CURO Group Holdings Corp.

Hello, everyone, and welcome to the Catapult Holdings second quarter 2024 earnings conference call. Please note that this call is being recorded. Everyone is on listen-only mode to avoid any background noise. You will have an opportunity to ask questions to our speakers during the Q&A session. If you'd like to ask a question during that time, please press star 1. Thank you. I'd now like to hand the call over to Jennifer Cole, Head of Investor Relations. Please go ahead.

Welcome to Catapult's second quarter 2024 conference call. On the call with me today are Orlando Zayas, Chief Executive Officer, Nancy Walsh, Chief Financial Officer, and Derek Medlin, Chief Operating Officer. For your reference, we have posted materials from today's call on the investor relations section of the Catapult website, which can be found at ir.catapultholdings.com. Please keep in mind that our remarks today include forward-looking statements related to our financial guidance, our business, and our operating results, as noted in the earnings release and slide deck posted to our website for your reference. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today's earnings release and our most recent Form 10-Q, and which will be updated in future periodic reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures. Non-GAAP financial measures should be considered supplemental to and not replacements for or superior to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is included with today's earnings release and is available on the investor relations section of the company's website. Any comparisons to 2023 financial results are referencing our resaved financials included in our Form 10-K for the year ended December 31, 2023, filed with the SEC on April 24, 2024. Finally, all comparisons are year-over-year unless stated otherwise. With that, I will turn the call over to Orlando.

Thank you, Jennifer, and thank you to everyone joining us this morning to hear about our progress during the second quarter. Today, I will follow our normal format of reviewing our operating progress against our merchant and consumer strategies before turning it over to Nancy to review our second quarter financial results in greater detail. including a few P&L milestones and goals. She will also touch on the steps we are taking to strengthen our balance sheet and capital structure. Q2 marked another quarter of across-the-board growth for us. We delivered our seventh consecutive quarter of gross originations growth, nearly 9% revenue growth, and adjusted EBITDA loss improved by $1.2 million year over year. We believe we are only in the early earnings of growth, but are confident that we have built a strong foundation that will allow us to continue to improve our growth trajectory. We base our belief on several inputs. One of the most important ones being our relationships with merchants. Let me explain further. We work closely with a robust base of merchants, either through a direct or waterfall integration, or those that we have added to our Catapult marketplace. As a result, we enter each year with line of sight into a meaningful portion of our gross originations forecast. Based on historical consumer shopping patterns, repeat purchase rates, and relationships with our merchant partners. And while historical predictability can't insulate us from major macro events such as meaningful slowdown and the sales of home furnishings that the market experienced this quarter, it does provide for a fair amount of stability on which we can execute a variety of growth plans. And we believe this stability is a significant asset for our business. That said, when we see a slowdown with one of our largest merchant partners like Wayfair, it's difficult to fully offset its impact. But keep in mind that 52% of our business is centered on originations outside of Wayfair. And our non-Wayfair gross originations, which includes catapult pay, grew by nearly 20% in the second quarter. We believe that as the headwinds within the home furnishings macro environment recede, we will see our wafer originations normalize, which will substantially accelerate our overall gross originations growth. Let me contextualize this further for you. If wafer gross originations had held flat to what we achieved in the second quarter of last year, our total gross originations would have grown by more than 8%. While the macro headwinds have been difficult to surmount year to date, we are seeing a number of reasons to remain encouraged, including we are holding steady with our existing Wayfair customers with both applications and originations from this cohort of customers relatively flat year to date. We define existing customers as those who had a previous origination with us and then returned to originate again. While we can't control application rates since we are in the Wayfair financing waterfall, We can control approval rates, and we've become experts in creating a compelling offer for the right consumer at the right time without compromising our underwriting. As a result, our approval rates are up 350 basis points, and the same-day take rates were up 500 basis points during Q2. We have a strong relationship with Wayfair, and we are partnering with them to get our business together back to growth. It's also very important to walk through how we are improving gross originations productivity, which is leading to strong revenue growth. Our strategy to partner with merchants to help them capture incremental wallet share with the non-prime consumer and our strategy to create a friction-free consumer experience by offering a best in class LTO product that meets them wherever they are, are both delivering. As a result, we have been able to make our gross origination dollars even more productive. To illustrate what I mean by this, I have a few different examples to share. Let's look at customer lifetime value, or LTV, first. As of the end of the second quarter, LTV has grown a little more than 15% year over year. We believe our growing LTV reflects the progress we're making against our merchant and customer growth strategies. In addition, leases per customer and gross origination dollars per customer have also continued to grow. We believe it's also important to view our gross origination results within the context of our performance over the past year, especially in comparison to many of our competitors. With the robust growth we achieved in Q2 of 2023, we are facing a fairly tough comparison. Looking at our second quarter performance over the past two years, we once again delivered nearly 20% gross origination growth for this quarter. Finally, we continue to attract new revenue-driving partners driven in large part by our