CURO Group Holdings Corp.
Q4 2019 Earnings Call Transcript

Published: 6 Feb 2020

[Operator:]

Hello, and welcome to the CURO Holdings Fourth Quarter 2019 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.I would now like to turn the conference over to your host today, Gar Jackson, Investor Relations. Please go ahead.

[Gar Jackson:]

Thank you, and good morning, everyone. After the market closed yesterday evening, CURO released results for the fourth quarter and full-year 2019, which is available on the Investor section of our Web site at ir.curo.com. With me on today's call are CURO's President and Chief Executive Officer, Don Gayhardt; Chief Operating Officer, Bill Baker; Chief Financial Officer, Roger Dean; and Chief Accounting Officer, Dave Strano. This call is being webcast and will be archived on the Investor section of our Web site.Before I turn the call over to Don, I would like to note that today's discussion contains forward-looking statements which include but are not limited to our expectations regarding continued growth in Canada in 2020, macro factors impacting the U.S. economy and how those factors impact our customers; the geographical expansion of the Stride Bank product during 2020, investments in card products and resources, including market and people to support them, Katapult's addressable market and growth prospects, the strengths of our company and operational model, and our ability to drive growth, our excess cash flow for 2020 and its expected uses, and our financial guidance for full-year 2020, and underlying assumptions.Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the statements made on today's call. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update 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 that these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in our earnings release. As noted on our earnings release, we have posted supplemental financial information on the Investors portion of our Web site.With that, I would like to turn the call over to Don.

[Don Gayhardt:]

Great. Thanks, Gar, and thanks to everyone for joining us today to discuss what was a very solid fourth quarter, and the continuation of good results and momentum. The year ended December 31, 2019, we posted 26.5% growth in adjusted EBITDA, 40.8% adjusted net income growth, and a 46.6% increase in adjusted diluted earnings per share.I will start in Canada, where for the fourth quarter our Canadian business delivered 18.3% revenue growth over the prior year quarter, and $20.3 million of adjusted EBITDA, which is 30.1% of our consolidated adjusted EBITDA versus $8.8 million of adjusted EBITDA in the prior year quarter. Suffice to say that a year later, we are incredibly pleased with how the product transition to open end loans has worked out in Canada. Our team in Canada has been extraordinary, and we once again demonstrated our ability to tackle product change on a very large scale, and do it in a way that works for us in terms of loan volume and credit, while delivering great value and service to our customers. We have a lot of momentum in Canada, and we are very optimistic about our prospects for continued growth there in 2020.Our U.S. business also continues to perform well with 6% growth in adjusted EBITDA versus the prior year quarter. The sequential deceleration in U.S. revenue versus the third quarter was almost entirely driven by the repositioning and the beginning of the runoff of our California installment loan portfolios ahead of the regulatory change, effective January 1. Absence of California impact, our U.S. revenue grew 6.5% in the fourth quarter versus 6.2% sequential growth in the third quarter, so very consistent and steady growth.We continue to see strong growth in loan balances, revenue, and net earnings. Overall credit quality is solid with our quarterly net charge-off rate improving 210 basis points year-over-year. Much of the improvement is related to mixed shift, but this is an important offshoot of the fact that our fastest-growing products are also our lower rate, lower net charge-off products, most notably our Canadian open-end product with a quarterly net charge-off rate of 6.3%, consistent with the third quarter and with our expectations for this product.We believe that macroeconomic trends continue to be favorable for our customers in both Canada and the U.S. We look at a great deal of data, and not to oversimplify, but the most important indicators continue to be the credit quality of our new customers and the ability of our current customers to meet their repayment obligations. On the second point, I noted the lower end share rates earlier, and the pace at which our customers carry [ph] delinquency was the same in this fourth quarter as it was in the prior year period. Both of these are very good leading indicators, but we remain very disciplined. By designer, our application approval rates for the quarter were down modestly across the board, U.S., Canada stores and online, as we work to keep cost per funded loan and loan vintage credit results performing well and meeting or exceeding our expectations. At the macro level, job growth and wage growth continue at very solid clips, and the most recent consumer confidence numbers for January are at the highest level since August. These trends bode well for our business.In Canada, we remain focused on portfolio performance and growing share with our market-leading open-end product. Canada's Q4 2019 revenue of $62 million was a record high. Canadian open-end balances stood at $252.1 million at December 31, 2019, and represented 83.4% of our consolidated gross combined Canadian receivables, up from 75.3% of December 31, 2018. Based on the success we've had in Ontario, we began rolling