CURO Group Holdings Corp.

Good day and welcome to the Curo Holdings third quarter 2022 conference call. All participants will be in a 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 the telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I'd 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 third 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 Deet. Before I turn the call over to Don, I'd like to note that today's discussion will contain forward-looking statements based upon the business environment as we currently see it, including statements related to our future operational and financial performance. As such, it includes 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 forward-looking statements included in today's discussion. Any forward-looking statements in 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 it in the events and presentation section of our IR website. With that, I would like to turn the call over to Dawn.

Thanks, Tamara. Good afternoon, everyone, and thank you for joining us today. Before I turn to our results for the quarter, you probably saw that earlier today we announced that Roger Dean is retiring as our Chief Financial Officer. Roger has agreed to stay with us in an advisory capacity through a transition period. Roger joined Curo in 2016, was instrumental in all of the transactions that have transformed our company over the past five years. He's worked tremendously hard and leave behind their talented team of finance and accounting professionals. I personally miss Roger's leadership and friendship, and on behalf of everyone at Kiro and those who know him both professionally and personally, we all wish Roger and his family the very best. We've commenced the search for Roger's successor, and Tamara Schultz, our chief accounting officer, will serve as interim chief financial officer. Tamara joined us last year from Capital One. She's done a terrific job for us. and we're confident should be equally good in its interim role. According to our business review, I won't spend a ton of time on macro comments other than to say that we do see a lot of data that suggests some economic weakness in both the U.S. and Canada. In the U.S., our customers are still working in a very tight labor market with consistent wage gains, particularly among lower-wage hourly workers, and these gains appear to be offsetting the inflationary impacts of gas, groceries, and housing We should note, as we have in the past, that Canada is seeing some impact on the downside of pandemic-related stimulus, but that stimulus was much more targeted and limited than in the U.S., with resulting inflation running about 150 to 200 basis points lower than in the U.S. The Canadian job market has shown some weakness over the past three months, and the Bank of Canada last week slowed their pace of rate increases. So as we plan for 2023, Our assumption is that we'll experience some form of a mild recession in both the U.S. and Canada, one that has higher levels of employment and wage growth than in the past, but with higher interest rates, at least for the near term. One final macro point relates to the Canadian dollar, which after holding steady at about 80 cents to the U.S.D. for much of the year, depreciated rapidly over the end of the summer and has recently been trading at about 73 cents to the U.S.D. It does not have a cash impact on us, but it does hurt us in translation on our Canadian revenue and earnings, and obviously an almost 10% decline during the quarter will meaningfully impact those results. During the third quarter, we completed a series of transactions that dramatically reshaped and repositioned our company. We discussed these at some length in previous calls, so I won't spend a great deal of time to review other than to note that our results for the quarter are impacted by by one, inclusion of results from our divested U.S. legacy visit through July 7th, two, a partial quarter of results from First Heritage, which we acquired on July 13th, and three, related non-recurring items. Roger will review these items later. Those transactions aside, I'd characterize our results for the quarter as mixed. We saw continued growth in earning assets in our direct lending businesses with Heights and our Canadian operations growing sequentially by 5% and 10%, respectively, and in constant currency, 21% and 29% since the beginning of 2022. Flexi's loan book has continued its strong growth at end of the quarter at approximately $950 million Canadian, or just under $700 million U.S., which is 128% higher than a year ago, and compares with approximately $170 $250 million Canadian when we closed the transaction in March of 2021. So terrific progress in just about 18 months. Credit rates in our direct lending book in both the U.S. and Canada did slow in the third quarter as credit tightening measures that we took beginning in