CURO Group Holdings Corp.

Good morning and welcome to the Kuro Group Holdings third quarter 2023 conference call. All participants will be in a lesson 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 Nick Panarossi, Head of Investor Relations. Please go ahead.

Thank you, and good morning. Curo released its third quarter 2023 results before the market opened today, which, along with our earnings presentation, are available on our investor website at ir.curo.com. With me on today's call are Curo's Chief Executive Officer, Doug Clark, and Chief Financial Officer Izzy Dawood. Today's discussion will contain forward-looking statements based on the business environment as we currently see it. As such, it includes certain important risks and uncertainties. Please refer to our press release issued this morning in our Forms 10-Q and Form 10-K for more information on the specific risk factors that could cause our actual results to differ materially from the matters described in today's discussion. Any forward-looking statements made 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 US GAAP reporting, we present in the earnings presentation 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 appendix to our earnings presentation. Current and prior period financial information is presented on a continuing operations basis, which excludes the results and positions of the Canada POS lending segment due to the sale of the Flexity business on August 31st, 2023. With that, I would like to turn the call over to Doug.

Thanks, Nick. Good morning, everyone, and thank you for joining us today. The third quarter was a successful quarter for Curo as we closed the sale of our Flexity point of sale business and completed our business transformation, enabling us to exclusively focus on our core business of direct lending in the US and Canada. We also made great financial and operational strides during the quarter, which collectively contribute to executing on our strategic vision. We continue to responsibly grow our loan portfolio across the US and Canada as we prudently extend credit to our resilient customer base. As you can see on slides three and four of our earnings presentation, we grew our overall loan portfolio by 2% sequentially and 8% on an annualized rate. The sequential balance increase was driven by a 5% increase in our U.S. loan book and a 2% increase in Canada on a constant currency basis. We continue to focus on our proven customer base and believe there is ample room to grow balances and improve overall credit profile in both geographies which is an important step in our path to profitability. Within our U.S. operations, we completed a major milestone by converting our entire U.S. branch network to a single loan management system. This conversion greatly simplifies management of our branches and allows us to increase efficiency and improve servicing. In addition, this will also enable us to offer both small and large loans in the same branch, providing opportunities for loan balance growth as well as network optimization. Our continued expense management led to lower operating expenses for a third consecutive quarter, excluding non-recurring charges. Expense management remains a top priority, and we feel we can continue to grow our loan book and improve our operating expense ratios. Turning to credit on slides five and six, we were very pleased with the stabilization of our delinquency rates and the improvement of our NCOs. Our NCOs decreased 110 basis points sequentially. We saw 170 basis points of sequential improvement in the U.S. and would like to highlight both the year-over-year and year-to-date improvement in our NCOs in Canada, driven by our Canadian open-ended product. As a reminder, we made a series of changes to our underwriting servicing programs at the beginning of this year, and we are starting to see the results materialize. We also continue to closely monitor credit and consumer health. Thus far, the consumer continues to perform consistent with previous quarters and our expectations, but we are ready to make further adjustments to the underwriting if conditions change. To summarize, we continue to deliver on our strategic priorities, simplifying the business, growing responsibly, and achieving key operational milestones all while closely managing our expenses. I will now turn it over to Izzy to give you more detail on our Q3 results, and then I'll close with some final thoughts.

