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.

Thanks, Don, and good afternoon. Adjusted net loss for the quarter was $11.3 million, or $0.28 adjusted loss per share, compared to 2020. 40 cents adjusted diluted earnings per share in the second quarter of 2021. The primary drivers of the year-over-year decline in earnings were the loan loss provision dynamics of strong sequential loan growth and normalizing credit performance this second quarter compared to the lingering COVID-19 impacts on demand and loss rates in the second quarter of last year. Our U.S. business also returned to normal tax refund seasonality and the related traditional impact on Q1 and Q2 earnings. Interest expense also rose year-over-year on higher non-recourse ABL borrowings to support loan growth and additional senior note issuance to fund, in part, the Heights acquisition in the fourth quarter of 2021. Total revenues in the second quarter increased $117 million, or 62%, year-over-year. Heights added $74 million of revenue and Canada point-of-sale lending contributed $24 million, or 230% growth, compared to the second quarter of 2021. Canada direct lending revenue rose 22.1% year-over-year. Consolidated operating expenses for the quarter increased $47 million compared to the prior year, driven primarily by the expense base that we acquired with Heights and Flexity, along with post-pandemic normalized advertising spend. Gross loans receivable grew year-over-year by just over $1 million, or 127%, primarily driven by our acquisition of Heights in December and its strong year-to-date 2022 loan growth, which contributed $492 million of balances. Continued growth in Flexi added $406 million in loan balances year-over-year. Canada and U.S. direct lending, excluding Heights Finance, combined gross loans receivable grew 29 percent and 10 percent, respectively, versus the second quarter of 2021. Since the end of last quarter, gross loans receivable grew 152 million, or 9 percent, primarily due to growth in Canada point-of-sale lending of $85 million, or 16 percent sequentially, and U.S. direct lending of $54 million, or 8 percent sequentially. On the credit quality side, Our credit metric trends in Q2 were consistent with what many of our peers have reported overall with continuing trends towards orderly normalization that's still favorable to pre-pandemic run rates. Our consolidated quarterly net charge-off rates for the second quarter improved year-over-year by 60 basis points as our portfolio mix continues to shift to lower loss rate products. The loans originated by Heights and Flexity are a bigger percentage of our overall loan portfolio. Obviously, the acquisitions have distorted the year-over-year comparisons. But if we look at the year-to-date performance metrics for our continuing businesses, that is, Flexity, Canadian Direct Lending, and Heights combined, Q2 of 2022 net charge-off rates improved 10 basis points, and past two rates increased 100 basis points sequentially compared to Q1. Both metrics remain below comparable 2019 levels. Looking at it by business, U.S. net charge-off rates improved 617 basis points year over year, while past due rates increased 102 basis points to a year ago. Sequentially, U.S. net charge-offs improved by 374 basis points, while past due rates increased by 141 basis points. Both comparisons are affected by our heights acquisition at the end of December. If we take heights out of the numbers, U.S. net charge-off rates were 630 basis points higher year-over-year, while past due rates were 200 basis points higher. Sequentially, U.S. net charge-off rates were up 290 basis points, and the past due rate was up 90 basis points. Heights, net charge-off, and past due rates were up 30 basis points and 160 basis points, respectively, versus first quarter. Canada direct lending net charge-off rates increased 150 basis points, and the past due rate was up 276 basis points compared to Q2 of last year. Sequentially, Canadian direct lending net charge-off rates improved 50 basis points, while past due rates increased 60 basis points. For Canada point-of-sale, we've had a very stable and consistent net charge-off in past due rates trends over the past year. You'll see in our balance sheet that the assets and liabilities of the businesses sold on July 7th, 2022 were reclassified for accounting purposes as held for sale as of June 30th. The disposition and related reporting will be included in our financials next quarter. And as we previously announced in July, we refinanced and expanded the existing Heights non-recourse asset-backed warehouse facility and we entered into a new non-recourse asset-backed warehouse facility support our first heritage business in total providing 650 million dollars of funding capacity each was priced at 425 basis points over one month so far with a 91 advance rate on new originations and two-year revolving periods additionally the maturity of our us senior revolver is extended to august 31st 2022 in order to process the impacts of the sale of the us legacy business Two of the banks in the syndicate have processing relationships with the sole business and have elected to drop out of the facility, which is what we expected. Therefore, we expect the facility to renew a capacity of at least 40 million compared to 50 million previously. As of July 31st, 2022, as Don mentioned, we had over $180 million of available liquidity, including unrestricted cash and undrawn capacity on the various ABL facilities. That $180 million includes the impact of the change to the senior revolver, by the way. In our recent meetings, our board authorized our quarterly dividend at $0.11 per share. And in closing, I'd like to echo Don's comments about the transformational nature of the past six quarters transactions, which we're now focused on executing to their full potential. It's an exciting time at Curo, as we're well-financed, and position, and thanks to our historical strengths in credit, marketing, and technology across a diversified and growing portfolio of businesses. This concludes our prepared remarks, and I'll ask the operator to begin the Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And our first question will come from Moshe Orenbach of Credit Suisse. Please go ahead.