April and May had the intended impact, particularly in the lower credit tiers in the U.S. and in our LendDirect brand in Canada. We'll talk about credit in more detail later. but we believe that we're well-positioned to continue to grow our portfolio in both the U.S. and Canada in a disciplined way while generating good credit outcomes, even amid more macroeconomic uncertainty. We expect our consolidated loan book to grow in our fourth quarter, with more than 50% of that coming from seasonal holiday growth and flexing merchant base of more than 8,000 retail partner stores and online shopping sites. With that loan growth in Canada, we saw strong revenue growth in constant currency, the combined Canadian operations growing to 139 million Canadian, or 11% sequentially and 43% year-over-year. For Heist and First Heritage, their combined operations saw revenue growth of 10% and earning asset growth of 14% versus the third quarter of 2021, which includes periods prior to our purchase. While revenue growth was strong, it fell short of our expectations as our credit tightening had marginally more impact than anticipated, particularly in the lower credit tiers, which have higher relative yields and more of the revenue stream comes from upfront origination fees. This impact was most pronounced in the small loan segment of our U.S. direct lending, and we expect these impacts to continue for the next several quarters. As we stated when we purchased Hype and First Heritage, our focus is on driving growth in the larger loan segment, of higher credit quality borrowers. At the quarter end of our $739 million U.S. loan portfolio, approximately 70% is in the larger loan category, and we expect to see that percentage continue to increase over time. Excluding the divested legacy business, our net charge-off rate for the quarter in the U.S. improved by 110 basis points over the second quarter as we benefited from higher recovery rates Some of us resulted from new centralized collection procedures and resources that we've added at Heights and have in the works at First Heritage. That said, net charge-off rates within the U.S. business are still trending higher than we anticipated as we are experiencing higher defaults on loans that originated at Heights Finance in Q3 and Q4 2021, which is before we closed on the sale. We expect the charge-offs on these vintages to peak in Q4 and early first quarter 2023, before returning to a more normalized rate. In Canada direct lending, we saw year-over-year loan growth of 19%, and reported balances were relatively flat on a sequential basis, but up 6% on a constant currency basis. Year-over-year and sequentially, net charge-offs increased 260 basis points and 90 basis points, respectively. We expected this increase in net charge-off rates as we return to pre-COVID performance levels. Overall, I'd say the credit in Canada has normalized a bit faster than anticipated, but we're comfortable with current trends, and I would note that we now have more than 20% of our loan book originated at the Internet channel, where we will see slightly higher charge-offs than in in-store originations, so some mixed shifts there as well. Our Canadian point-of-sale lending business, Flexity, a modest increase in net charge-offs of 20 basis points and 30 basis points year-over-year and sequentially, respectively. As more of a Flexity portfolio moves into revolving status from deferral periods where no payments are due, we'll see charge-offs tick up, but yields will move higher as well. We should spend a minute on this, as it is important to understand how this dynamic, coupled with continued loan growth, will drive sequential earnings improvements at Flexity. In addition to the discount that Flexity earns from its merchant partners, we also earn interest and fees from consumers, but only after the end of the promotional period. Given that this is largely a prime book, a significant portion of consumers will pay off the balance during the promotional period, and more consumers did that during the pandemic. Also, and importantly, as the book is growing, it will, by definition, have more new customers in the deferral period. While the Flexity Loan Book is on track to meet its expected loan growth of 80% to 90% for this year, we expect more modest growth of 30% to 35% in 2023. So in terms of the composition of the portfolio, we expect a portion of Flexity customers carrying interest-bearing balances to increase from approximately 20% currently to approximately 30% by year-end 2023. And this should help gross yields on the Flexi portfolio to conservatively increase by approximately 500 basis points by the end of 2023. Turning to some of the expense and earnings improvement steps that we announced in our earnings release, in addition to credit normalization and other factors impacting operating results, our earnings outlook has been negatively