mean with Heights and some of the new stuff you guys have bought in Canada, you've got a number of different channels to grow and customer acquisition channels. I'm wondering -- can you comment on customer acquisition, specifically customer acquisition costs, the methods of customer acquisitions and so forth and any channels that are growing at different paces or more attractive paces than you would have expected?

Yes. John, It's Don. I think -- well, obviously in some of the new stuff, Flexiti is a merchant-based relationship business. But we do get some traffic to flexiti.com. And as we -- particularly as we've rolled out and ramped up the LFL relationship, which -- so like either a reminder, for [then U.S.], it is the largest home furnishings retailer in Canada. So we've been featuring in a lot of their advertising both print and online. We've been able to get some traffic with flexiti.com directly. And we have some -- we're testing ways to grow that.

We've got a good team up there, a good marketing team with some good digital experience. So -- but I think the main focus of that business continues to be just ramping up and rolling out the regional relationships we've added and, as I mentioned, we're probably up about -- we tripled their origination volume year-over-year in the first quarter there. So that's basically the main focus, although we are starting to put some more money and some more energy and effort into the -- call it, the direct-to-consumer and the flexiti.com online brand.

Heights is a retail business. I think most people will -- they'll be either sort of shopping for applications online, calling the branches. So it's really not a walk-in business per se, but most of the -- unless just a certain kind of repeat transaction, most of the loan transactions there are branch visit loans.

We are -- we have some work to do before we can sort of fully, I think, take advantage of some of the digital capabilities that we have and sort of, I guess, just kind of sharing those with Heights. And certainly it's -- we're looking -- we're working on adding some centralized collections, audience from more centralized underwriting, and then adding to their digital capabilities, up to and including in the -- in our -- not through distribution so we'll be able to close certain kinds of loan transactions completely online, like we do in the legacy U.S. direct lending business. But I'd say in terms of money being spent on either Flexiti or Heights, it's a little early. I think it's much more sort of planning and development to make sure that we kind of get it right when we do roll out.

And one thing I would just mention as well is one of the exciting parts of both of those is there are certain -- in some of the high-cost lending channels, you're limited. It's Google or [certainly] where you can put your apps, et cetera. And Flexiti, a large measure of the loan portfolio and the products of Heights are not borne by the same kind of restrictions. So we're kind of excited to be out in -- with those businesses. We'd grow those to able to use a wider variety of channels and we've been able to use in the -- over the legacy direct lending business.

Our next question will come from John Rowan with Janney.

Don, I just wanted to kind of go over some of the guidance that you previously provided, specifically the $3 plus whatever number was for guiding -- for Heights previously. I mean are you backing away from that? Or is that still a target for 2023? I just want to understand how you're looking at the 2023 number with everything in it.

Yes. So we're certainly -- we're -- I guess we didn't address a revised outlook for Heights. So we're certainly affirming the outlook that we gave for Heights when we announced that deal and closed at the end of December. So we try to remind -- I think it was in the $55 million, $56 million pretax, I think going to $75 million to $76 million in 2023. So we feel good about where Heights is.

And then -- so we still -- a reminder, we still never -- just because of the difficulties in forecasting the legacy U.S. direct lending business coming out of the pandemic. As we said at the top of the call, it feels like we're getting more normal numbers now, a more normal kind of quarter. But exactly how that business goes back, I think -- and in light of what is some more uncertain economic type, we're still not prepared to sort of give an outlook on that business. We did reduce our Canadian direct lending businesses a little bit for -- the direct lending business a bit for a little bit higher credit cost as well as just interest expense increases with the forward currents going up so much in Canada and the U.S. by about the same, looking out as kind of 225, 250 basis points.

So -- and then on the Flexiti side, we just looked at -- I think we talked about in the last call the sales volumes have been running a little bit behind what we'd like, and that's just retail in general in Canada, people spending more money on dining out and travel, et cetera, and not on [family sets] and furniture, et cetera.

And then the -- while the credit quality was excellent that you can see in our earnings release, still running around 50 basis points a quarter in charge-offs there, but that means fewer accounts are rolling to interest-bearing. So typically with the 90 days, same as cash and that rolls to an interest-bearing account. We're seeing a few of those roll, so being paid off later, which benefits credit a lot but it hurts us a bit on the top line yield.

So I think that even if you look at the -- if you roll those numbers out for '23, I think a $3 number -- and again, depends on where the U.S. legacy business and how that business lines are performing, but that number certainly, we think absolutely in view for us in '23. Again, assuming we get a somewhat normal kind of return to loan volumes and credit in the U.S., which I think the first quarter was a pretty good down payment on that.

So obviously, we have guidance for Canada, right? We have -- you're standing by your guidance for Heights. The wild card has always been -- and this is nothing new, what happens in the U.S. How do you feel about the U.S., right? There was a relatively modest segment operating loss for the quarter if I'm reading the supplemental correct. If I'm not mistaken, I believe in the last few quarters, it was a bigger number. So maybe just give us an idea of the trajectory in the U.S. and whether or not -- what it's going to take to turn that business profitable.