Great, thanks. Congratulations, Don and Roger, for getting all the moving parts in sequence there. Sure. I guess... You know, to some degree, you know, I'm not sure we really care that much about how the legacy U.S. business X Heights was performing, right? I mean, I think the real question is, you know, the expected performance, you know, of Heights and First Heritage as we go forward. And is there a, you know, given your commentary about the customer base and about the acquisitions, is there – like, uh, you know, and, and the commentary that you made about, you know, kind of generally being able to, you know, choose to a slightly better customer can just discuss, you know, kind of the outlook into the back half of the year.

Yeah. Yeah. I'll give you, I'll give you some comments on what Roger can show any of you put them in this, but, um, you know, I think that, um, just to hear a quick, you know, heights and for starters together, end of the quarter, you know, we said about $730 million in receivables. We expect that in kind of you look at sort of the June 30 to December 31 period, so to the end of the year, we'll see growth somewhere across the two quarters. We'll see growth overall somewhere in the mid-teens. I get to say it's, you know, on a sequential basis, it's know seven percent a quarter somewhere in that range right in that range so you know decent growth but we as i mentioned we have we have definitely um certainly the bottom end of the um the credit box um there and in canon as well um we we have uh uh you know just just just trimmed a little bit there um raise um minimum credit scores incomes um reduce kind of credit offers etc so I mean, it's not, you know, it's not a one size fits all approach. We're very sort of granular about how we do it by product and by, you know, by state, by channel, et cetera. But there's, so we feel, you know, we feel like we've got, we've had good luck, as I mentioned, attracting, or do you look at sort of the smaller loan side of the Heights First Heritage business or the larger loan side? In both cases, we're seeing, kind of the credit quality of the inbound customers getting better. So it gives us an opportunity to be – so not only the overall originations, we're taking a little bit out of that, but we're also – the balance that we're approving is better. So, you know, we feel like that sort of lines us up pretty good for the back half of the year. And I'd say if you're looking, you know, into 23 – and I should point out, you know, we have open – a number of new branches and some of the heights sort of had in the pipeline when we bought them. We're slowing that down a little bit, but that's contributing to some of the growth that we're talking about there. If you look into 23, we would expect that those numbers, that 15 point, that mid-teen, 14, 15% growth rate would probably come off by maybe 300 basis points. So probably in 23, you're looking at kind of low double-digit growth in portfolio. I'm sorry, I'm sorry. You're looking at a high single-digit growth in that portfolio. And I think that we feel from a credit quality standpoint, the moves we've made both on the credit box and also adding – we've added some servicing and collection capabilities there. We're building out some late-stage capabilities in both of those businesses to kind of centralized late-stage capability, which neither of them really had, and are helping on the recovery side. So, you know, I think the 3Q charge-offs are going to improve on a like-for-like basis. They're probably about a couple hundred basis points as a result of both of those issues. And, you know, it's hard to say. I mean, our forecast implies that we'll see charge-offs in that business probably be, you consolidate U.S. direct lending business be somewhere in the, you know, 12, 13% range in 2020, across 2023. So, I don't know, Roger, do you have any other sort of thoughts about that? But, you know, I think, again, you know, I said, I just want to make sure I shut up here, but, you know, I think that it's always important, I think, to look at the growth rates that are in, you know, when you're kind of comparing not just our business lines to one another, but also sort of externally, you And some of the growth rates that, you know, that are out there that are being posted by some of our peers and, you know, kind of a more broadly defined peer group are so far in excess of the numbers that I'm talking about. I think, you know, just the general rule is the lender that grows the fastest has the highest credit losses, you know, as something of a rule I've always kind of lived by. I think, you know, we feel good about where we're sort of you know, the kind of growth we're getting and the quality and kind of the discipline growth we're getting in that business. And I would say, in general, both of those businesses, Heights and First Heritage, are performing to the, you know, to the earnings targets that we gave out when we bought those businesses. So, Roger, do you have anything else to add, though?

