Q2 2020 CURO Group Holdings Corp Earnings Call
[music] good morning, and welcome to the crew group Holdings second.
Our 2020 conference call.
All participants will be in listen only mode.
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Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then to be.
Please note. This event is being recorded I would now like turn the conference over to not Kidding Investor Relations for Carroll. Please go ahead.
Thank you and good morning, everyone. After market close yesterday Kirill released results for the second quarter 2020, which are available on Investor section of our website at <unk> Dot Com with me on today's call, our carols, President and Chief Executive Officer, Don Gayheart, Chief Operating Officer, Phil Baker Chief.
Financial Officer, Roger Dean and Chief Accounting Officer, Dave Strano.
This call is being webcast will be archived on the investor section of our website <unk>.
Before I turn the call overtime I like to note. The today's discussion will contain forward looking statements based on that business environment. As we currently see it as such it does include certain risks and uncertainty.
Please refer to our press release issued last night and our forms 10-K. Thank you 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. We make on this call are based on assumptions as of today and we undertake no obligation to update the state.
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 enhanced the understanding of our performance reconciliations between these GAAP and non-GAAP measures are included in the tables found yes.
Today's press release with that I'd like to turn call over to John.
Great.
Thanks, Matt Good morning, Thank you for joining our call Tonight.
Okay, Great you remain healthy and say if there are managing as well as possible.
Before we get our second quarter update worn administrative no.
Given the rapid changes in our business, resulting from recent events warmed to provide you look some slides focus some key weekly and monthly metrics really tell our story from the second quarter.
Well be referencing this presentation in our remarks, and you can find it only events and presentations section of our IR website.
As we speak today on August 4th we continue to face.
Very uncertain public health economic outlooks, I will try our best to explain.
Confluence of these developments is having an impact on our business.
Helping economic fun, when we last spoken or we may there were some signs that the worst assays or at least what we had hoped once the war Saes health crisis in certain parts of the country past.
However virus insurgent many parts of the U.S. suggested the brought in accidents endemic are likely to be felt for some card.
I said then they were business people are not doctors from the current trends and certainly put that point.
Well relative basis, our neighbors in Canada could be showing better and the U.S. in terms of managing the virus. We think that helps explain stronger performance again on a relative basis and our U.S. business.
As discussed in our last earnings call three investor updates during the second quarter, we create a customer care program in response to covert lighting.
For the end of last week, we provided payment really.
The 12% of our active customers, including more than $4 million in principle and interest waivers. In addition, we also weighed over $4 million on Cds from a turned items and for cashing over 30000 stimulus checks at no cost a lot of a payment assistance request has tapered off some minimal levels since peaking in mid April we.
Remain dedicated to assisting our customers in managing their finances.
For our frontline employees, we continue to adhere to enhance cleaning and protection protocols for all of our stores consistent with these policies were temporary temporarily closed the number of stores for a limited amount of par for suspected or confirmed infections, which affected our total store volumes.
Well pay supplements to support full time employees working reduced hours no furloughs or layoffs, we effectively maintained full employment in the U.S. and Canada during second quarter.
Most of our contact center or corporate support employees, we continue to work remotely as we evaluate best practices in timelines for returning to the office.
Priority is to keep our valued employees, writing and in place to serve more customers as demand improves.
On the social front, we're also operating in complicated towards.
Likewise matter movement, and social Justice protests have brought to the forefront maybe lost longstanding issues and challenges and response, we're taking a proactive stance to support our customers and employees. Some preliminary actions included recognizing the June team holiday from employees and making a contribution.
Thurgood Marshall College funds, which are white scholarships mentoring and career supports the students attending historically black colleges and universities.
They have more permanent a comprehensive plan the dresses diversity and inclusion.
We've also formed a diverse inclusion council comprise employee representatives on the U.S. in Canada and across all company functions.
The council sort of all employees for the goal of incorporating best practices throughout organization.
Well focus on promoting diversey inclusion and a quality.
