CURO Group Holdings Corp.

Good morning and welcome to Kuro Group Holdings third quarter 2020 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I'd now like to turn the conference over to Matt Keating, Investor Relations for Curo.

Please go ahead. Thank you, and good morning, everyone. After the market closed yesterday, Curo released results for the third quarter of 2020, which are available on the investor sections of our website at ir.curo.com. With me on today's call are Curo's President and Chief Executive Officer, Don Gayhart, Chief Operating Officer, Bill Baker, Chief Financial Officer, Roger Dean, and Chief Accounting Officer, Dave Strano. This call is being webcast and will be archived on the investor 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 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 obligations 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 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. With that, I would like to turn the call over to Don.

Thanks, Matt. Good morning, and thank you for joining our call today. I hope this defines you and your families and your colleagues all safe and healthy. Before we begin our third quarter update, I'd like to point out that we have again prepared a supplemental investor presentation to highlight key trends through last week. We'll be referencing this presentation in our remarks, and you can find it on the events and presentations section of our IR website. Our results for the third quarter were positively impacted by a gradual increase in loan demand, our decisions to selectively adjust our credit scoring to raise approval rates, reduce quarantine and stay-at-home orders, and historically low delinquencies and net charge-off rates. Canada remained a bright spot, posting another quarter of sequential loan balances, revenue, and bottom-line growth. We continue to experience a solid demand and improving credit trends for open-end loans in Canada, which drove the third quarter's impressive results. We believe that our strong results in Canada are reflective of two things. One, our strong market position and our market-leading omnichannel product offerings. And second, the more pronounced economic rebound in Canada, where approximately 80% of the jobs lost due to COVID have been recovered, compared to just under 60% here in the U.S., In our U.S. business, we finally started to see some growth return in August and September. Credit has held steady at very strong levels so far. We also continue to gain traction with the Verge credit product and are now offering that product in 14 states. Although there are signs of progress in the U.S. business, the impact of COVID-19 in terms of reducing loan demand and increasing loan repayments remains a challenge, and we still have work to do to get the bottom line in the U.S. back to more normalized levels. Getting into the detail a bit more, we experienced steady weekly increases in loan applications and new loan volume overall as we moved through the third quarter. While these trends were still well below the same periods a year ago, they have for now turned the corner. Our total managed loan balance has increased by 9.5% from the second quarter of 2020, with growth of 4.8% in the U.S. and 13.8% in Canada. While managed loan balances were still down 26.5% year over year due to the impacts from COVID, the 9.5% sequential increase in this year's third quarter was better than the 7.9% sequential growth in last year's third quarter. I should note that the year over year decline was 18.2%, without the impact of the runoff of our California installment portfolios. In addition, an unprecedented improvement in credit quality partially offset the impact of lower loan volume and on revenue. Total delinquencies were down more than 30% year-over-year for most of the third quarter. Through the week ended October 24th, total delinquencies were down 28% compared to the same period a year ago. Putting the pieces together from a P&L perspective for the third quarter, we posted a revenue decline of 38.8%, primarily due to COVID-19's impact on loan demand, as well as the year-over-year impact of the California regulatory change that went into effect at the start of this year. Excluding the impact of our California installment loans, revenue declined 35.8% compared to the year-ago quarter, so COVID-19 was by far the main driver. Adjusted EBITDA declined $30.9 million, or 46.1%, while net revenue declined $46.1 million year-over-year. The net revenue decline was offset by about $20 million of year-over-year cost reductions, which Roger will cover in more detail. As a result, adjusted diluted earnings per share declined 62% year-over-year to 27 cents per share for the third quarter. We've said before that non-prime consumers consistently show a greater ability to manage credit as measured by the relative change in their delinquency and charge-off data during an economic downturn than prime and near-prime customers. Our experience in this crisis certainly provides additional support for this view. Our delinquencies and net charge-offs in the US and Canada stayed low despite much of the government stimulus burning off. The behavior of our customers through this period also demonstrates the value of our omnichannel platform and the investments that we have made to allow for a seamless transition from our store to digital channels. In the U.S., 67% of transactions occurred online during the third quarter of 2020, compared to 57% in the first quarter of 2020. In Canada, where online adoption has lagged the U.S., we saw similar shifts toward online with 34% of transactions conducted online during the third quarter of 2020, compared to 23% in the first quarter of the year. We remain focused on expanding our product set and strategic relationship, and as mentioned earlier, are encouraged by the early results from our relationship with Stride Bank. As a reminder, Stride Bank licenses our underwriting, origination, and servicing platforms to generate online installment loans using the Verge credit brand. Burge is now offered in 14 states, and we expect