So yes, you can see the provision impact in that business on Page 4 of the -- actually, for all the businesses on Page 4 of the deck. But again, it's -- Roger, we have the operating numbers but does that include the bond interest in the -- is fully burdened by that?

Yes, yes, yes. It's, yes, in all periods. So obviously, the interest expense for that is on that business, but -- and it went up. So we had a meaningful improvement obviously sequentially from Q4 in the pretax and the EBITDA for the U.S. legacy business. But I think it's pretty much what we've talked about, which is I think we've said, because of the year-over-year provisioning, and you saw a big chunk of that this quarter with allowance release and provision being a credit or a tailwind in Q1 of last year, a headwind this year.

That's going to -- that delta year-over-year in the second half of the year kind of normalizes, but the business will continue to make a little more money, I think, each quarter. But it's never -- at like-for-like, the '22 -- we said a number of times '22 will never approach '21. But assuming that we can grow the loans and get the provision normalized and get a lot of the upfront provisioning behind us, then '23 should start to look normal again.

And so again, just to make a point, I think one of the ways we look at the business for now is we take sort of direct lending, like you pick the Heights business, Canada Direct Lending, the Flexiti business and then the U.S. direct lending business, building out the burden of the interest expense that kind of sits up holdco because if you look at those businesses, they all have financing facilities, nonrecourse financing facilities, and we deduct the interest expense of those from their pretax earnings on kind of -- from an internal work.

So if you add the $75 million of interest expense on the bottom back to the U.S. segment, you can sort of see the level at which -- it's not that, that business -- that the business unit, the operations aren't profitable. They're quite profitable. It's just that the way it's presented, your burdened -- that business is burdened with all that interest expense.

Okay. And is there any -- thanks for the explanation. Are you guys writing any guidance for 2Q at this time?

Not yet.

Not yet, no.

Our next question will come from Bob Napoli with William Blair.

This is Spencer James on for Bob Napoli. Could you just remind us how Heights is positioned relative to how that business is positioned pre-pandemic? Does your guidance for this year for Heights imply it being ahead of where it was in 2019? And then in that context, what are the drivers you're seeing for the revenue growth for Heights into '23?

It's a good question. So no, we absolutely see it being -- and again, it was a private company. So -- but no, we see well ahead -- 2021 for them was ahead of -- they've shown relatively consistent earnings growth even with a little bit of pandemic-related slowdown. But remember, this was a higher credit quality customer, the small loan customer there. And that book is going to be kind of low 600s and the large loan customer is going to be 20 to 30 points higher there from a FICO perspective. So -- and as I mentioned, not as -- so there was -- there's not much seasonal paydown with tax refunds, et cetera.

So it's a very different product and a very different customer than our legacy U.S. business. So they continue to see good growth. Their earning assets for March of '22 -- so March 2022 versus March of '21 when they were private were up 23.2% year-over-year. Revenue is not quite the same but close to some of its mix shift with some of the larger lower-yielding loans but a very good performance in that business. And I think that we are in the process of opening a number of branches. We're probably going to be in 4 new states by the end of the year.

We're trying to be -- again, it's -- all of this is -- I think everybody has kind of looked at the macro and making sure that you're not -- in terms of volume and customers are being -- we're being a little bit more measured than maybe we have been in the fall just because we're looking at the macro, but I think you're still going to see us opening branches, expanding in the new states. And again, more emphasis -- except at the time we closed the deal, more emphasis on that larger loan product as opposed to the smaller loan product, so larger loans, lower yields, longer terms.

And those products also -- again, just because of the pandemic, they didn't see nearly like -- and it's up -- [if it makes sense] it's up for us to pay down the fastest or the smaller balance, higher-yielding products that we offer in our legacy business. Those paid down -- it's almost a linear relationship. The lower price of the product, the larger the loan, the longer the term, those had -- those experienced lower paydown rates. And the Heights smaller -- the large loan business kind of -- if you were to subplot then on that same curve, they would show that same kind of behavior. So we haven't had to deal with -- they haven't had to deal with the same kind of paydowns that we did in the U.S.

Okay. That makes a lot of sense. And so if I'm hearing you correctly, there's no changes to the plans to open new stores in Ontario and also new branches for Heights in the United States? Is it the outlook there are the same as it was last quarter?

Yes, it's still the same. Yes, that's our -- primarily our LendDirect brand in Ontario and then the Heights brand in the U.S.

Okay. And then I'll just sneak in one more quickly. Any comments on, for the Flexiti business, customers' propensity to run a revolving balance? I know that some of those customers take longer to ramp up. Any change to how you're seeing customers running a balance versus paying it down more quickly?

