CURO Group Holdings Corp. (NYSE:CURO) Q1 2023 Earnings Call Transcript May 10, 2023

CURO Group Holdings Corp. misses on earnings expectations. Reported EPS is $-1.34 EPS, expectations were $-0.79.

Operator: Good day, and welcome to the CURO Group Holdings First Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. [indiscernible], CURO’s Vice President of Investor Relations. Please go ahead.

Unidentified Company Representative: Thank you, and good morning, everyone. CURO released its first quarter 2023 results before the market open today, which along with supplemental information 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, 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 Form 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 U.S. GAAP reporting, we present in the supplemental materials 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 the supplemental materials. With that, I would like to turn the call over to Doug.

Doug Clark: Thanks, [Juan] [ph]. Good morning, everyone and thank you for joining us today on our first quarter earnings call. During the first quarter, we remain laser focused on executing our business plan, consistent with our stated roadmap. We successfully executed on key capital priorities that we laid out on our prior earnings call. Consistent with our previous discussions, we continue to progress in our efforts to find a strategic option for Flexiti and hope to have an update in the not too distant future. We also navigated current macro headwinds and delivered favorable results relative to our guidance expectations. Lastly, during Q1, we completed our leadership transformation and have an extremely talented and energized team to execute our strategy.

On Slide 4, you can see details of how we strengthen our liquidity position and funding capacity. We are very pleased that amidst a challenging liquidity environment, we entered into new debt arrangements for over 230 million of gross capital following quarter-end. Of this amount, 150 million was in the form of commitments for our First Lien Senior Secured Term Loan and C$110 million or approximately USD83 million in commitments for our Canadian SPV facility. The transaction is expected to close shortly. We are confident in our business model and believe this funding provides growth capital, which is a key step to executing our plan to profitability over the long-term. It also demonstrates continued access to capital markets and strong support from all our lending partners all of whom identified the strong underlying opportunity in our business.

We now have the runway to drive responsible balance sheet growth and capitalize on the opportunity to further strengthen our position as a leading consumer lender in both the U.S. and Canada. As noted with the Canadian SPV facility, we expanded borrowing capacity, which provides opportunity for us to drive growth and further expand our Canadian business. We continue to see a significant opportunity in Canada even with anticipated regulatory changes and believe our Canadian Direct Lending business in an attractive point of differentiation for CURO relative to our U.S. peers. Turning to Slide 5 of the deck. We entered the first quarter with nearly 2.1 billion in total gross loan receivable balances, relatively flat on a sequential quarter basis.

Consistent with our responsible growth approach, we had already tightened our underwriting standards and were significantly more cautious on lending given the increasingly uncertain macro environment. We also pulled back on marketing in Q1 as we were engaged in the systems conversion at our U.S. branches, while moving to a single robust technology platform. During this transition, we suspended certain marketing activities to allow branches appropriate time to focus on the conversion. We anticipate completing the systems conversion by mid-2023. The conversion of the branches to a single loan management system should benefit our longer-term growth, while enhancing our cost efficiency as it allows us to optimize loan origination, servicing, and performance monitoring.

Our efforts in 2023 will be focused on ensuring CURO’s direct lending capabilities, including scalable omnichannel acquisition, credit and automated underwriting, and centralized servicing and collections. We will also remain focused on driving growth through selected branch expansion, new secured product offerings in the application of improved credit and fraud tools to expand product availability for new current and even former customers. We will continue our gradual mix shift to more secured versus unsecured lending by leveraging our current product suite, while also introducing new auto secured products later this year for our U.S. and Canadian Direct Lending branches. Importantly, we will always prioritize resilient credit quality over balance sheet growth, particularly through an uncertain macro environment.

