CURO Group Holdings Corp.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good morning, and welcome to the CURO Group Holdings Third Quarter 2018 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Gar Jackson, Investor Relations for CURO. Please go ahead.

[Gar Jackson:]

Thank you, and good morning, everyone. After the market closed yesterday evening CURO released results for the third quarter of 2018 and revised its outlook for the reminder of the year. You may obtain a copy of our earnings release from the Investor Relations section of our website 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 Relations section of our website. Before I turn the call over to Don, I would like to note that today's discussion contains forward-looking statements based on business environment as we currently see it as of today, and as such includes certain risks and uncertainties. These statements relate to our expectations regarding bringing new products to markets and the timing of transition of certain stores to LOC products, revenue and earnings for our Canadian operations, ad spend, NCOs and loan growth, timing of contributions from the MetaBank product, LendDirect brand loan offices currently piloted in Ontario, substance and timing of regulatory activity and expected impact on us, use of our revolver and timing of repayment, our financial outlook for the reminder of the year. 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 projections described in today's discussion. 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 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 in our earnings release, we have posted supplemental financial information on the IR portion of our website. With that, I would like to turn the call over to Don.

[Don Gayhardt:]

Thanks, Gar, good morning everyone, and thanks for joining us today. In general, this call will follow our usual format, I’ll offer some high-level thoughts in the quarter, a few strategy notes and few brief comments on the regulatory environment and Roger will give you much more detail on numbers. And then we’ll take a few questions. From the top I think it's important to acknowledge that this quarter fell short of our expectations and probably your expectations and quite simply not up to our standards. While most of this shortfall is related to issues that will be resolved rather quickly meaning this quarter, some will persist as we go into 2019. There's a lot of detail in the release and Roger will review that with you. But from the standpoint of operating earnings we're about $17 million or $18 million short of our expectations and approximately $12 million of that relates to our ongoing Canadian product migration and increased loan loss provisions related to higher than expected loan growth. The remainder relates primarily to higher than expected charge-offs but here it is important to note that our overall net charge-offs are meaningfully lower than the same quarter a year ago. The 20.0% for the quarter versus 22.2% in 3Q 2017, so a 220 basis point improvement. And if you look at it by country and product seven of our nine products, I’m excluding Canadian line of credit because we don’t have comparable data for the third quarter of last year but seven of our nine products have lower year-over-year charge offs. Our overall business is still strong, it is still growing and our customers are in very good shape. We've also included in our release an update on our situation in the UK. Don't have much more than what was in the release but we'll try our best to get you up to date on what was a very, very fluid situation there. By far the biggest impact of quarterly results was the ongoing product migration in Canada specifically in the province of Ontario. For reference Ontario accounts for approximately two thirds of our Canadian business. From an operating and customer service perspective this transition is going very well. In fact I sat in a meeting with our Canada ops team just last week, I've never been proud of a business that lost money this quarter. With our new line of credit product, which we think is unique as we're the only small-dollar lender in Canada offer this product and thus very well positioned in the market. We enrolled on this 40,000 new customers in Ontario approximately 40 to 100 of which were brand new customers just in the quarter. We also funded almost 7,000 line of credit loans in Alberta. We ended the quarter with a total Canadian line of credit book of $138.7 million up from $51.3 million at June 30 2018, so the sequential quarter and up from $17 million at March 31 of 2018. All these numbers exceeded our expectations and the credit quality on those products are generally in line with our expectations based upon the current delinquency rates. This is a huge undertaking that puts our business on a great footing with the product that customers love and competitors do not offer. The downside of course that was dramatically reducing our Canadian Single-Pay revenue, which historically has been our most profitable single line of business. Very high yields with modest and very consistent credit losses but a business line which is impacted by steady run of provincial regulatory reviews that resulted in lower fees and a range of other provisions and increased operational complexities and reduced the attractiveness of the Single-Pay product for our Canadian consumers. There is a review in detail in the release. We did lose money in Canada in the third quarter as an 8.8% drop in year-over-year revenue coupled with a provision for loan losses percentage of revenue at 52.9% versus 31% in the prior year generated an adjusted EBITDA loss of $3.4 million, which is $15.4 million lower than last year's adjusted EBITDA of $12 million and $13.2 million lower sequentially than in the second quarter of 2018. We should note that a significant part of reduction in earnings relates to the allowance builds to the line of credit product, which grew $7.5 million sequentially. We expect our Canadian business to generate positive adjusted EBITDA in the fourth quarter as the line of credit portfolio growth will be solid in the range of $20 million sequentially but not at the level that we saw in Q2 and Q3, which leaves a much smaller build in the allowance and a return to profitability. In terms of full year earnings Canada had adjusted EBITDA of $54.6 million in 2017. And we'll probably end to 2018 with a full-year adjusted EBITDA of less than half that. But absent any new regulatory or macroeconomic changes, 2019 should see very meaningful year-over-year improvement in revenue and earnings from our Canadian operations. In terms of our U.S. business we had very good loan growth 21.8% year-over-year and 15.2% revenue growth but loan loss provision grew 29.9% and ad spend grew 46.9% as we continue to invest in our newer brands. We would expect to see that ad spend number decline sequentially in the fourth quarter. In terms of loan losses overall net-charge offs for our U.S. owned and managed loans were essentially flat to last year at 22.1%. So we're not at all worried about credit in the