Q3 2019 Earnings Call

Good morning, and welcome to the care Group Holdings third quarter 2019 conference call.

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Thank you and good morning, everyone. After market close yesterday evening. Your release results third quarter 2019, you may obtain a copy of our earnings release in the Investor section of our website at IR Doctorow Dot Com with me on todays call or care as President and Chief Executive Officer, Doggy Hart, Chief Operating Officer, Bill Baker, Chief Financial Officer Roger.

In the Chief Accounting Officer, Dave strategies. This call is being webcast will be archived on the Investor Relations section of our website before I turn the call over to Dawn I would like note that today's discussion will contain forward looking statements, which include but are not limited to our expectations regarding macro factors impacting the U.S. economy, and how those factors impact our cost.

First the timing and pace of transitioning customers to open in laws in British Columbia, I believe the JV as a competitive advantage over its competitors, our revised financial guidance for the full year in fourth quarter, 2019, and underlying assumption, California state level EBITDA contribution for 2020 unrelated expectations of total company earnings growth for 2000.

Funny, the impact to our customers and mobile app availability on Android platform to mobile devices, and the resulting impact on our business.

The strengths of our company and operational model.

Please refer to our press release RCC finally for more information on specific risk factors that could cause our actual results to differ materially statements made in today's call any forward looking statements. We make on this call are based on assumptions as of today and we undertake no obligation to update statements as a result, new information or future events. In addition to U.S. GAAP reporting report.

Certain financial measures that do not report to generally accepted accounting process.

We believe that these non-GAAP measures enhanced the understanding of our performance reconciliations between these GAAP non-GAAP measures are included in the tables found in our earnings release as noted on the earnings release, we have posted supplemental financial information on the investor portion of our website, but that would like to turn the call or the Dod.

Great. Thanks, Garen, thanks, everyone for joining us today.

Scott. This is Scott was an excellent third quarter and the continuation of good results I'm a matter.

Our adjusted net income nearly tripled year over year on strong loan portfolio grow them performance and operating expense discipline through the first three quarters.

2019, we have produced 10.8% revenue growth, 47.2% adjusted net income growth and 40% and a 40% increase in adjusted diluted earnings per share.

For the quarter, our Canadian business delivered 34, 3% revenue growth.

$15.3 million non-GAAP adjusted.

EBITDA versus a 3.4 million dollar adjusted EBITDA loss in the prior year quarter suffice to say that <unk> a year later, we're incredibly pleased with how the product transition has worked out of Canada. Our team in Canada has been extraordinary we once again demonstrate our ability to tackle product change on a large scale do going away that works.

For us in terms of.

Low volume and credit, while delivering great value and service to our customers.

Our U.S. business also continues to perform well.

6.2% revenue rose, 11.7% net revenue growth and 23.3% growth in adjusted EBITDA.

Part of your core.

We get to these results, we executed well remember key areas. So good growth in earning assets revenue and net earnings.

Overall credit quality was very solid quarterly net charge off rate of 16.4% versus 24.0, <unk> third quarter 2018.

Most notable improvement year over year.

What for Canadian Oh open ended <unk> charge off to Canadian open ended loans, where the quarterly rate was just under 25%, which continues to be better than our expectations.

Last month, we started to optimize our California saw the loan portfolios to be.

To be well positioned for the January one 2020 law change and this optimization is impacting our unsecured and secured installment loan growth.

We continue to believe the macroeconomic trends are positive for our customers in both Canada and the U.S. In addition to the net charge off rates that I just spoke about another important indicator is the rate at which our customers pure delinquent loans at least what these rates were essentially unchanged from the third quarter 2018, we remain very.

Discipline as we work to keep our cost per funded loan and loan vintage credit results, performing well and meeting or exceeding our expectations.

In Canada, we remain very focused on portfolio performance and growing and our growing share with them with our market leading open ended one product.

Q3, 2019 revenue was $60.2 million.

Unlike in the U.S. was the highest.

Third quarter in our history open ended balances stood at $237.3 million at September 32 doesn't like gene represented 82.8% of our total receivables in Canada.

71.6%.

At September 32018.

Based on success, we've had in Ontario, we began to slowing if he was the open any long product in British Columbia last month, I would expect to have qualifying single pay customers transition to open.

By the Middle of 2020, British Columbia represents 8.5% of total Canadian revenue in the third quarter, two doesn't like team and because of its different competitive dynamics versus Ontario.

Would you be more measured in BC transition no material revisions to the earnings earnings trajectory.

Juno opportunities, where we continue to invest I'm pleased with the progress Oh evolve finance and JV.

Revolvers are demand deposit or D.A. account sponsored by the public bank or Chicago that we introduced in March of 2019. This part of provides our customers. The full functionality. The bank account direct deposit customers paycheck debit card, you'll pay even optional overdraft protection. In addition to an FDIC insured account for their deposits.

We earn fees on account of current views are those customers who qualified overdraft protection.

So far we bought it almost $50 million over 30000, Nic cards are really good growth for new product.

