CURO Group Holdings Corp.

Good day and welcome to the Curo Holdings second quarter 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tamara Schultz, Curo's Chief Accounting Officer. Please go ahead.

Thank you, and good afternoon, everyone. After the market closed today, Curo released its results for the second quarter 2022, which are available on the Investors section of our website at ir.curo.com. With me on today's call are Curo's Chief Executive Officer, Don Gayhart, and Chief Financial Officer Roger Dean. Before I turn the call over to Don, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it. As such, it does include certain risks and uncertainties. Please refer to our press release issued this afternoon and on our forms 10-K and 10-Q for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update or revise these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in today's press release. Before we begin, I'd like to remind you that we have provided a supplemental investor presentation that we will reference in our remarks and that you can find in the events and presentation section of our IR website. With that, I'd like to turn the call over to Don.

Great. Thanks, Tamara. Good afternoon, everyone, and thank you for joining us today. The past few months have obviously been an eventful and incredibly exciting period for us as we successfully closed on the M&A transactions that we announced in May. that being the sale of our legacy U.S. lending business to Community Choice Financial for $345 million and our acquisition of First Heritage Credit for $140 million. The latter was our third acquisition in slightly over a year following Heights Finance last December and Flexi earlier in 2021. Going back to 2018, we had set strategic goals to first transition our business into longer-term higher-balance and lower-rate credit products, and second, to diversify our channel offerings to point-of-sale and credit cards. The closings of the recent transactions, coupled with the related finances that locked in a lower cost of funding and more capacity to fund future U.S. business growth, achieved those twin strategic goals. We were especially pleased to complete the transactions given the turbulent market environment of the first half of 2022. These transactions generated over $100 million of net excess proceeds. Thus, we currently have more than $180 million of excess liquidity to fund our business lines, U.S. Direct Lending, Canada Direct Lending, and Flexity. Take a minute to describe each one of these business lines briefly. U.S. Direct Lending, which is comprised of our Heights Finance and First Heritage businesses, operates in 523 locations in 13 states and makes small, mostly sub-$2,500, and larger $2,500 to $30,000 installment loans, as well as insurance and other ancillary products. As of June 30th, on a pro forma basis, without purchase accounting adjustments, U.S. direct lending had $730 million in receivables with a gross interest yield of 47%, and including insurance and ancillary income, an annualized yield of approximately 54%. Smaller loan customers have average FICO scores of 604, and larger loan customers averaged 621 for the overall portfolio. I'll point out that our more recent large loan customers have average FICO scores approaching 640. Canada Direct Lending, which is comprised of our cash money and LendDirect brands, has 209 locations in eight provinces, plus a very high-performing internet lending channel. This business had $468 million of gross receivables as of June 30, with blended yields of approximately 52%. Just over 20% of the loan book was originated online, which is often just over 12% pre-pandemic. Interest plus insurance and ancillary revenues produced an annualized implied yield of approximately 66%. Flexity, our Canadian point-of-sale finance business, had $627 million of first receivables at June 30th, about 95% with prime customers with an average FICO score of 740 and average household incomes of approximately $100,000 Canadian. We're working with our team at Flexi to add more non-prime options while we continue to onboard and optimize our largest merchant partner, LFL Group, largest home furnishings retailer in Canada. As a prime business, the Flexi book currently yields 14.3%, comprised of interest and fees from consumers and a discount from merchant partners as it continues to rapidly grow in size. We expect this yield to become closer to 18% to 19% as the pace of growth normalizes in 2023, and a larger percentage of the book is higher-yielding non-prime earning assets. Taken as a whole, pro forma at June 30th, we had combined gross loans of $1.8 billion with a weighted average interest yield of approximately 46%. Approximately 53% of our U.S. portfolio had a weighted average interest rate of less than 36%, and all of our line of credit portfolios in Canada have APRs below the federal rate cap. In terms of geographic distribution, our portfolio is split 60-40, Canada-US, while the revenue base is roughly evenly split between the two countries. Setting aside all the transactions for a minute, and Roger will cover more of our numbers later, we had a very good quarter from an underlying growth perspective across all of our businesses. In Canada, our direct lending and point-of-sale lending portfolios grew 29% and 183% respectively year over year. Sequential loan growth was 6% for Heights, 4% for Canada direct lending, and 16% for Flexity. From a credit perspective, our trends continue to normalize to pre-pandemic levels, and the quarter saw largely flat, and in some cases, improved NCO rates and benign delinquency trends in line with what we're seeing across the industry. Where we have seen vintages or channels evidence credit performance that's not in line with our expectations, we've addressed this by selectively tightening credit, particularly in our lower credit tiers, and by increasing pricing on certain products and tiers. We've also increased loan service and collection capacity in both the U.S. and Canada. Our third quarter is off to a very good start, both in terms of originations and credit. We're being very disciplined in our marketing and credit decisioning and are not chasing volume for volume's sake. Demand remains very good, and we are in many cases having success attracting increasingly better credit quality customers. As we noted earlier, Heights, for instance, has seen average FICO scores for new customers increase by over 20 points versus pre-pandemic levels. You know, Bob, broadly speaking about the macroeconomic environment and external factors that are