Port our employees serve our customers to engage with our communities fully implementing these plans may take some time more determined.
Based on the <unk>, our internal feedback, we're very optimistic of your foster real improvement within our company and make a positive impact in the community something Sir.
Turning to Q2 financial results.
Earning supplement duck summarizes the trends that drove our financial results.
As we said before our customers entered March and historically good.
Actual condition employment levels and wage growth for our customers were record highs and they benefited from the normal federal income tax refund season in the U.S.
Uncovered 19 hit in mid March block has limited spending options after April lag unemployment supplements and stimulus bridge the gap financially.
Overall these measures had the effect of reducing loan demand increasing loan repayments significantly reducing delinquencies and improving credit quality in the second half of the quarter.
The charts, our company presentation illustrate these dynamics pretty clearly.
As a result or manage loan balances declined by 20.9% from the first quarter, a 27.5% year over year.
By comparison sequential quarterly loan balances increased 10%.
Second quarter 2000 my team.
Offsetting the impact lower loan volume in loan demand on our financial results has been unprecedented improvement and credit quality.
Compared to mid March levels early stage delinquencies, which we define as one of the 30 days late increased by approximately 30% picking on April 12.
However at quarter end early stage delinquencies were approximately 30% below that say mid March level.
Total past due loans peaked at over 20% minimal as of April 12, which was up 12% increase from the same time in 2019.
Through the weekend in August 1st early stage delinquencies are down 35% versus the same period last year.
I'm sorry.
Call last quarter I've been in the small dollar lending industry for quite some time and this is my fourth experience Marins you can business through an economic downtime.
Well the scenario.
Scenarios on like anything I've seen before my experience subprime underbanked consumers have consistently trying to greater ability to manage credit as measured by the relative change in their delinquency and charge offs theater during an economic downturn than prime and near Prime customers.
Well, we buy stimulus our customers demonstrate similar pattern of financial responsibility in second quarter.
Behavior of our customers choose pandemic emphasize the value of our omni channel platform.
Any investments we've made.
To allow for seamless transition from our store to digital channels and the U.S., 66%.
Total transactions occurred online during the second quarter 2020, compared to 57% in the first quarter and this trend held through July.
In Canada Armani adoption has lagged the U.S.
We saw moved to online, but 35% of transactions conducted online for the second core versus 23% in the first quarter and they got mix shift held through July.
Regarding our loan portfolio as a brief update our relationship with stride bag, which we believe provides an important competitive advantage.
Right, thank licenses, our underwriting origination and servicing platforms to generate online installment loans <unk>.
He is offering ones and 10 states today, and we expect to another nine states to go live by the end of the third quarter.
In Q2 balances in revenues related to this relationship were immaterial due to the low demand that broadly affected the rest of our business, but that said, we remain optimistic about the future growth contribution problems product.
Moving to our second quarter piano results for the quarter ended June 30, we posted revenue declined to 30.9% primarily due to covert 19 impact on demand as well as the year over year impact of the California regularly regulatory change it went into effect of the started this year.
Excluding the impact of our California installment loans revenue declined 28.3% versus New York a quarter. So obviously covered 19 was by far the primary driver.
Adjusted EBITDA declined just $2.6 million or 4.8%.
Well net revenue decline.
$20.5 million year over year, it was offset by $17.5 million and cost reductions, what's Roger will cover in more detail.
Adjusted diluted earnings per share grew 1.9% 53 cents per share for the quarter.
Geographically I'll start with Canada, where the year over year performance continues to stand out despite cobot headwinds.
In Canada revenue declined 16.7% versus the prior year quarter entirely due to lower demand from the single pay product as a result of cobot King.
Our open end book in Canada declined only 3.5% sequentially and was up 5.8% from June 2000 biking.
Revenue for this product was up 14% over the comparable pure a year ago.
Year over year growth reflects the 120 basis point improvement and the net charge off rate, which increased candidate second quarter, adjusted EBITDA $16 million, 37.6% year over year.
