CURO Group Holdings Corp.

Good day, ladies and gentlemen, and welcome to the KERO Q2 2021 conference call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Matt Keating, Investor Relations for KERO. 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 investor section of our website at ir.curo.com. With me on today's call are Curo's Chief Executive Officer, Don Gayhart, President and Chief Operating Officer, Bill Baker, and Chief Financial Officer, Roger Dean. 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 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 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 presentation 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 Flexity Signing of LFL Group, Canada's largest home furnishings retailer, to a 10-year exclusive contract that in the future will add over $800 million Canadian in annualized origination volume and earning assets. This accelerates Flexity'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 Catapult, receiving $146.9 million in cash and 20.7% ownership in the new publicly traded company when the D-SPAC merger closed on June 9th. And finally, we improved our capital structure with the senior notes refinancing that extends maturity to 2028, lowers the coupon by 75 basis points, and provides important flexibility for supporting the significant earning asset growth that I mentioned in Canada. Similar to the last several quarters, our Canadian operations were the 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 EBTA was up 81.4% year over year on 48% net revenue growth. Flexity's loan originations were up over 117% compared to the same quarter a year ago. In the US, 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 was mainly a consolidation of underperforming stores, not a departure from our belief in the advantages of an omnichannel 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 impacted 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 40 cents per share, compared to last year's adjusted EBITDA of $51.1 million and adjusted EPS of 53 cents. 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 impact on Flexity's merchant base, where brick-and-mortar sales make up about 75% of total value. We'll have more on Flexity in a minute. Fortunately, with fewer COVID cases and more widespread vaccinations, Canada is reopening. Canada Direct Lending's $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 net revenue was $17.3 million or 48% higher than the second quarter a year ago. Turning to our Canada POS segment, Since our acquisition of Flexity closed on March the 10th, the second quarter was our first full quarter of results. Flexity contributed $7 million in revenue and adjusted EBDA of $2.5 million during the second quarter. Flexity'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 Flexity's expanded relationship with LFL, which operates more and 300 retail stores under multiple banners, including the Leon's and the Brick. Flexi 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 Flexi's origination volume increasing from $292 million Canadian in 2020 to a projected $1.9 billion Canadian in 2023. including $221.5 million of loan balances in our Canadian POS lending segment from our Flexity acquisition. Overall loan balances in Canada finished the quarter 64.4% above the prior year level. You'll also notice from the investor supplement that the percentage of transactions conducted online in Canada continues to be well above historical averages, likely partially influenced by the re-imposition of COVID restrictions. While we can't predict the long-term behaviors of the Canadian consumer, this demonstrates the value of our full-spectrum omnichannel platforms. Our U.S. loan balance has 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 balance has 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 two 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. Look at the information presented on page six of our investor supplement. On the 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. The starkly 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 Flexity acquisition, we've grown our Canadian operations, which accounted for 76% of 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 basics. 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, and I'm pleased to announce that Dan Kirsch joined us this week as our new EVP and Chief Technology Officer. Dan has a great background leading software engineering, 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 US 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'll see in our earnings release that Flexity 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, Flexity'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, or MDR, associated with the acquired loan portfolio. The unrealized MDR that would have normally flowed 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 10th of 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 investor supplement, you can see that outlook. Based on this quarter's performance, we think Canada direct lending revenues and adjusted pre-tax income will now approach Canadian dollar $310 million and Canadian dollar $100 million, respectively, compared to page 17. Plexi'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 pre-tax 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 Flexity continues to onboard LFL. I'll now expand on the trends and key drivers of Q2 results. First, demand and loan volume. Pages five and six 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., trends for application volumes, approval rates, and originations showed fairly consistent improvement as we move through the second quarter. Through last week, July 24th, 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 five and six 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 eight 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 balances in the US at the end of second quarter, which is down from 5.9% at the end of 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 recognized the magnitude by which we have transformed Curo in the three 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 Flexity 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.

Thank you. The floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. Questions will be taken in the order they were received. If at any time your question has been answered, you can remove yourself from the queue by pressing 1. Again, ladies and gentlemen, if you do have a question, please press star 1 on your telephone keypad at this time. Our first question comes from Moshe Orenbuck. Please state your question.

Great. Thanks. Can you hear me? Yes, we can, Moshe. Good morning. Okay, great. All right. Thanks. Good morning. So you talked about the loan growth that you're seeing both in the U.S. and Canada. you know, kind of quarter to date. Can you talk a little bit about, you know, just how you see, and because you did kind of also allude to, you know, expecting strong sequential growth in Q3. So, you know, what is, you know, what's the pattern? What's happening? You know, is it that you're going to approve more customers? Is it that the application flow is going to be better? Can you talk through that a little bit?

Yeah. Hey, Moshe, it's Don. I'll give you a couple comments, but they'll chime in as well. Let's start with Canada. So we thought the growth there was really good, given the fact that there were some lockdowns sort of reimposed, which, you know, although this is like knock wood, it looks like those are, you know, the case loads are going to come up a little bit recently with some of the Delta stuff. They do look like we're going to be in a period where some of the retail stuff will be We'll be open again. But even in that kind of a period, we thought we had really good growth in the direct lending side of the business. And 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 take a draw on the line without having to go in either online or into a branch and take out a new load. So the product structure really helps us there a lot. On the Flexity 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 Leons or the LFL relationship. And that's, you know, we're really just in a, you know, that's just a complete, you know, 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 Flexity business as they did in the entire year of 2017. So that's just the scale of that relationship that's taken. So the thing we mentioned in the comments that they have, And the brick is, they're converting all the brick stuff, and the Leon side of the business, they'll have that, the plan is to have that going in September. So that'll be, you know, I think it'll probably take another month or so, but 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, originating on the Flexity 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.