Yeah, I probably, I think just a couple quick thoughts to add on. You know, I think we said, you know, when we got, we said our outlook when we announced the transactions back in May, and Don mentioned in the prepared remarks that the interest, the variable rate interest curve headwinds are probably driving those results across the board are probably driving towards the lower end of the range of the outlook that we gave. If you also recall when we announced the deals, You know, we said that, look, if you break down that outlook, we said Q3 we expected to be around break-even or a little better, and then Q4 I believe we said 26 to 32 cents a share. You know, that headwind that we're talking about, if you look at the curves, doesn't really hit until the fourth quarter. So I think we still feel good about that. you know, that former outlook for Q3 that says that, you know, that probably may be a little better. We feel a little better about it. But I think that, you know, so if you kind of break out the exit at that point, you know, Q3 still stands as we issued it back in May. Q4 is probably at the low end because of interest cost headwinds. And as we move through next year, you know, again, there's a lot of puts and takes, but, you know, So I don't know if that's helpful, but that's very, yes, Roger.

That's, that's very helpful. And thanks Don also, maybe just a quick followup. Um, Flexity has been, you know, had strong growth, but, but basically, you know, probably a little soft relative to what your original expectations were. Is that more a question about the integration of the partner partner, or is it more about pushing, you know, uh, you know, pushing the non-prime through there? Like, what do you see as the, uh, the way that that gets closer to your original expectations.

Yeah, I think one of the big issues is just going to be the sales and approvals we're seeing across from our merchant partners. Again, as a reminder, we're working hard to expand and diversify the merchant base, but it's largely concentrated in furniture, blinds, electronics, some larger ticket you know, $2,500 kind of ticket items. And that, while, you know, and our biggest partner is a company called LFO, Great Largest Home Furnishings Resale in Canada. And their March quarter, them reporting, their March quarter was off on a comp store basis about 5%. And obviously, so while our numbers are going up as we're integrating them into our platform, and we'll continue to see really good growth. It is a little below our original expectations, largely just because of lower sales there. That's somewhat tied to stimulus and the removal of stimulus. They're also very levered to housing starts. I think I mentioned in the prepared remarks that housing starts are off in Canada as they are in the U.S., so people buying furniture, for new houses, and even new rentals are off as well, so that'll have an impact there. The other macro issue is just and this is normalizing the credit there. So we expect credit over time there to be charged us to be four to 5%. You know, they're running, you know, 60 basis points a quarter now. So still kind of well below where we think that some of that, the book, we'll see the book season. Those will go up a little bit, but I still think we're seeing customers while it is normalizing customers are still continuing to pay off in the promotional period. So our, so they're not rolling into earnings revolving balances. So you still get the merchant discount rate, and we get some fees on that, but we aren't getting the interest earnings. So that continues to be a challenge. But, you know, I think we're still really happy with the progress we're making. Again, onboarding a merchant like LFL, which tripled the origination base of the company, is not something that, Um, you know, just, you know, that just doesn't fall out of the trees. Uh, so Peter and his team have done a really terrific job. You know, we were just up there for a board meeting. I think really highly of the teams assembled and what the prospects are there. It's happening a little slower than we'd like. Um, but it's, you know, it's still happening and the progress is still there. And I think the, you know, the long-term there still looks really, um, uh, really promising. As I said, a lot of work being done to try to add some new merchants that will diversify us out of, uh, some of the larger ticket categories. Great.

Thanks, and congrats again.

The next question comes from John Rowan of Jani. Please go ahead.

Good afternoon, guys.

Hey, John.

Hey, Donna, if I'm not mistaken, Did you just give guidance on the charge-off rate for the Heights and First Heritage business combined? I just want to make sure I got it, if you did, in fact, say it.

Yeah, we did. We said that we thought it would be – well, we said for the back half of this year – I don't know if we said this earlier. In the back half of this year, we would expect it to be in high single-digits, low double-digits. for the combined businesses. And then in 2013, we would expect it to be in kind of low keys, call it the 1213 number for 23. Okay.