out the open-end product in British Columbia this January. British Columbia comprised 8.7% of Canadian revenue 2019. So, the transition is a much smaller undertakings in Ontario, and effect of the transition is included in our 2020 earnings guidance.During the fourth quarter, we launched our newest loan product, an unsecured installment loans originated by Stride Bank. We market and service loans behalf of the bank, and they license and utilize our proprietary credit decisioning for scoring and approving loans. We're now offering this product in two states in the U.S., and we'll look to expand it geographically over the course of 2020. However, as we mentioned in the past, this product will not be materially additive to 2020 earnings, and may actually be slightly dilutive depending on the rollout pace.We're very focused on building a sustainable unscrupulously compliant underwriting and servicing platform with multiple products and partners. This will require ongoing investment in people, processes, and technologies, and our 2020 guidance reflects a higher level of ongoing spend in all of these areas, as well as higher spend for startup marketing.Two more opportunities where we continue to invest and are very pleased with the progress are Revolve Finance and Katapult, formerly Zibby. Revolve is our Demand Deposit Account, or DDA, sponsored by Republic Bank of Chicago that we introduced in March of 2019. This product provides our customers with full functionality in the bank account, direct deposit of customer's paycheck with access up to three days early, debit card, bill payment, and even optional overdraft protection in addition to an FDIC insured accounts for their deposits. We earn fees on accounted card use, and for those customers who qualify overdraft protection. So far we have loaded on $68 million on over 24,000 unique cards, which is promising growth for a new product.Revolve is a logical extension and companion to our up plus general purpose re-loadable card, which in U.S. is sponsored by Axiom Bank and Metropolitan Bank of New York. In Canada, our bank sponsor is Pay Savings and Credit Union. Up plus provides more core card functionality, including later this quarter optional overdraft protection. We currently have over 150,000 active cardholders. Cards are a small, but important part of our product offerings, and we will continue to invest in these offerings to improve the features, mobile functionality, and value to our consumers. 2020 will also see us invest more in marketing promotions and employee training around our card offerings to drive growth, particularly to our branch network.I discussed last quarter, we participated in two investment rounds in Katapult of on-line virtual lease-to-own platform in 2019, and these investments brought our fully diluted ownership in this private company to approximately 44%. Katapult continues to perform well, particularly with key accounts such as Wayfair, Lenovo, and Fern [ph]. While, Katapult is still a small player, but a growing player, they've almost doubled their leasing volumes over the last year; they work in a very large addressable market. We think that the non-prime segment of the consumer durables market is approximately $50 billion, and it's a growing category, and we believe that Katapult's online integration, underwriting, and service capabilities give them a durable competitive advantage over competitors who focus on brick-and-mortar retailers. Overall, we've laid a strong foundation going into the new decade and believe that 2020 will continue to provide growth for continued Canadian success, product diversification, and leveraging bank partnerships with those card and credit products.We will hit on a couple other key topics before turning it over to Roger, first in brief regulatory update, as everyone knows, new California law took effect January 1, so we're only offering single pay loans along with our DDA and other ancillary products in Canada. The wind down of the California installment book and related changes in the market are included in our 2020 guidance. On the Federal side, last February the CFPB published a proposal, which will rescind the ability to repay a portion of its small dollar rule and among other provisions would narrow the scope of the rule. In addition to CFPB push the implementation date back to November 2020.Also in December of last year, the Texas court continued its stay on the payment portion of the rule until April of this year, at which point it is believed that the CFPB will revisit that portion of the rule. Finally before wrapping up, Roger will provide more details, but we're pleased to announce to both the continuation of our share buyback plan as well the initiation of a quarterly dividend, which based upon Tuesday's closing price equates to an annualized yield of 2.3%. We think this represents meaningful steps to return capital to shareholders but should still leave us with an excess of $120 million of free cash flow in 2020 to invest in our growing business lines, pursue strategic acquisitions and potentially pay down debt.In summary, 2019 was another positive year for CURO and I think the fourth quarter once again demonstrates the strengths of our company and our operating model. We're stronger growing company with strong free cash generation capabilities, we have the strongest omnichannel model in the consumer finance industry, we continue to improve our ability to navigate and rapidly adapt to regulatory and repetitive changes across the markets we serve. We continue to invest across our company to remain at the forefront of innovation and to leverage this innovation, as well as our scale for the benefit of our underbanked consumers.And with that, I will turn it over to Roger.