As we discussed last quarter, we recently participated in the longer follow on and that's where I'm zigbee and online virtual least own platform, which part of fully diluted ownership and this private company to approximately 42% did he continues to perform well, particularly with key accounts, it's just wayfair well novo enter from.

Well there do you still small player, but growing like almost doubled or leasing volume and a growing category and we believe their online integration underwriting service capabilities give them a durable competitive advantage over competitors, who focus on brick and mortar retailers.

Overall, we see that we will have a very strong final quarter to your into wasn't great results for the full year you can sina release that were once again, raising our earnings guidance for full year 2000 might change what else 2020 guidance along with our fourth quarter earnings early next year.

Well a couple other key topics before turning it over to Roger.

In terms of regulation at the state level in California, we're preparing for pretty effective date Jan 20. Gen 120, 20 for maybe a 539 or a smaller portfolios will want all over the course of 2020 at 2020 more.

During the quarter, we saw small decline or California, unsecured and secured installment loan balances as we began to change the credit composition in the portfolio to reduce risk in 2020, and optimize portfolio cash flows and our.

For the trailing 12 months ended September Thirtyth 2019. These products represented 13% of our consolidated revenue.

All core portfolio positioning for the but this change is included in our 2019 updated guidance.

You said, a number of occasions, but it bears repeating for 2020, given the composition on installment.

A combination of installment portfolio, while growth in our single pay product and the elimination of variable costs associated with installment originations, we expect the California state level EBITDA contribution to 2020, but essentially on <unk> on point with 2019.

Of course at this point with the continuation of hurt macroeconomic trends, we'd expect it the rest of the U.S. and Canada will post healthy earnings growth next year. So we think overall, we're very well positioned for earnings growth in 2020.

A quick weren't at Meadowbank and bank relationships in general.

For almost 18 months of hard work by lot of people on our team we decided to direct our efforts elsewhere during the quarter. So we mutually agreed to terminate our partnership agreement with not a bag.

But during the quarter, we did enter into a new new agreement to offer analytics marketing and servicing support to another bag and look forward to discussing this range, but more in the near future.

So in summary, the first nine months it to does not have been very positive I think this quarter has once again, demonstrating the strength of our company and our operating model were strong and growing company with strong cash generation capabilities. We have the strongest omni channel model in the consumer finance industry, we continue to prove our ability to successfully navigate and rapidly adopted regulatory compare.

Due to changes across the markets, we serve and we continue to invest in our people processes and technologies to remain at the forefront of innovation and we use this innovation as well as our scale the benefit of our underbanked consumers and with that I'll turn it over to Roger [noise].

Thanks, Good morning, consolidated revenue for the quarter was 297.3 million up 10.3% compared with last year's third quarter.

Third quarter revenue in the U.S. was 237.1 million the highest in a in the third quarter in company history for the U.S.U.S. loan balances grew 5% to 444 million led by good growth are opening portfolios and Virginia in Tennessee.

Offset somewhat by California, California portfolio repositioning.

Adjusted EBITDA came in at 67.1 million, which was up 73.8% year over year, but most of US recall that Q3 last year was affected by what we what we expected to be in has turned out to be very successful product transition and market share expansion in Ontario, Canada.

Consolidated adjusted net income and adjusted EPS rose dramatically year over year.

That was a result of one candidate year over year success to healthy U.S., Aspen, earning U.S., earning asset growth and credit quality improvement three carefully managed expense growth.

For interest savings from last year's refinancing and matters utilization of our Canadian ABL facility and five opportunistic repurchases of our common shares.

That's an update on our share repurchase program. It was announced in April during the third quarter, we repurchased 1.9 million shares on the open market with an additional 700000 shares of open market repurchases in October through the end of the day yesterday.

In addition, we also purchased repurchase 2 million shares from NFL a related party in a private transaction at a 3% discount to the market price at the time.

In total we repurchased 4.9 million shares through yesterday that what we believed to be very attractive valuations.

At this point, we have $14.5 million remaining available repurchase was under the plan which is continuing.

Next I'll comment on advertising customer counts in cost for funded loan or keep you up before moving to one portfolio performance.

As a backdrop, it's important to note that there is a fundamental shift in the composition of our portfolio year over year that drives a meaningful change and advertising patterns and new customer counts, especially in Canada.

So all metrics on new customer counts are lower they're generally in line with our expectations and we're pleased we're pleased with new customer count.

Looking at new customer advertising stats, we added 168000, new customers. This quarter that is down about 16.8% from last year for nine months ended September Thirtyth, we acquired 438000, new customers and our same store capability added 31000, new customers in Q3.

Consolidated cost per funded loan was $96, that's down $7 or 6.7% year over year, breaking it down by country. A U.S. advertising was down 3.4 million and new customer counts were down 16% year over year for three reasons.

Well, we had a managed decrease and abele customer acquisition as we allow our new machine learning models from mature second we selectively reduced installment loan customer acquisition in California in advance of regulatory changes and third we had a regulatory change in Ohio.

