CURO Group Holdings Corp.

Good day, and welcome to the QRO Holdings First Quarter 2021 Conference Call. All participants will be in listen-only mode. Should you need assistance today, 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, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to Matt Keating with Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. After the market closed yesterday, Kuro released results for the fourth quarter and full year of 2021, which are available on the investor section of our website at ir.kuro.com. With me on today's call are Kuro's Chief Executive Officer, Don Gayhart, President and Chief Operating Officer, Bill Baker, and Chief Financial Officer, Roger Deane. 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 discussions. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update or revise these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in yesterday's press release. Before we begin, I'd like to remind you that we have again provided a supplemental investor presentation. We will reference this presentation in our remarks, and you can find it in the events and presentation section of our IR website. With that, I would like to turn the call over to Don.

Thanks, Matt. Good morning, everyone, and thank you for joining us today. 2021 was a transformative year for Curo that would dramatically shape our company's prospects and ability to drive shareholder value well into the future. We made two significant acquisitions, Flex City and Heights Finance, that diversified our business, enhanced our long-term growth prospects, and positioned us to grow our customer base in the US and Canada, all while reducing our exposure to regulatory uncertainties. We saw very strong growth in our Canadian direct lending business, and after a sustained period of weak demand driven by COVID-related stimulus, our legacy US direct lending business is now seeing healthy growth. Importantly, Our team's focus on executing our strategic priorities meaningfully improved our position in the three main consumer credit verticals that we target, direct-to-consumer, point-of-sale and card-based applications. Our March 2021 acquisition of Flexity diversified our channel, loan and revenue mix by adding established point-of-sale financing capabilities and private label credit cards to our direct lending capabilities in Canada. We believe Flexity's signing of LFL Group, Canada's largest home furnishings retailer, to a 10-year exclusive point-of-sale financing agreement in June of last year positioned the company as the largest provider of point-of-sale financing in Canada. For perspective on Flexity's recent growth, consider when we closed the acquisition in March, our acquired loans sold $196 million, and by year-end, our gross loans receivable reached $459 million. Flexity ended 2021 in good fashion as gross loans receivable increased $157 million or 52% sequentially during the fourth quarter driven by the onboarding of LFL group volume and seasonal holiday demand. Our December 2021 acquisition of Heights Finance significantly strengthened our U.S. direct-to-consumer business as Heights primarily serves near-prime and non-prime customers through its network of 390 branches in 11 southern and midwestern states. This acquisition accelerated our transition into longer-term, higher-balance, and lower-rate credit products and offers us opportunities to expand into new geographic markets, leverage our omnichannel capabilities, and cross-sell our recently expanded set of card products. We're also excited to launch First Phase, our new credit card that provides eligible non-prime customers with a Visa branded credit card. We launched in December in select markets and look forward to the rollout of this product across all of our US business channels this year. While we don't expect first phase to affect our earnings meaningfully in 2022, we expect it to be a solid contributor earnings growth in 2023 and beyond. Along with these two significant acquisitions, our core business ended the year with very good momentum. Excluding Flexity and Heights loans, our combined gross loans receivable increased 11% year-over-year and 6% sequentially. If we also exclude the runoff portfolio in the U.S., year-over-year and sequential growth is 23% and 9% respectively. During the year, we also completed several key financing initiatives. In July, we refinanced our senior secured notes, reducing the interest rate by 75 basis points increasing capacity and extending the maturity date to 2028. In the fourth quarter, we added $250 million to our senior secured notes, in part to finance the Heights acquisition. At Flexity, we increased the capacity of our existing warehouse facility and added securitization capacity, bringing Flexity's total funding capacity to over a billion dollars Canadian. We also monetized a portion of our investment in Ketapult when it became public in June 2021 receiving $147 million in cash from this highly successful investment. You'll recall that our total investment was $28 million. We also currently retain a 25% ownership stake in Catapult on a fully diluted basis. 