[Roger Dean:]

Thanks, Don, and good morning. As Don mentioned earlier, we closed 2019 with significant momentum in a number of areas including outstanding profitability and earnings growth in Canada, managing the California transition while posting solid growth in the rest of the U.S. business, strong expense discipline and meaningful return of capital to shareholders.Consolidated revenue for the quarter was $302.3 million, up 5.1% compared with last year's fourth quarter. For the quarter, U.S. and Canadian revenues were $240.3 millionand $62 million respectively. Both are the highest in company history. U.S. loan balances decreased 0.4% to $440.1 million due to the California portfolio repositioning Don mentioned earlier. I'll cover more on that in a minute.Adjusted EBITDA came at $67.5 million up 26.5% year-over-year. Consolidated adjusted net income and adjusted EPS for the quarter rose dramatically year-over-year up 52% and 66.7% respectively. The high growth was a result of one quarterly adjusted EBITDA growth in Canada of $11.5 million year-over-year, two solid U.S. loan growths outside of California, three disciplined expense management, four interest savings from last year's refinancings and managed utilization of our Canadian ABL facility and five repurchases of common shares.Next I'll comment on advertising customer counts and cost per funded loan before moving on to loan portfolio performance. As a backdrop, it is important to note that there's a fundamental shift in the composition of our portfolios year-over-year that drives meaningful change in advertising patterns, and new customer counts, especially in Canada. So while metrics on new customer counts are lower, they are as we expected. We're pleased with the new customer counts and just as importantly, the underlying credit quality and performance.Looking at new customers and advertising stats, we added 164,500 new customers this quarter, down 9.9% from last year. For the year-ended December 31, 2019, we acquired 602,000 new customers, our site to store capability, a key competitive differentiator added 29,000 new customers in Q4 and 112,000 for the full -– unsecured and secured installment loans net charge-off rates were up 40 basis points and 90 basis points respectively and were impacted by the fact that the California portfolios are running off with limited refinances and shrinking balances.U.S. unsecured installment net charge-off rates excluding California were down over 200 basis points year-over-year. While secured installment rates excluding California ticked up a little over 100 basis points on higher growth in Arizona. Single pay net charge-off rates rose 30 basis points year-over-year, Canada was up 70 basis points from the fully phase in effect -- impact of Ontario extended payment plan rules that went into effect over the second half of 2018 while U.S. single pay net charge-off rates improved 30 basis points year-over-year.Turning to our capital structure and liquidity, our total available liquidity position at the end of the quarter was $142 million. This was comprised of excess unrestricted cash of approximately $27 million, U.S. revolver capacity of $50 million, Canadian revolver capacity of over $7 million and undrawn borrowing base availability on our Canadian SPV facility of $58 million.In addition, we're pleased to announce that earlier this week we executed a non-binding letter of intent for a $200 million non-recourse revolving credit facility to fund our growing U.S. portfolio at very attractive terms. This facility has a 90% advance rate and a 5.75% LIBOR spreads. Our ending liquidity position and expectations have strong excess cash flow in 2020 is a good segue to the next two topics. As Don mentioned earlier, at our board meeting last week we authorized the new share repurchase program for open markets with negotiated purchases of up to $25 million of our common stock. Secondly, we authorized a quarterly dividend program and declared our first dividend since becoming public, $0.055 per share or $0.22 per share annualized.Finally, I will close with our outlook for full-year 2020. Revenue in the range of $1.165 billion to $1.195 billion, adjusted net income in the range of $135 million to $145 million, adjusted EBITDA in the range of $265 million to $280 million, adjusted diluted earnings per share in the range of $3.10 to $3.35 and an effective income tax rate in the range of 26% to 27%. This guidance reflects the expectations that Don expressed earlier that is mid-20% earnings growth for Canada, modest U.S. earnings growth as non-California growth will offset declines in California, up to $5 million of investment in new product launches and discipline accretive use of significant cash flow.This concludes our prepared remarks, and we'll now ask the Operator to begin Q&A.

[Operator:]

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from John Hecht with Jeffries.

[John Hecht:]

Good morning, guys. Congratulations on a great quarter and positive guidance. First question, just sort of an update on store trends versus online trends, you know, where is the mixed band [ph] with respect to originations and so forth, and where do you see that going in terms of that mix?

[Don Gayhardt:]

Hey, John, this is Don. I'll start, and Bill might have some thoughts on that as well. I think we continue to see the stores being really productive for us, and - but the mix in the store originations continues to shift from what we call, organic stores, which is our organic customers, which is customers just -- who will just kind of come to a store, see TV ad, you know, radio, whatever, and come to a store versus the customers who come in -- from leads to stores. So, the -- and you know what, probably over the last, if you look at longer term trend, from an organic base probably somewhere in the neighborhood of last couple, probably like a third -- our organic traffic is down by sort of a third, but we've been able to more than supplement that with the lead to stores customers. So, the growth in traffic, the traffic at the stores continues to be really positive.Part of it also is we can use the store, because we are so heavily - the product mix is so heavily weighted to the installment line of credit products now, and a lot of those customers are on -- a huge percentage of customers are on auto pay, so -- whereas in the past if you were doing a single pay transaction, customers are having to visit the store much more frequently around tighter refinancing cycles. Now, customers that are on auto pay, they may come into the store and originate a loan, and then we're simply using auto pay feature to do payments every couple of weeks. So, there's not as much traffic there, and it free the store up to be much more kind of an outbound marketing, we make -- and Bill can give you the numbers, and we make a lot of calls out of the store now from the store people out to prospective borrowers, and that's been a big lift there. So, we don't really disclose the individual breakdown kind of for competitive reasons, but we got -- obviously, we got a question about California, we don't have installment products in California, what's the store base look like in California, and we've heard there's quite a number of competitors saying in California, they're simply going to going to exit the retail side of the market there. We're quite the opposite, and when we make -- our California store base is still even without the installment products, still makes a lot of money, and we're looking forward to hopefully picking up some share there, and it's also a great place on top of the card products, being able to sell the card products suite of branches, California is going to be kind of at the -- kind of the fulcrum of that for us in 2020, it's a market and sell the card products through the branches. So, I don't feel there are any other thoughts on it, but I think that's -- it's a good question, but stores continue to be overwhelmingly positive and a big part of the omnichannel strategy.

[Bill Baker:]

Yes, I think Don covered it. I think the only thing I would add is that they continue to be important for the servicing component, and although all the stores are productive, where we have stores we actually do better online as well. So, they are a nice complement. I think that buzz term omnichannel continues to be something we put into practice, and I think it's really important.

[John Hecht:]

Okay, great. Thanks, guys. While you mentioned California, they're done, Roger, just a modeling question, how fast do we think about the run-off into the California portfolio that you're shifting?

[Roger Dean:]

Yes, good morning, John. I think it's frontloaded in 2020, because of tax season. We could easily see a third of the balance being amortized by April, and then the rest -- and more ratably thereafter, but the way we think about it is -- and this would be a case -- even if we hadn't stopped originating seasonally, but it's going to be more obviously more accelerated with no new origination. So, I think we could lose 30% to 40% of the -- lose, I mean we can get repayment on or get prepaid on 30% or 40% of the balances in the first four months of the year, and then kind of a more ratable run-off after that.