While our portfolio is almost evenly split between Canada and the U.S., specific macroeconomic factors that impact our U.S. customers do not necessarily impact our Canadian customers to the same degree and vice versa. Currently, we are not seeing unexpected trends relative to our typical customer base, particularly as the employment picture remains generally supportive in both the U.S. and Canada. However, we acknowledge that macro headwinds, including inflation and a general decline in personal savings rates impact consumers, which could ultimately lead to industry-wide lower demand for lending products and an uptick in credit quality stress. Turning to Slide 6, we are pleased that credit quality continues to show signs of stability. Total Direct Lending net charge-off declined sequentially to 47 million, primarily driven by the changes to the charge-off policy in our Direct Lending business in Canada, which we discussed on our last earnings call.

On the right side of the page, you can see our Direct Lending charge-offs by geography. U.S. charge-offs increased at a slower pace in Q1 2023 on a sequential basis than they did the prior quarter. In Canada, charge-offs declined sequentially, due to a change in charge-off policy from 91 days to 180 days. Even if the change in net charge-off policy had not been implemented, credit trends would still be encouraging as total Direct Lending charge-offs would have been flat sequentially and charge-offs in Canada would have been slightly down sequentially. Moving to Slide 7, you can see that delinquency trends, a leading indicator of future net charge-offs are also encouraging. Total Direct Lending, 31 plus delinquency stabilized during Q1 remaining relatively flat at 100 million versus 96 million in Q4 2022 and 100 million in Q3 2022.

In Canada, delinquencies increased primarily due to the change in our charge-off policy, which rolls charge-offs back to delinquency status and gives us an opportunity to work with the customer. Excluding this policy change, total Direct Lending delinquencies would have declined sequential to 81 million in Q1 2023 and delinquencies in Canada would have been up modestly versus the prior quarter. In the U.S. 31 plus delinquencies declined sequentially for the second quarter in a row. Turning to Slide 8, you can see that Canadian point of sale charge-offs and delinquencies increased due to overall growth and maturity of the portfolio. While we are not immune to continued industry-wide credit normalization, we believe the changes we made to our servicing and collection process in Direct Lending across our U.S. and Canada regions should drive improved recoveries and lower charge-offs over time.

Specifically, in the U.S., we began tightening credit underwriting in 2022, deployed new debt mitigation tools in Q4 2022 and established a centralized collections team in Q1 2023. Moreover, as noted earlier, we anticipate continuing to remix the portfolio gradually towards more secured lending later in 2023, which should result in lower NCOs going forward. In Canada, we also tightened credit underwriting in 2022, changed our servicing platform to replicate traditional consumer lending platforms, deployed new debt mitigation tools, replicating capabilities in the U.S. and updated our charge-off policy as discussed earlier. In Canada, we also anticipate deployment of new credit and fraud capabilities later in 2023. On Slide 16, we are providing you with a growth strategy framework, including ranges for KPIs that align with the three pillars that we laid out for you last quarter.

Izzy will provide you with more detail in his section, but I want to highlight a few takeaways from this framework that we believe puts us on a path to profitability. First, we believe the framework provides a good sense of the strong underlying opportunity embedded in our business, as well as an understanding of our strategic vision for driving profitable long-term growth. Second, we remain very confident with our business model and the opportunity to grow receivables and revenue. Third, we continue to see an opportunity for operating efficiency improvement through strong cost management. And fourth, we are encouraged by the early signs of credit stability at CURO given the actions we took. Let me end by providing a little bit more context regarding the recently proposed Canadian rate cap, which includes proposed legislation to reduce the maximum allowable rate of interest.

We continue to closely monitor developments and remain focused on managing our business to serve our customers while maintaining an appropriate level of risk adjusted returns. However, it is important to note that the proposal could ultimately exclude a substantial portion of hardworking Canadian borrowers from access to credit. Our current understanding based on how the 2023 draft budget is currently written is that the rate cap would impact new originations consistent with our experiences in the U.S. with similar legislative change. Currently, over 90% of our line of credit portfolio falls above the new rate. Correspondingly, post implementation, we will tighten our credit box sufficiently to manage overall risk adjusted returns. We would also anticipate increasing utilization of our single paid product following the credit tightening.