2022, we are focused on a number of key objectives, primarily, first, continuing to scale Flexity's originations and invest in its infrastructure to accommodate strong growth. We expect Flexity's revenue to grow more than threefold in 2022, and to double again in 2023. Second, growing and executing on combined synergies of Heights Finance. Third, sustaining the growth and margin expansion of our Canadian direct lending business with a focus on building on our 2021 success in growing LendDirect, both online and through the opening of new LendDirect branches. Fourth, continuing to evaluate the cost structure and opportunities for our legacy US direct lending business as this segment continues to recover from two years of pandemic-related impacts. More on this in a moment. Fifth, remaining very disciplined across all of our business units with our underwriting and customer acquisition and ad spend decisions. Finally, to remain conservative and careful managers of our capital. Markets for larger, longer-term, and lower-yielding loans have better growth prospects and less regulatory risk. But these products and business lines are, by definition, more capital intensive and require us to stay ahead of the growth curve to continue to secure stable and cost-effective funding. Next, I'll provide some additional details on a few of these objectives. Let's start with Flexity, where our 2022 plan centered on supporting the company's strong origination growth. When we announced the LFL partnership in June, we forecasted originations increasing to $660 million Canadian in 2021 from $292 million Canadian in 2020. Our 2021 originations came in at $711 million Canadian, exceeding our projection and growing 143% year over year. Flexity's originations in the fourth quarter alone totaled $322 million Canadian, positioning us very well for continued strong growth this year. Flexity exceeded by $3 million Canadian, our publicly disclosed 2021 revenue, and by $9 million Canadian, our pre-tax earnings outlook. While Flexity remains focused on executing on its considerable LFL opportunity and capitalizing on the full exit of Desjardins, we have several other visible growth initiatives underway, including rolling out the distinct Flexity Wave branded card designed for non-prime customers, developing a pay-in-for option to address its merchant partners' sizable small-ticket retail market in Canada, which is estimated to include close to 80% of total retail spend, investing in the direct-to-consumer online channel to further accelerate new customer acquisition. And finally, Flexi continues to have a very strong sales pipeline, and we're hopeful that new merchant relationships could drive even better growth than our current forecast implies. We'll include our standard reminder that new merchant wins are likely to be diluted in the near term while being accretive over the long run. Moving next to our plans to grow and execute on combined synergies for Heights Finance. We closed the Heights acquisition on December 27th, 2021. So it had an immaterial impact on our fourth quarter financial results. Although the Heights team only joined us recently, we're very pleased with how quickly they've acclimated to our culture and the meaningful opportunities we see to grow our combined operations. They have outstanding leadership collaborative, hardworking culture. Heights accelerates our transition into longer-term, higher-balance, and lower-rate loan products. The company provides us with an upmarket product that complements our legacy U.S. direct lending business and positions us to serve a larger addressable market and potentially retain Curo customers as their credit profiles improve. Approximately half of the Heights loan balances are comprised of loans with APRs less than 36%, reflecting their customers' stronger credit profiles. The average Heights customer makes around $10,000 to $12,000 a year more than an average Curo customer and has a FICO score that's about 40 or 50 points higher. The acquisition meaningfully diversifies our U.S. product, revenue, customer, and geographic mix and opens the door for further geographic expansion. In fact, we already have plans to offer Heights products in four new states in 2022, and meaningfully expand the store count at Heights' existing footprint. As I'm sure everyone understands, the speed of investment in market expansions determines how dilutive the opportunity is in the near term. Our plans for our high-performing Canadian direct lending business are not dissimilar to Heights in terms of market expansion. 