CURO Group Holdings Corp.
Q2 2021 Earnings Call Transcript

Published: 31 Jul 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the CURO Q2 2021 Conference Call. All lines have been place on a listen-only mode, and the floor will be open for questions and comments following the presentation. . At this time, it is my pleasure to turn the floor over to your host, Matt Keating, Investor Relations for CURO. Sir, the floor is yours.

[Matthew Keating:]

Thank you. Good morning, everyone. After the market closed yesterday, CURO released results for the second quarter of 2021, which are available on the Investors section of our Web site at ir.curo.com. With me on today's call are CURO's Chief Executive Officer, Don Gayhardt; President and Chief Operating Officer, Bill Baker; and Chief Financial Officer, Roger Dean. This call is being webcast and will be archived on the Investors section of our Web site.

[Don Gayhardt:]

Thanks, Matt. Good morning and thank you for joining us today. The second quarter was a busy one for us and we made significant progress in several key areas of our business, all with the aim of continuing to grow and evolve our company to drive earnings growth and value creation. We solidified significant growth visibility for our Canadian point-of-sale business with Flexiti signing of LFL group, Canada's largest home furnishings retailer, to a 10-year exclusive contract that in the future will add over C$800 million in annualized origination volume and on the assets. This accelerates Flexiti’s timeline for achieving profitability at scale. Secondly, we took action to improve profit margins in our U.S. business by consolidating stores in a number of markets. Third, we began monetizing our tremendously successful investment in Katapult receiving $146.9 million in cash and 20.7% ownership in the new publicly traded company, when the De-SPAC merger closed on June 9. And finally, we improved our capital structure with a senior notes refinancing that extends maturity to 2028, lowers the coupon by 75 basis points, and provides important flexibility for supporting the significant earning asset growth that I mentioned in Canada.

[Roger Dean:]

Thanks, Don. Good morning. While Don covered some of the consolidated and segment highlights, I'll provide some more color on details. Consolidated adjusted EBITDA came in at $50.3 million, down just $800,000 or 1.6% year-over-year, as revenue declines from lower loan balances were offset by lower provision for loan loss and cost reductions. As a result, adjusted earnings per share was $0.40 for the second quarter.

[Operator:]

Thank you. The floor is now open for questions. . Our first question comes from Moshe Orenbuch. Please state your question.

[Moshe Orenbuch:]

Great. Thanks. Can you hear me?

[Don Gayhardt:]

Yes, we can, Moshe. Good morning.

[Moshe Orenbuch:]

Okay, great. Thanks. Good morning. So you talked about the loan growth that you're seeing in both U.S. and Canada kind of quarter-to-date. Can you talk a little bit about just how you see, and in case you did, kind of also that lead to expecting strong sequential growth in Q3? So, what's the pattern? What's happening? If you're going to approve more customers, the application flow is going to be better? Can you talk to that a little bit?

[Don Gayhardt:]