Lastly, we will also be introducing a secured product later this year and will remain focused on our loan servicing and cost efficiency efforts. I will now turn it over to Izzy to give you more details on our Q1 results and then I’ll close with some final thoughts.

Izzy Dawood: Thanks, Doug, and good morning everyone. As Doug mentioned earlier, CURO is off to a good start in 2023 evidenced by our Q1 results being favorable relative to our expectations. First quarter gross loan receivables of 2.1 billion were relatively unchanged versus the prior quarter and towards the high-end of our guidance. Slide 9 shows the summary results for the quarter. Revenue was 209 million, a 4% sequential decline and towards the high-end of our expectations. The modest decline was driven mainly by continued product mix shift in-line with our strategic shift to longer-term lower yielding, but lower risk credit products. Our net interest margin post-charge-offs, a key indicator of our risk adjusted return on our assets remained flat sequentially at 18%.

Net revenue post provision expense of 147 million, up 20% sequentially, primarily driven by a lower provision for loan loss expense as our net-charge-off rate declined in the quarter. Interest expense continues to be impacted by rising benchmark rates though at a slower pace. For the first quarter, interest expense increased to 59 million from 55 million sequentially. Operating expenses of 118 million decreased a little more than 6% sequentially from 126 million, driven by decreases in restructuring charges recognized in Q4, which as we indicated were part of operating expense reduction through store closures and headcount reductions in the U.S. and Canada. Our operating expense ratio improved to 23% from 25% sequentially. Other expenses of 8 million, primarily represent gain on sale adjustment Flexiti earn-out and Katapult losses.

Net charge-offs of 59 million decreased sequentially from 74 million, and our net charge-off rate improved 326 basis points sequentially to 11.5%. This was driven by a charge-off policy change in our Direct Lending business in Canada, standardization of charge-off policies of First Heritage and improved credit performance. Excluding this policy change, net charge-offs would have been $18 million higher or 77 million in Q1. As Doug noted earlier, the actions we have taken on collections along with our focus on responsible asset growth should continue to drive stable credit quality. Net loss for the quarter was $59 million or $1.46 per diluted share, including a valuation allowance impact on our deferred tax asset, 18 million related to the net charge-off policy items and a $10 million restructuring expense, our pre-tax post provision loss was $47 million.

Pre-provision income, which we highlighted last quarter as being a key metric for us going forward, was 24 million this quarter, compared to loss of 112 million in the prior quarter, mainly driven by the $145 million goodwill impairment charge in 4Q 2022. Turning to our segment results on Slide 10. As we discussed last quarter, we run and manage our Direct Lending business cohesively, but the only practical difference being, which side of the border the consumer lives. As such, we have realigned our external presentation with this perspective and combined our U.S. Direct Lending and Canada Direct Lending into one Direct Lending segment, and also removed a reporting of adjusted net income. Going forward, we will continue to provide performance detail by geography.

We believe this also simplifies the process of modeling the company going forward. On Slide 11, you can see more detail on our allowance. As a reminder, we adopted CECL on January 1, which resulted in a non-cash accounting adjustment that we recognize in our opening retained earnings. Including the CECL allowance adoption, our allowance increased to 260 million this quarter. This increase is largely driven by the change in our net charge-off policy in our Direct Lending business in Canada, along with our cautious view on the macroeconomic environment and our view of unemployment rates. Turning to Slide 12, net interest income post charge-off modestly increased sequentially, due to the charge-off policy change during the quarter. This was partially offset by lower revenue due to product mix, as well as an increase to interest expense, due to rising benchmark rates.

As noted earlier, our net interest margin post charge-offs remained flat at 18% versus last quarter. Let’s turn to Slide 13 for a bit more detail on operating expenses. On the left side of the page, you can see our consolidated operating expenses on a reported basis decline in Q1 to 118 million from 126 million sequentially and includes 10 million of restructuring expenses that we called out earlier. The sequential decline was driven primarily by lower restructuring charges this quarter versus during Q4, as well as a benefit from lower stock based compensation. On the right hand side of the page, you can see our operating expense ratio trends by business. Positively our operating expense ratio in both Direct Lending and Canada point of sale businesses continue to improve.