aggregate but we did see higher than forecasted net-charge offs in our line of credit in CSO portfolios. Line of credit net-charge off increase are mostly related to growth in Virginia, which is a new state with a loan book that needs to season and Tennessee where we offer credit line increased to certain of our better customers. And while net revenue in Tennessee has increased, net charge offs on this book were higher than forecasts. We do expect to see these trends persist into the full fourth quarter on the line of credit but before moderating in 2019. Quarterly net-charge off rates on our CSO book came in lower than last year about 500 basis points lower on a year-over-year basis. But we expected a reduction, a further reduction as last year's quarter was impacted by Hurricane Harvey and where we forgave about $3 million in customer payments in the quarter, which elevated the 2017 charge-offs. NCO rates improved even after adjusting for Harvey. The problem there, just to be blunt, is that our forecast simply assumed more improvement than historical and seasonal trends would indicate. Really just kind of an unforced forecasting error here. Finally, in our Avío Credit brand in the U.S., which we launched in the second quarter of 2017 are exhibiting good loan and revenue growth. We're still seeing net-charge offs coming in at a level, which is keeping us from looking to grow the book substantially as we move into the end of the year, which had been our plan. We're still confident that when time will get credit right in this book but our exit rate for 2018 will give us a lower contribution from Avío than planned in 2019. Roger will have more detail but the remainder of our U.S. business are Unsecured Installments, Secured Installment and Single-Pay lines all deliver revenue and net-charge off performance very much in line with our expectations. And our U.S. Single Pay revenue fell to under 10% of our total revenue, which is an important milestone to continue to grow and shift the mix of our business to longer term installment and line of credit products. Finally, in the UK we were again hit with very high cost of legacy redress claims almost $4 million in the quarter. As we said in the release claims at this level is simply not sustainable given the limited scale of our UK operations and as such, we're working very hard with advisors and regulators to find a solution. We have had ongoing what we think fruitful discussions with both the Financial Conduct Authority and a Financial Ombudsman Service. And we're grateful for their time and attention. As a first step in the process, we have with FCAs approval retained Huntswood as a skilled person to review the options that we’re considering. We hope that all of this will lead to a good resolution for our customers, our business and our employees in the UK. We'll look forward to reporting back more on this when we know more. As a quick aside our business continues to perform very well in the UK and in September we had record new customers almost 11,000. The highest number of active customers in good standing at 57,000 and the highest quarterly origination volume for the third quarter came in at GBP23.3 million. So, here just a couple of notes, in the aggregate obviously a pretty disappointing numbers. But I would reiterate again that we think much of this shortfall relates to issues that may well be rectified in the near term. Second, and most significant parts of our domestic business are performing very well. And for those areas where weakness may persist we’re focused on limiting the financial impact and remedying the root causes. Just a couple other operational notes. Our verge credit tower by MetaBank product is quite close to launch. We're doing test loans right now and we're very happy with the product development IT and credit score work that our teams have done with our partners at MetaBank. We are a little behind in our rollout schedule but the finish line at least in terms of product launch is very much in sight. We don't have any more updates in terms of financial impact other than to reiterate that we don't expect any meaningful impact from this relationship until the end of 2019 and the beginning of 2020. Finally, on the operations front, we are pleased with the progress that we've made with our LendDirect brand, loan offices we are piloting in Ontario. We currently have nine locations open and two more will open by the end of the year. These stores are smaller format desks and chairs environment only offer the line of credit and do not handle or distribute cash. We've tested a variety of sizes and layouts and we evaluate the early returns and formulating developing plans for 2019 and beyond. A few regulatory comments and then I'll wrap up and hand it over to Roger. In Canada just as we completed the transition to line of credit in Ontario and Alberta, and may transition our British Columbia stores during 2019. This would cover 174 of our 190 Cash Money brand locations at Canada. So, had limited exposure to any further changes in provincial regulation of Single Pay lending. And at U.S., this is a quite time of the year in terms of state legislation. We think we had a good season our key states with no new significant negative legislation passing. Just a couple developments we're watching in Colorado. We only have three stores there but there's a 36% APR cap initiative that's on the ballot there in November. At this point, we would expect this measure to pass and albeit our current product offering to mention we only have three stores and a minor online presence. So not material from an earnings perspective but we're evaluating several options for those stores and the products that we offer there to consumers. In California, as mostly of you know, we talked to you a lot about ballot, the California Supreme Court found that loans made by one of our competitors could be found to be in violation of the unconscionability standards in the states finance code and sent the case back to a lower court for further consideration. This case will take some time to play out and is subject to further appeals. So, kind of a long way to go there. In Ohio, as we talked about in last fall we’ve begun winding down our CSO lending book and relationship in advance to the May 2019 effective date of the new regulation there. We are all working on a alternative product we hope to begin offering to customers as we get closer to the May date. This is important even though Ohio was a fairly new market, it was not generating meaningful earnings for 2018. We were expecting and growing and seasonal loan book there to contribute as much as $6 million to $8 million in operating earnings in 2019. So I’ll close by reiterating as I said numbers aren’t where – where we’d like but I'm still grateful to our employees for all their dedication and effort. We're still making great progress in a number of areas and look forward to seeing that progress improve our earnings performance starting with this quarter we're in right now. And we’ll report back on that progress in January. And with that I will hand it over to Roger.