[John Hecht:]

Okay. And then last question is with respect to the Revolve and the card products, I know these are -- you're investing in them at this point, but how do we think about over the long-term the scale and season, what the kind of product margins are, and I guess the revenue sources?

[Bill Baker:]

Yes. John this is Bill. So, I think you're right. This is an important year for card projects. We invest a lot and probably just slightly less than $5 million pre-tax this year, but that's a lot of marketing investment, and I think if you look at the drivers of that business, I mean there are certainly fees, interchange, but as we mentioned in the opening remarks that we're excited to offer the optional overdraft protection, which by the way, is much more competitive than you may get at a traditional bank from a pricing perspective and grace period perspective, and I think customers will adopt that and that that's also a big driver.I guess the second point I would make that all the investment that has taken place to-date is really within our universe. So, our four walls in the stores and our online customers, we think there's a nice opportunity as we look to update the apps this year and offer some of these various product features to expand to other partners, whether that's just online direct-to-consumer, or with other brick-and-mortar retail partners. We think we've got a very scalable solution, a lot of support from our bank sponsors, and keep in mind that we do all the servicing on our own, and I think we've proven over the years that our ability to take advantage of operating leverage and to add scale. So I think the bottom line is, in investment here this year, we're redoing some of the technology, and that we would love to capture some of the pre-tax and revenue results certainly next year and out years.

[John Hecht:]

Great, I really appreciate that. Thanks, guys.

[Don Gayhardt:]

Thanks, John.

[Operator:]

Thank you. And the next question comes from Robert Napoli with William Blair.

[Robert Napoli:]

Thank you. Good morning and nice job on the quarter. And I guess, where -- the growth outside of California, what is the growth strategy outside of California, where are you seeing opportunities to offset the shrinkage in California?

[Don Gayhardt:]

Yes. Hey, Bob. It's Don.

[Robert Napoli:]

Hey, Don.

[Don Gayhardt:]

So I think that - yes, I mean obviously big markets outside of California would be Texas, Arizona, Nevada, Tennessee, Kansas, probably are bigger markets, and I think in all of those markets -- Bill mentioned and talked about the -- there's a big branch markets for us. So, we've got the benefit of both a really strong online channel, but the way the stores kind of work and supplement the online channel, the online advertising. So, I think -- those happen to be from demographic standpoint, you know, population growth, and within those markets, wage growth, job growth, there's a really, really strong market. So, and I think in general -- I believe that we can -- we grew kind of 6.5% outside of California in the fourth quarter. So, it's -- and I think that we thought we could do that maybe do a little bit better particularly from some of the card stuff, but it's not -- you know, our guidance doesn't imply us kind of -- we're not necessarily going to sort of try to drive a lot more growth in all the markets. We really feel like the strategy we have now the way we're spending ad dollars we've been disciplined on that, that we're very disciplined on credit. We're going to kind of continue that program in the other markets outside of California, and hopefully get some good growth in revenue -- probably isn't -- as Bill mentioned on the card side, it's not going to show up as much on the bottom line in 2020, because a lot of spend both on the marketing side, the technology side, and so, we have a lot of improvements in the mobile side of things, and that's -- so that there's some investments there.So, I think the message on the states, the rest of this is going to be -- let's just say we'll get a lot of good growth in where we are now. We're going to work -- we had the Stride Bank product in two states now, and it is -- we're really in kind of a pilot phase now to make sure that the functionality, the program works great and all of the -- everything on the loan management side, and processing payments and et cetera, all works great. That should give us some good asset growth as we get into the back half of the year, and set us up in 2021 to see real meaningful earnings accretion from that program, and that's a product that will help us expand geographically online in some states, where we don't operate right now.

[Robert Napoli:]

Thank you. That's helpful. Then what is the opportunity long-term in Canada? What are you -- I mean you're growing nicely, you've converted some products, is that -- do you think you can grow with the 10% plus for the next five years opportunity, or is that -- what do you think is reasonable for the market opportunity there?

[Don Gayhardt:]

Yes, so I think -- we think we can grow earnings probably 20 plus percent. We will get revenue from the maybe the mid teams and some operating leveraging and get over 20% earnings growth next year. I do think the opportunity is -- again, it's hard to say an exact number, but I would think -- we would be able to continue to grow certainly from a top line standpoint in a double-digit range, and get some operating leverage. We're converting British Columbia on the line of credit product, which is going to help us this year and help next year.The other thing, Canada is still -- if you look at -- we're kind of in the range of 20%, or some of our new customers are coming online versus 65% in the U.S., and the ability to kind of close that gap, and some of that is, I think, we're doing a lot of stuff that starts to help close the gap, but also just online financial services in general, the adoption rate in Canada just isn't what it is in the U.S., and I really think it's -- one of the good parts about Canada is that in the installment side of the business, it's kind of a -- it's us and it's money mark, and easy goers, the parent companies go easy. So, from a competitive standpoint, there's really kind of only three companies of any scale, but I think even within that market, we feel like we have the best online capabilities. So, as the market continues to shift to more online versus retail, I think we're going to pick up share. We also haven't -- from the line of credit practice is a great -- I think possibly extending in the even some larger longer term installment loans, which is something that both of those companies do a lot of -- something we're kind of taking a look at, and we'll probably do some piloting on that as we get later in the year.