Earlier, this year or that affected our customer acquisition in that state year over year.

With the U.S. reduction in new customer volume, especially from a vo U.S. cost for funded loan was down $3 year over year to $98.

Moving on to Canada, Canada advertising was down 1.5 million year over year almost entirely because Q3 2018 was elevated for the Ontario market transition and this years, there's more normalized.

Okay Canadian new customer accounts were down, but that's really up that's not really apples to apples or year over year, as a better comp or Canadian new customer counts were up sequentially versus Q2 this year by 6.4%.

And cost per funded loan and Canada was $84 with was down $28 from the same quarter year ago.

Next I'll spend a little time, covering overall loan growth and portfolio performance first a few highlights of the product level U.S. company owned unsecured installment loan balances declined 6.1 million or 3.7%.

Every year this was entirely due to a California portfolio optimization. The rest of the U.S. grew 6% year over year Canadian installment balance the shrank because if you expected mix shift to open end, so consolidated company owned unsecured and smaller balances decreased 5.7%.

Similarly, U.S. secured and so installment loan balances decline.

1.8% versus same quarter year ago, and again, that's entirely due to California portfolio optimization.

Putting excluding California, the title portfolio grew 10%, 2.5% year over year.

CFO loan balances were down slightly but you'll recall that the law change in Ohio, eliminating the FPSO model became effective April 27 this year.

So good growth in Texas, the replaces Ohio balances.

As expected single pay loan balances were affected by Canadian regulatory change and treated and transition to multi pay products Canadian single pay balances declined 2.8%, but similar to the last couple of quarters week. There was we had a.

Solid growth in U.S. single pay loan balances, which grew 4.1% year over year.

Moving on to loan loss reserves and credit quality, our consolidated net charge off rate improved over 300 over 350 basis points versus the third quarter, when 18 with all products with all products, improving except unsecured installment and single Pat.

The company unsecured installment net charge off rate rose year over year, but that's as we've discussed for the past several quarters.

Those rates those rate comparisons continue to be affected by mix shift away from Canada, and the effect of credit line increases and our unseasoned Vo portfolio.

Single pay net charge off rates rose year over year in Canada, and that's pretty much the fully phased in impact of Ontario extended payment plan rules that went into effect July one of 2018, U.S. single pay net charge off rates were flat year over year.

Our next a few comments on seasonal.

As you May know last week, the financial accounting standards Board voted to defer to January one 2023, the Cecil effective dates for company for companies to qualify under FCC rules as small reporting companies or Src fees.

Bureau qualifies as as an Src for this purpose and at this point, we will elect to defer seasonal adoption past January one or 2020.

Turning to our capital structure and liquidity, our total available liquidity position at the ended the quarter was approximately 105 million. This is comprised of one excess unrestricted cash of approximately 14 million us revolver capacity of 25 million and Canadian Canadian revolver capacity of over 7 million.

And Undrawn borrowing base availability in our Canadian SPD facility of 58 million.

Finally, I'll close with our outlook for the remainder of 2019.

Our revised guidance is revenue in the range of 1.14 or 5 billion to 1.150 billion.

Increase from prior guidance of 1.154 billion 1.1.

But no billion, because what the California and spot on repositioning as Don mentioned earlier.

Adjusted net income in the range of 125 million to 135 million, that's narrowing our prior guidance of 120 million to 135 million.

Adjusted EBITDA in the range of 260 million to 270 million an increase from prior guidance of 250 million to 265 million.

Adjusted diluted earnings per share in a range of $2.75 to $2.85 an increase from prior guidance of $2.55 to $2 at 80 cents and our RF and our adjusted.

Second income tax rate, we still expect to be in a range of 26% to 27%.

This concludes our prepared remarks from I'll now ask the operator to begin Tonight.

Thank you now beginning I assume then answer session.

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Okay.

The first question today comes from Bob Napoli with William Blair. Please go ahead.

Hi, Thank you and ER and good morning the.

Hi, good question on the so what what is the share count today, Roger suite has been hit it fully diluted share count with the acquisition. The purchases you made it looks like 43 million shares.

Correct.

Okay.

And.

And it just your thoughts I mean on returning capital and it's pretty aggressive or would you expect continued to return capital.

Next year, I guess, I mean, maybe not at the same level, but.

And is that kind of a long term strategy. It was your with your stock at this price.

Yes, I mean, Bob obviously, we view you're right we've been we've been.

Find a bunch back in and I don't think we've made any we have a good bit remaining in the current authorization.

Yeah I'll probably.

Pass on predicting what's the on.

The existing program and until we sort of get through our budgeting and capital planning for 2020, but I would expect when we give you guidance for for for 2020 early next year.

So we're talking about that thank you and then.

Don merger I know, you're going to give full outlook in 2020 next quarter, but I just you know with the growth you're seeing in Canada. I mean do you still what inning are you are and in the growth than you would expect to see that growth decelerate a lot into next year and can you grow the U.S.