[Roger Dean:]

Thanks Don and good morning. Consolidated revenue for the quarter was $283 million up 10.9% with that growth rate affected by the product mix shift in Canada that Don discussed earlier. U.S. and UK revenues rose 16.2% and 27.1% respectively. Adjusted EBITDA came in at $38.4 million down 25.4% versus the same quarter a year ago. The decrease was driven by as Don talked about elevated loan growth, related loan loss provisioning and higher ad spend that Don talked about earlier. All other operating expenses grew at low single-digit rates year-over-year. In terms of comparing adjusted EBITDA for the quarter to our expectations for third quarter, the U.S. business fell short by approximately $4 million. Revenue was well above expectation because of related loan growth but the combination of the above expectation loan growth and the NCO rate variances for CSO and line of credit that Don mentioned earlier drove the miss in the U.S. The Canadian business missed adjusted EBITDA by $12.1 million on loan portfolio mix shift and upfront provisioning on acceleration of Open-End in Ontario. The UK was slightly behind after adjusting for redress cost mostly on provisioning on loan growth. Adjusted net income was down similarly year-over-year from $14.2 million to $10.9 million. And we incurred a GAAP net loss for the quarter of $47 million because of $69.2 million of debt extinguishment cost in connection with our previously announced high yield refinancing. Next I’ll comment on advertising customer counts and cost per funded loan before moving to the loan portfolio. Consolidated advertising expense was up 48.2% year-over-year that's about almost $8 million increase and was 8.5% of revenue compared to 6.5% of revenue in Q3 of last year. As we talked about in the past, acquisition spend to revenue tends to be highest seasonally in Q3. And as Don mentioned, we'd expect that rate to tick down a bit in Q4, resulting an ad spend in the 6% to 7% of revenue range for the full year. We added almost 235,000 new customers globally this quarter. That's up 14.9% versus Q3 of last year. I'll break it down a little bit by country with a related advertising spend. U.S. advertising rose 46.9% year-over-year, of this $5.6 million increase, nearly $2 million supported the ramp up of our new Avío installment loans. U.S. new customer counts were up 10.1% year-over-year fueled by 21.9% growth in Internet new customers. U.S. store new customers were down modestly year-over-year, even though our site store capability added 36,000 new customers this quarter. That 36,000 compares to 25,000 in the same quarter last year and 22,000 in second quarter of this year because of the Avío and the Internet mix shift, U.S. cost per funded loan was $101, that's up $27 year-over-year. U.S. advertising as a percentage of revenue was 7.9%, which was in the range we expect to given the ramp up of Avío and the mix shift online. Canadian advertising rose 28.2% for three reasons. First was mix, we are acquiring more installments in Open-End customers versus Single-Pay. Two, the marketing channels, we've expanded cable TV and direct mail spend and other media spend, especially in July when we launched – when we introduced Open-End in Ontario and three, new product expansion including LendDirect stores. Canadian new customer counts were up 1.1% but that comp, as we mentioned in the past, that comp is distorted by mix. Last year a much, much higher percentage of new customers being acquired were too weak Single-Pay customers. And because non-Single-Pay customers are scored more extensively, we do have more declines. As a result Canadian cost per funded was $112 that's up $24 from the same quarter a year ago and up sequentially from $87 last quarter. UK advertising rose $1.4 million year-over-year and UK new customer counts were up almost 80%. The UK cost per funded was $86; that's up $10 compared to the same quarter a year ago. But the cost per funded in the UK has been flat sequentially since the fourth quarter of 2017. Next I'll spend a little time covering overall loan growth and portfolio performance. Don already covered loan growth by country and the dynamics there. So I'll cover a few highlights at the product level. Company owned unsecured installment loans grew to $211.6 million, that's up $29.7 million or 16.3% versus the same quarter a year ago. But even at that 16% growth rate, loan growth was affected by mix shift from installment to Open-End in Canada. In Canada, unsecured installment balances were actually down $30.2 million year-over-year. U.S. unsecured installment was up $46.7 million year-over-year or 39%. And UK unsecured installment was up 100%, that's $13.2 million. Open-End loan balances finished the quarter at $184.1 million, an increase of $151.9 million year-over-year and $93 million sequential. U.S. Open-End balances grew $13.2 million or 41.2% year-over-year and that's fueled by growth in our season markets like Kansas and Tennessee of 13.2% and 11.3% respectively. And as Don mentioned earlier, the impact of credit line increased there. And introduction in Virginia in Q3 of last year’s we have a new state year-over-year. Canadian Open-End balances grew $138.9 million year-over-year, we didn't have any Open-End in the third quarter of last year and $87.4 million sequentially. CSO loans grew 10.7% year-over-year that was a bit ahead of our expectations. However, CSO loan growth going forward, will be affected by Ohio as we approach the May effective date for law changes there. We had $6.7 million of loan balances outstanding in Ohio at quarter end. We've curtailed spending on customer acquisition. So those balances will likely trail off approaching May. As we've indicated, we're working on potential direct loan replacement products for Ohio and our verge product will also be used – will likely be used to replace the existing CSO model in Ohio. Single-Pay loan balances declined 14.4% versus the same quarter a year ago, concentrated in Canada where the Single-Pay balances declined $14.2 million or 28%. U.S. Single-Pay loans grew $2 million or 5.1% versus the same quarter a year ago. Before I move on, I’ll pause and recap the moving parts of Canada's sequential loan growth, kind of what happened in the quarter in Canada. The total loan book went from $122 million to $193.6 million, an increase of $71.5 million just in the quarter. Open-End balances grew $87.4 million and almost 90% of that growth was in Ontario where we introduced the product in July. Unsecured installment balances declined $4.6 million. Most of our unsecured installment balances are in Alberta where cannibalization by Open-End is stabilizing. So we’ll maintain some of that book but we don't expect it to grow. And in the Single-Pay loan balances declined $11.2 million during the quarter entirely because of conversion of Single-Pay customers in Ontario to Open-End. Non-Ontario Single-Pay balances grew sequentially by just under a million. Moving onto loan loss reserves and credit quality, really important piece of this quarter. As Don covered earlier, loan growth obviously affected loan loss provision comps. Loss provisions exceeded net charge-offs at the consolidated level by $17.8 million in the quarter. We had a $132.7 million of sequential loan growth from Q2 to Q3 this year. Last year that was $52 million. For company-owned unsecured installment, the net charge-off rate for the quarter and past-due percentage both ticked up about 300 basis points entirely because of mix shift. At the country level, unsecured net charge-off rates improved year-over-year in all three countries. The net charge-off rate for the U.S. was 10 basis points lower year-over-year and net charge-off rates in Canada and the UK declined 260 basis points and 150 basis points respectively compared to the same period last year. However, I mentioned earlier the Canadian unsecured installment balances declined $30.2 million from shift to Open-End and U.S. balances grew $46.7 million year-over-year. So the U.S. share of the unsecured installment loan portfolio rose from 66% last year to 79% this year. Since the absolute level of the net charge-off rates in the U.S. book are higher than Canada, this geographic mix shift result in an overall increase in the consolidated net charge-off rate, even though each country's rate declined or improved year-over-year. Provision exceeded net charge-offs for unsecured installment by $7.6 million. For CSO loans, the net charge-off rate improved 430 basis points while delinquencies were flat year-over-year sequentially. As Don mentioned earlier, the net charge-off rate for comps for CSO were affected in the prior year by Hurricane Harvey, excluding the effect on the prior year from Harvey, the CSO net charge-off rate improved 124 basis points. For secured installment, the net charge-off rate in past-due percentages rose modestly primarily in California. For the Open-End portfolio, the net charge-off rate declined significantly year-over-year at the consolidated level but that's distorted by Canada. U.S. Open-End net charge-off rates were up because of the aforementioned credit line increases in Tennessee and Kansas and the maturity of the Virginia book. Closing out the discussion of the P&L, our adjustments for adjusted EBITDA and adjusted net income are explained in detail on Pages 9 and 10 of our release. The only additional thing I'll point out there is that the duplicate interest expense we incurred in the quarter in our high yield refinancing. The actual loss on extinguishment from the high yield refinancing was $69 million as indicated in the P&L. But the adjustment for adjusted net income includes $3 million of duplicate interest for the redemption notice period on the redeemed senior notes in U.S. SPV. The U.S. SPV facilities were extinguished at the end of the required notice periods in October, resulting in Q4 debt extinguishment costs of $9.7 million. Looking at the capital structure, we announced earlier in the quarter the details of our very successful high yield bond refinancing and our attractive Canadian dollar denominated SPV facility. So I'm not going to reiterate that this morning. As I mentioned, we also have now extinguished the U.S. SPV facility in October. Our U.S. revolver was drawn at the end of the quarter because of the large cash outflows over the past three months in connection with refinance debt extinguishment and high loan book. We expect to use the revolver through year-end with repayment and early in Q1 and probably – and at this point don't expect to need to use it across periods next year. Finally, I’ll close our full year outlook for 2018. Based on third quarter results and expectations for the next couple of months, we are revising our 2018 adjusted earnings guidance, that’s a non-GAAP measure that excludes onetime items like the aforementioned loss on extinguishment of debt and share-based comp and UK redress cost. We anticipate revenue in the range of $1.90 billion to $1.95 billion. Adjusted EBITDA in the range of $215 million to $218 million, adjusted net income in the range of $88 million to $91 million and adjusted diluted earnings per share in the range of $1.84 to $1.88. With that, this concludes our prepared remarks and we’ll now ask the operator to begin the Q&A.