[Robert Napoli:]

Last question, I mean, you guys have executed very well over a long period of time through very difficult regulatory, but your stocks trading at 3.5 times earnings, and you're buying back stock, and regulatory issues obviously are the reason I guess, and there was a hearing yesterday about national rate caps, maybe any thoughts around -- I mean, I've been around a long time, I've seen efforts to do that forever for the last 30 years, but what are your thoughts on that efforts specifically, or any other regulatory concerns, and do you feel that's why your stock is trading at such a depressed valuation despite good earnings?

[Don Gayhardt:]

Yes, Bob, obviously, we've -- this is a conversation you and I've seen a lot that I don't want to date either of us, but now, I mean, I think that's certainly an overwhelming piece of it, and I understand that industries configure a lot of stuff out and are obviously really good at pricing risk, and part of what the regulatory questions bring about is -- are these pricable risks, and I would think that if you look at more specifically on sort of a national rate cap level, I think I would encourage everybody to kind of look at the outcome of that, and some of the testimony, not hearing yesterday, which was structured to provide a forum for people that are in favor of rate caps, and if you just look at the line-up of academics it was kind of four to one on the panel in terms of people favoring rate cap, but even there's good article, the American Banker Article this morning is really -- I think a really good summary of the concerns on the democratic side about our rate caps right way to regulate small dollar loans, and it's really a good argument, and we didn't -- advancing that argument a lot of places over a very long period of time and doesn't rate an arbitrary rate cap, our argument is quite simple, you put in an arbitrary rate cap at 36% you're probably taking 40 million to 50 million Americans out of the credit economy, and they're going to be bouncing more checks, paying overdraft fees, you're having to pay deposits to get their utilities. If the small dollar credit is properly regulated it's a better cheaper options for those consumers. So, it's not -- these arguments will go on, but I think yesterday's hearing was a great -- I heard everybody kind of look at it, it was a really interesting debate and healthy kind of debate about this, and I think that one that we win over time, and I think we are kind of -- again, we didn't win in California obviously in last year, but I think more broadly I think it's -- California may actually in some respects, it's turning out to be a good -- it'll be a good laboratory for us to sort of look at the effects of -- on a broad basis on some of these arbitrary rate caps and how consumers that are -- call it Sub 620 FICO customers get kind of priced out of the credit economies.

[Robert Napoli:]

Thank you. I had listened to that hearing, and I know it was set up to be pro rate caps and led by a lot of the California people. I was surprised how balanced it was, and the concerns from the Democratic side in many regards. It was pretty, I agree, it was very interesting and worth investors listening to replay. Thank you.

[Operator:]

Thank you. And the next question comes from Moshe Orenbuch with Credit Suisse.

[Moshe Orenbuch:]

Great, thanks. Just following up on that discussion, Don, did you envision participating in any of those, and to kind of advance that point of view?

[Don Gayhardt:]

So what we participate, like, in a public hearing?

[Moshe Orenbuch:]

Yes.

[Don Gayhardt:]

I've done them in the past, I would -- there is another hearing scheduled, but it's currently on the docket for the end of the month of February. I'm not sure what the line-up is going to be, and it's meant to be more industry-focused as opposed to academic-focused. I'm just not sure what the line-up is going to look like. Remember, we're active in a lot of places. I'm certainly with our trade associations, very active on the show, we're there a lot, we're in the state houses a lot, and we've got both sort of industry trade association level people, industry CEOs like me, we've got -- our Head of Government Relations is very active in the state. So, whether we're in DC, in public doing one of these, I'm not sure yet, but we're certainly very, very active in a lot of places trying to advance this argument.

[Moshe Orenbuch:]

Got you. On the dividends, can you talk a little bit about your thoughts about setting up dividends, it's obviously a pretty bold move, obviously kind of evidence is your confidence and consistency of earnings, and what it means in terms of kind of buybacks in the future?

[Don Gayhardt:]

Yes. So, we did initiate dividend, and are going to -- and we reauthorized the $25 million in the buyback program. The dividend it works out to be somewhere in the neighborhood of $9 million of annual distribution there. So taken together, it's called 35 million of plan, at this point, capital return. We talked about that we generated a lot of cash in 2019, we will get a lot of strong cash generation in 2020 in the core business, and then we get some additional benefits from the run-off of California, but even -- if you just look at the dividends, it's kind of a payout ratio on net income, it's relatively modest. So, we think it's a good place to start, and it is -- I would also point we have a lot of available liquidity now. We're going to add to that. We announced we have got a new $200 million revolving facility to finance a line of credit and installment products in the U.S. that we've signed a letter of intent on, we will close that shortly at a really attractive rate. So, we're kind of increasing our liquidity and flexibility there.So, I think it's confidence in the businesses today and where it's going to go forward, and I think it's a balance of dividends and share repurchases. Share purchases are important, but we are -- we don't -- from a float standpoint, we bought back 75 million of stock or so over the last year. So, we are a little bit -- we're always kind of mindful of not shrinking or float too much, so that people would own the stock now and think about wanting to buy the stock, you know, have liquid tradable securities.