2021 was a great year for our LendDirect brand, and we see opportunities to drive more growth through branch and online expansion. We paused opening new LendDirect branches during COVID We've signed leases for 12 new locations and are evaluating additional sites. Finally, for our U.S. direct lending business, during COVID, our results have been impacted by elevated repayment rates and increased competition at the top of the non-prime funnel. In addition, portfolio runoff related to regulatory change will create year-over-year headwinds of close to $30 million of pre-tax earnings. The balance of our U.S. direct lending business is expected to grow at healthy levels, but we will see some higher allowance build. Turning to our outlook for 2022 and beyond. Starting on slide nine of our earnings supplement deck, we are increasing our previous Canada Direct Lending 2022 revenue outlook and raising our 2022 pre-tax earnings guidance. We are also increasing our 2023 revenue and pre-tax earnings guidance for this business. For Canada POS lending, we are maintaining our pre-tax earnings guidance while modestly lowering our 2022 revenue guidance. On that front, a couple of developments are worth noting. First, a portion of the reduction is related to an accounting change related to merchant rebates, which are now deducted from revenue instead of being classified as an operating cost. No change in the bottom line, but it does slightly lower revenue. Second, Omicron impacts, as most provinces started 2022 with modified retail restrictions that are just now in the process of being lifted. This led to some slow revenue growth in certain categories in December and January. And finally, a higher percentage of our customers in Flexity's business are continuing to pay off in full at the end of the promotional period versus moving to revolving and interest-bearing balances. This results in lower portfolio yield, but is partially offset by lower charge-offs. We're starting to see early trends towards moving to revolving balances, and as that returns to pre-pandemic levels, yields and revenue will increase, but with a corresponding uptick in loss rates. And the FlexCity business overall expenses are in line, with better credit being offset by higher spending for merchant support and investment in our new buy now, pay later, pay in four product. To close on Canada, we're extraordinarily pleased with the financial performance, market position, and prospects for both of these segments. You can find the details on page nine of our investor deck. but we are now forecasting combined 2022 revenue and pre-tax income respectively of $571 million Canadian and $109 million Canadian. And for 2023, we see revenue of $774 million Canadian and pre-tax income of $230 million Canadian. Next, you'll see in slide 10 of our earnings supplement deck that we were affirming our previous 2022 guidance for heights and introducing our 2023 outlook. With the visible opportunity to expand footprint and store count, we believe Heights can achieve the loan growth necessary to support the 2023 revenue guidance and acquisition synergies and operating leverage, drive our expectations for the related growth in pre-tax income. For 2022, we affirm our guide of $275 million in revenue and $55 million in pre-tax income. For 2023, we see revenue increasing to $303 million and pre-tax income to $76 million. To close, we recognize that the full potential of large-scale acquisitions is only achieved through careful execution and by ensuring a strong culture is maintained throughout the expanded organization. Accordingly, in 2022, our focus is on realizing the considerable value creation opportunities presented by these acquisitions and on making sure that urgency, passion, and teamwork, all hallmarks of the Curo culture, are shared by our new colleagues. We're already off to a strong start and are excited to continue executing on our strategic plans to drive growth and deliver long-term value for our shareholders. As always, I'd like to close by thanking our team members who are so critical to delivering on our strategic priorities and to meeting the needs of our expanding customer base. I'll now turn the call over to Roger to review the highlights from our fourth quarter and full year 2021 results.