Yes. It's -- we're starting -- we've seen gradual improvement, but it's -- again, you can -- if you look at the -- we just plot. We gave you on Page 4 -- at the very bottom right corner of Page 4, we give you the charge-off rate by segment, and you can see that Flexiti has gone -- it's -- actually, it's gone down even from 2Q of last year, which was a pretty good quarter from a credit quality standpoint. So the credit quality continues to get scattered there. And -- but that's a function. That's almost the inverse on what we're talking about, so we'd rather see on balance.

Obviously, we're annualizing 50 basis point charge-offs, but we think charge-offs -- and Roger said that over time, in that business, we'd like to see them run kind of 4% to 5%. I mean some of that's going to be -- we're adding some near-prime and subprime to the product mix there, but we think that the right sort of -- and that's kind of historic. If you look at that business over time, that's a more normalized charge-off pattern. And we think that the business model works because you then add -- if you add more in charge-offs, you're going to add a lot. You have a proportionately larger amount of yield. So you're kind of net -- your net margin after credit provision is going to go up. So right now, our margin, while -- again, it's great to have 50 basis point charge-offs in a quarter, and so the kind of second consecutive quarter, over time, we'd like to see that float up. So more of those balances that float into -- in the revolving, and we earn interest income in addition to the merchant.

And just a quick reminder. We've been questioned a lot. This is a private label card business. And it has, I guess, some product similarities that might line up with buy now pay later companies. This is probably not a buy now pay later business. This is promotional interest rate financing, very typical 90-day same as cash, 180 same as cash on larger ticket purchases. So this is furniture, appliances and electronics. This is not $200 or break $200 of spend into 4 payments or 4 kind of biweekly payments. It's a very different business than the buy now pay later models that are quite prevalent right now. And we think very much it lines more up with sort of what kind of what -- Synchrony and your GE, Monogram card business and ADS and those private product label card businesses, that kind of business model.

(Operator Instructions) Our next question will come from Moshe Orenbuch with Credit Suisse.

Most of my questions have been asked and answered. But maybe could you talk a little bit maybe in more detail about the plans for growth in Flexiti? Given the various things you've already talked about, I think you made a small acquisition that kind of goes on that platform of a portfolio. And obviously, there will be -- you'll be operating in a higher rate environment. So does that have any implications from a competitive standpoint? Just can you talk about that a little bit?

Yes. So we did most in terms of it. We did buy a portfolio as part of sort of onboarding Michael Hill, which is an Australian-based jewelry chain of operations. In Canada, we bought their existing point-of-sale portfolio. I think it was CAD 11 million, CAD 12 million, and that's the strategy we'll certainly -- that's what a merchant would -- is part of and something. So in most cases, we tend to sort of transition, stop offering the financing relationship with the incumbent lender and we'll start issuing [perhaps] cards. But this is just a different option to provide retail a little more liquidity uptime. We're happy to entertain that.

So I think we are -- in Canadian dollars. Roger, because I think we just sort of passed about CAD 700 million in Canadian outstandings just recently. And I think by the end of the year, that business will probably be -- I don't know, certainly be north of $1 billion in receivables. And that's -- the biggest chunk of that is going to be the LFL business that we added with some other good-sized merchants that we continue. So we don't -- we have not -- we don't forecast -- we forecast growth -- organic growth from existing merchant relationships. So we don't -- we haven't built in any of the numbers we've talked about on Flexiti, any new merchants. And we continue to feel like we're in a position down -- at some point down the road to add some additional like that.

Now whether it's going to be something of the scale of LFL, I think it's probably more unlikely just because of the size of that business but if we look to the sort of annualize or get a full -- I guess, get a full year of contribution from the business we have now. So that's how we kind of get to that business being -- from a rev standpoint, getting into the -- the high 300s in 2023. So I think it's -- hopefully, there'll be some other stuff. And I'll just -- I'll bring up the question, which is that we had no relationship that's generally going to be dilutive in the near term, mostly just to some extent and mostly just a provisioning exercise early on.

But it's -- that's a business that is -- at the end, that we think if we get to $1 billion in receivables, we would be the fourth largest retail credit card originator in Canada. I know one is Canada Tire (sic) [Canadian Tire]. I can't remember of any others but that -- but because all of those cards are general-purpose cards, so it's a Mastercard, Visa, you go -- you get -- you can -- people will use the card for gas and groceries and they have rewards features, et cetera. We would be the #1 private label issuers. So our cards just only works on the network.

It's one of the things we continue to sort of analyze and think about. Is it -- does it make sense for us to have our -- to turn our card into a general-purpose card so you can use your Flexiti card with the Mastercard, Visa and use it for purchases outside of the network. So there's a lot of cost considerations but obviously, it would be more volume. And if it is done properly, it's a very cheap way to originate a general-purpose card, which is what -- as I say -- we just pointed out, there's a lot of larger companies that have very big general-purpose cards that originated on our retail platforms. So that's something we've taken a hard look at right now.

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

Great. So thanks everybody. We appreciate you joining us. We look forward to talking to you again after our second quarter results. Thanks a lot. Bye.

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