Hi, Moshe. It’s Don. I'll give you a couple of comments and let Bill chime in as well. So we're -- obviously, we thought the growth there was really good given the fact that they worse in lockdowns sort of reimpose, which, although this is like knock wood, it looks like those are the case flows, they’re going to come up a little bit recently with some of the Delta stuff, they do look like we're going to be in a period where some retail stuff will be open again. But even in that kind of a period, we thought we had really good growth in the Direct Lending side of the business. And a lot of that, that's one of the beauties of having the line of credit product where people have an open line and they can take a draw on the line without having to go in either online or going to a branch and take out a new loan. So the product structure really helps us there a lot. On the Flexiti side, we're really just getting the growth in the existing merchants, like Sleep Country and Staples. And then we started on-boarding sort of The Brick side of the Leons, or the LFL relationship. And that's -- we're really just in a -- that's just a complete, no pun intended to Canada, but it's a complete hockey stick right now. They're going to do as much volume in July in the Flexiti business as they did in the entire year of 2017. So that's just the scale of that relationship as they were mentioned in the comments that they have and The Brick is they’ve convert all the brick stuff and they'll -- the Leons side of the business, they'll have that -- the plan is to have that going in September. So that will be -- I think they'll probably take another month or so. But sort of by the end of the third quarter, we should have that, all of those properties, all those locations, both brick and mortar and online, originating on the Flexiti platform, but a lot of work to do, given the ramp there to make sure that continues to go as well as it's gone so far. In the U.S., and I'll just talk a little bit more about sort of what we're doing in the advertising environment, all that kind of stuff. But I think we're just -- we are already starting to see demand. And we talk about internally as we -- the card data suggests that people are spending money. Obviously they're shifting the spend from furniture and appliances and electronics to travel and leisure and dining, et cetera, and all that's positive. And obviously the job growth in those areas I think -- the initial jobless claims numbers came out. It ticked down a little bit again, which is good. So I think that's just the -- it's the reopening. Now we need that to continue. And hopefully the mask mandates and what's going on with the virus doesn't interdict the progress that's been made so far. But I've said that we -- I’ll give you one more data point. We were about -- ex the Verge portfolio, which is running off, I think we said we'd be 7.2% sequential growth in the June quarter, just month-to-date so far. We got a couple of days left in the month. We’re up in the U.S. ex Verge, we’re up 5% just through the month of July. So getting sequential growth, quarterly growth above that 7.2% number that we saw in the June quarter looks -- again, the externalities aside, it looks like we're pacing to see sequential growth that is improving at an improving rate. And Bill will talk about some more components of that.

[Bill Baker:]

Yes, sure. I think Don covered a lot of it, but I'll just quickly talk about Canada. And it's interesting, if you look at just the new customer growth and how it paces with the different phases. As the lockdown ease, there really is a correlation there. So as that continues to accelerate, we'll continue to invest in marketing dollars, because we're getting a better response and getting a good return on that investment. In the U.S., it's very much about I think back to school, and Don covered a lot of that. But we're continuing to see weekly progress, but really very much looking forward to the back to school season, having children back in class, which means they'll need backpacks and shoes and school supplies. And it also for many families serves as a form of childcare, which means people can get back to work and feel confident in taking them. So those are really the things that we're monitoring on the demand side.

[Moshe Orenbuch:]

Got it. Just as a quick follow up, is there any change in the competitive dynamics in Canada? You’ve seen given those results, anything else going on there from your competitors?

[Don Gayhardt:]

Not that we've seen. We kind of like where we are. And obviously on the Flexiti side of things, those are contractual relationships. And then on the Direct Lending side of it, I think -- again, our ability to offer that line of credit product, there's some -- with Goeasy and Fairstone, there's some companies of scale that are in the larger installment loan space. But I think we'd like the competitive advantage we have, just basically the ability for customers to have a line of credit and make a draw on that line of credit without having to come originated. And it's not in a declining balance as you pay down installments, and we just like to -- and constantly make the customer really continue to respond well to that product, and don't see any new entrants in that end of the market.

[Moshe Orenbuch:]

Great. Thanks.

[Operator:]

. Our next question comes from Bob Napoli. Please state your question.

[Spencer James:]

Hi. This is Spencer on for Bob. Can you guys hear me okay?

[Don Gayhardt:]

Yes, we can, Spencer. Good morning.

[Spencer James:]

Good morning. I just had one on the longer term plans for the two businesses geographically. Given the higher valuations for installment loan business in Canada, would you ever consider spinning off the Canadian business or conversely selling the U.S. business?

[Don Gayhardt:]

Yes. As I mentioned, we're in Canada in the process of -- our Direct Lending business is growing. Growth is strong. We've upped our guidance there that Roger talked about. Flexiti is actually in the middle of just -- it's not just these kind of things just don't kind of fall out of the tree. You really got to go execute. So we're in the process of -- the origination ramp is very strong. But we need to -- we're working hard and helping, like one of the good parts of the relationship there is in our call center, our CURO call center in Mississauga, we're hiring customer service and collections rep to help support this growth. They're Flexiti employees, but we're helping in that process. And I think we're going to be on-boarding about 100 new teammates to support that LFL by the end of the year. So our focus is really on executing as best we can and that's a huge relationship and essentially kind of triples the volume in the business. And as we said, we gave some long range guidance when we announced our LFL deal. We take those combined businesses can generate in the neighborhood of C$180 million of pre-tax in 2023. Our focus right now is really executing to make sure we can get there. And we think -- certainly our hope is that investors in the current structure will appreciate that growth and award the company appropriately. And if that doesn't happen down the road, you know, we'll have a lot of options on the table.