Going forward, maintaining operating efficiency will continue to be a top priority for us. We will continue our work on lowering expenses where we can and will remain intensely focused on identifying opportunities for improvement. We have already done some headcount rightsizing given the business outlook and our newly established procurement team is diligently working to continue to enhance our processes with an eye on further streamlining and improving efficiency of third-party spend. As we are executing with the new team, we continue to find opportunities to lower expenses to improve profitability and provide capacity to invest in future growth as well. On slide 14, you can see our leverage and liquidity summary. Net leverage declined in Q1, due to a sequential increase in adjusted pretax income.

Total cash increased sequentially, while capacity declined due to funding our portfolio growth. Restricted cash increased by 32 million, due to an increase associated with the SPV’s of 40 million and offset by a decrease in restricted cash associated with our bank card products and reinsurance. Pro forma for the announced capital transactions, we will have a total of over 460 million in cash and available borrowing capacity, including 195 million in unrestricted cash. This provides a solid foundation of capital that we can use for growth purposes. By year-end 2023, we expect it to have 100 million to 140 million in unrestricted cash as we support growth in our Direct Lending business. Moving to our outlook for the second quarter on Slide 15.

For Q2 2023, we expect receivables to be in the range of 2.0 billion to 2.1 billion, and for revenue to be in the range of 200 million to 210 million. Net charge-offs is expected to be between 13% to 16%. Our operating expense is expected to be in the range of $112 million and $120 million on a reported basis. Finally, on Slide 16, let me give you a bit more detail on our growth strategy framework. Doug provided strategic drivers and I will spend some time on the KPIs. While this is not guidance, it does provide a reasonable view of how we plan to drive sustainable profitability and create a path to deleveraging. We see multiple opportunities to do this. Grow responsibly. Over time, we believe we can achieve consolidated receivables growth of 8% to 10%.

We plan to scale in Canada where we see great opportunity for growth even with anticipated regulatory changes. We also intend to improve our small and large loan mix in the U.S., expand our product offering, including secured lending, and selectively target new geographies. We also believe we can reach a net interest margin post charge-offs of 17% to 20%, inclusive of Direct Lending net interest margin post charge-off of 26% to 31%. Our net gross margins will benefit from improving charge-offs and we should also benefit from an improving interest rate environment over time and more efficient funding sources such as securitizations, though we are currently not factoring that into these ranges. Execute with excellence, we will continue to improve our operating efficiency and believe we can reach a consolidated OpEx ratio of 15% to 17% over time.

We plan to manage our expenses effectively and improve operating leverage by continuing to align our expenses with our business outlook further centralizing the automating operations and through new procurement programs. To strengthen our foundation, we plan to enhance our liquidity position and manage to a robust minimum liquidity level, while also establishing new capacity. Recall that our notes have general maturity dates five years out. With that in mind, we believe we can ultimately reach a net recourse leverage of 5x to 6x and successfully refinance our recourse debt. To help you gauge progression, we believe we can achieve these ranges as we start to approach loan balances of nearly 3 billion. We will also provide you with an update on these ranges once final language is available on the Canadian rate cap situation.

With that, I will turn it back over to Doug for some final comments.

Doug Clark: Thanks, Izzy. The CURO team accomplished quite a bit this quarter, which makes me very enthusiastic about our long-term opportunity. We strengthened our capital base. Our business trends are moving in the right direction. We laid out a detailed and reasonable path for long-term profitable growth, and are highly experienced energized new leader team will work diligently to execute our plan. With that, I would like to open up the call for Q&A. Operator?

Q&A Session

Operator: [Operator Instructions] And the first question will come from John Hecht with Jefferies. Please go ahead.

Operator: The next question will come from John Rowan with Janney. Please go ahead.

Operator: [Operator Instructions] This concludes our question-and-answer session, as well as our conference call for today. Thank you for attending today’s presentation. You may now disconnect.