another five states to go live by the end of the fourth quarter. We remain optimistic about this product's growth potential and future contributions. Another area where we are focusing a good deal of our effort is on our card platforms. We currently have approximately 415,000 open accounts with a positive balance in our OP Plus and Revolve programs. We offer our OP Plus prepaid card in both the U.S. and Canada, Well, our newest product, our Revolve bank account, is offered in the U.S. In all cases, we act as the program manager, and while we partner with banks for core functionality, we control pricing, marketing, and feature development for all of our card products, allowing us to capture greater economics than if we worked as an agent for another program manager. Revolve is particularly interesting as it offers the full functionality of a bank account to our customers, including direct deposits, early access to payroll direct deposits, and overdraft protection, and in many cases, a better and cheaper alternative to traditional bank accounts. These card-based or light bank accounts, which are also offered by companies like Chime, have proven very popular with non-prime consumers, and we believe that our branch network provides us with a great platform to market and fulfill new account relationships. To that end, our fourth quarter advertising spend includes a significant increase in advertising investment for the Revolve card, which the successful will continue on into 2021. I'd now like to turn to our investment in Catapult, a leader in the rapidly growing virtual point of sale financing space. Catapult's origination volume and credit performance continues to be strong. Through the end of September, Catapult's originations increased by over 160% compared to the same period in 2019. We pick up our share of Catapult's income on a two-month lag, so we expect that its strong earnings trends will contribute considerably to our earnings in the fourth quarter of 2020. It's important to note that our equity share of Catapult's earnings is not included in our adjusted EBITDA or other non-GAAP metrics. Specifically, our equity income from Catapult was $3.5 million in the third quarter of 2020, a $4.9 million improvement over last year's third quarter loss. We also increased our ownership of Catapult in the third quarter, spending $11.2 million, and we now own 46.6% of the primary shares and 41.2% of Catapult's fully diluted shares. In what has been a very challenging environment, we also generated over $185 million in free cash flow from operations after loan funding and capital expenditures. Roger will highlight our continued strong liquidity position. While we have a fair amount of caution around the economic environment, we are carefully evaluating M&A and investment opportunities focused around our key strategic growth areas in Canada and cards. As we start the fourth quarter with higher loan balances and continued low delinquencies, we think this third quarter could be the trough for risk-adjusted revenue. With that said, we expect increased new customer accounts, online mix shifts, and upfront loss provisioning on higher volumes to modestly impact risk-adjusted revenue margins in the near term. Even though recent economic data and our own indicators of customer health have been more constructive of late, there remains a significant amount of uncertainty. As we have over the last couple of quarters, while we aren't going to provide guidance, we plan to continue to provide business updates as we move through the quarter. On page 12 of our supplemental investor presentation, We've highlighted the trends and uncertainties that we think will affect the balance of 2020 and into 2021. We are prepared for a range of outcomes and are continuing to focus on supporting our customers and communities through this unprecedented time. More broadly, though, and as we discussed last quarter, we believe that we're still tracking to end 2020 with an upward trend in earning asset growth. Given our current business and product line mix, we think this growth trajectory points to a 2021 revenue picture that looks broadly in line with our results for 2019, although with a higher percentage of the total coming from our Canadian operations. However, there remains uncertainty around the extent to which higher advertising spend and upfront loan loss provisioning that come with hiring new account volumes will impact our bottom line results. In summary, While business continues to show the effects of the pandemic, we feel great about the work that we've done to continue to move the company forward. Namely, managing through the pandemic, including extended work from home time for over 1,300 employees, continuing to invest in our technology and risk and analytics platform, the strength of which has helped us to quickly migrate customers to our online channel and to continually refine our credit decisioning. supporting the growth of our Canadian operations, which accounted for more than 45% of our consolidated quarterly adjusted EBTA and 57% of our gross earning assets at the end of the third quarter, growing and enhancing our card offerings, investing in the continued growth of Catapult and its market-leading e-commerce LTO solutions, and continuing to evaluate a number of M&A and corporate development opportunities that could offer further growth and diversification of our business lines. I'd like to close by thanking our 3,900 team members who, despite the challenges created by the pandemic, continue to meet our customers' everyday needs for financial services and to execute on our strategic priorities, all while helping customers navigate financial hardship and other challenges. Like a lot of companies, on Tuesday, we're giving our U.S. employees extended time off to vote, and we're very pleased with the response that this plan has generated internally. We firmly believe that the strength of our company lies in our people and our culture. I'm confident that together we will manage through these unprecedented times and emerge even stronger and more nimble than before.