And just so I understand, because it looks like the US NCO rate here for QQ is 11%. Is that exclusive of the loans held for sale? I'm just trying to get an idea if that's based, that number, that 11% number is just heights.

John, you're looking at the chart.

I'm just looking at the press release. It has, you know, net charge-off rate by segment, and it shows total U.S. NCO rate of 11%. I just want to make sure – I just want to know if that number excludes the loans held for sale.

No, it would include – that would be for the whole segment, including the business that was sold. Okay. And by the way, that's – But we only own it for a few days, right? Yeah. Yeah. No, no. For Q2, it's the entire U.S. Okay. And, John, it's 11, which makes sense because it's a quarterly rate at 11%. You know, the business we sold runs 80% annualized, was running, you know, normally. So that's a blend.

Okay. All right. That's it for me. Thank you.

The next question comes from John Hecht of Jefferies. Please go ahead.

Hey, guys. Afternoon. Thanks for taking my questions. I mean, you've really diversified the business. You've got multiple channels and different geographies and then different products. And I guess the question would be that just given kind of where you're maybe focused on in terms of the credit exposure as well as the consumer usage of the product, what would you guys expect to kind of makeshift over the next, few quarters in the current environment?

Yeah, John, I'll take a swing at it. So I think that the clearly the fastest growing part of the business will be the flex city business, which, you know, we expect to see sequentially, you know, 15% growth there in the third quarter and 25% growth in the fourth quarter. Because, you know, that's a sequential number, so you have seasonality with holiday shopping there. And we would expect that it would be, you know, still over 50% growth there in 2023. That's a full year of LFL onboarding plus some other newer merchant partners as well as some growth in non-prime. So, you know, if you look at our estimate, you would likely see a, and earning asset base that is in U.S. dollars potentially, you know, gets close to $3 billion by the end of 2023. And FlexCity should be, you know, in the neighborhood of, you know, 60% of that number. And then on the, and if you kind of back it, you know, that implies, you know, our Canadian direct lending business we would expect that that business would grow, you know, somewhere in the low double digits in 2023. So call it, you know, 10% to 12%. And then, as I mentioned earlier, the U.S. direct lending business, we would expect that business to grow high single digits, so 8%, 9%. So if you sort of, you know, roll all those together, you can see that the next shift is going to be, you know, it kind of rank-ordered. flex fee would be the fastest growing business by a pretty wide margin. Canada direct lending, next fastest U.S. direct lending, kind of the first of that, you know, that will certainly shift the mix. I think we said it's, you know, we're 60-40 now, Canada earning assets. We'll get to 60-40, but it's about the other, I'm just getting to earn assets, the other obviously higher yielding stuff in the U.S., so from a revenue standpoint, it'll feel closer to 50-50. Yep. Okay.

That's super helpful. And then, you know, across the sectors, are you seeing like competitive opportunities develop just given kind of the changing backdrop and, and or is it affecting customer acquisition costs in any of your markets or products?

I actually think it's, it's been, we feel like certainly in, if you look at the U.S. direct lending, as I mentioned, we're, we're seeing even though we're tightening some at the bottom of the credit box, we're seeing better opportunities at the stuff we're approving is coming in at, you know, the higher FICO's and higher average incomes. It's just better credit quality, something we're approving now. So that feels better, and I suspect that some of that may just be coming from some of the competitive issues, certainly some of the really super high growth FinTech businesses out there, I think there has to be some spillover just given how much volume that they were writing. I think, obviously, we're probably seeing a little bit less of that in Canada. It seems like a little bit more of a static credit environment. But I would just, you know, our market businesses are great there. I mean, we think that together, you know, we're probably number one or two in our sector on that. on the direct lending side. And we, you know, feel like that Flexi is getting to that. We'll be in that kind of a position by the end of 2023 from a, you know, from a market position and market share standpoint. So, you know, good, good, good share. And we'll continue, I think, to get, you know, the volumes just given the, I think our products are well positioned there, both on the direct lending side of what Flexi has to offer since they've been adding some, some non-prime options to help their retailer, their merchant partners draw more sales.

Okay. That's very helpful. Thanks, guys.

The next question comes from Bob Napoli of William Blair. Please go ahead.

Hi. Good afternoon. Thank you.

