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.