Thanks, Doug, and good morning, everyone. As Doug highlighted, Q3 was an exciting quarter where we closed on several meaningful milestones and continued to deliver on expectations. Slide 7 of the earnings presentation shows summary results for the quarter. Revenue of $168 million increased slightly from the prior quarter. Our net interest margin post-charge-offs declined slightly versus prior quarter, driven by higher non-recourse interest rates, overall portfolio growth, and a higher level of average debt. Net revenue post-provision expense was $119 million versus $103 million in the prior quarter, primarily driven by net credit change of $6 million due to improving late-stage roll rates and improved macroeconomic outlook, partially offset by portfolio growth during the quarter. Our pre-tax loss post-provision was $33 million in Q3 23 versus a loss of $54 million in Q2 23. Interest expense increased $56 million from $51 million the prior quarter due to an increase in debt levels and higher rates. Operating expenses for the quarter was $94 million. Included in our operating expenses was $6.5 million of non-recurring charges. Free provision income increased by $3 million from the prior quarter to $16 million. Net charge-offs were $55 million, an improvement of $2 million sequentially, and a reported net charge-off rate improved to 17.7% versus 18.8% in the prior quarter. We continue to believe our focus on responsible asset growth and the actions we have taken on underwriting and servicing should drive further credit quality improvement. Net loss from continuing operations for the quarter was $34 million, or $0.81 per diluted share. On slide 8, you can see more detail on our allowance. The lower allowance versus the prior quarter was driven by late-stage roll rate improvement, as well as improved macroeconomic conditions. As a reminder, our allowance will likely increase as we grow our portfolio in future periods. Turn to slide 9. Net interest income post-charge-offs and excluding recourse interest decreased slightly versus the prior quarter due to higher average debt levels and increased non-recourse interest rates. as well as lower yields due to the continuing product mix shift to larger balance, longer duration, and lower credit risk loans. These are partially offset by a decrease in net charge-offs. Slide 10 shows our operating expenses. During Q3, our operating expenses on a reported basis increased slightly sequentially and include $6.5 million of non-recurring charges. Our OpEx ratio also had a slight uptick versus the prior quarter, Again, primarily due to the non-recurring charges. During the non-recurring charges, OpEx receivables ratio would be lower by 210 basis points to 28.3%. On slide 11, you can see our leverage and liquidity summary. On the left-hand side, net leverage improved versus the prior quarter due to an improvement in our adjusted earnings before credit changes, recourse interest, and taxes. On the right side of the slide, our liquidity and capacity decreased primarily due to the August semiannual bond payment and receivables growth. We expect our unrestricted cash levels to be 90 to 140 million at year end. I would like to further expand on our liquidity position. Currently, we're in the strongest position since the beginning of the year, having raised capital in May and closed the sale of Flexity. We expect it to get stronger over the coming months, giving us a runway to becoming profitable. Over the next two quarters, we expect further inflow of liquidity driven by the escrow release through-up related to the Plexity sale, a tax refund related to prior periods which has been approved by the IRS, and a higher advance rate on our Canadian lending facility as credit performance improves. The collective actions equal $45 to $50 million in additional liquidity. We also anticipate we will modify several of our U.S. lending facilities in Q4 2023 giving us additional 65 million capacity to grow receivables. Additionally, Q1 tends to be a seasonal quarter where we see our portfolios shrink and collections outpace loan growth. In Q2 2024, we anticipate refinancing our lending facilities and increasing capacity and liquidity support growth. Finally, with the sale of Flexity, we saw a gap loss, but we will be able to utilize this loss for tax purposes and expect to receive a refund of approximately $38 million after we file our 2023 tax returns. We anticipate receiving the refund in the second half of 2024. As a reminder regarding our corporate taxes, even though we're in a lost position for U.S. tax purposes, in Canada we are profitable, so we expect there will be a cash outflow for Canadian taxes. In summary, we are in a stronger liquidity position than we have been the past three quarters, and we expect liquidity to improve by year end and throughout 2024. Next, we'll discuss our outlook for Q4 2023 on slide 12. For Q4 2023, we expect receivables to be in the range of $1.26 to $1.28 billion, and for revenue to be in the range of approximately $165 to $175 million. Net charge-offs are expected to be between 16.5 to 18.5 percent. Our operating expenses in the range of $85 to $95 million on a reported basis, and our cost of funds will be approximately $60 million. We're also providing an early view into our 2024 expectations. We expect to grow receivables 8 to 12% and net interest margin post-charge off excluding recourse interest to be in the range of 26 to 28%. We expect our 2024 expense run rate to be in line with our Q4 2023 annualized expenses. And we expect to maintain unrestricted cash balances of 90 to $140 million at the end of every quarter. Finally, We have also updated our long-term outlook. The key metrics for us are receivables growth, net interest margin post-charge-offs, excluding recourse interest, and OpEx ratio. Our current net interest margin is close to our inflection point and long-term targets. Our inflection point is our estimate of when Curo's net interest margin is able to cover 100 percent of our operating and interest expenses. The improvement will be driven by continued focus on our product mix and improving our loss rates. Our OpEx ratio improvement will be driven by managing expenses while growing our receivables approximately 8% to 12% a year. With our move to a single loan management platform in the US, we can start focusing on optimizing our branch network, which will further improve our OpEx ratio in the future. Our 2024 and long-term outlook are dependent on a stable macro environment, and we will update the outlook in future quarters if we see any meaningful changes. With that, I will turn it back over to Doug for some final comments.