Revenue I know you said you'd grow earnings would you be able to grow revenue in the U.S. next year with.

The changes in California.

Yeah, I mean, obviously is California is very helpful. But to answer the other question first in California is is it was a big secondary to state for us after after Texas.

So will you know.

I wouldn't that we would expect that as we said the earnings contribution California.

Should should be should be pretty solid and kind of right on top of what we're going to deliver 2019.

The topline uncomfortable will soften a little but there is that portfolio runs off.

The rest of the of the business in the stage should be should be is healthy engine remain pretty healthy, but but if you look at U.S. sort of third quarter earnings growth over the full year you can see some of that deceleration so but again, it's a little early to be.

To protect all the way out through the end of 2020, but but the rest of the.

Underlying trends in the business are in the states are really really healthy for Canada, certainly it's going to from a from a topline standpoint, we think we'll continue to see good numbers, we're going to we talked earlier in the year, we were hoping to.

Got to get our adjusted EBITDA in Canada. This is in us dollars.

To bounce back from from 26 million last year, and we thought if we had a good year, we could get close to 50. It looks like we're going to be in the mid to high Fiftys for for Canada. So really really big year, we would expect earnings growth to be good in Canada next year, but again, it's just not going to go we're talking adults, it's not a double again.

Next year, but it should be it should be pretty solid. So you put in a non California, U.S. plus category together and I think that makes for a pretty good let's kind of got the mixed are pretty good year, and then California, depending on the you know the exact timing of the above what happens in the portfolio there.

And potential new products there.

That's what we're kind of working on planning for right now.

And just last question any what I will send a regulatory front are you are you watching today, where where do you see a.

Things that need to attention or.

I mean I take it from a from a I think as well you can we go through the through the bigger states that we're in now I think that that will I think Arizona will be will be.

We'll see some legislative and potentially ballot initiative.

Action there Nextera, that's probably the biggest thing were.

No that we're looking at right now in terms of big contributions from from USAID and Canada.

I think.

For the most part.

The product transition there.

The regulatory picks it looks like it looks pretty good infat and on the the kind of legacy single Bay, We may see some some movement is back in places like Alberto from the put in place more restrictive loans over the past couple of years.

Thank you appreciate it.

The next question today comes from Moshe Orenbuch of Credit Suisse. Please go ahead.

Great. Thanks, I guess for starters should you you John you alluded to this new bank relationship.

I would like it was more advisory and balance sheet oriented could you just maybe flesh that out a little bit.

Yeah, you know Moshe I. It's it is I think you just have to sort of taken for what we said it's a it's a arrays. When we provide we provide the obviously the bank makes a lot and will provide.

Underwriting and marketing and servicing.

Work to the bank.

As tends to south to make that load.

As it were.

Yes, we just thought we'd rather sort of limited that and.

Once we sort of have something Hudson out in the marketplace will will.

Both in terms of what the agreement says and what the product.

Structure is going we can be a little more little more definitive about it.

Okay and does that.

Yes, it does that preclude you from any other types of relationships or is it just something that store, but no. It does not because it does not preclude us from other other relationships.

And we as I should make it we do have a lot of bank relationships right already in terms of.

Debit processing, the merchant processing side of things and a CHF. Obviously, we have bank partners that are behind the card products both are up plus.

No reloadable card and the revolve product the DTA product, we talked about with Republicans Chicago. So we've got a number of of current bank relationships and we're always looking in those areas.

For for for growth and good partners as well.

Right.

And it looked like a lot of that yields on on quite a number of your products were up is that something that's just a lag because the rise in rates in the past or is there pricing action and how should we think about that is going to 20 twond.

It would only be mix.

The the California portfolio with the repositioning or has it didn't grow.

And it's it's the lowest yielding.

But it's the lowest fielding of the unsecured installment products.

So that would have some impact on a mix shift would have some impact on unsecured installment yields.

And the Oh, we didn't make any pricing, Jeff it's all its all mix and timing.

Got you okay. Thanks very much.

Your next question today comes from John .

Jefferies. Please go ahead.

Morning, guys. Thanks, very much for taking my questions.

Congratulations on a good quarter first one is just thinking I know you're not going to give specific guidance next year until next quarter, but just thinking about.

Some of the developments and migrations in some of the Big States like California puts kind of the product emphasis that you're going through how do we think about yet and it's a little bit of a follow up from the last question for Moshe how do we think about how that mix shift will affect product margins and yields and so forth on a consulting.

Basis next year.

So I guess is you know its.

Obviously, the California installment portfolio is a big part of the the overall unsecured portfolio.

So you'll see that.

Again absent any any any new products in California, you'll see the the balance has come down and the overall yields on our installment portfolio will go up just because of the other way that that transition as John It's some of that will will also go into the the secured solve it.

See the same you'll you'll see the same effect on the title book, because California is yield as much as quite a bit lower than there are titles, basically, Arizona, and California, and the title in California yields, but quite a bit less than Arizona.

But I think I think otherwise still is is it something I guess should see no theres not a lot of we don't have any sort of meaningful.