Thanks, Don, and good morning. Consolidated revenue for the fourth quarter of 2021 was $224 million, an increase of 11% from the same quarter last year. Adjusted EBITDA was $17 million, and we reported an adjusted loss of 29 cents per share. Compared to last year's adjusted EBITDA of $34 million, and adjusted earnings per share of 20 cents. Fourth quarter earnings were at a low point, and it's pretty easy to summarize the drivers. First, we had the impacts of upfront loan loss provisioning on high levels of sequential loan growth with expected upticks in net charge-offs for credit normalization. Second, sequential spending increases at Flexity to support LFL's onboarding in a really good holiday season for Flexity's merchant partners increased our sequential expenses. Net revenue for the fourth quarter decreased $2 million or 1% year over year and decreased $8 million or 6% sequentially. The sequential decline in net revenue reflected upfront loan loss provisioning on accelerated sequential loan growth and higher net charge-off rates from new customer mix and originations, seasonality, and channel origination mix shifts. Our consolidated provision for loan losses exceeded net charge-offs by $15 million in the fourth quarter of 2021. The chart at the top of slide five of our supplemental earnings presentation illustrates the loan loss provision tailwinds and headwinds by quarter and is useful for thinking about 2022. Consolidated operating expenses for the quarter increased $34.7 million, or 32%, compared to the prior year. Excluding the increase in operating costs related to the Flexi acquisition, transaction costs associated with our acquisition of Heights, and one-time store closure costs related to our second and third quarter U.S. store rationalization, adjusted operating expenses increased just $4.7 million, or 4.4%, aided by cost savings from the store closures. The $4.7 million increase was due to the timing and level of performance-based variable compensation and higher variable costs primarily due to collection and financial services fees on higher volume year over year, particularly in Canadian direct lending. 2021 loan growth was significantly influenced by our acquisitions of Flexity and Heights. To illustrate, our gross combined loans receivable increased by $985 million or 165% year over year. Don mentioned earlier that excluding Flexity and Heights, gross combined loans receivable increased by $66 million or 11% in 2021. Excluding the U.S. runoff portfolios, gross combined loans receivable increased $121 million or 23% in 2021. Turning to our business segments, Canada Direct Lending Loan balances increased by $97 million or 29% during 2021 and 9% sequentially. Flexity continued to grow rapidly throughout 2021, particularly beginning in July 2021 when its exclusive POS financing partnership with the LFL Group began. In addition, the holiday season resulted in $114 million of Canadian POS lending growth in November and December alone. Excluding the impact of the HIKES acquisition, our US gross combined loans receivable decreased 31 million or 12% in 2021, primarily due to COVID-19 impacts and runoff portfolios. However, excluding runoff portfolios, and loans acquired with heights, our U.S. gross combined loans receivable increased 24 million or 13% versus a year ago and 7% sequentially. Interest expense for the fourth quarter increased $10 million or 53% year over year, primarily related to interest on non-recourse debt to support the loan growth at Flexity and the additional $250 million tack on issuance of 7.5% senior secured notes to advance, in part, the heights acquisition. Turning next to credit, our credit metric trends in Q4 were consistent with what many of our peers have seen overall, what is being termed as a trend towards normalization, but still favorable to pre-pandemic run rates. Our consolidated quarterly net charge-off rates for the fourth quarter improved year over year by 220 basis points, primarily from the relative growth of Canadian POS lending, which shifts our portfolio mix to lower loss rate products. Sequentially, consolidated quarterly net charge-off rates increased 100 basis points due to the relative loan growth, new customer mix and originations, seasonality, and channel origination mix shifts. US quarterly net charge-off rates increased 340 basis points year-over-year and 275 basis points sequentially, primarily driven by new customer mix, growth, origination channel mix, and diminishing COVID-19 impacts. Notwithstanding, US net charge-off rates remained 80 basis points below the fourth quarter of 2019. US past due rate including loans guaranteed by the company improved sequentially by 75 basis points or 3%, which was better than we expected. Canada direct lending net charge off rates increased 85 basis points year over year and 110 basis points sequentially as provisioning fully normalized with no noise from allowance releases or adjustments. Canada direct lending net charge off rates remain 240 basis points below the fourth quarter of 2019. The Canada direct lending past due rate increased sequentially 200 basis points due to growth and seasonality. Don already covered the 2022-2023 outlook for several of our businesses. I'll close with some color on Q1 expectations. we were encouraged by January's loan growth. Consolidated balances grew approximately $34 million with both Canadian businesses leading the growth. Flexity continued to grow in January, bucking what is normally a seasonal decline for post-holiday merchant seasonality. Customer behavior through U.S. federal income tax season is a big uncertainty for the next six weeks, and it affects the way we think about Q1 expectations. In thinking about Q1 earnings, I'd also point everyone to slide five of our earnings supplement deck, especially the upper right chart. You'll see that in the first quarter of 2021, allowance release driven primarily by the second round of major US COVID-19 government stimulus resulted in the loan loss provision being $17 million less than net charge-offs. In other words, $17 million of pre-tax earnings benefit with historically low net charge-off rates. As we saw in the back half of 2021, loan loss provisioning normalized with loan growth and net charge-offs are bouncing off of unsustainable levels. And also remember that we acquired Flexity at the end of Q1 2021, So we are comping against no operating expense base for Flexity in Q1. This should result in Q1 earnings significantly below Q1 of 2021, but meaningfully improved versus Q4 of 2021. We will continue our practice of updating you on our outlook for the quarter next month. We ended the year with $63 million in unrestricted cash, and $214 million of additional liquidity, including undrawn capacity on revolving credit facilities and borrowing base levels. We continue to work on several opportunities to expand capacity to support growth and capital return. And finally, our board authorized our quarterly dividend at 11 cents per share and authorized a new $25 million share repurchase program. This concludes our prepared remarks and we'll now ask the operator to begin Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To enjoy your question, please press star then 2. Today's first question comes from Bob Napoli at William Blair's. Please go ahead.