Thanks, Izzy. This is the third quarter with our new management team, and I'm very proud of all we've accomplished during these nine months. During a challenging economic backdrop, we improved credit performance, raised additional capital, completed our leadership transformation, sold Flexity, strengthened our liquidity position, consistently reduced our operating expenses, and recommenced responsible growth. These accomplishments, along with the conversion to a single more robust loan management system in the US, provides a strong foundation for the future. We look forward to finishing the year strong and capitalizing on many of the investments we have made. With that, I would like to open the call up for Q&A. Operator?

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question comes from John Hecht from Jefferies. Please go ahead.

Morning, guys. Thanks for taking my question. And congratulations on, you know, lots of achievements over the course of the last couple quarters. Just, you know, first one's kind of just general, maybe a little bit more detail on overall credit. You know, you're talking about improving roll rates. You've also migrated to a single loan management system in the U.S. I mean, and so I'm, you know, the general question is, you know, How are you managing approving credit? Is it a function of execution in the new system, or is it a function of just more stable macro backdrop? And then maybe you could talk about any differences you're identifying between the U.S. and Canada in that regard.

Yeah, John, this is Doug. Well, I try to bifurcate it into both a U.S. answer than a Canadian answer, starting with the U.S., I think we've talked about in the past a variety of actions we took to address credit, including late Q4 tightening, but also standing up our centralized collections and servicing team and putting in new payment solutions for consumers. So I would say when we look at our, for example, our Q1 vintage curves versus Q3 of last year, there's noticeable improvement post-tightening and post some of those changes. So I think a lot of what we're seeing now in the credit is as our front book continues to increase some of that flowing through into the numbers. So I think it's a combination of underwriting and servicing. In Canada, we talked about, again, in previous quarters, we extended the charge-up period from 90 to 180 and established traditional roll rates and customer solutions. And if you look in the table in the 10, you'll see that kind of our charge-offs for our open-ended line of credit are really down about 400 basis points now from last year's levels. And that's really a result of both some credit tightening, but primarily the servicing platform changes we've made there. So as far as what we're seeing from the consumer, again, consistent with last quarter, nothing, I would say, remarkably different from previous quarters. You know, I would say that We've seen an increase in some consumer proposals in Canada, which are comparable to Chapter 13, but they're still below pre-COVID levels. So overall, you know, I'd also kind of finish with, you know, 10 of the 13 states we operate in the U.S. carry unemployment levels lower than the national average. So we're monitoring that, obviously. But overall, we think we're in pretty good shape on the credit side.

Great. That's very helpful. Thanks for those details. And then, Izzy, you mentioned some modifications to some ABS structures. I mean, actually, it sounds like you're addressing a few of your tenants of debt over the next few quarters through some modifications. Is there any way you can describe what those modifications are, or is it just sort of a renewal of a term or something?

I think there are two. I'll talk about what's going on currently and then what we're looking to do in the future. Currently, what we really do is try to create capacity for the growth of our secured loan program, which tends to have higher average balances, longer durations. So we have to make sure that our facilities are configured to make those loans eligible, right? And that's working with our lenders, because it is a better credit, better access spread. So that's been going well, especially since we have kind of shorted a lot of operations and liquidity. The second big milestone really is next year when We move away from, I'd say, a legacy name such as a Heights-related facility or a First Heritage facility to really a U.S. direct lending facility that's bifurcated between more secured loans and unsecured loans and potentially loan sizes. And that will happen next year. But again, a lot of that's being driven by the fact that we're able to kind of switch our focus to growth since we have a lot of our liquidity challenges behind us and the lenders are working with us.

Yeah, that's great. Thank you guys very much. Good job.

And there are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.