New States, we continue to see really solid growth in states, where we've gone into in the past couple of years. We've seen good growth. This year, we expect that to continue but yes that did the California step aside I don't think yields we like what I expect in the yields on the and the and the the earnings.

The earnings by division yields as portfolio yields to be that same.

Portfolio should grow and we should see see see good earnings contribution growth from those seats as well.

I know as I mentioned, Canada.

We are you going as you're going to finished the year from an adjusted EBITDA standpoint in the in the in the mid Fiftys at least in May be higher you should continue to see really solid margins and earnings growth in Canada as well.

Okay. Thanks, and then turning to credit I could see good good year over year credit trends, Don you mentioned.

In your remarks something about the.

Proven curing delinquent loans and I'm wondering if you could just give us an update on.

Kind of the overall credit environment and what you guys are doing from a from a strategic or execution perspective to improve the Uh huh.

I guess curing and manage delinquency trends.

I think what I'm thinking as we looked at if you look at at the that obviously the delinquency rates were good the chart. The net charge off rates were really good for the quarter, but if you sort of unpacked that and you look at.

On what goes what goes delinquent and the rate at which those not only.

Loads ultimately cure.

The rate at which those cure is really important inflection folks will say what are the roll rates when something goes from the zero to 15 and rolled into the 16 to 30 bucket and 31 to the 60 bucket how does that what are the what are those trends look like that those are.

That's really good yeah that that's that's it.

As as as good a kind of light data as you can get on on the health of our consumers, we think and I said as I said those numbers both in the U.S. and Canada does limit those those rates a cure rates the roll rates were sort of spot on where they were in the third quarter last year, as we think thats, a really healthy selling.

If you look at our the rate our approval rates they are actually kind of down a little bit year over year, and that's us Canada kind of across the board, but if you've got to be one pack that is a question to you is it the other customers as the is it credit quality the of the new customers degrading or is is it something we're doing and it's very much.

Much of the latter were were again bills bill in the marketing folks we haven't discussion every month and a lot of that discussion is they're talking to us about business that we maybe you know kind of left on the table, but that's where we're trying to be really disciplined about the credit of the new quality in the new customers, but also the.

The acquisition costs there so.

Net net I think we're we're still a bit more.

If you look at our internal credit metrics were bit higher than we were.

Year ago, but I think thats, that's showing up in the overall results.

Okay and then the final question, turning a little bit to expenses I know you guys talked about I guess.

More productive in marketing and then let's marketing demands in certain geographies, how do we think about.

Your your your goals and targets for marketing expenses next year given that you.

Youve grown fairly.

Aggressively in certain markets with with the less marketing than you had a year ago and what are your would it what are kinda demands and strategic objectives next year in that regard.

<unk>.

Yes, Hi, Phil I think we look at it monthly so I mean, it really does depend on what the market looks like what the cost for fund it looks like with the credit looks like and I think thats going to continue to.

To be the case me I think we'll continue to be disciplined oh, right with capping a lot of things.

I think like for like we could have a lower cost for front, but we continue to test different channels and try to expand thing so.

I think it'll be pretty similar to this year on the percent of revenue, but again I think if we see opportunities we will spend more and I think if we see efficiencies we're disciplined enough to have to lead a little bit on the table as well, so I think thats going to be very similar strategy.

Obviously this I think the overall I'd add market that are in our little color or the world is is really healthy. We're just not seeing the competitive side of things is really good we're not seeing.

And large large companies or our new companies at raising lots and lots of money that go out and embark on big brand building and and advertising campaigns as sort of scale their business up it just isn't that's more in sort of payments and prime credit and bank account products and that kind of we're just not at all.

End of the world, but less than the subprime lending part of the world.

The AD market is really rational and and healthy and were I think this that we probably you know netting that'd be talk for a marketing people, they're saying, where we have we're there. They are there opportunities that are that they are more opportunities that we can probably get after in.

In a way that keeps cost were funded and vintage credit performance in line.

Great guys, thanks very much.

The next question today comes from Vincent Kim with Stephens. Please go ahead.

Hey, Thanks, good morning, guys.

So first just a I guess another follow up on.

If one yeah, but on the so appreciate the comments about the California, EBITDA contribution to expectation that it should be unchanged and.

2020 versus 2019 and just.

Wondering what sort of assumptions are in there. So let's say if you are shrinking maybe have a provision benefit but.

If you have.

Hey, you're able to transition those customers and you have growth, there, where where it sets EBITDA unchanged just kind of wondering maybe whats baked in there or maybe both scenarios kind of get you to the same situation.

Yeah, I think our base case that we've been referring to.

It's Roger good morning.

Our base case, we've been referring to basically has a run off of a big installment book with upward with allowance release to your point.

Is that book wrote road Rolls off.

The contribution to net revenue it theres still some of that book left by the end of the year, but most of it.

5% of it will amortize over over the course of of 2020 with an outside contribution because we really are you don't have any losses on new loans or new customer and then we're going to pick up some single pay volume.