affected by increases in forward benchmark rates for variable rate debt, as well as the currency impact that we discussed earlier. Since we announced our decision to sell our legacy U.S. business and purchase First Heritage in the spring, forward curves and currency have impacted our 2023 outlook by more than $45 million. To mitigate these expected headwinds, we are executing on a number of initiatives to materially improve our 2023 earnings. Let's start with expenses, where we're taking immediate action to lower our operating costs across both the U.S. and in Canada. In Canada, we are closing 59 branches and consolidating those units into our remaining Canada direct lending stores, which will have 149 cash money stores remaining. We're still very strong networks in most Canadian metro areas. This consolidation capitalizes on the strength of our online channel, which I mentioned earlier, and demonstrates the more limited need for our line of credit customers to visit branch locations. We've also reduced store headcount in certain markets to better align with branch traffic. Collectively, we expect these actions to save us $13 to $14 million on an annual basis. In our Canada point-of-sale business, we've identified additional opportunities to defer planned staffing additions and other expenditures, which will result in savings of approximately $5 million. In the U.S., beginning this month and through the first quarter of 2023, we plan to close approximately 10% of our U.S. direct lending stores. We are targeting both lower-performing stores as well as stores where we have overlapping footprints. This consolidation capitalizes on in-depth analysis of local market density and continuing improvements in centralized digital operations. We expect these store closures to result in an annual savings of $10 to $12 million. In addition, we've also made a difficult decision to suspend indefinitely the rollout of our first phase non-prime credit card. This card was meant to appeal to customers of our U.S. legacy business. And the rapid change in the macroeconomic environment for funding costs, credit performance, and liquidity considerations significantly altered the return horizon for this initiative. We'll continue to work on a larger balanced card product that appeals to our current U.S. direct lending customer base, but do not expect to launch any new offerings in this area in 2024 at the earliest. We expect the suspension to result in potential operating savings of approximately $7 million. Across our geographic footprint, we are consolidating certain back office functions as well as reducing our corporate office footprint, both to reflect the changes in our businesses through the acquisitions and sale and how our employees work post-pandemic. We expect to achieve approximately $5 to $7 million of operating expense savings by consolidating corporate office functions and space. Coming up, through the consolidation and rationalization across our Canadian and U.S. operations and our corporate functions and office space, we expect to see a net annualized improvement in adjusted pre-tax income of approximately $40 to $45 million, while reducing our overall headcount from approximately 4,000 employees to between 3,500 and 3,600 employees. We also expect to incur pre-tax non-recurring restructuring charges in the fourth quarter of 2022, in the range of $5 to $7 million relating to these initiatives, of which $3 million represents cash costs. Looking at risk-adjusted revenue, to address the margin compression we've experienced due to rising interest rates, where permitted and appropriate based upon the competitive environment, we're working in three areas. First, adjusting pricing to consumers in all three business units. Second, adjusting discount rates for Flex City to reflect higher base rates. And three, adding more resources and debt mitigation tools for consumers. While we expect that the ongoing shift in the portfolio to flexing U.S. direct lending larger loans will modestly reduce our overall yield, these measures taken together should improve our risk-adjusted yields in 2023 across our entire portfolio by 100 to 125 basis points. In conclusion, We believe we have identified revenue enhancements and operating expense reductions, which should result in a meaningful improvement in pre-tax earnings in 2023, which will help offset the increase in interest expense due to rising rates, a weakened Canadian currency, and other economic headwinds. While the extent and duration of these headwinds makes it difficult for us to provide any forward outlook at this point, we do feel very confident that we are well positioned to continue to grow our business in a very disciplined fashion and to deliver a solid and sustainably profitable business in 2023 and beyond. I now turn the call over to Roger to review the details for our third quarter 2022 results.