Thank you, and good morning. Good morning, Bob. Good morning, Don. How are you? Hey, Roger. I'm good. So I guess the question on, uh, uh, the 2023 outlook and, uh, you know, kind of, you know, as you've owned flexibility now for awhile, uh, now your, your confidence level, uh, in, uh, the revenue and pre-tax earnings now for the Canadian businesses in particular, uh, Canada, you know, direct lending, I would imagine you have, you know, much higher, uh, visibility and confidence giving the longer. history there, the Canada POS lending and Flexity. So I'm just curious, I guess, on your confidence level, what you've learned in owning Flexity for a year and the profit model, the long-term profit model, the confidence in that.

Bob, I'll talk a little about Flexity and a couple kind of broader comments and maybe let Bill comment on sort of the Canadian direct lending business. So we've owned Flexity since March of last year. It feels like a lot longer than that. But, you know, I think we spent, you know, pretty much nine months in, you know, somewhat intensive diligence on that. So, you know, I think we got to know the team there very well and really got to understand the business. And obviously the merchant side of the business, the B2B side of the business, you know, I think we had some really good exposure with that with our, you know, ownership and, you know, activity and board service with Catapult here in the US. It's obviously different than a B2C company, but I think it wasn't a completely new animal from that perspective. I would say I think what ultimately was compelling for us was that not only Desjardins, which is kind of an Uber credit union, a $600, $700 billion asset credit union, but also TD Bank and some of the larger banks up there had really been getting out of the point of sales. They didn't think the market was big enough to return, et cetera, et cetera. So, you know, we saw an opportunity for smaller players like Flexity to sort of take share as the larger players exited, and that thesis has proven, you know, I think very, very true. And then, you know, the big win for us was getting LFL, you know, which basically kind of tripled the origination base. You know, we felt During diligence, we had a decent chance to get it. It wasn't until after that we had to get some of it, and I think we were able to sort of get all of it. So I guess in terms of like where the numbers kind of roll out from here, there aren't any – there's some new business in there, but there aren't any sort of major new wins that are in sort of the numbers. It's basically – kind of, you know, some growth in the existing merchants, some, you know, kind of a category of smaller wins, but there aren't any, you know, kind of, you know, as we like to call them, earth-moving kind of merchant wins that are baked into the 22 and 23 forecast. So I think from a confidence level, I mean, the drivers of that business are going to be, and we talk about, you know, yield. Yield's been a little bit lower. It was a little bit lower in 22. Volume was a little better. yield was a little lower just because these are promotional periods, you know, pay no interest for 90 days, 180 days, whatever. And then if you pay the obligation off in that period, we get our merchant discount, but that's, you know, and maybe send a little bit of fee income, but it doesn't flip into an interest-bearing account. You know, like in the U.S., a lot of the card businesses, you probably know about, but, you know, a lot of people paying off their card, certainly during 21, buying like people paying off their balances more because they had more sort of disposable cash. And that's starting to, you know, I think card balances in December, November, December started to come back. So we're starting to see more of a normalization in terms of the rate at which consumers, remember these are prime customers, just 740 FICOs, the rate at which they let the promotional period kind of roll into an interest-bearing obligation. So And then from there we've got credit and credit's been very, very good. And again, these are, you know, very high quality customers. We're trying to add some non-prime to it. But by and large, it's still a prime customer base. And then it's OpEx. And there, I think the issue just, we're, we're trying to make sure we invest the right in the right areas to continue kind of building. You know, we mentioned we, we, they have a bunch of different formulations they can work on with merchants, but a, of a sort of what we call a more robust paying for product, a real buy now, pay later product. We think something that our merchant base is really going to like. And in some cases, I think it's going to, from a competitive standpoint, it's going to give us a nice leg up and one that's more sort of easily integrated for online merchants. So we're putting some real investment dollars into that. We started that in the back half of this year, 21, and I'll continue into 22. And then, you know, funding costs. And I think we, you know, obviously we spent, Roger and he spent a ton of time adding a, you know, securitization. And that deal got priced in, I think, Roger, probably November, December, and it closed. So we started borrowing under that, you know, putting stuff in the warehouse in the securitization in December. And that's going to lower our overall funding costs. So, I think, you know, by and large, those are kind of the, you know, the big drivers. I think we feel good about our ability to, you know, to manage those. Some of them, again, the externalities for, you know, the rate at which people pay off obligations, you know, not, you know, that's, you know, we're waiting for that. And I think we say that that will normalize, but also probably credit quality ticks up a little bit. Credit losses tick up a little bit as more balance. It's not because somebody just pays it off in the promotional period. You have no charge-offs. So there'll be a little bit of a – but we want a reasonably high percentage of those to roll into a balance. But I'll just say from a market position, we think they're a market leader in point of sale in Canada. We think in direct lending, we're a top three provider in the kind of direct-to-consumer space. And maybe I'll let Bill talk a little bit about sort of our confidence levels in direct lending.

Sure. Good morning, Bob. For us, it's a few things, and I'll be brief. But I think the first is the experience and tenure of our operating team. We've got a really good team who understands what's the second driver, I think, is the product. And I think it's our confidence in the stickiness and predictability of that open end product. I think we've got the models really well refined. I think our team is very experienced in explaining it and helping customers use it properly. And you can see that in the numbers as far as just how long the customers keep that product opened and draw on it. And then the third is the growth in LenderAct. LenderAct had a terrific year last year on growth, to the point where it was generating as many online customers as the Cash Money brand, and obviously with a much smaller footprint, which led us to the decision to expand that footprint to the point Don made by at least 12 locations, perhaps more, And those would all be in the Ontario province, which gives us even more operating leverage and helps our marketing dollars go further.

Thank you. Just a follow-up question. The first phase credit card, what is the, I mean, how aggressive is the rollout? What is, you know, how much testing have you done? What should we think about as far, you know, what is the near-term and long-term opportunity for that business? Near-term cost, long-term opportunity, right?