[Operator:]

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

[John Hecht:]

Hi, guys, good morning. Thanks for the color on the quarter. Just I guess focused on Canada a little bit, I understand that the migrations impacted the business. I’m wondering can you just give us the characteristics of the type of portfolio or book of loans you're migrating into, what would you consider kind of the long-term loss factors there and compare those to the previous loss factors. And margins as well, just do we get a sense for that as well as, when should this migration based on the current trends, when should the effects of that wane?

[Roger Dean:]

Yes, so just the Open-End product in Canada, the lending yield on the product is just under 50% annualized. And then we offer a true credit protection insurance product there. It's optional customers opt-in and based on the acceptance rates that the insurance product drives the total financial yield on the product. So something in the 60% to low 60% range on an annualized basis. Right now, our expectation would be that as the portfolio seasons, the losses on that portfolio would be in the low 20s. So you got low 60s yield, low 20s losses, they’re higher than that now because the portfolios are mature. And we probably think it takes six to nine months for the losses to start to stabilize down in that range that I just mentioned.

[John Hecht:]

And that compares to what range of losses in the prior portfolio?

[Don Gayhardt:]

So, John, this is Don. The Single-Pay book – the mix, that the quarterly charge-off in the Single-Pay book – the annualized charge-off in the Single-Pay book run about 50%.

[John Hecht:]

Okay.

[Don Gayhardt:]

So that the yield, now again that the yield, it was higher than that, obviously the yield will come down a lot as the provinces lowered the lending caps. So this product, you'll get higher average balances, lower yields, lower losses, so losses as a percentage of revenue and this book will still run higher. They run about low 20s as a percentage of revenue in a Single-Pay book. But as Roger went to, if you get low – you get 60-ish, low 60s yield, low 20s charge-offs you're going to get about 30% to 35% losses as a percentage of revenue.