[Moshe Orenbuch:]

Understood. Last question just in terms of like the exit rate of earnings in 2020, how do you think that compares, and you talked a little bit about some of the things that will kind of give you a little bit of tailwind just to 2021, maybe if you could just, Roger, talk about that a little bit?

[Roger Dean:]

Yes. Good morning, Moshe. This is Roger. Yes, I think, as we -- if you think about just breaking down 2020 versus 2019, and kind of what's implied in our guidance, we have the sequential earnings in Canada obviously has expanded since third quarter of last year consistently. I think we view that as, we view Canada earnings growth to be as Don mentioned earlier mid 20% range on high teens revenue growth. The U.S. is -- the first three quarters of the year, the U.S. business isn't going to have any growth or much growth at all because of the mainly just because of California year-over-year comps, but setting quick California side, that I think we will see, for the full-year for the U.S., we see modest, very modest earnings growth with, mainly open-end and mainly open-end loans in new products, offsetting the California run-off. So that growth for the U.S. is probably pushed to modest growth and so overall that's kind of what's implied but as Don mentioned earlier the state layout, but the growth legacy products is going to come from open-end both in Canada and U.S., and obviously we are launching although it's not additive this year, certainly be accretive to 2021, with the new product set.

[Moshe Orenbuch:]

Thank you very much.

[Operator:]

Thank you. And the next question comes from Vincent Caintic with Stephens.

[Vincent Caintic:]

Hey, thanks, and good morning. I wanted to talk about the destroyed bank partnership, and maybe if you could give us a little bit more detail of how it rolls out over the course of 2020 and 2021. The product plans and kind of how quickly you could expand and what's the thought once relationship matures? Thanks.

[Don Gayhardt:]

Hey, this is Don. Good morning. So, it's going to take us, while I'd say kind of a quarter and a half or so to make sure that fundamentally that all of the engine kind of works properly. It's a good deal more complicated process to have the bank license our technologies and host those technologies and use this technology so it's we spent a lot of time, a lot of energy on it, it's a very big just the developers like to say a heavy lift from an IT standpoint and we just want to make sure all that works well. And as we as we get through the year, I think we'd like to, our viewers, as we'd like to exit the year with somewhere in the range of $50 million to $75 million of earning assets in that program. And that those are installment, the closed and installment loans. And probably be in -- we're in two states now, and you're probably as you're growing that business maybe you exit the year in year-end, five or six days, by the time you, you exit the year, we've stride is a really interesting, innovative, really entrepreneurial bank, we've done stuff with them on the payment side, in the past was a relationship we've had for a while. So we have known each other that, from a team standpoint for a long-time. So, I think, from a -- I think probably, as I don't see it, it's sort of expanding outside of this closed in installment product. You know, as we look into probably, I think that would probably, I would say, it's probably become probably stick to the same kind of products all the way through 2021. Longer term, it's kind of hard to speculate on what else we might be working on together because it's just a lot of opportunities in some states that we don't operate in right now online to offer really competitive installment product, so, again in the year, five or six states, $15 million $75 million of earning assets and have that kind of roll into a really healthy business and a good earnings contribution in 2021.

[Vincent Caintic:]

Perfect. And is the -- so you're starting off with a couple of states just to kind of test the waters on the technology, but it's the conversations with stride bank, is it that they want to license your technology for all 50 states to use them there. And then, when you talk with suppose you're talking with other banks as well sort of what's the appetite for licensing your technology and using them in all the different states.

[Don Gayhardt:]

I mean, obviously that was one of the nice and we think that the there is a potential to be in all 50 states. We don't know again, we only have or stride the conversations really focused on a relatively small handful of states right now, and I'm not, from a competitive standpoint, I'm not, we're not going to kind of go into more detail than that right now. As I said in my remarks, our view is we want to have multiple partners and multiple products. So, we do have some conversations going on with some other partners to look at all the products. And hopefully we'll have some more to talk about on that front later in the year, but, again, that's a really. I really got -- there's not a lot of granularity in that answer, but that's just the nature where our conversations are right now.

[Vincent Caintic:]

Got you. Yes, thank you. It's really helpful. One kind of modeling question, so helpful to think about the U.S. kind of being flat overall in terms of loan growth for 2020 year-over-year, just because of the -- what's going on with the California mix? Could you help us understand some of the other pieces that are being affected by the California run-off? So I'm assuming that 2020 has a less credit reserves as real results of that, or just maybe if you could help us just as from a modeling perspective, what we should be thinking about my line, maybe there's also marketing cost around the things for the California run-off?

[Roger Dean:]

So, yes, it's Roger. I think that, first of all, we're going to have some loan, even with the California run-off, we'll see some loan growth in the U.S., and if you just think about -- we finished, we disclosed as we finished the year with -- the installment balances in California are about $108 million in total between the two products. If you assume that, I don't know 75% of that, prepays amortizes by the end of 2020. You've got $70 million, $80 million of loan run-off in California, but we're still going to see loans. I still are going to apply to, but we'll still see overall loan growth in the U.S. by, the fourth quarter of 2020, which means you're replacing more than 80 million of run off with new growth and the provisioning that goes along with that. So, I just when you add it all up, you don't, we're not, it's not like provision, it's going to be less than that charge-offs, or, so I think there's going to be a pretty consistent relationship throughout the year of the provisioning versus revenue, and kind of that's pretty much moving somewhat in lots. I mean, we're not, adjusting either. We're not -- our plans don't imply that; we're going to see any big improvement and allowance coverage rates or big deterioration and allowance coverage rate. So, it's kind of just, the U.S. There's a lot of moving parts in the U.S. for 2020 as you point out a lot of growth in the non-California products, but when you kind of add it all up, if, or just you could tear adjusted EBITDA guidance. If you back Canada out of that, you get flattish or very modest growth in the U.S. And that's from kind of the revenue in the provisioning moving in lockstep with some pretty strange and something for a couple quarters. Some pretty strange year-over-year comps, because California peaked. The California portfolio peaked in mid last year, and it's going to be -- and its run-off from that point. So, the U.S. won't have growth in the first two quarters year-over-year.