Thanks, Don. Adjusted net loss for the quarter was $12 million, or $0.29 adjusted loss per share, compared to $0.15 adjusted earnings per share in the second quarter of 2021. The primary drivers of the year-over-year decline in earnings were, one, decreased revenue in our U.S. segment as product mix in the U.S. shifted with the acquisitions of Heights Financial and First Heritage and the sale of our legacy U.S. direct lending business. Two, increased interest expense attributable to rising benchmark rates and increased borrowing to support and part the acquisition of Heights and loan portfolio growth. And three, increased loan loss provisioning on sequential loan growth and loss rates returning to pre-pandemic levels. Total revenues in the third quarter increased $5 million or 2% year-over-year. Canada direct lending revenue rose $13 million or 19% year-over-year. And Canada POS increased by $16 million or 143%. as compared to the third quarter of 2021. In the U.S., revenue decreased by 24 million, or 18 percent, because of the sale of the legacy U.S. direct lending business. For perspective, the sole business had revenue of $127 million in the third quarter of last year. For this third quarter, the combination of heights and a partial quarter of First Heritage added $97 million in revenue. Consolidated operating expense for the quarter decreased 6 million, or 5 percent, compared to the prior year, primarily driven by the divestiture of the U.S. direct lending legacy business in July 2022, partially offset by the acquisitions of Heights Finance and First Heritage. Interest expense increased $24 million year over year. Of the increase, approximately $20 million was attributable to higher average borrowing levels. That is, growth at Flexity and Canadian Direct Lending, increase for the Senior Notes TACON, and new facilities for Heights and First Heritage. The remainder of the increase was due to increases in the benchmark rates for Flexity and Canadian Direct Lending facilities. Gross loans receivable grew year-over-year by over $1 billion, or 115%, primarily driven by the acquisition of Heights in December 2021 and First Heritage in July 2022, which contributed $509 million and $225 million to the balances, respectively. For Canada, it's worth mentioning that the Canadian dollar weakened by 7 percent during this third quarter, with 4 percent of the decline occurring in the last two weeks of September. This negatively affects year-over-year and sequential loan comps. Flexity loans grew 143%, adding $388 billion in loan balances year-over-year. Canada direct lending grew 19%, adding $74 million in loan balances year-over-year. Since the end of last quarter, gross loans receivable grew by $114 million, or 6%. primarily driven by the acquisition of First Heritage and Canadian POS lending growth of 63 million or 10%. The increase is offset by the sale of the legacy U.S. direct lending business. Excluding the loans sold with the divestiture of the legacy U.S. direct lending business, gross loans receivable grew $302 million sequentially, of which $225 million came from the First Heritage acquisition during the quarter. And direct lending was relatively flat sequentially, but on a constant currency basis increased by 6%. On the First Heritage acquisition, for accounting purposes, we are required to account for the loans and other balance sheet amounts acquired at fair value as of the date acquired. We have included a brief summary of the purchase accounting on page 13 of our investor presentation. The fair value of the loan portfolio incorporates the credit losses expected to be realized on that portfolio. So, at day one, there is no allowance for loan losses for the acquired portfolio. The roughly $18 million discount is then accreted into revenue over the life of the loan portfolio. Charge-offs related to this portfolio will be recognized in provision So while these entries should be neutral to risk-adjusted revenue, the geography on the P&L will be different than our originated loans. Also, over time, we will be building allowance on loans originated post-acquisition, as well as any further credit deterioration that was not included in the initial valuation of the acquired portfolio. We are also on track to adopt the CECL accounting standard on January 1st. We are still finalizing all of our processes and procedures, including review with our external auditors. But we expect that adoption on January 1, 2023 will have a material impact by increasing the allowance for loan losses with a corresponding reduction in shareholders' equity. We expect the day one impact to be similar to what our peers experienced upon their adoption as of January 1, 2020. On the liquidity and funding side, we announced during the quarter we put in place new non-recourse revolving warehouses to support our U.S. business, and we also expanded the capacity and extended the maturity on our Flexity facility. The maturity date for these facilities now extends through 2025. In August, we renewed our U.S. revolver for 12 months. At the end of the third quarter, we had $118 million of available liquidity, including unrestricted cash and unbrought borrowing-based capacity on our various warehouse facilities. As Don mentioned earlier, we expect to fund, among other cash inflows and outflows, approximately $3 million of cash restructuring charges in the fourth quarter of 2022. Given the payback, we believe this is an attractive investment, and we have incorporated the use of cash and all of our liquidity projections. With respect to our dividend, while we feel comfortable that our current liquidity position would allow us to make this quarter's payment, we are prioritizing cash and liquidity needed to fund our growing loan book and to make investments, including the cash restructuring costs in the fourth quarter, to deliver sustainable profitability with our new business model in 2023 and beyond. As such, we are suspending our quarterly dividend and will continue to review with our board going forward. I'll wrap up by saying what a privilege it has been to be part of Curo's journey since 2016. I've worked with some of the best and most talented people, a very knowledgeable and engaged board of directors, and great advisors. And I've known many of the investors and analysts on this call for over a decade, and I've thoroughly enjoyed the engagement and support. I'll likely miss it all on some level, but after 38 years in accounting and finance, I'm ready to slow down a bit and move on to the next chapter. This concludes our prepared remarks, and I'll ask the audience.