[John Hecht:]

Okay, that's helpful very much.

[Don Gayhardt:]

But much higher earnings assets in…

[John Hecht:]

Yes, understand…

[Roger Dean:]

The average line is about $2,400 in Ontario with the average amount drawn about 1,800 and that compared to the average Single-Pay loan of about $600. So it’s meaningfully more money. And as far as the conversion to that question, I mean, I think we are largely converted at this point. We would just expect to convert new customers into the products so we’ll use the higher yielding Single-Pay. It's sort of an upfront underwriting exercise. And then once they take one or two of those loans successfully we then would offer the line of credit, and we think we’ll largely did migrate the existing portfolio in the third quarter.

[John Hecht:]

Okay. And then any comment, I assume this is flushing out a little bit of the competition. As the less scale market participants have a tough time here, any effects you see there in terms of customer activity at this point?

[Bill Baker:]

We are the only lender in the state that offers a line of credit in Canada so we do see advantages to that. We certainly have seen locations in Alberta, begin to close that provincial regulation has gone into place. And I think we see some of the smaller players in Canada struggle just with new regulations and that could be extended payment plans and then reduced rates, I mean, it does – it does flush some of them out. Although largely our large competitors, the one or two that we have there we have the majority of the market share. So I do think that the product is beneficial, I think the way that we're offering is beneficial. And this is actually ignited the online business which now accounts for about 50% of originations compared to just 5% or 6% a year ago. So as we’ve said before, we think the UK sort of runs five years ahead of U.S. on online adoption and financial transactions online, in Canada is kind of run five years behind U.S. But we are starting to see that catch fire and I think as we've validated over the last few years our ability to operate a very successful and profitable online business.

[Roger Dean:]

Yes, John. I think it's probably worth noting that we've got our confidence to do Ontario by testing early in the year in Windsor, in our Windsor stores. And the thing that – one of the things that relates to your question is as we saw – that the unique customers in our Windsor stores has not been growing and since we've converted, the number of unique customers in the Windsor stores are up, Bill, how much – up double digits.

[Bill Baker:]

Yes, I mean, I think so we started that process in February. So test of that is a few months ahead. A number of months ahead of the July launch, but just last month when we looked at Windsor just revenue was up 23% year-over-year. So it does get to the point that Don and Roger made, it does take a little time to work through the provision and get the revenue build because the loans are so much higher and the risk is so much better. You do start to see that revenue build over time and I think we will get year-over-year revenue growth despite the far lower yield.

[John Hecht:]

Okay. Appreciate the color. And then a final question a little bit higher levels that you guys talked about customer acquisition and marketing spend and obviously those were influenced in part by the migration in the quarter and you seem to have accomplish much of that. Any commentary on how we should think about those factors in the intermediate term?

[Bill Baker:]

Yes, I think this is Bill, I’ll let Don comment. Well, I mean, I think you'll see it tempered a bit. I mean, I think that – I think it's important to note we have absolute control of our marketing spend. I mean, there's not a dime that doesn't get spend as Don and Roger and I don't prove and we've got, again I think we've got a world-class marketing team. A lot of that spend was related to the new brands. And the reason to spend that much, an elevated cost per funded is to get the data, which really allows us to then model the credit risk and the acquisition models for a more sustainable brand launch which is exactly what we did. I think we've got that data. We're going to – we go back and we focus on credit risk particularly with Avío and temper the marketing spend a bit. And also make sure that we're focusing the right marketing dollars on the core business, which is more seasoned, more mature and returns a higher yield. So I think not only in the fourth quarter and again we're not getting guidance for next year. But I think you'll see that across the quarter and next year be tempered as a percentage of revenue certainly, in return not just cost per funded but as a percentage of revenue to more historic levels.

[John Hecht:]

Great, guys. Thanks very much.

[Roger Dean:]

Thanks John.

[Operator:]

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

[Moshe Ari Orenbuch:]

Great, thanks. You had mentioned that in couple of the states, I think you had mentioned Virginia and Tennessee you had kind of expanded credit lines. And maybe could you just elaborate a little bit on what you learned and how over what period of time that situation will normalize. And I’ve got a follow-up after that.

[Don Gayhardt:]

Yes, this is – I'll just give you a couple of highlight, and some of the details. So little bit of – we’ve been in Tennessee with a line of credit product for since they changed the state law there probably three years ago. What we did there was which we've done in some other places is just also increased credit lines to some of our better customers. As I mentioned that’s been, if you look at risk-adjusted revenue, we've seen improvements there but it does. It did come with some higher charge-offs and probably higher charge-offs, a little bit higher charge-offs than we had forecast. Virginia is just a new state, for us which we did in what five quarters now. So there it's just going through the process of the loan book building, the provision growth, the upfront provisioning and then just kind of seasoning of the book. So I would expect, it's probably I would say, middle of next year we'll see mid – but by the second quarter of next year, we'll see charge-offs in the Virginia book, moderate to where our line of credit book kind of runs in the rest of the U.S. And likewise some of the elevated charge-offs in Tennessee that will probably, I think that will come in a little sooner because there's just not a big percentage of the overall book there. So that's probably another quarter or so. So we would expect to see, we get into sort of and again we haven't done full bottoms up kind of budget for next year. But I would expect that we'll start to see provisioning, charge-offs rates on our line of credit book in the U.S. come back to kind of normal levels in 3Q or 4Q of next year. So its kind of a little while longer but not that much longer, a couple of quarters.