[Vincent Caintic:]

Okay, got you. That's really helpful and that's a…

[Bill Baker:]

Hey?

[Vincent Caintic:]

Yes, sir. Go ahead.

[Bill Baker:]

Vincent, I would just add on you got some, the rest of, I think one thing. I think advertising cost as a percentage of revenue, now those will probably go up and some of that is just your mix shift because it's, all the online business has more advertising costs, but less, less operating costs, other operating costs. So the mix shift will drive some of that increase in that and then on both the card side, the Stride side and in general, I think there's we've built some more marketing dollars and so advertising as a percentage of revenue in 2020 will likely be 80 to 100 basis points higher as a percentage of revenue, but if you look at non-advertising costs, corporate -- and corporate expenses, they will probably get some leverage there. And then, interest expense even though we're going to have some kind of carry costs on this new this new revolving credit facility, interest expense will probably some of that just some debt pay down interest expense overall well probably goes down slightly in actual dollars in 2020. So more ad spend, some leverage on the corporate end and sort of store in call center cost and flattish to down interest expenses in 2020.

[Vincent Caintic:]

Okay, that's really helpful. Thank you, and it's a pleasant surprise, I thought that there would be a big reserve release because of the California went down. Just last one for me, and maybe this is kind of an overall picture. But we've been stocks been volatile because of the political environment, so on and I just maybe wanted to focus back to the consumer. So what have you been seeing in terms of the consumer demand? So we've been talking about the supply issues and trying to have different products, but has the consumer demand continued to be strong? Have you seen the consumer tightening and have you seen that consumer demand being met by the industry or what's the opportunity that remains out there? Thank you.

[Bill Baker:]

Yes, it's a big broad question. I will try to be a little succinct, but I think in general, from what the demand and the health of the consumer continues to be to be really good. The biggest indicator I think we've said for a long time there. Demand, we think is most closely correlates to consumer confidence, people feel good about their financial situation, feel good about their jobs and their prospects for their job to continue in earning. So to continue and hopefully go up, so competence numbers have been good, competence numbers have bounced around more in the past six months, some of that, you kind of read sort of the academic research on it and sort the details of it is somehow bouncing a lots but bounced around based on sort of trade deals and some stuff that it's hard for consumers to sort of figure out what it ultimately means for them, some -- I think some of the fact that the trade stuff, the temperature just either have come down a lot on that has recent stuff obviously has led to more consumers feeling better about their prospects that their jobs will somehow be interrupted by a trading work. I think from it, we're certainly the part of the reason why we invested in Katapult is that we certainly understand -- if you look at that where that business which is essentially financing $800 to $1,000 purchases online.There's no question in our mind that some of that the demand is going to the virtual rent-to-own company has been demanded in the past might have been met by unsecured installment of wide credit financing that we provide and others in our industry provide. So I still think that consumers healthy, the market is growing overall. It is tipping more in the favor of the larger companies that we scale, both in terms of servicing platforms and underwriting technologies and ability to attract more and cheaper capital. So, I think that's helping, but there's no question that some of the demand that is used to sort of funnel for us and our unsecured lending competition has moved to the virtual RTO company. But in general, we think that the economy in U.S. is healthy. I think the recession related fears that seem to sort of popup that popped up in the fourth -- third and fourth quarter of 2018 and maybe popped up again in the summer of '19. It still feels like that's, we're in a pretty good spot and certainly as we look out into 2020.

[Vincent Caintic:]

Great, thank you very much.

[Operator:]

Thank you. And our last question comes from John Rowan with Janney.

[John Rowan:]

Good morning, guys.

[Don Gayhardt:]

Hi, John.

[John Rowan:]

So, going back to that hearing a little bit, I thought it was -- I'll say it pertaining, but ironic that when some of the questioning came from -- guys were a little more aligned with the space, Meyer went toward Ms. Lamone, and he simply asked her what does someone do for $300 or $400 loan something that's in the donut hole, where the California regulations are, and she just basically didn't have an answer. She said there's a vibrant market, and had absolutely no answers to how that market was construed, who's lending and at what rates? So with that said, right, as you've exited and others have exited the $2,500 in up segment, has there been a corresponding increase in the payday product because again she didn't have an answer to how are these people finding, "More affordable loans" that she claims are generous at 36%, when they just eliminated that market above $2,500?