And our base case thinking of this we're not we're not the single pay.

Customer pick up not not a moonshot.

But you're going to pick them up and you know if it doesn't take much single pay.

To make to replace a lot of installment so and then there's a lot of cost to go way Vince I mean weve. It we there's a lot of variable costs associated with the especially unsecured book.

In California, whether it's whether it's obviously marketing that's that's where most of the marketing spend is was.

Theres data cost, it's the most expensive product to underwrite a from a data cost perspective, there's definite financed merchant processing fees the customers predominantly pay.

With card.

Debit cards for that product. So once you take out all the variable costs and there's just collection and servicing chose another it's a big component. Those are that's a that's yes, that's a longer term loan. So it's a it's a more complex servicing operations to support that as well. So what's your thinking I mean, if if we end up their replacement products.

They are on the unsecured installment sided apart from the single pay side, you'll feel you'll see some of those costs come back in but you'll also see the the topline and I don't it's not our.

To the extent, we're able to the fiber placements there I think those products from a credit standpoint will perform in line, it's not like starting I wouldn't be said, we're starting up a greenfield stayed where youre going to see very high AD spend in very high credit cost early on as you build book and wait for that book to.

Just to kind of season, I think it'll be a little different dynamic in California, but thats not that the last part of it I just like but is not included in the comments were making about EBITDA being being flat year over year.

Okay got you so kind of what do you think about 2020, that's going to be some adjustments, but it kind of sets up for that's that should be a good run rate into 2021, So it's kind of like an even.

Sure Yeah, Yeah yeah.

Yeah, and we've said 2021 more it will do is dependent upon.

And some some replacement products and.

Quite frankly, not speculate on what California markets going to look like over time, you get to 2021.

Right that makes sense. Okay. We think we think history would suggest will be a lot less competition.

Right.

So that makes a lot of high. Thank you I guess broadly just the bank partnerships just kind of wanting to get an update on the.

The progress the enthusiasm on that when we can expect more out how how much.

Appetite there is for that and also kind of relate to lead but.

Has the I guess regulatory environment or political environment had.

And then determinant.

Appetite from your discussions with bank partners. Thanks.

Got you know answer the last part of it I mean, there a lot of as just the we have a lot of bank partnerships for a lot of products and services now there are a lot of of.

Folks across our industry and across marketplace lending in general.

The have a lot of bank really relationship so.

I think that it's not in the discussions we've had.

So it's I don't believe Theres, a big impact from from.

Political regulatory environment on those on those on those conversations.

I think we're you know.

It's early in the morning here, so maybe our enthusiasm doesn't doesn't come all the way through the phone here.

Oh, no there are a little more kept pace, but.

You know, we're we're across all our businesses I think we're we're enthusiastic about what we're seeing and as you know regulatory changes always out there. It's always been part of this business for and I've been in it so.

Go ahead dating myself, but going on 30 years and it's always part of what what what is in is in the landscape in what you're you're planning for and and.

Kind of kind of.

Building your business around so everybody every business has different businesses that this different risks and people have product obsolescence and and international issues to worry about et cetera, and trade et cetera, we don't have those like that and we have regulatory issues that we have always had to deal with but I think weve physician our business construction business.

To be responsive to that kind of stuff and that includes some of the banks up and and so we're going we love. The bank partners. We have now across a bunch of different things not just not just lending so.

And we're looking forward to.

Renewing those and hopefully expanding those relationships next year.

Perfect very helpful. Thanks, so much guys.

Yes.

The next question today comes from John Rowan with Janney Montgomery Scott. Please go ahead good morning, guys.

Got it.

I think bill is the most enthusiastic of all you guys on the phone I just have to set up.

[laughter], if he had a benjie creelan et cetera.

[laughter].

Okay I just want to think about something very broadly as we go into next year.

Yes, my right your flow chairs around 15 million today talking about right.

Okay.

More than 14 right. Okay. So you are 14 million inflow, which is I don't know.

A little over $200 million worth of public float right and how much money are you going to you said you're going to 80, some odd percent of the California bucket is going to amortize next year right I mean.

Can you remind me again, what cash flow you're expecting to come in just in 2020 off of the California Buck.

I think it's John I think it's between you look at that book, obviously, a lot of its going to pay off we're gonna yet and we'll continue to get get.

Get get interest on on on the good the stuff. Its current so we'll get well get interest on the current book will yet pay offs and then Neil you met out sort of the charge off if we do all that math together next year it looks like on that buckets, it's roughly $130 million.

Cash flow between between fees and interest and and payoffs and principal paydowns.

Okay. So that's a lot of here going a little bit point, it's what do you get a little bit more in 2021, as well, but I know everybody at 85% of total pay off in 2020, 215% I think that's probably that's probably not right yep yep.

The issue I'm, having is kind of fundamentally understanding what you're going to do with the cash right. I mean, he can't buy back stock because you basically will buy back almost the entire flowed right.

You just don't have the flow to buy it back at me ensure you can buyback.