And the U.S.

side, I'll just, I'll talk a little bit more about sort of what we're doing in the advertising environment, all that kind of stuff. But I think we're just, we are really starting to see demand. We talk about internally as we, you know, the card data suggests that people are spending money. Obviously, they're shifting the spend from, you know, furniture and appliances and electronics to, you know, to travel and leisure and, you know, dining, et cetera. And all that's positive. And obviously, the job growth in those areas, the initial jobless numbers came out, ticked down a little bit again, which is good. So I think that's just the reopening. Now, we need that to continue. And hopefully, the mask mandates and what's going on with the virus doesn't interdict the progress that's been made so far. But I'll give you one more doubt. We were about X the verge portfolio, which is running off. I think we said we've been 7.2% sequential growth in the June quarter. Just month to date so far. We've got a couple days left in the month. We're up in the U.S. X verge. We're 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, you know, the externalities aside, it looks like we're pacing to see sequential growth that is improving at an improving rate. And Don, we have to talk about sort of some more components of that.

Yeah, 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 lockdowns 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.

Yeah, just as a quick follow-up, is there any change in the competitive dynamics in Canada? I mean, given those kind of results, anything else going on there from your competitors?

Not that we've seen. You know, we kind of like where we are. But obviously, on the flexing side, I think those are contractual relationships. And then on the direct lending side of it, I think, you know, again, our ability to offer that line of credit product, you know, there's some with Go Easy and Fairstone, there's some companies of scale that that are in the larger installment loan space. But I think we like the competitive advantage we have, as I just mentioned, the ability for customers to have a line of credit and make a draw on that line of credit without having to come originating. And it's not in a declining balance, you know, as you pay down installments. And we just like the customers really continue to respond well to that product. I don't see any new entrance in that end of the market. Great. Thanks, everyone.

Again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad at this time. Our next question comes from Bob Napoli. Please state your question.

Hi, this is Spencer. I'm for Bob. Can you guys hear me okay? Yeah, we can, Spencer. Good morning. Morning. I just had one on the longer-term plans for the two businesses geographically. Given the higher valuations for installment loan business in Canada, would you ever consider spinning off the Canadian business or conversely selling the U.S. business?

Yeah, I mean, as I mentioned, we're in the process of our direct lending business is growing. Growth is strong. We've upped our guidance there that Roger talked about. Flexity is absolutely in the middle. It's not just, you know, I said it again last call, you know, these kind of things just don't kind of fall out of the tree. I mean, you've really got to go execute. So, you know, we're in the process of, you know, the origination ramp is, is very strong, but we're working hard and helping. One of the good parts of the relationship there is in our call center, our Curo call center in Mississauga, we're hiring a customer service and collections rep to help support this growth. They're Flex City employees, but we're helping in that process. We're going to be onboarding about 100 new teammates to support that LFL rent by the end of the year. So our focus is really on executing as best we can. And that's a huge relationship that essentially kind of triples the volume in the business. And as we said, we gave some long-range guidance when we announced that LFL deal. We think those combined businesses can generate in the neighborhood of $180 million of Canadian dollar pre-tax in 2023. Our focus right now is really executing to make sure we can get there. And we'll, you know, we think, you know, certainly our hope is that the investors in the current structure will appreciate that growth and reward the company appropriately. And, you know, if that doesn't happen down the road, you know, we'll obviously, you know, we'll have a lot of options on the table.

Thank you for that. And then one follow-up. I know you've gotten this question before, but I just wanted 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 on the balance sheet from Catapult?

Yeah, good morning, Spencer. I think we're emphasizing flexibility right now. You know, kind of the priorities are – 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 the flux is going to get big. So right now, we're keeping an eye on flexibility. And then as we move into next year, we'll reevaluate that.

Thank you. Appreciate it, guys.

Our next question comes from John Rowan. He states your question.

Good morning, guys. Hey, John. Can you remind me how, again, the earn out? I know the triggers are 12 and 14 on the catapult deal, but can you remind me the time frame at which it would need to I know it's an average over a certain time. 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 two of them. You mentioned 20 out of 30 days above $12 and 20 out of 30 days above $14 triggers the two pieces, and the period is six years. So if that happens at any time in six years.

Oh, it's a full six years is the... Yeah, yeah.

Six years from the merger closing.

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

Yeah, you know, we've obviously been monitoring it directly and through our trade associations. I think we're, you know, I think continue to... I think make a good case and get a lot of good support that rate caps are simply an easy means to cut off credit for a lot of consumers. It's just the simple math on small dollar loans, small dollar short duration loans, and an APR cap is just not the right way to think about the product and think about the regulation. As I said, I think we've gotten a lot of good support on that front, and we'll kind of go from there. We do it both kind of on our own and through a coordinated effort through trade associations. But we'll certainly monitor what goes on today.

And then can you give any guidance on interest expense for next quarter? Obviously, there's a lot. Coming and going with the bond deal, so I was trying to see if you can provide some type of framework for, you know, what you think interest expense is, the run rate going forward.

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

Okay. And then... The guidance for the back half of the year, just 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, yeah, well below because of that. You know, we've had provision tailwinds, you know, we've had provision tailwinds like everybody else for so long. You know, we're not, you know, nothing we're seeing suggests we're going to be able to sustain those provision tailwinds because of loan growth. Okay.

All right, thank you.

All right, thanks, John.

And that was our final question.

Okay.

I'll turn the call back over to Don for concluding remarks.

Oh, great. Thanks, everybody, for joining us, and we'll 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.