[Roger Dean:]

Hey, John. So I mean, look we have -- I don't think others have said this. I mean, we've seen some it started in the fourth quarter as our installment folks started the run-off we've seen some increase in the single pay business in California. It certainly helps take some of the sting out of the chain, but it doesn't, it's not, it's not, it's by no means any kind of a one for one supplemental replacement for the installment side, mostly because and this is I don't want to go online, they can, Google, California, installment loans, whatever you can see there are a large number of companies that aren't state license in California that still offer loans online and this is part of the conversation that we had and tried to have in California that that simply passing a law isn't going to, isn't really we don't think it's really going to change that that the availability of that kind of -– that kind of credit in California. And also that the outlook there are companies that operate in California in the sub-36% market, there are marketplace lenders, there's the traditional space installment lenders like OneMain and Lendmark all what are really good companies, but they simply don't offer the credit for customers, and this is you can look at the trust days that's out there and you can look at the loan tiers that that the marketplace lenders report and they're simply not offering credit for customers who were in the low-600s and high-500s from a FICO standpoint.So they're the idea that that a customer, our in California is going to be able to sort of just instantly pop over to a marketplace lender or with a traditional branch space lenders and get alone. It's just not our customer is not a OneMain, Lendmark, marketplace lending those customers are, they make $10,000 to $15,000 more per year. Their stability metrics are better than our customers and they're taking out loans that are, the average loan on a lot of those securitizations are, the unsecured loan is a $6,600 loan. So it's a much larger loan to a customer that's got 40, customer needs 40 to 50 more FICO points to qualify for. So I look forward to being able to sit here a year from now, which I think is part of what came out of the testimony and look at what's happened in California for customers, who formally borrowed money from us or Lenovo or Elevate, the unsecured lenders who operate in the low-600, high-500 kind of FICO range.

[John Rowan:]

So, do you think when they pass this regulation, they understood that there's -- they're not comparing apples-to-apples when they say there's a liquid market at 36% that they're not talking about a $2,500, or even it'd be greater $1,500 loan, whereas these other companies again good companies, I cover some of them and I think the rate companies provide a very different products which at the end of the day a $6,000 loan at a rate lower rate is going to cost you more in interest if you really need a $1,500 loan, right? I mean when you were talking to these regulators prior to this building test, did they understand that, because it didn't seem like they had an answer to that in yesterday's hearing, and frankly they used just -- they tried to gloss over the issue of what the real health of the market is and what's like-for-like comparison between your customer's FICO scores and the loans that they actually need and what is actually available in market from state license lenders.

[Don Gayhardt:]

California was an incredible frustrating set of conservation because I think there was a -- from a lot of people -- we want people who -- both on the legislative side, the regulatory side, I think there is a lot of people who understand it, but I think there is a feel good aspect to this idea that somehow customers are going to be "Saved" a lot of money, because they can do a calculation on $2 million of loans that are over 36%, and if all those loans are suddenly rewritten to be sub 36%, that saves consumers a lot of money, and I understand the appeal of the politics of that, but it simply isn't -- it didn't belies in understanding of what really happens when there is a lot of academic research out there about markets that have put in rate caps or eliminated the small dollar lending, and I think also -- in - and I won't go in too much of it, but in a market pre-Internet, where you had basically branch-based stuff, you could really eliminate a lot of the products by simply not -- by having stores closed, but with the online lending models and the way that the variety of those models and the way that a lot us are not subjected to state licensing, the credit is going to be there. It's already there in the donut hole, and it's significantly more expensive, and we think with many more -– many fewer consumer protections that we offer. So, I don't know, as I said, it is a big state and I am hopeful that -- and I think some of that came out in the testimony -- you heard yesterday that California would be a really interesting kind of laboratory to look at, and I think unfortunately it's going to lead to a lot of bad outcomes for consumers, but hopefully in that experience, we will able to point to that and chart a way forward for more kind of sensible way. We are not advocating for no regulation. We believe, and we had 425 regulatory exams across our business last year. So, we believe in a licensed, regulated, and heavily -- and scrupulously compliant kind of environment, and think we can operate in that kind of environment, but an arbitrary rate cap isn't a way forward that provides better outcome for consumers there.

[John Rowan:]

Okay. Easier question, the decision to do dividends and repurchases, is that mostly a function of when the bonds are callable, and just remind me, when they are callable if they are callable, and then just also let me know [technical difficulty] in total of repurchase authority between any of the open programs. That's it from me.

[Don Gayhardt:]

Yes. I think -- I will let Roger sort of get on the details of it, but yes, I think we certainly -- I mentioned -- in my comments again I mentioned that between repurchases and dividends, you are talking about probably $35 million there, and even after that, we still think we can generate in excess of $120 million cash, and that we will look throughout the year to -- it could be additional investment on the core business. It could be strategic acquisitions. But paying down debt is obviously and managing the right side of the balance sheet is something that we will continue to be focused. And we think we can provide a good return to shareholders and balance that with sensible debt reduction as well. So, I will let Roger kind of comment on the call dates et cetera.

[Roger Dean:]

Hey, good morning John. Yes, the bonds will mature in 2025. They are first callable at three-year point, which would be August 2021, and as you know, that's the first on the call that would hit in the premium at that point. I think the call premium have the coupon and then goes down from there.

[John Rowan:]

Okay. All right, thank you guys.

[Don Gayhardt:]

All right.

[Roger Dean:]

Thanks, John.

[Operator:]

Thank you. And that concludes that question-and-answer session. I would like to turn the floor to management for any closing comments.

[Don Gayhardt:]

Okay. We appreciate everybody joining us. Thanks for all the questions. We will look forward to talking to you again after our first quarter. Thanks.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.