[Moshe Ari Orenbuch:]

Just as a follow-up with respect to that, I mean, when you think about kind of overall earnings levels, and I understand you haven't done your budget and certainly given guidance. But what does the sort of things that you can do kind of elsewhere in the P&L you talked a little bit about that advertising expense. But are there other things that you can do to kind of mitigate some of the impacts on the overall P&L for that period of two or three quarters?

[Don Gayhardt:]

Yes. So we're really want to do this with our operating folks but we have 424s or so in North America, I think the cost base there is somewhere in the $170 million range or something on an annual basis. So I think we talked about a lot I mean, our stores because we are as you convert to the multi-pay products, the line of credit product, the installment products, a lot of those customers on auto-pay where there were other – where it's ACH or debit transaction. So if you just as you’ve been in our stores on a regular basis over a period of time, the stores are just noticeably less busy, where the Single-Pay product customers are kind of have to come in every couple of weeks. It's just that dynamic, is just kind of different with these products. So we've done a lot of work to shift sort of the kind of repurpose the stores and the biggest, we see the biggest benefit of that is in the lead stores program. So our customer advocates are making calls and store managers and assistants, they are making calls to customers, we can approve online and setting up appointments when they come into the branches and Roger went through those numbers. And there’s still a lot of growth, there’s still a lot of runway left in that program. Now having said all that, we look at our store expenses, payroll expenses et cetera, they're up a little bit year-over-year. But there's some opportunities maybe there to sort of look at the scheduling and the hours – we just haven't and we’re going to be careful with that because I think customers appreciate that we are open a lot, we kind of open longer hours, we open earlier and close later than our competition we have 24 hours service in a lot of markets. So we’re going to be careful on how we do that. But there's a lot of – beyond that the contact centers. I think we've got a lot of efficiency there. We’ve really improve the technologies there, cloud based dialer solutions et cetera, that really helps the individual. If you look at the number of accounts that an individual collector can manage, the yield in those accounts, all of our collection metrics have improved really meaningfully. So we've been able to grow the business, have a lot of contact centers, take a look at all that. On the corporate side, the thing that you probably start to see is there are a lot of expenses in the kind of probably $4 million plus range that we have to incur as part of own public. That there were new expenses and this year we will – I don’t those are going to reduce but you won't see kind of year-over-year growth there. And we'll take a look in general at the rest of the P&L. We don't – what we've said and we're probably going to have to harvest a little more. we won't do as much new product development except – we spent a lot of time in 2017, 2018 building the Avío credit, building LendDirect in Canada, building Juo Loans brand in the UK. So some of that and the focus on 2018 operational is obviously that’s a tremendous opportunity. So it is not going to be as much new product work and associated IT credit modeling et cetera but will be doing around new products up in 2019 because we have a full pipeline of stuff to execute on.

[Moshe Ari Orenbuch:]

Got it.

[Operator:]

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

[Bob Napoli:]

Thank you very much. Just I mean, what is within the guidance in the fourth quarter. I think I guess its $0.49 to $0.53 of adjusted earnings. What is the interest expense and what is I mean, what are you looking at for 2019. How should we think about interest expense, in other words you haven't pay down but go ahead?

[Roger Dean:]

Yes, so we have duplicate interest, I mentioned a duplicate interest in Q3 plus the U.S. SPV facility goes away. So right now the interest expense for Q4, our expectation would be about something its little lower around $17 million.

[Bob Napoli:]

Okay.

[Roger Dean:]

$17 million to $17.1 million and then it is pretty easy to model going forward. The Ohio bonds obviously are easy to model and then the Canadian SPV facility. If you look at the relationship of that those loan balances to the Open-End loan book in Canada and just – and model that those balances going forward. But our interest expense probably stabilizes next year in the range of about $17.5 million a quarter.

[Bob Napoli:]

Okay. Thank you. And then what is the game plan now with the bank product over what timeframe and what should we expect?

[Roger Dean:]

So we’ve been sort of – we're kind of in the test loan phase. Just making sure from a system standpoint the underwriting stuff, the approvals, the funding, loan management, all that stuff kind of works. And we're going to run that out for I’d say a couple of more weeks before we begin to do mailings. I think we said it's going to be a prescreen direct mail offering in beginning to kind of be able to control credit. So you won't be able to just come to the website and apply. You'll have to have a reservation code that you get in the mail after we've done pre-credit screen preapproval, prequel as we call it. So now that would start to hit and ramp up in December. The way we expect to see the book build a lot. But with the RevShare and the way the sort of waterfall works as we said, we’ll get a lot of asset growth but don't expect to see any kind of meaningful earnings contribution in 2019. We don't think it's going to be dilutive. But we don't think it's going to be accretive in any different – as we’re looking at it right now. We're a little behind our time moments but not – we're talking about like weeks. We don't expect it to be – we expect to not to be accretive or dilutive to earnings will be – it will be accretive to the earning asset growth but those assets will be on MetaBank balance sheet, not on our balance sheet. But then in 2020, it should be really meaningfully accretive. And as I said, I think that’s probably will hopefully have some more – a little hesitant to sort of give a lot more color on it specifically. We actually kind of get it fully launched. But we should be fully launched with a couple of months under our belt by the time we report in the end of January and have some more color about the earnings contribution in 2019 and actually 2020 is part of kind of overall guidance.