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 questions, please press star then two. At this time, we will pause momentarily to assemble our roster.

Still just one.

The first question is from John Hecht of Jefferies. Please go ahead.

Hey, guys. Roger, best of luck. Sad to see you go, but I'm sure we'll keep in touch. So congratulations on a big move. So let's see, just I guess just trying to, you know, I guess take out some of the noise from the acquisitions and all the moving pieces there, I guess acquisitions and sales of loans portfolio. Can you maybe tell me what organic growth was? And I know there's no perfect science to this, so you're going to have to maybe take a gauge at it, organic growth was quarter to quarter. So from Q2 to Q3, inflexibility, and then the direct business in Canada, and then the U.S. business. Just trying to get a sense for what is organic momentum for those three categories.

Sure. Hey, John, thanks for the comments, by the way. So, John, I think at the beginning of our earnings release, we added some tables that we'll kind of unpack the moving parts at a very summary level. And if you look at the loans and ignore what we sold, the U.S. direct lending business, you know, was up, you know, obviously up 40% sequentially, but $225 million of the growth, of the $300 million in growth came from the acquisition of First Heritage. So if you, heights grew 8% sequentially, Yep. Canadian direct lending was flat sequentially, but that was currency-driven. In Canadian dollars, it was 6% sequentially. Okay. But the reported numbers were flat because we took the hit of the weakening of the Canadian dollar on September 30th. And then POS grew 10% sequentially. Okay. In U.S. dollars, though.

Yeah, in U.S.

dollars. It would have been like 14% in Canadian.

And given what you're – Don, you mentioned just being a little bit more surgical from a credit perspective. How do we think – I guess seasonally, thinking about seasonality and you guys getting a little bit more selective – What would you think, how would those, what do you think happens to that type of growth for the next few quarters?

Yeah, so John, I think obviously you've got, particularly in the Flexity business, right, you've got that merchant base, which is geared, a lot of big ticket stuff is geared to holiday shopping. So I think that our expectation is that that business, that portfolio in kind of in U.S. dollars is probably going to grow you know, mid-teens, maybe mid to high teens through the end of the year. The balance of the portfolio, I think the U.S. business, you know, starting at a base of, you know, 730 or 740, you know, we could see, you know, maybe 20, 30 million of portfolio growth there, given kind of where we are from a credit perspective. And then I think Canada direct lending will go up probably 3% in U.S. dollars for the fourth quarter. Again, we're kind of adjusting for where the trend was versus some of the credit tightening measures. But then if you go forward to the end of Q1, you will still see Flexi is still going to grow, although it obviously will be coming off of the holiday period. The rest of the portfolio, Flexi will grow a little bit. The rest of the portfolio will shrink a little bit. So from Q4, from December 31 to March 31, you know, it's very little growth in there because of the, you know, we still, the small loan portfolio at Heights has, some real income tax impacts. We'll see the biggest amount of shrink in that portfolio. But that's $200 million of the total earning asset base right now. The large loans will kind of run in place, maybe grow in touch. And then, as I said, Canada Direct Lending will grow in touch and Flexi will grow somewhere. But the whole portfolio will be relatively flat December to March. And then, you know, it's really hard to, you know, with the kind of the macro situation, we're anticipating some continued growth in the portfolio sequentially across the balance of 23. And we feel like, as I think I said, the content flexi is going to grow from the year end. It'll grow 30%, 35% by the end of Q4. Most, by the end of Q4 of 23, most of that, though, is just within the existing, the full year of the existing merchant base that they have. That does not assume that they sign any more, you know, meaningful kind of enterprise merchant partners.

Okay. And then I guess sort of a similar question, but turning to credit, because you guys do give the NCO rates by channel, I guess, the U.S. direct lending, Canadian direct lending, and POS. Where those are, again, understanding the seasonal considerations, but you're still talking about seeing some weakness or normalization. What's the kind of normalized level for those three categories of loss rates, or are we kind of in the zone at this point when thinking about seasonality?