We counted in many of the same macro trends played out as in the U.S. That's confirmed cases have stayed low.
The U.S. has spiked.
This is up Canadian businesses reopen at a more consistent pace kind of Ontario mood and just stage three of its provincial reopening plan on July 17, which permitted the reopening of all work places and initiated steps towards relaxing restrictions.
Filling up the U.S. can manage cobot in a way that brings per capita infection hospitalization rates in line with Canada. Obviously this will help our business, but it will also helped to reduce the unease uncertainty suffer in so many are experiencing in the U.S.
In the U.S. <unk> impact to cover 19 was more pronounced revenue down 34.6% from the prior.
Our adjusted EBITDA up $6.9 million or 16.5%.
They're just to cover it impacts U.S. comps were affected by the run off of our California installment portfolios.
Excluding California revenue decline year over year by 30.6%.
Last person the U.S. rose 80 basis points year over year rapes comparisons were affected by the significant decline.
In a our balances during this years Q2, Roger will talk more about that in a minute.
Turning to our 43% ownership of catapult, which is an online virtual at least on business.
Merrily serves online retailers, it's leasing volumes benefited dramatically from the shift online shopping during the pandemic.
During the I've covered.
Oh, posting record weekly origination volumes at higher approval rates stay at home consumer shop online.
And is prime and near Prime on financing providers tighten credit and drove more customers catapult.
For the end of June catapult originated approximately $100 million on leases compared to just $30 million for the first half of 2019.
And even with this outsize growth credit trends have continued to improve allowed catapult terming profitable through the first six months 2020.
We pick up our sure catapults income or two month lag. So we expect that its strong earnings trend will contribute considerably to our earnings in the back half of 20 Twond.
Roger will highlight our very strong liquidity position, while we have a fair amount of caution around the economic environment. We are actively evaluating a number of M&A and investment opportunities that are focused around our key growth areas in Canada and cards as well as perhaps adding to our ownership position in cattle.
I'll turn it actually regulatory developments in the U.S.
July 7th to see a P.D. rescinded the mandatory underwriting provisions of the 2017 see if you've you see a P.D. rule, however to see if you'd be did not we send were all to the payment provisions of the final 2017.
That said the final 2017 rule is currently state as a result in an industry legal challenge. So we cannot predict when it's pain to provisions will ultimately go into effect.
Overall, we're very pleased to see these rules finalizing a confident we can just our customer payment practices to comply with the rules will not materially impacting our financial results.
As we said before we think the first step in addressing the economic crisis is solving health crisis based on what we know today, so can accurately predicted duration or severity of the pandemic and its impact on businesses and communities.
In the health economic and political factors together, we're not in a position today to offer a specific guidance or estimates for future performance. However, as we did in Q2, we plan to provide business updates as we move through the quarter on page 11 of our supplemental investor presentation, highlighting the trends on certain seems that we think will affect the rest of 20 twond.
Okay and into 2021.
In summary, we ended Q2 2020 successfully navigating the many challenges associated with the pandemic.
I'll close by expressing my profound gratitude chore over 3900 dedicated employees, who continue to serve our customers day in day out regardless of the challenges they face.
We firmly believe that the strength of our company lies in our people and our culture I've never been more proud of our employees, but I am today.
We're working hard to meet the challenges of covert 19, while continuing to care for our people.
And our customers.
That I will turn it over to Roger.
Thanks, Don and good morning.
As Don mentioned earlier consolidated revenue for the quarter was $182.5 million down 30.9% compared with last years second quarter.
You asked loan balances in revenue decreased 42.7% and 34.6% respectively year over year, primarily due to the going back a couple of it and some additional pressure from the run off the California installment portfolios.
Canada loan balances decreased 4.4%, reflecting a year over year $21 million decline in single pay balances from cope with my team impacts offset by a 12.7 million dollar increase in opening balances in Canada.
Consolidated adjusted EBITDA came in at $51.1 million down $2.6 million or 4.8%.