Hi, Bob.

So I've asked this question before, but, I mean, it's super high growth of Flexity. I mean, it's relatively young business. You know, the – profitability of that business is going to be a big driver of where Kira's stock price goes. How confident are you in the financial model for Flexity? I mean, you've owned it for, you know, I guess a bit over a year now, a year and a half or so. So how confident are you in the profit model for Flexity?

Yeah, like I said earlier when I think Moshe asked the question, it's not, you know, it's not happening as quickly as we envisioned a year ago. And I think there's a lot of macro there. I think from an execution standpoint, we feel great about what we're doing there. We've insourced a bunch of the customer service collection operations. We're building out a much more robust kind of credit function there. Roger has been working hard with the team up there on the treasury side and the funding side. So I think the pieces are in place, I think, for that business to to be, you know, very successful and very profitable over the long haul. I think the, you know, between the rate pressures on one hand and, you know, the macro, which is sort of overall retail, typically bigger ticket retail being softer, it's certainly sort of it's taking us longer to get to where we want to be there. But I am, you know, absolutely confident that that business is it's got the right partners. I think we're a good partner for them and a good parent for them. I think the tech side of things continues to get better. You know, I feel great about where that business is going. It's got really, really good leadership, not just at the top, but I think they're really built out. You know, it's not easy to sort of scale a business up and have it triple in origination volume. And I think that to do that, and, you know, again, they've been doing it the right way. Credit's been good. And, you know, it's a prime, you know, to blow out prime credit portfolios, and they don't perform from a credit standpoint. So we feel good about where it's going. I wish we could push the accelerator a little bit faster, but I'm not at all disappointed about the work that they've done and where it's going to get to.

Thank you. And then just, I mean, you've talked about tightening credit, and it's been discussed, but can you be a little more specific about where you're tightening credit?

Yeah, so I think that I would say, as I mentioned, it's probably other than I think the FlexCity Prime stuff, there's been some of it in every area. And I think the U.S., if I look at the U.S. direct lending business, it's been more on the historical core of that business called Southern Management. And they do sort of the $700 or $1,200 installment loans that are eight to 15 months in duration. And I think we've tightened more in that business because that's a lower credit quality customer. And in particular, the stuff that's over, we've also cut on the durations there, the credit offers that extend over 12 months. We've moved to reduce those. We had our U.S. card business. We've cut back there. We'll probably do a loan book that's 20%, 25% lower than a 23% than we had anticipated. And that's really just from a competitive standpoint. I think we have seen some competitive pressures in that business. And just the economics aren't as attractive as we thought in the beginning of the year, so we're going to be a little more cautious about how we roll that business out. Canada Direct Lending, you know, new credit offers, again, lower tier credit quality customers of lower credit, lower offers, or just hard denials. And we've also moved to where we have some risk-based pricing to take, you know, to increase some pricing. And a lot of that is really just more to reflect sort of cost of funds in addition to sort of the credit stuff. So, Again, I don't want to divulge a lot of competitive stuff. I'd rather not give too much detail. But I think it's been across the board, but done in a very sort of granular and sort of targeted way, except for the, I'd say, the prime end of the complexity originations for now.

And consumer demand for loans? I mean, with the tightening, still had some – some pretty good growth broadly, but what are you seeing as far as consumer demand for credit?

You know, we looked at the, you know, I think the New York Fed put out their data over the weekend, and you saw a lot of, you know, kind of increases other than sort of mortgage stuff, auto slowing down somewhat. But certainly on the consumer side, the unsecured side, you know, continued good growth. I think the demand continues to be good, and I think that's mostly tied to the employment markets. Um, and obviously we saw it on the job numbers on, um, on Friday. So, but I think it's at a point where we, you know, we feel like the man's good enough that we can still grow the business in a thoughtful kind of disciplined way and not, um, um, you know, while, while still, um, being a little bit more selective on credit. So, um, and I, you know, I, I think I don't so far that, you know, we've seen that continue, um, this quarter. both demand being pretty good, the quality of demand being pretty good, and, you know, credit being pretty good.

Thanks. Thank you. Appreciate it.

Thanks, Bob.

This concludes our question and answer session. I would like to turn the conference back over to Don Gayhart for any closing remarks.

Thank you, everybody, for joining. We look forward to talking to you again after our third quarter concludes. Thanks very much.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.