No, I think we're running – I think, as Don mentioned on the call, the prepared remarks, you know, heights is still – it's still above what we expect because of those 21 vintages are still working their way through.

I think maybe the trailing 12 annualized rate is maybe a couple hundred basis points above where we'd like it to settle. But the, you know, in Height's business, the delinquencies, and again, it's not, I don't think you get a clean cut in the, because we still have the legacy stuff, but in the Height's business, the delinquencies came down, the early stage stuff came down from June to September. And we feel like, you know, if you track the subsequent vintages, you know, you get into the end of last year, the first part of this year, the subsequent vintages, you know, the curves are performing better than the stuff that was being written in sort of the called June to October period of last year. So we feel good about our ability to, you know, again, to get that, you know, get the trailing 12 rate down another, down a couple hundred basis points.

Okay. Okay. And then some of the measures you're taking for expenses in this quarter, how much of the kind of run rate expenses do you think go away once all the dust settles there?

Yeah, so I think if you go to page – I know it was a lot of words in the script because there were a lot of initiatives. But if you go to – in our earnings deck, if you go to page 14, I think it is. Hold on a second. Okay. Page 12. I'm sorry. Page 12.

I apologize that when you started the call, this wasn't up, and now it is. So a lot of the questions I have are answered.

I know. We had some technical difficulties with Business Wire this afternoon. But anyway, if you look at that page, John, the Canadian store closures have happened. They have been. And so that will start. We'll start realizing that in November. You know, the Canadian POS deferred spend occurs over the course of 2023. U.S. store closures, you know, we said those are starting.

Those are starting, three-quarters of those. We're talking, you know, circa 50 stores closed. 30 of those will happen in this quarter. The balance will happen in the first, probably at the end of the first quarter of 23. So kind of two-thirds maybe this quarter, the balance in the first quarter of next year.

The first phase suspension, that's the tough decision, but the related costs, the people have been laid off, so that happened. The corporate office function consolidation and closures, the closures have occurred. We closed. We consolidated corporate offices. Those have all occurred. The corporate office function, some of that's tech dependent, and that's probably going to get achieved by the first half, by the end of the first quarter.

I would say most of that happens this quarter, though, John. There's a little bit of it that will lead into the first quarter of next year, but most of that $5 to $7 million number will happen this year.

Well, that's all very helpful. I'll get back in the queue because I've asked a few questions, but thanks very much.

The next question is from Vincent Cantik of Stevens. Please go ahead.

Thank you for taking my questions. And Roger, well-deserved and well-earned. We're going to miss you, but after 38 years, it's well-deserved. So congratulations. So a couple of follow-ups. In terms of the pricing powers, I know you were talking about passing out to the consumer. On the flexibility side, you're talking a bit about the merchants and maybe getting some discount rates. Sort of wondering what you're seeing there and what you're seeing with merchant engagement, especially ahead of the holidays, what the maybe opportunities are for getting some merchants. And then if you can talk maybe about the differences, since I don't cover many Canadian companies, just how the differences are between that Canadian consumer versus a U.S. consumer. Thank you.

Hey, Vincent, thank you. Just to make sure I answered the first part of the question, you're talking about new merchants?

Yeah, just in terms of – so just hearing from the U.S.-based guys like Synchrony and Bread talking about, well, maybe the consumers – we're facing macro headwinds, but actually maybe the merchants are engaging more, or maybe there's pricing opportunities there in terms of the discount rate. Just maybe making it a broad question, though, in terms of, you know, what you can do with Flexity.