valuable base of engaged and loyal customers, as well as our continued gross originations growth. This is allowing us to responsibly monetize our customer base and push forward against our goal of creating new revenue streams, among other growth strategies. Given our foundational progress, including continued top line growth and bottom line improvements, we believe we are well positioned to create value for our stakeholders by unlocking the power of a financial model. Now let's turn to our merchant strategy. Our merchant strategy is built on three key drivers. One, growing gross originations by integrating with new merchants through draft and waterfall integrations. Two, growing our market share with our anchor merchants. And three, ensuring that we offer the variety of durable goods our customers are routinely looking to acquire. Starting with our integration progress, we have several developments to discuss this quarter. First is our new relationship with Meineke. Meineke is a leading franchise-based automobile repair chain with more than 700 locations across the US. And we are excited to discuss our addition to their consumer application process called Meineke Payment Solutions. We've only recently kicked off the relationship, but we believe we will be great partners as we offer a proven and transparent option to their customers. And the decision to work with Catapult was endorsed by the Meineke Dealers Association which is comprised of more than 500 Meineke franchise owners. In addition to our e-commerce capabilities, we will also leverage our proprietary text-to-checkout technology that we recently launched. As a result, in-store Meineke customers will be able to complete their lease transaction on their own mobile devices, protecting their privacy, promoting transparency, and regulatory compliance, while lowering fraud risk to Catapult and Meineke. We can control the customer journey through our app and make it easier for the in-store salesperson by eliminating the burden they have to explain how the LTO product works. Another benefit of this relationship is our ability to remarket to pre-approved consumers. Through our agreement, even if a customer does not convert on a pre-approved offer for a Monarchy product, we'll be able to remarket to this consumer, encouraging them to enter into a lease on any one of our many merchant products. We also entered into an agreement with PayTomorrow, a premier waterfall financing platform. Through this partnership, we have embedded our LTO on the PayTomorrow platform. In case you're not familiar with PayTomorrow, their platform provides merchants with a diverse range of payment options that serve prime, near prime, and non-prime customers. They have more than 2,700 merchants online and in-store that offer a variety of products to consumers across the U.S. We believe that this relationship will be instrumental in accelerating our integration into the waterfall application processes for multiple merchants. We're also excited to announce that we have completed our integration process with Synchrony's waterfall called dApply. This strategic integration means that we are now in line to receive application flow from applicants who are declined for Synchrony's prime credit option. We believe this will be a sizable opportunity for us over time and will give us a pool of new applicants as well as another channel to partner with existing and potential merchant partners. We are currently piloting our integration with a regional camera equipment and accessories merchant, and we look forward to expanding to other merchants in the coming quarters. Finally, we're very excited to announce that we have been awarded an exclusive waterfall agreement with Adorama. After a competitive vetting process We have been named exclusive LTO in their waterfall, which is powered by ChargeAfter. These are just a few of our successes this quarter that demonstrate the steady progress we are making on this strategic front. As we remain focused on partnering with more and more merchants, we are also equally focused on doing more with our current merchant partners. Let me give you some highlights. We added more than 30 new merchant pathways in Q2. Pathways include new and existing merchant partners that launch a new website or an in-store experience that include Catapult as a direct or waterfall LTO offering. About half of these launches this quarter were with existing merchant partners. We believe that each of these launches creates an opportunity for us to expand our reach and customer base and will contribute to top-line growth. Since integrating the newest version of Shopify last quarter, we have successfully transitioned more than 70 merchants and our websites to the platform. We believe that this will deliver meaningful volume on an annualized basis over time. We have also continued to roll out our price calculator tool to merchants, and we are seeing results. Our price calculator allows consumers to easily see upfront what their payments will be for an item that they'd like to lease. Price calculator gives us a distinct advantage with consumers and merchants. When merchant partners use Price Calculator to transparently market the affordability of their durable goods, Catapult is included on just about every product page during the customer journey, putting us front and center with consumers as they shop. After deploying this tool with one of our large mattress retailers, we saw their daily gross originations expand by nearly 6% over approximately 60 days following the launch of the tool. We're also tapping into more strategic ways to leverage the power of our merchant partners from a marketing perspective. Let me give you two examples. First, our merchant partners are becoming more and more interested in using their own marketing assets to promote their relationship with us. We have recently been added to four newsletters published by our partners. Two of these merchants were existing Catapult partners, and in the 30 days following the mention, we saw more than a 10% gross origination lift. Beyond this, we are doing even more testing and learning on co-promotions. Recently, we ran a 10-day test with a waterfall partner in the tire category through which we offered a customer rebate promotion on certain leases. This resulted in about a 35% gross origination lift at the end of the test. We intend to strategically scale this test into recurring campaigns throughout the rest of the year. These are just a few examples of the ways we are deepening our relationships with our merchant partners. And while none of these advances individually are game changers, collectively, they can move the needle and they're helping us grow our non-Wayfair business. In