[Spencer James:]

Thank you for that. And then one follow up. I know you've gotten this question before, but I just wanted to ask. Any update on capital allocation. I know in the last quarter you enhanced returns to shareholders. Any update now that you have the cash on the balance sheet from Katapult.

[Roger Dean:]

Good morning, Spencer. So I think we're emphasizing flexibility right now. Kind of the priorities are evaluating M&A opportunities, organic investment, and up-market products. And we're also very mindful of how big the relationship is and how fast Flexiti is going to get big. So right now we're keeping an eye on flexibility. And then as we move into next year, we'll reevaluate that.

[Spencer James:]

Thank you. I appreciate it, guys.

[Operator:]

Our next question comes from John Rowan. Please state your question.

[John Rowan:]

Good morning, guys.

[Don Gayhardt:]

Hi, John.

[John Rowan:]

Can you remind me how -- again, the earn-out -- I know the triggers are 12 and 14 on the Katapult deal, but can you remind me the timeframe in which it would need to achieve – I know it’s an average over a certain time. Given the reduction in the stock price, I just want to make sure I understand kind of when that calculation period ends?

[Roger Dean:]

Well, there's two of them you mentioned. 20 out of 30 days above $12 and 20 out of 30 days above $14 triggers the two pieces, and a period is six years, if that happens anytime in six years.

[John Rowan:]

It's a full six years is --

[Roger Dean:]

Yes, six years from the merger clause.

[John Rowan:]

Okay. Don, anything you want to talk about regarding the hearing today on the Rate Cap Bill?

[Don Gayhardt:]

We've obviously been monitoring it directly and through our trade associations. I think continue to -- I think made a good case and get a lot of good support that rate caps are typically a way to -- I should just say an easy means to cut off credit for a lot of consumers. It's just the simple math on small dollar loans, small dollar short duration loans and an APR cap just doesn’t -- it's not the right way to sort of think about the product and think about the regulation. So, I think we've got a lot of good support on that frontend. We'll kind of go from there. As I said, we do both kind of our own and through a coordinated effort through trade association. But we'll certainly monitor what goes on.

[John Rowan:]

And then can you give any guidance on interest expense for next quarter? Obviously, there's a lot coming and going with the see if you can provide some type of framework for what you think interest expense is the run rate going forward?

[Don Gayhardt:]

Yes, the bond deal doesn't move it very much, because we outsized and the coupon was 75 basis points lower. But Flexiti -- the only thing that will change will be Flexiti borrowing on their ABL. I see interest expense the next quarter barely inching up, but because of the Flexiti, with the on-boarding of LFL, there's probably an additional -- next quarter it’s up slightly. And then by fourth quarter, it's probably -- you could see $2 million or $3 million increase sequentially.

[John Rowan:]

Okay. And then the guidance for the back half of the year, just -- I want to make sure I understand it correctly. You're saying that earnings per share per quarter will be below the $0.40 mark here in the second quarter, correct?

[Don Gayhardt:]

Correct. Yes, well below because of that -- we've had provision tailwinds like everybody for so long. Nothing we're seeing that suggests we're going to be able to sustain those provision tailwinds because of loan growth.

[John Rowan:]

Okay, all right. Thank you.

[Don Gayhardt:]

Thanks, John.

[Operator:]

And that was our final question. I’ll turn the call back over to Don for concluding remarks.

[Don Gayhardt:]

Great. Thank you, operator. Thanks everybody for joining us and we'll look forward to talking to you again after our third quarter results. Have a good day.

[Operator:]

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.