Yeah, I think just, and I think we said, you know, overwhelmingly the merchant base, contractually we have, and again, it works a little bit differently with each contract, so I wish I gave you a blank answer, but We generally have the ability to pass along interest rate increases, so base rate increases, in the CEDAR in the form of higher discounts. So I know you're asking, coming up here, just to make sure, just as a reminder on that point. And then there are, within each merchant, if you're from Synchrony Brexit, you have a variety of different sort of promotional options. programs that are being run with merchants, and some may be 90 days same as cash, 12-month, you know, equal monthly payments, and all of those are going to have kind of different economics, different discount rates, et cetera, with the merchants. And a lot of the, you know, the hard work in that business is working with merchants to help align these promotional programs with, you know, advertising spend they have as well as sort of product introductions and initiatives. In some cases, we have multi-line retailers that have different brands. They may have an appliance store, but also, you know, opening some, you know, mattress stores and trying to work with them on rollouts and new promotions. So there's a whole, and that's, you know, I think the team up there, that's what they're really, really good at is working across those lines and making sure that we're both maximizing the opportunity for the retailers to sell through so they can hire, you know, more financing, higher conversions, but also doing it in a way that doesn't, you know, in an environment where gross margins have been strained at the retail level, you know, shipping costs and, you know, again, for furniture retailers and lumber, et cetera, it's been a tougher, you know, the inflation environment, the supply chain environment has caught them as well. So I guess what I would say is it feels like the supply chain pressures and the gross margin pressures are, abating to an extent. And that given the, I think the economic climate and certainly there's a lot of demand for, you know, demand for consumer credit remains pretty good in the U S likewise in Canada. We feel like it sets us up for a pretty good holiday season with the merchants. And we've done, you know, I think most of the work to set up new programs has kind of been, you know, then to the extent they involve new discount rates, et cetera, that's been, that's already been worked out with the, with the retailers. So I think we're just doing everything in Canada to make sure we're supporting the merchants so they can sort of finish the year strong. And what's, you know, what's been a, and I'll sort of get into the next question, which is, you know, Canada did not see the, you know, the runoff in retail fed by stimulus that we did in the US, but they did see some of it. So And you can track the bigger, you know, LFL Group is our biggest partner up there. They're a publicly traded company. So they've seen, you know, sales kind of bounce around a little bit, but generally kind of keep moving in the right direction and not sort of see the big, you know, a big sort of whiplash effect from the, certainly some of the online, you know, bigger ticket retailers, the furniture retailers that I've seen in the U.S. So I think the consumer, the environment in Canada, the economy is generally pretty good. I mentioned that the labor market isn't quite as tight as it is in the U.S., so you're not seeing the 1.7 job openings for every applicant kind of thing. But the flip side of that is inflation is lower, and the Bank of Canada last week sort of surprised everybody by, at least most people, by only raising 50 basis points and signaling, hey, we want to make sure we're balancing strength and ongoing strength in the economy with with the need to contain inflation. And again, I haven't had a ton of time to read today's goings on in the Fed world, but it does seem like the Fed, what I read quickly is that the Fed's going to continue to race. There's a little bit of a divergence there. I think almost, in my view, entirely owing to the amount of stimulus that was spent in the U.S. and the effect that that had on inflation. So we feel good about the Canadian consumer. I've said a million times, an average Canadian consumer similarly situated, similar FICO, similar income, and all the same kind of ability to repay metrics that you'd run in the U.S., that customer is going to pay – payment rates over time are going to be 15% to 20% higher than what you see in the U.S. And the flip side, obviously, is delinquencies and charge-offs for similarly situated customers are going to run lower. There's a million reasons and theories about why that happens, but it's certainly just been my 25 years of experience doing business out there.

Okay, great. Very helpful. Thank you. Separate question, last question. Just on the capital structure, your funding structure, How should we think about that in terms of a rising rate environment, perhaps if you can give us some sensitivity? And is there a – are you comfortable with your current capital structure, or should we maybe see it evolve? Thank you.