impacting our business. In both the U.S. and Canada, we are seeing overall economic conditions deteriorate from the period of COVID recovery that we saw in 2021 and early 2022. We think it's important to differentiate between the two countries. By and large, we've seen better overall conditions in Canada. We think mostly for two reasons. The first is the Canadian economy is not seeing the whiplash effect from the ending of COVID-related stimulus, which was more muted there. In the US, our government spent in the range of 25% to 28% of GDP on stimulus for individuals and businesses, whereas in Canada, the ratio is closer to 8% to 10%. So while many Canadian businesses benefited of increased demand from stimulus payments in 2021 and 2022, the return to normal or the COVID hangover is not nearly as impactful as it is for U.S. businesses. In many areas, we see FlexCity's merchant partners reporting sales flat to down 5% year-over-year, while in the U.S., particularly in bigger ticket items, volumes are in some cases off more than 15% year-over-year. Secondly, in Canada, The economy there benefits from about 17% of GDP from natural resources, which is about four times the figure in the U.S. And the run-up in commodities prices in the first half of 2022 certainly contributed to better growth in the first half of the year north of the border. I think one other factor worth mentioning is what we see in credit quality generally in Canada, which is to say, like for like, it's just better. I've been lucky to have run consumer finance businesses in Canada for more than 25 years now and a deep experience seeing Canadian consumers who are similarly situated to U.S. consumers in terms of income and other key demographics simply demonstrate a higher propensity to pay off their obligations. Of course, Canada is not without its issues, most notably inflation and what looks to be a housing bubble, particularly in the greater Toronto area. The ratio of home values to household incomes has been spiking back to pre-COVID periods and a related reduction and housing starts does have a direct impact on FlexCity's financing volumes for bigger ticket furniture and appliance merchant partners. So while it's not without some concerns, we do like having Canada to help balance out some of the economic issues we're seeing in the U.S. And in the U.S., we are continuing to see our customers' take-home pay increase, although negative real wages have been impacting consumers across the board in the U.S., and this has led to a fairly rapid dissipation of higher savings balances that had been accumulated during COVID. Based on our data as well as publicly available information, it does appear that this phenomenon is having a greater impact on lower-income consumers, which makes sense given the fixed nature of much of the COVID stimulus. However, overall employment data continues to look favorable. Friday's jobs report in the U.S. provided a great upside there, as well as initial jobless claims while kicking up from COVID recovery levels are still suggesting a relatively tight labor market, as does the number of job openings. Looking at our businesses at this point in the cycle, we certainly were happy to have traded our legacy businesses for the better credit quality heights and First Heritage customers. Competitive, we think we're in a great spot. Both in the U.S. and in Canada, our market positions are very good, and we have a lot of durable, competitive advantages relative to our peers. While we use financial technology, our direct lending businesses have been around for over 25 years and been through many cycles. We have great discipline in operating credit models, and we're going to stick to that. And as I said earlier, we're not going to chase volume or growth. We've tightened some areas, and I suspect we'll do more given current trends. As we look at our businesses now, we love the three businesses that we have. Our new U.S. direct lending, comprised of Heights and First Heritage, canada direct lending which are cash money lend direct brands and flexity our canada point of sale business these businesses are all very well positioned in the markets in which they operate they've significant untapped growth and profitability opportunities and exceptional leadership as we said when we announced the transactions in may we put a lot of time and energy into m a and the related financing activity but that's now in the rear view mirror and we're excited about 100 of our efforts and running these businesses and maximizing the potential and the value of these businesses. To that end, and to ensure the best allocation of our time and capital, we decided to close our Op Plus and Revolve brand debit card and DBA products, which mostly appeal to the customer base that we sold to Community Choice. We also plan to refine our first phase credit card marketing and origination plans, as that card offering was also targeted to the legacy U.S. customer base. In the near term, we plan to increase marketing of first phase to height small loan customers with good credit histories, as well as introduce a larger balance card product for near prime heights and first heritage customers, likely in 2024. We're going to focus very hard on originations and what we spend for customer and acquisition costs. We are focused on funding, focused on credit, and we're going to continue to be very focused on operating expenses. There's no question in this current environment with recession fears, rising interest rates, high inflation, and potential job losses trending up, we continue to evaluate the ongoing right-sizing of our cost base, and we'll be more selective on new projects and new opportunities. And as I said, there's a lot of competence in the business and leadership team. So we're going to keep investing in people and processes and technology to help our businesses continue to grow, while seeing our operating expenses as a percentage of our earning asset base decline meaningfully. I'll close by commenting on the financial outlook for 2022 and 2023 that we provided on May 19th. The forward interest rate curves for CDOR and SOFR steepened dramatically during the second quarter before moderating a bit. While there are a lot of outcomes that would result in those curves being overly aggressive, some of which we're already seeing, Losing that magnitude would increase interest expense on our variable rate ABL facilities and likely steer our earnings to the lower end of the 2022 and 2023 ranges. I'll now turn the call over to Roger to review the details of our second quarter 2022 results.