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.