Blocks from your private equity investors. If you wanted to continue down that route but what other uses of cash do you have other than squeezing the flow of what's a relatively thin flow to begin with.

Wide opportunities you have to repay debt are there any call provisions and some of the bonds that are out I just want to understand you know short of the money just sitting here in the balance sheet, where you're going to doing that.

Well I mean, we just took some for start we have we have no asset backed debt, we have our Canadian ABL facility.

That that we can pay down doesn't have any sort of prepayments et cetera.

We can always do open market repurchases of the bonds or non callable.

Until.

2021, maybe.

And then would you call him at half the one plus hap coupon, which would be one of four something.

But we can we can do open market repurchases of those.

For that.

And then there we've got our existing business, which is really helping them in Canada is a really healthy business.

We're evaluating potentially maybe opening what we've got to lend direct brand up there, which has been and we have 12 of those stores opened which are just offer the the line of credit product in a in kind of a destined share sit down environment. Its alone office environment, It's not a service counter environment like our cash money brand.

Wow.

Our speed cash rapid cash brands in the state we've actually open we're piloting some kind of pop up stores in shopping malls.

In that brand. So you know the Canadian business is really healthy and retail expansion there looks really attractive.

And we haven't been very active in the M&A markets lot of it has just been the the valuations of we think have been sort of not not.

For private sellers haven't been been did all that great I'm going to maybe that will start to change we're going to be really disciplined and try to be really opportunistic there.

And then maybe is a great platform. We've continued to invest in that platform. We have begun we don't have any sort of special rights to buy that business, so, but but it is because of the continued to grow and these capital will you know, we're we love the management team that we love the path there on and that's another place we could deploy some.

Some some investment capital so.

Yes. Its said we want to be I think the last thing we want to do is get really rigid about and and so.

So this is exactly what we're going to do because we just don't know what what opportunities are going to be out there. It is great and we do a lot of scale discussions internally with our team about you know we've got we've California is disappointing we don't know the outcome. There I don't think is good for consumers.

But you know this is you know we gotta, we got to.

It's not as that we don't have have we've got good people did proudest of technologies and we have a lot of capital. So we'll go out and figure out great ways to keep growing the business with that capital.

Okay, you mentioned repurchase bonds in the open market I, just the bonterra below par for not mistaken.

It wouldn't that be and one of your one of the private guys and had some trouble with as I mean, when the rating agencies consider that strategic default.

I have not had not at the levels that we're talking about.

As we understand it I mean, they do if it's the other there's there were times when they did but that's one.

But people bought bonds back in the 40 billion or not I mean, our budgets rating in the high Eightys Hot. So again this doesn't try to lots and lots thing thats like a super liquid active market, but it's not not the levels. We're talking about partnership and then last just with the termination of them at a deal I mean is there.

And you have any rights would have to pay them, even just pay termination fee or do you have any rights to even litigate to try to get back some of the fees that you put into that product. I mean is it really just them not up holding their ended the bargain to get that product up and roll out in rolling I mean, I know there was a manager and change average seem to stop everything just curious your at evaluated.

You know any of those options on your end.

Now you know what it was the discussions were met or will it we're always amicable I mean, a disappointing that you know it ended up where it is and I think we did everything when I ran both contractually and and just from a from a business standpoint.

You know again things change and people change and managing you said leadership changes and you know I think we can sit here and prior spilt milk and and break a bunch of stuff or we can go out and keep looking for ways to grow the business. I think we you know and continue to find good partner. So I think we've chosen put our energies.

In the latter I'm not worried about you know what met it did or Didnt do and that's you know that that's a good bank of the good people I just did it didn't work out but will you know we're up.

And it sounds like Dobell check here, but now we're moving on [laughter] through and we feel good about where we are.

Okay last question Roger I think you had some comment about 2020 earnings being higher than that higher than 20, I can I wasn't sure about that and really get it written down quite fast enough you just repeat what you said in that vein.

I'm, sorry, 2020, I think you've made a comment about 2020 earnings outlook.

No I mean, I think we would we obviously want to earlier question, we talked a lot about California over the rest of business we expect.

Everything other than California to grow next year, it's all healthy.

At the outset outsized growth in Canada.

The asset balances the average loan balances are already there.

As we as we exit this year. So yes, I think we are we feel good about the prospects for healthy earnings growth in 2020, but as Tom said earlier, we're working through all of our plans and our budgets and everything right now and you've got operating leverage continues to be healthy and across the business you've seen that and the results.

In this quarter and that's to continue.

And then you're going to get benefit of a full year of of all the.

But from S&P when you get the benefit of the of all the repurchases, but the open market repurchase them.

The one off deal we did with up a fell that'll that'll factor into the share count calculations are as well next year. So what you're gonna see I think forgetting the essence written the the the weighted share count calculations, you will see good earnings growth in.

In dollars, which will translate it get into little bit better better EPS growth given the share count reduction.

Okay, all right. Thanks, guys.

Your next question is a follow up from Bob Napoli of William Blair. Please go ahead.