That's revenue declines were almost completely offset by lower provision for loan losses and cost reductions.
Consolidated adjusted net income declined 9.3 person.
Well adjusted earnings per share increased 1.9% year over year on a lower share count from share repurchases in the second half of last year.
Bob mentioned to keep macro drivers of RPL and balance sheet performance earlier, I'm going to expand on that just a bit.
[noise] first demand and loan volume.
Page four of our Duck recaps the weekly trends through last week indexed to the weekend in March 7th.
Application volume Troughed in mid May when it was down nearly 70%.
On an index basis since that time application volumes have returned steadily to nearly 120% of what we experienced pre Toby.
And loan balances have begun to grow more modestly week to week.
However, we would normally expect application volume at this time of year.
To be double what we see in early March seasonally.
We also tightened underwriting in early March with approval rates less than half the normal rates.
As we move through July we selectively loosen credit criteria, particularly for existing customers.
But approval rates are still lower than a year ago due to the relative quality of the application volume recently.
The combination of these factors has resulted in gradually increasing origination volumes as you can say I'm on page four the duck and some sequential weekly loan growth.
But volumes remain historically low.
Secondly, I'll talk about delinquency in credit trends.
Page five of our earnings supplement highlights weekly delinquency trends by bucket.
After the Spike that ended the week of April 12.
Delinquency levels have improved each week and at the end of last week were down over 30% versus the same period, a year ago and at historic lows.
Our consolidated net charge off rate declined 150 basis points year over year.
With a 240 basis point improvement in Canada.
Partially offset by a plot NCR rate in U.S.
However, as we described in a lot of detailed in our release and in DNA.
Net charge off comps are affected primarily by the relative sequential loan growth impact on the denominator in the net charge off rate calculation.
Third I'll talk about a provision for loan losses.
Unprecedented second quarter sequential decline in loan balances affected our loan loss provisioning and the calculation of net charge off rates as I mentioned the second to go.
The loan loss provision is a function of the calculated required loan loss allowance coverage, but the ended the period after replenishing net charge offs.
Our allowance coverage rates declined modestly from the levels, we saw after our Q1 allowance build.
Consolidated allowance coverage was 16.7% at the end of Q2 versus 17.6% at the end of first quarter.
The impact of dramatically lower delinquencies was offset <unk> qualitatively <unk>.
In our allowance evaluation by continued high levels of uncertainty for employment trends and expiring unemployment supplements as well as the impact of modified loans.
Under our customer care program, we modified loans totaling about 4.5% of balances as of June Thirtyth 2020.
And the resulting application of troubled debt restructuring or TDR accounting.
Increased our allowance like for like by about $5.5 million.
Notwithstanding these changes affecting the allowance coverage percentage.
Loan balances shrink, 20.9% for $129.7 million sequentially from the first quarter of 2020.
As a result, permitting expense declined $61.3 million worth 54.7% year over year.
Fourth and finally I'll talk about our operating expense reductions as discussed last quarter. We took actions in mid March to reduce operating expenses across several major categories, including advertising variable compensation for use on hiring suspension of merit increases and savings from work from home initiatives.
On a combined basis, we previously guided that these actions would drive $11 million to $13 million of quarterly cost reductions.
The actual year over year reduction was $14.2 million. This quarter. So we came in a little better than expected.
We intend to keep these expense measures in place until business volumes and operations begin to return to normal.
We ended the quarter with $269 million in cash and $363 million of liquidity, including Undrawn capacity on our revolving credit facilities.
Of course access to the revolving lines depends on continued collateral performance for the ABL facilities and covenant compliance.
In addition on July 31st we closed participation for an additional $100 million of commitments for our U.S.S.P.D. facility, which also lowered the blended borrowing cost.
To 8.15% until we reach the draw level above 145.5 million.
As we moved through the second half 2020, we believe we are well positioned to deploy this capital can meet the needs of our customers. We served through responsible lending well also filling the gaps created by other lenders exiting the market are limiting access to credit.