I'm happy to take that one as well. We really are in a pilot phase right now, testing all the workflows, making sure credit works, and we'll continue to do that for the next couple of months. At that point, just based on the structure of the product, we have the ability to ramp pretty quickly. I think we want to make sure that everything works right, the customer experience is right, that our bank partner is comfortable with everything, that everything's buttoned up. That has gone reasonably well thus far. We've got a lot of good experience on the team at this point from a credit card experience perspective. So I think you'll see the first quarter continue to be a rollout, opening new marketing channels, evaluating those, and then really in the middle to back half of the year, you'll see us get more aggressive with volume as we have the confidence to do so. The costs are really internal from a team perspective. Then, of course, you've got your bank costs and processing costs. But I think those are all – we've got those all – baked into the model and understand the targets that we need to hit for, you know, for that product to be successful. Thank you.

And our next question today comes from Marshall Orenbach with Credit Suisse. Please go ahead.

Great, thanks. And a lot of detail in the call on the Canadian business. Maybe you could, and you did kind of talk a little bit about the U.S. side and maybe just expand a little on what it, you know, what you think it's going to take to get that back to where, you know, you're, you know, I mean, or maybe just tell us what your plans are and what you think it can get to within a, you know, kind of a two-year timeframe.

Hey, Moshe, it's Don. Good morning. I'll give you a little call or maybe you don't have to chime in. But, you know, as we saw, if you X out the, for the runoff portfolios from regulatory change, the biggest ones would be California, Virginia, and then the Verge credit bank product. We saw 9% sequential growth in balances. I think last year we said we'd like to see 8% to 10% sequential growth absent the runoffs in sort of the core portfolios for some extended period of time. So I think the first quarter you know, so far is tracking well. I think a lot of people in our space have talked about, you know, this is going to be a very different tax season. So, you know, that's part of our caution on guidance on the U.S. business is just, you know, with the child tax credit payouts last year, how that's going to impact, you know, tax refund season and what that does to paydowns and credit, et cetera. So, you know, we're really in a little bit of a, you know, we have some thoughts about it and we're kind of prepared for a bunch of different, outcomes but it's um it's certainly gonna be a different year than what anything we've seen in a long time so um but you know that you know the tax season aside i think that you know if you can we can um you know continue to see good sequential growth um and and you know if you if you know tax season you can obviously have an impact so maybe for the year you're still looking at balanced growth that's going to be you know uh you know well past 20 percent uh for the year in the u.s and i think You know, a lot depends on the macro, you know, the factors in the U.S. But, you know, we're still, you know, two and a half million, two, two and a half million jobs, depending on the number you believe, short of the number of people that were working before COVID in the U.S. Actually, that's in Canada. Canada is actually the more people working in Canada now than were working pre-COVID. The U.S. were still short. A lot of those jobs in the U.S. are in Canada. you know, retail, restaurant, hospitality jobs. And there's a lot of, that's a key kind of customer base for us. So provided that that gap continues to close, you know, we feel, you know, you said a kind of a two-year horizon. I think we see a two-year horizon. But remember, we still have, you know, portfolios, you know, California, Virginia, that, you know, those from a regulatory standpoint, that business, you know, we're just going to have to kind of build back and that, you know, without sort of the benefit of, got some pretty nice pieces of, uh, of, of business there. So, um, I think it is, I think your question though, is it is kind of a two year, you know, bill to kind of, you know, to, to, to kind of build back from the, the sort of the, you know, the COVID impacts. Cause you know, these, these balances pay off the smaller, higher, you know, higher yielding products where the, where the products have paid off and stayed kind of depressed from a demand level, um, um, you know, more so than the, the larger ticket, the larger balance, lower yielding products. So, I don't know if Bill or Roger have any comments on that.

I think you covered it. I'm sorry. Yeah, I think the other thing that's obviously worth noting is we have to continue to be diligent on evaluating the cost structure of that business because of those trends and because with more with obviously with more volume going online and also, you know, we're not going to, we're not going to have an installment product in California, you know, in the future. So, so, you know, that, that, that runoff portfolio influences a lot of decisions around evaluating cost structure as well.

Got it. Thanks. And maybe just as, as a follow-up, I mean, you know, your delinquencies overall were relatively stable in the fourth quarter and, you know, you've talked about credit normalization, like it's just, I understand the trends that you talked about, kind of year-over-year differences in provisioning, but maybe just in terms of just the delinquency performance, are they at roughly normal levels? Is there more of that to come? How do we think about that into 2022?