[Bob Napoli:]

Okay. Thank you. Last question, a big picture question I'm not sure you're ready to answer it. The full year EPS for this year at $1.84 to $1.88 adjusted, looking at next year do you expect that to be meaningfully up from that level or without adding new products to provisions should normalize versus what we saw this quarter, other offsets any thoughts – any big picture thoughts you can give before you give your clear guidance next quarter?

[Roger Dean:]

Yes, I mean, I’ll try to be careful – other than, we absolutely think next year is going to have really meaningful earnings growth. Canada we mentioned it did 54 million and I would urge everybody to spend some time with – and we do give you segment by country down to adjusted EBITDA in the detailed release and in the Q. And so, if you look at Canada we said for the year it did $54 million, not exactly but probably $54 million adjusted EBITDA last year. It's going to do less than half of that this year. And that includes this year being a negative 3.4 for the quarter versus 12 million or something the quarter a year ago. So, I think we're going to get back to those levels that low, maybe even in the low teens from an operating and adjusted EBITDA per quarter in Canada. You run out a full year and that's going to happen 4Q and 1Q of 2019, 4Q this year and 1Q 2019. If you run that out for a full year that's a lot of earnings improvement just in Canada. The U.S. business again we're a little behind where we'd like to be with Avío. We’ve had charge-offs in the line of credit book are running a little higher than we thought. Everything else is running in good shape. CSL is – the charge offs weren't as low as we forecasted but they were better than last year. So, if you just run out the business even if charge-offs were the same level in the U.S. in 2019 as in 2018, you'll see a meaningful earnings improvement in the U.S. And then in UK as I mentioned we are working hard to find a solution there. Now that business is absent redress costs, will be a nice earnings contributor in the fourth quarter, and kind of a break-even in this quarter based on a provision build. But just a sequential revenue growth we're getting there and it's part of what if we can find a solution, the whole market is being impacted by all these redress claims. If we can find a solution there we have a business that is going to be a – it probably is a low double digit – in U.S. dollars a low-double digit contributor from an EBITDA standpoint if we can find a solution. But that solution is not in place yet. So that's a little speculative, but I think if you put all those together you can see your way to a really – a really strong positive 2019.

[Bob Napoli:]

Okay. Thank you Don appreciate it.

[Operator:]

Thank you. Next question comes from Vincent Caintic with Stephens.

[Vincent Caintic:]

Good morning guys. So, I want to focus on the 2018 EPS guidance and also what that implies for 2019. So, first off maybe if you could just give a retrospective here of the differences between your prior guidance and your updated guidance and what changed intra quarter. Understanding there's a lot of Canadian growth here, maybe if you can kind of parse out what changed and why you're thinking between what changed things.

[Roger Dean:]

Yeah, I think this is Roger. Good morning. Yeah, I think as I mentioned in my prepared remarks we missed our expectation by $17 million, $18 million for the quarter, two thirds or three quarters of that was with Canada and the combination in Canada was not just that the provisioning on the loan book but I also mentioned that our Single Pay balance was liquidated or converted almost $12 million of Single Pay balances. So the revenue that was – in the quarter the revenue was well below our expectations from that conversion and the provision was much higher. And then in the U.S. the mix was about $4 million relative to our expectations. That was partly loan growth because loan growth was higher sequentially than we expected and year-over-year. But also because as Don mentioned we missed, we didn't forecast the CSO net-charge off rates adequately either. So of that $4 million miss probably two thirds of it was the CSO net-charge off miss and the rest was loan growth.

[Vincent Caintic:]

Okay got it. And how much of that do you think persists from here going forward in terms of those trends.

[Roger Dean:]

I think, yeah, as I mentioned Q4, we expect Canada to rebound meaningfully in Q4, Q3 for Canada was in the $10 million range of contribution. And we expect – just to give you perspective on how fast we think it's going to rebound our current guidance would suggest that we can we'll rebound to that rate to that kind of quarterly run rate in the fourth quarter. And then I think it takes a little longer – the CSO will obviously adjust our forecast for the NCOs we already have. But also the open end net-charge off rates are higher in the U.S. and that's not going to – that won't improve that quickly. But probably as we move into the middle of next year those come back into the seasoned range as opposed to where they are today.

[Bill Baker:]

I mean if you just look at Canada, we're sensitive to the earnings impact and doing what we say we're going to do. But, I think if you just look at the loss in the quarter, I mean the majority of that actually came in July when we did it. I mean it does rebound very quickly and I think one option would have been to kind of grind through this over a quarter or two, which may have short term lessened the earnings impact. But I think long-term we're all going to be very happy that we put the focus and effort into the conversion.

[Don Gayhardt:]

Just, real quick you know we had $80 million of assets that represents roughly sequentially in Canada about – that Roger mentioned 9% provision rate on that. So you can do the math that's $8 million of provision build, allowance build there. If you – this we said this quarter will probably get $20 million of – so just the improvement in the reduction in that in that upfront provisioning is probably going to be in the $6 million range a little bit more than that, sequential quarters. The net-charge offs will come down as the book seasons. And then you just have revenue because it's a product in provision 9% in the first, when you make the loan if the product yields about 5% a month. So, it's a money loser. The day you make the loan the product is a money loser and it takes you kind of six weeks to a month and a half to have it sort of begin to contribute in the block.