And as Tom mentioned, we continue to pursue strategic investments in partnerships in the U.S. in Canada that will provide long term growth opportunities.
In summary, and what it's been a very challenging an unprecedented environment.
Year to date, we have generated a little over $230 million and free cash flow from operations after considering loan funding and capital expenditures.
We suspended our share repurchase program early in the pandemic and we also temporarily suspended all non essential capital expenditures, including planned Canadian Lin direct store expansion.
Based on second quarter, net income and our strong cash flows.
Our board of directors declared a quarterly dividend of five and a half since per share to be paid on August 24th to shareholders of record as of August 13th.
We will continue to evaluate quarterly dividends as we move through 2020.
We believe that our strong liquidity position will allow us to manage the near term impacts of covered 19.
Well positioning us for market and strategic opportunities as we move closer to the eventual recovery.
This concludes our prepared remarks, and when I ask the operator to begin culinary.
Well now begin the question and answer session to ask a question you May Press Star then one on your touched on.
If you are using a speakerphone please pick up your handset before passing the key.
So let's try your question. Please press Star then Q.
This time, a pause momentarily to assemble the roster.
So first question today comes from Bob Napoli of William Blair. Please go ahead.
Thank you and good morning.
I appreciate all the information and the charts.
Bond Dodger.
They'll get the top you guys.
Likewise.
I guess.
The I mean at the very tricky times as your.
Starting to see a great thin loans, obviously, you had your balance sheet looks looks really really good with all that cash, but how are you balancing or how do you feel about the he have the the stimulus that is out there that is certainly been helpful. You, we may or may not have an extension of somebody.
The stimulus.
And I know volumes are way down from a year ago, but but that's starting to increase how or what is your confidence I guess in the quality of the credit and the performance of those loans.
Given the tricky environment that we're in and I mean that is it early enough that you've seen any trend didnt first payment defaults from a the ramp up you saw a month ago.
Hey, just any color on thoughts on how you're managing the return to loan growth in this environment.
[noise] [laughter], maybe Bob I'll start and what it like Roger and as Bill will chime in I would also I guess I would.
Maybe I'm not to argue the premise for the question, but were working <unk> phrases like ramp up I don't think quite I'm sure hit on a relative basis, a bit more but I think we're still you know I think we're proceeding with the Oh and overwhelming amount of caution, yeah, we and and and all the data.
And it's not uniform across you know all the portfolios, it's been a by state by product candidate et cetera.
But but certainly we're seeing you know just just extraordinarily low I guess I'd like our Jamie Diamond say that somebody that people use the word unprecedented.
It's it's not warranted, but this next door to what's going on now the use of the word unprecedented [laughter] yeah.
There really appropriate so we're seeing an unprecedented levels of low levels.
First payment defaults and then that's obviously rolling into you know zero to Verizon as the as you know obviously nothing to become a charge off as if it isn't in the you know if it isn't going to want to 30 buckets. So yeah. We're just saying very very low numbers continues very low numbers. There. So I would also you know we we have.
They immediately made in a lot of adjustments to our to our scoring models and added additional verification steps, including what we call pending a pending processing product where people have to actually speak to to one of our customer service associates before alone can be.
For additional verification for a welcome to close so but I think if you look at that the across the portfolio's I'm a little different on auto, but then but because that's the you know borrow up or pay down kind of product, but but so the for the most of the portfolio you're looking at right now about half. The this is here today about half of the portfolio given its short duration was a rig.
Good.
Most coded Oh and those numbers are you know the credit performance and those numbers it seemed to be a really really strong. So what additional stimulus may do for that both obviously, there's U.S., but actual stimulus Canadian and whether its direct cash payments or additional unemployment small business support.
Et cetera, it's it's hard to say so that's I think why we continue to be.
Cautious around I, we would expect something we'll get past I'm in a way of additional stepping up the news. This morning in U.S. at least seems a little more optimistic little more promising about something like that happens. We do believe that no one of the consumer needs to be needs to be some additional stem is it kind of you know that's a build to bridge to you know maybe it's not completely postcode.