This is Bill. Maybe I'll just say a few things and then let others chime in, but I think if you look In the prepared remarks, we talked about the things that drive a lot of that, which is the channel mix, the new customer mix. But if you just look at it on a per unit basis, and then those that do go into delinquency and the liquidation levels, we continue to perform well above where we were pre-pandemic. And I think a lot of that is, a lot of what we learned through the pandemic, both from a credit risk model perspective and just our recovery tactics. And we would expect to maintain you know, a significant portion of those efficiencies as we move into a, you know, more quote-unquote normal period.

Great.

Thanks. Thank you. And our next question today comes from John Hecht at Jefferies. Please go ahead.

Morning, guys. Thanks very much. Don, I think even if I can't remember if it was the last call or the call before, you talked about You estimated kind of impacts of inflation and how that might affect things. I'm just kind of interested in an update because, yeah, I think we're now seeing it in real-time action. And how does inflation impact the different segments? I mean, I would assume the lending segment has a different impact than point-of-sale. Are you seeing any changes that are worth noting at this point in time as that develops? Yes.

Yeah, I mean, I'll try to do this in a way that's not because I think you just hit on some of the complications, right, that it's different. It has different impacts in different segments. So obviously in the point of sale side, you know, your AOV, your average ticket is going to go up because you're talking about furniture and appliances, stuff with either lumber or, you know, chips in certain appliances, et cetera. So you're seeing some inflation in the AOV. And I think that it's something that from a credit quality standpoint, we've got to be pretty mindful about how we adjust the underwriting side. I would say again, remember, that's a prime customer, so a 740. Now, we are adding some non-prime to that, and we're working closely with our partners at Flexity on the non-prime stuff, including the underwriting side. But for now, overwhelmingly, that's a prime customer. So with more, you know, sort of flex and ability to absorb price increases. And when I'm talking about price increases, meaning, you know, how much net disposable income do they have? So Canada is seeing, you know, wage inflation in Canada was about 2.7% for 21, but it's expected to kind of keep going up from there this year. And in the U.S., I think it was 4.7%, but the The rate, the sequential rate fell in the fourth quarter. And I think a lot of the forecasts are maybe that we're sort of, you know, going to see some moderation there. So I think in the direct-to-consumer side, the thing for us is always if the inflation is sort of, if prices are going up on a kind of, you know, something of a normal, again, we haven't seen inflation like this since, you know, I was in high school, I think. So, you know, I don't have a lot of experience with this in my business life. Um, but I think in my experience though, is if, as long as there aren't sort of shocks and the one, the one I use, the example I use is, is gas prices during Katrina, you know, Katrina hit, it just, you know, obviously disrupted all the refinery capacity, et cetera. And gas prices went in the period of nine, I went back and looked at them back from 90 days of gas price went from two 11, uh, to $3. Um, and that's the kind of spike that, and that, and, and, you know, my, I remember in my prior job, that did have a credit impact because there was that big a spike. And, again, gas prices are up again. But I think if prices are moving up in a normal fashion, it gives our customers more ability to sort of adapt because, again, they live on tight budgets generally, and I think they have kind of an ingrained ability to sort of manage it more tightly than, you know, customers that have more sort of flex in their disposable income. So we're not seeing, I wouldn't say we're not seeing any, I don't think we're seeing any of that bleed over into NCO and delinquency performance. I think more of what's happening there is just kind of, you know, is kind of returned to normal post-COVID as, you know, bank balances and excess cash starts to burn off.

Okay. That's very helpful commentary. And then two quick questions kind of related to modeling. Is the runoff of, like, California and Verge, where are we in that whole spectrum? And then where are you guys putting up new branches? I think you talked to a dozen or so new branches.

Roger, you want to talk about the portfolio runoff?

Yeah, sorry. I was muted. Forgive me. Yeah, John, for those runoff balances, just for perspective, you know, those balances ended 2021-2021. in total at about 55 million. So it would have started 21 at about 85 million. And so, obviously, one thing that sticks out because of how long we, you know, and that includes California, Virginia, Illinois was tiny, and then the Verge product, the bank product. So, you know, 55 million of receivables running down, we still think that by the end of the year, by the end of 2022, we still probably have a quarter of that left. Okay.

And then, John, to the question on the branches, a couple of moving parts. One is Lend Direct, and those will all be in the Ontario province, mostly outside the greater Toronto area, filling out some of the surrounding markets. We're going to open a couple of cash monies again in sort of outside markets this year. And then the Heights expansion will be primarily for new states for us.