[Vincent Caintic:]

Okay got it. That's very helpful. And touching on that point. So, you saw a lot of – so great growth in the Canadian line of credit. I know there's always tension between the growth rate and beating guidance and I'm just kind of wondering if you can take us through your kind of decision process when you see an opportunity like that and your decision process about taking that opportunity. I think you've had this sort of decisions in the past as well. And then also when you think about the dilution that that makes to 2018 guidance what sort of accretion should we expect in 2019 and then the pace of that accretion?

[Don Gayhardt:]

So I guess I'll give you a little bit answer, I was given the [indiscernible] we will see Canada adjusted EBITDA and our U.S. dollars for the year kind of in the mid-to-high 20s versus 54. So, kind of half, roughly half of last year. I am not, I don’t know if they are going to get all the way back to 54 for the full year next year. But it's a possibility because the snap back to a double-digit quarterly EBITDA, I mean Canada is much less seasonal because you don't have the tax refund issue that you have that distorts kind of 1Q and 2Q in the States. It is much more sort of level throughout, you do get some holiday borrowings and stuff, so 4Q is a little bit better. It's much more sort of evenly spread across the four quarters. So, as I said you've got, again you’re just doing the basic math I know you’ve got to whatever $14 million a quarter or something to get to back to EBITDA to where it was in 17. So, I don't think we quite get there in 1Q and 2Q. But I think we got a shot to get back there in the back half of 2019. But our guidance we're going to have really good, good earnings growth. And if you look at that really good earnings growth with a product that customers love it takes you – the regulatory risk around the Single Pay product is dramatically reduced. It’s from a competitive standpoint, it's something that most people from just from a capital standpoint I mean they don't need to put $140 million of loans out and to finance that. It really – there is only two or three companies in the market that can support that kind of an earning asset base. So, I think that the regulatory risk, competitive positioning and it is just the product that sell them in, the scale of the operations tipping the favor and tipping the balance of the market in favor of larger competitors, that stuff with all benefits us in 2019 meaningfully and positions us in the market there going forward in a much better place versus the Single Pay. As I mentioned it was our best – Single Pay is our best performing product for a long period of time, but that nothing lasts forever. And I think we've done a good job of putting the business on footing to really perform well for a long period of time up there. So, I think it's and look I will absolutely, I think it's a very fair criticism that we did a less than stellar job of explaining in our probably our July call, or even back into our April call what was going, the impact of this on sort of the near term. And then it accelerated faster than we thought, our people up there did a great job of customers et cetera and probably didn't lay it out for everybody as explicitly as we probably should have. And we will try not to make that mistake again.

[Vincent Caintic:]

Okay got it. Thanks so much guys.

[Operator:]

Thank you. And we have time for one more question and that comes and John Rowan with Janney.

[John Rowan:]

Good morning guys. Can you just remind me what you said about marketing spend in 2019 if you gave any guidance?

[Don Gayhardt:]

Yeah I think as Bill said he thinks that the growth rate is going to be muted relative – we won't see the same year-over-year growth in marketing spend in 2019 that we saw in 2018. I think at Q4 – we'll definitely as a percentage of revenue will be lower than Q3 and this was a big, this was a year where we spent on Avío launch. We spent a meaningful amount at a much elevated level in Canada in July when we launched Open-End. So we’re – that growth rate is going to be much, will be considerably lower as we move into 2019. But seasonally John I think it will be – the seasonal by quarter as a percentage – that way will behave similarly. But the full year growth or even the quarter-over-quarter and the full year growth rates will be much lower. We expect them to be much lower in 2019 than in 2018.

[Bill Baker:]

That's right. I don't accept the actual dollars to go down but I mean I think very flat would be – it is, so obviously the percentage of revenue that may come down a bit but as far as actually raw dollars are coming, I think the expectations are fairly flat budget would be accurate, we're still working through that as Don said there is a lot to do from a claim perspective. Those are the conversations we've had and that still leaves us plenty of budget to go grow the business and find the right customers. As Roger said I think some of the money that we put into a Avío and LendDirect was important to get the data to make those businesses scalable from a long-term perspective. So, you’re glad you have a higher cost of funding, you do some loans that you wouldn't do, long-term but you've got to have the data to build those models and I think we achieved that mission.

[John Rowan:]

Okay and then just quickly on the UK, Don I think you mentioned something about absent changes in the regulatory front. What changes would that be. Whether or not these claims compensation companies are going to be regulated and to what extent you're willing to incur the current operating environment to a certain extent to survive this issue and then get to a point where revenues are better given the exit of one of the major players in the market?

[Don Gayhardt:]

Yeah John, I'm going to be a little cautious on the comments as I – I don't want to speculate too much – there has been a lot of conversations going on. I just said we're really grateful the regulators have been giving us a lot of time to sort of I get – they understand the magnitude of the issue. And $4 million dollars in quarterly redress claims given the scale of operation is just not something that's sustainable. We're willing to kind of keep working on it for in the near term. But if they are as I said – I don’t know even – let me kind of define what the near term is but we're not going to buy this for another year or so. So it is going to be – and we're talking about weeks and months not quarters and years here. So, in terms of how much longer we can and we feel we can sort of let this keep going. So beyond that I'd really just like to leave at what's in the release and what we've always said in the script so far.

[John Rowan:]

Okay. Fair enough. Thank you.

[Operator:]

Thank you. And so that concludes the question-and-answer session. I would like to return the call back over to Mr. Don Gayhardt for any closing remarks.

[Don Gayhardt:]

Great. Thank you again. We appreciate everybody’s time and attention. And we'll look forward to talking to you again after the year-end. Thanks very much.

[Operator:]

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