Yeah, I think it will evolve. You know, what's most immediate is we are – you might have saw that we posted a deck because we were at the ABS conference launching you know, launching a U.S. securitization transaction that we expect to close, you know, just after the first of the year. And, you know, deals are still getting done. Regional just priced, I think, last week an opportunity. So the ABS markets, you know, are still, they're certainly not as attractive as they were six months ago, but deals are still getting done. So we expect to, for the U.S. business, to do a securitization just sometime in the first quarter. Flexity will tap securitization markets again middle of next year. And we are evaluating some potential opportunities even for the Canadian direct lending business for similar securitization as we start to put the Flexity non-prime assets collateral into combining that Flexity non-prime collateral with our with our Canadian Direct Lending Collateral. So that's really the biggest thing we have on the plate. You know, we'll continue to work to expand our senior revolver and more bank participants in that. But the big thing, you know, is securitization of the U.S. port, the Heights large loan portfolio.

First up in the queue, yep.

Great, perfect. Thanks very much.

Again, if you have a question, please press star, then one. The next question is from John Rowan of Jani. Please go ahead.

Good afternoon, guys. Hey, John. I'm Roger. I echo everyone's sentiment. It's certainly been nice to work with you over the last few years. Certainly keep in touch.

Thanks, John.

As far as closing stores, I mean, you're basically closing stores, I assume, that you bought from Heights and First Heritage, right? There's no other stores that you have in the U.S., am I correct? Yes.

Sure, in the U.S., yes.

Okay. And just to be clear, you're pulling the $2 to $2.40 guidance for 2023?

Well, we gave it as an outlook, John. We just said, you know, we feel like given where we are in the macro, giving forward outlook doesn't make sense to us right now.

and a lot of that goes back to interest expense. The ramp-up in interest expense has been pretty steep, and it seems to be almost one for one with changes in the Fed funds rate. How sensitive are you? I mean, what's the percentage of your funding that's fixed versus floating in HR?

So, I'll just, Roger, yeah. No, we did, as we said, it's about, you know, $40 million of increase from, once the curve started moving up kind of in March of last year, that hurt our 23 outlook by about 40 million pre-tax. And then currency, which is, you know, we don't move money back and forth, so it's not a cash issue for us, but it certainly, it'll translate into that EPS number that we gave. But Roger will give you the breakdown, but obviously part of, as we just talked about with Vincent, you know, having portfolios that we can moving out of the warehouse in the securitization transaction helps, you know, both from a duration standpoint and a fixed versus floating standpoint as well.

Okay. What's the breakdown now? It's about half and half. We have $2 billion in debt and half of it's fixed rate and half of it's floating.

Right. And that's, as I was going to say, the base rates have gone up, you know, 350, 400 basis points. That's kind of that $40 million number right there.

And then you said 30% to 35% growth in the point-of-sale business for next year. Is that correct? And you said you would end this year about where you expected. Can you remind me where you expected to end this year and refresh my memory if I'm correct on the 35% growth for 23?

So the question is where are we on just the point-of-sale portfolio?

Correct. Okay. Did I hear you correct that you gave guidance for 35% growth in 2030? Yep. Just to get to the number here.

We also said it's going to grow. The next six weeks, it will be the holiday season. Go ahead.

We expect that portfolio, which is about US, about 690 now, will end in the 800 million range. U.S. dollars at the end of the year.

And then 35% growth on top of that. 35% growth next year.

Yep, yep. And again, I'll make the point, that's part of why we're talking about sort of the yield stuff, which is, you know, there's that maturation in a business, and if you start to look at, you know, what you get in 23, where we think the business will move from being, so it's kind of a cash P&L profitable business. Now, if you add back depreciation, amortization, and provision impact, and And the MDR, which we don't disclose that separately, we do it in that there's an addendum in the earnings deck. So we think it'll move. It should be a gap-profitable business at the pre-tax line early in, we hope, early in 2023. But even with, because of that growth, an ongoing healthy dose of provisioning, of A-triple-O growth.

Does the revenue yield in that business still go to about 5% as, you know, you get past kind of that cohort of consumers that are in the promotional period?

Yeah, I think it should grow pretty radically over the year and exit. By the time you get to Q4, you should have that whole 500 basis point increase.

Okay. All right. Thank you very much.

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

Great. Thank you, everybody, for joining us. Again, we'll talk to you. I look forward to speaking to you again for our year-end call, and I will add my thanks and goodbyes and good wishes to Roger and his family as well. So thanks, everybody. Have a good evening.

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