Okay. Great. I appreciate that, guys. Thanks.

And our next question today comes from John Rowan at Janie. Please go ahead.

Good morning, guys. I missed the very beginning of the call. Two questions. So, Don, did you kind of address the longer-term guidance? We haven't had an update of that $3 a share number for 2023 since pre-heights. I'm wondering, you know, if there's an update to that number, where you think it is, inclusive of heights. Just wanted to get an update on that.

Yeah, I mean, John, we didn't really address it specifically, and I think the We addressed sort of the component pieces other than the U.S. direct lending business. So we talked about height and introduced a guide for height for 23, and then we talked about the guide for, you know, modestly higher guide for the combined Canadian businesses in 23. So I would say that, you know, if you heard the answer about sort of the recovery of the U.S. business, If we can see, and again, this is not an official, I'm just saying, if we can see a real recovery in that business over the next couple, again, a two-year kind of where we see sort of pretty consistent sort of sequential growth in earning asset balances and pretty decent credit performance, our feeling is that you can kind of add up the numbers from the subsidiary pieces And, you know, we think you can plug in a number. If we get some growth, the kind of growth we're talking about over a two-year period, I think we're certainly of the belief that, you know, height, $3 plus height in 2023 is absolutely achievable. But, again, the piece of that that we're still a little cautious on for a bunch of factors we talked about is going to be, you know, the recovery of the U.S. business.

I just wanted to talk about that, obviously.

The U.S. is a non-U.S. business.

Yeah, I mean, obviously the U.S. business is still losing money, not on an adjusted EBITDA, but on an operating basis. You know, there's a lot of noise in the quarter in the U.S. business because of the Heights acquisition. Realistically exclusive of that, I mean, how unprofitable is the U.S. business and kind of where do you see that tipping point of it turning profitable again?

So, John, the other thing Roger said, I'm a little, I think in terms of sort of specific numbers, I just, I think we're going to, you know, we'd like to see things kind of, you know, spool out and get through this, the first quarter, which has talked about the tax season impact. But I just, I'll just say that the other thing we are continuing to, Roger mentioned, continue to evaluate is the cost structure in that business. You know, we closed, you know, I'm going to get the exact number wrong, probably somewhere in the neighborhood of 40 branches there last year. Some of the dynamics in terms of consumers' willingness and ability to do transactions online, which obviously have into that kind of variable cost lending model are still there. To give you a more precise answer, I think we need to be a little bit more precise and come to some conclusions about additional moves we're going to make on the cost structure of that U.S. direct lending business, the non-heights U.S. direct lending business. And obviously, Roger, Bill, I have comments by all means.

Yeah, John, it might be helpful, and we can talk about it offline, but just page 16 of our earnings release has the segment P&L for the U.S. and the segment operating loss for Q4. including, look, obviously we capture the interest on the senior notes in that segment, John, but we have the operating loss for Q4 for that business on page 16 of our earnings release is a little over $28 million.

Okay. And then just last, I want to make sure I understood one Q guidance. It's Weaker than 1Q20, but better than 4Q21, correct? Correct. Okay. Thank you very much.

And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1. Today's next question comes from Vincent Kaintick with Stevens. Please go ahead.

Hey, thanks. Good morning. Thanks for taking my questions. Most of my questions have been answered. But one question... about marketing and customer acquisition cost trends that you're seeing. You know, your growth has been great. I think some of the other fintechs have pointed to higher acquisition costs and some concerns about low-end consumers starting to maybe slow down their spending. Just wondering what you're seeing and, you know, how your particular growth, have you been able to generate that while keeping, you know, marketing efficient? Thank you.

Good morning, Vincent. This is Bill. And so I think it's for us, as we've long said, the fact that we have a very diversified marketing funnel gives us the ability to very quickly throttle up or throttle down based on what we're seeing in almost real time. And I think that was the case in the fourth quarter. In addition, we actually tested some higher cost per funded channels to see what that did for demand. And of course, now we'll evaluate what the credit looks like and just how it performs as a vintage. But, you know, not to say that there aren't pockets where you see increased marketing costs, but our ability to move that to, you know, to more reasonable cost channels and based on performance, I think it has been and continues to be a real differentiator for us.

Okay, great. That's all I have. Thank you.

And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Hey, it's Don. Thanks, everybody, for joining us. We will talk to you again after we report our first quarter. Thanks very much, and have a great day.

Thank you, sir. This concludes today's presentation. We thank you all for your participation. You may now disconnect your lines, and have a wonderful day.