fact, excluding Wayfair, we now have several merchants that we expect to each deliver $10 million in gross originations for 2024, which will reflect the growth of more than 40% for this group of merchants. I would also like to point out that some of these merchants were just added to the Catapult platform last year, which shows how fast we can ramp gross originations for merchants where customer demand is high. In the second quarter, our top 10 non-Wayfair merchants accounted for 36% of our gross origination base, up from 27% in the second quarter of last year. I hope it's resonating with you that we have a lot of very positive developments within our merchant strategy. While the impending recovery of home furnishings has taken longer than we anticipated, this will be a definitive driver of our business. And in the meantime, we are executing across other growth fronts, which are delivering positive results. This is a good segue into our strategy to drive consumer demand for our market-leading LTO product. Today, I will highlight our continued progress with Catapult Pay and our marketing strategy. Let's start with Catapult Pay. which has become a core driver of our business in less than two years since we launched it in late 2022. First, let's talk high-level numbers. During Q2, Catapult Pay, or as we call it, K-Pay, delivered $15.7 million in gross originations, representing 28% of our total gross originations. This means that we grew K-Pay originations by more than 100%. To put this in perspective, If Catapult Pay was a standalone merchant, the gross originations we were earning through this channel would make them our second largest merchant partner. In addition, the vast majority of these gross originations were with merchants that are only available through Catapult Pay, demonstrating that our app delivers gross originations that are incremental to our direct and waterfall channels, and that K-Pay is a powerful consumer engagement tool. Gross originations for merchants only available through Catapult Pay grew 115% in Q2. Second, since we last spoke to many of you, we are excited to have added two well-known retailers to our Catapult Pay marketplace, Costco, and most recently Newegg, a leading global online retailer of PC hardware, consumer electronics, gaming peripherals, home appliances, automotive, and lifestyle technology, which we launched about five weeks ago in time for back to school season. They joined Lowe's, which we added to our marketplace early in the second quarter. We've been very pleased with the response to Lowe's and Costco, and while it's a bit early to give a readout on Newegg, based on customer survey data, we believe the consumers will embrace the opportunity to engage with this new retailer. I could not be more enthusiastic about the ramp up of Catapult Pay. PayPay has added a new element to our business model that allows us to control our destiny. We are constantly educating merchants on the incrementality of our LTO offering, and KPAY is providing compelling data that we can leverage to make our case. In addition, it allows us to participate in major sales events, like Amazon's July Prime Day, which would not be possible otherwise. During this year's event, we grew gross originations by nearly 115% compared to last year's event. We feel confident that our app is also allowing us to deepen and strengthen our relationship with our customers. This quarter, we saw another quarter of high net promoter scores and customer repeat rates, both hallmarks of a healthy ecosystem we have been building for consumers across the U.S. As of the end of the second quarter, our overall NPS score was 62 and our customer repeat rate was 59.3. We are very proud of both of these results. Turning quickly to marketing, we are continuing to test and learn into a scaled marketing strategy. Within consumer marketing, the majority of our resources remain focused on driving potential customers to our app, and we learned a lot from the paid ad testing we completed during the first quarter. We are already driving strong repeat purchase activity through our app and other low-cost marketing activities, and we believe We can complement this in the customer flow we receive from our merchant partners with our own marketing efforts while keeping customer acquisition costs low. We are seeing encouraging results from our marketing efforts, including these highlights. Our monthly active users on our app have grown by 40% year over year. We've increased the number of marketing emails sent by approximately six times year over year, resulting in about a 35% increase in gross originations attributable to this channel. Unique customers who opened the app in Q2 grew by more than 35% year over year, and app downloads have grown 83% from last year. We will continue to be judicious about our investment in marketing, but believe we are demonstrating that we can leverage this strategic tool to drive incremental growth. Last quarter, we highlighted some of the initiatives focused on building our referral and partner marketing networks that we see as highly complementary to our digital marketing efforts. Since that time, we've seen some early but encouraging results. Within our affiliate program called Impact, we've added 41 partnerships and our impressions grew 30% versus the first quarter of this year. As a result, revenue from this small but growing channel grew 38% versus the first quarter of 2024. Our affiliate program was just one of the many opportunities we're exploring to build new revenue streams. In early June, we partnered with an insurance provider to launch Layoff Insurance, a new product that can provide a cash benefit of up to $2,000 for customers facing involuntary job loss and who have purchased this coverage. Our goal is to help customers navigate unexpected financial hardships should they arise. We believe that offering, like income protection, insurance, directly addresses the financial vulnerabilities that many of our non-prime consumers face every day. We plan to launch more products that complement our innovative LTO solution and provide underserved consumers with the financial tools and resources they need to power their daily lives. At the end of the day, we believe that adding products like this will allow us to monetize our customer base, create new sustainable revenue streams, and make our gross originations, which remain the lifeblood of our business, even more productive over time. In summary, we're executing a dynamic growth strategy that is unlocking the power of a financial model and positions us to create sustainable value for our stakeholders, and we're very proud of our progress. With that, I'll turn it over to Nancy to discuss our second quarter results.