Hi.

Just wanted to ask about the revolve product and what the potential is for that over the next several years.

Seems like it has some some good traction.

Yeah, Hi, Bob It's Bill I mean, I think we agree.

We think there's a lot of opportunity. We currently only offer the product within our our branches.

Think we want to continue to to optimize it and get a little bit more data, but we think expanding the channels is is the big opportunity.

'cause the uptake has been more impressive than we thought the product features are strong.

So as we think about finding a retail partner with a couple of thousand.

Four walls I think that could be.

Things that could be really really impressed I think that the bigger thing with revolve is getting customers on direct deposit when you think about the benefit to the customer and also profitability. It just it really extends the life of the account and that's what we're really focused on which lets take some time to do but it really does expand the feature and functionality. The card. So it's certainly something we're going to talk about next year expanding.

Beyond and whether that's direct to consumer or different channels with retail partners and I think we're going to look at all of that.

How many of those I guess 31000 cards or whatever what do you have a percentage or when you are adding customers. How many do you get on what percent do you get on direct deposit.

Yes, I mean, how are you I think I didnt, how many states right now.

We offer in all of the locations that okay.

Yes.

Yes, we don't offering Canada, just yet, but I think it's probably a little early to give the exact percentage because we're still it's still growing we think about a customer who signed up for direct deposit you often times can take.

A couple of paychex without the come through just depending on the company's policy. So I think it's probably a little early to give you a number there, but I think we're happy with it and I think customers see a clear benefit and it is different than prepaid. They do see it is a a checklist checking account and I think they utilize it a bit different as well. So we can probably give you better start to just give us a quarter to date.

Having mature a little bit.

And then just on on Zigbee as said is that business I mean is the outlook for that business to become profitable.

In the next year or two or when it where does that business stand from a profitability perspective.

Yes, I mean, you can see Bob This is Don I was we restart accounted for that in the equity method. This quarter you can see the.

Operating loss, there as well within our numbers I think the managements plans and expectations that are obviously I believe is as you know board members that company, our that that business is going to keep growing but it and it should be a business that is the sometime into into in 2020.

Breaks even in starts to its got a fairly expensive.

Our debt capital structure and the company continues to grow said balance where how quickly can you internally foreign capital do you go and get more capital.

To support the growth and we tend to bring down the cost of the.

The on the liability side of the balance sheet, but it's a it's a small growing company with a fairly expensive right.

Right side of the balance sheet and I think they're very focused on we're helping them focus on on bringing down the of the cost of liabilities and but there are various ways to kind of kind of go about that but we would expect that business with what would make some money overall next year.

And and really turn really really solidly pop profitable in 2021.

And you compare that business to the progressive businesses that.

Well I mean.

It's like making very myself to.

Now that you've got I'm, not going to get the football analogy, if I'm not going to compromise up and Tom Brady here, but.

Thats you know it's not that me Progressive is you know the it isn't is we are in the same industry. They're a very successful very very large company really successful company I think everybody that industry some level expires aspires to be progressive so.

Yeah, right now were a fraction of their size I do think that thing we have that we focus a lot of that business or that the management team focuses on a lot is is that it is a at almost entirely online platform.

And that's a very different animal then managing a large storefront and a bunch of storefront relationship because the customer online is essentially coming directly to us as opposed to having you know a salesperson somebody in the store as kind of the middle of the transaction. So that adds an element of.

Operational complexity and those risks fares and there's and frankly, there's there can be issues, whether the sales person is motivated to took kind of closed the sale.

And maybe you're not getting 100%.

Great customer provided information and your your models may have to sort of adjust for that kind of stuff. So I think Sydney again is very focused on the online side of things only and that's somewhat unique in that in that into the world.

Thank you appreciate it.

Yes.

This concludes our question and answer session Oh Pardon me. There is another question that did come in.

Next question today comes from Hugh Miller of Buckingham. Please go ahead.

Hi, Thanks for taking my questions.

Good morning, So good morning learning so I guess, assuming that you are successful at some point and potentially creating a substitute product with the bank in California can you just give us a sense of kind of how we should think about the startup process for that type of initiative. You know how long is the testing phase how long does it take the kind of start to originate product and really ramp that port.

Folio. If you can just give us a feel of kind of how that process might go to be very helpful.

Yes.

This is Don we're just it's it's I think we're going to leave our comments as a as as we kind of read them out there. It's just too early in the.

I do have a signed agreement we're working hard.

You know, we're really pleased with the the conversations we're having but at this sort of be just sort of the you know.

In any way kind of definitive about when where how that's going to going to roll out I think it's just it's just too early so.

Give give us a little time kick to keep working on animal when we had something that when we feel like we can give you a better outlook will get benefits. It's just that were not went out there today.

Sure completely understand thank you very much of the time.

This concludes our question and answer session I would like to turn the conference back over to Mr., Don do you have for any closing remarks.

Great. Thanks, everybody for joining us today, and we will look forward to talking to you again.

I'm going into January .

That.

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