It environment at least so back to school, what's happened in a real way you know the positive test rates in the U.S. There your deposit that's right in the U.S. is 8%, it's 1% in Canada, but he just look at those kinds of numbers and you can bend the curve and those kinds of numbers to get the U.S. look more like Canada, I think we'll be will be in pretty good shape, but it will take.
Some additional sitting on it but I, we feel really good about the way our models are behaving.
And given the adjustments, we've made including as a city addition, and some additional verification.
Okay.
Thank you then just a follow up question.
On a capital you talked about that's some of the card products catapult and on the M&A, what what area what Oh.
How closely I mean, how seriously are you looking or you are you know what's the amount of cash you have on your balance sheet are you very confident in in making an investment or at this point and what areas are what is that what are the priorities, but are the highest priority investments.
You would make diamond yeah, I mean, all I don't.
Like I say that that I mean, we're we are evaluating seriously you know.
A.
A number of opportunities right now.
It's obviously just devaluation, it's not you know, it's it's quite a different exercise them.
It was pretty coated depending on the kind of business in the trajectory than it was all of the kind of products that have et cetera. So it's a it's a it's a good to it so it's a lot harder.
So sort of evaluate M&A deals.
I am just [noise].
On the phone up in my office sorry, Bob.
Right.
<unk>.
You do either them.
[laughter] it brings like once a month bedtime anyway.
So.
But I think you know where I guess, it's hard to say how confident are we didn't we'll be able to actually.
Just to get something done it just you know it's hard to say obviously some of that it depends on you need a willing buyer and willing seller and I think we are.
Very interested buyer across the <unk> cards, kinda catapult weren't interested buyer, whether or not we're able to treat getting it done it's hard to say, but but we are you know like they take taking advantage of the the capital position, we have and you know what we consider to be areas of real strategic importance for us.
Great. Thank you appreciate it.
[noise] Kinda next question comes from Moshe Orenbuch of Credit Suisse. Please go ahead.
Great. Thanks, and John maybe just building on on Bob's question, a little you talked about managing.
No smoothed <unk> liquidity position through could 19, it'd be it feels like and I'm not making light of this at all but it feels like the coke in 19, it's been a source of liquidity rather than.
You should liquidity and I guess.
No.
Maybe just stay I mean is there do you do you have like a negotiated that price at which you can invest in catapult like it just feels like.
This is an environment, where you probably have you know strength relative to some others, who who need that liquidity and I guess I'm wondering if there's any way to.
Kind of expand on elastic answer.
Yeah.
Okay Thats of course, it's rather than kind of we don't we don't have a specific price we don't have any options or anything like that so, let's all kind of or one off a investment so.
But you know just somebody said I think from set for a couple of calls nail or in a row, we did something we'd like that you except one can figure out you know or how to invest more at the right. We would consider to be a good valuation we'd like the opportunity. It's a really good management team.
Doing doing really good things and obviously had been a real beneficiary of work from home shopper. So.
But I'd read we don't have any sort of set formula. We can just kinda kind of step into from a from a solid investment standpoint.
Okay.
In terms of you know on on the loan growth side and you know I appreciate that volumes are down a lot.
From a year ago. He just talk a little bit about you know what normally goes on seasonally around now are we beginning that back to school season are you seeing you know.
You know consumers in certain parts of the country and perhaps yeah, it's not too much piling on just talk about you mentioned a bunch of additional states.
For the stride Bank partnership.
And could that you don't have an impact this year kind of trying to expand the.
Bring the volume back closer to historic levels.
Good morning, Moshe This bill I hope, you're well picked up the first question.
Yeah, Historically, you would see no write about this time. So late July early August our you'd see demand go up as is.
It had to your point is different across the country, Oh, sorry, as far as and when school start, but you know you see people go back and its buying clothes, and and shoes and launch boxes, and obviously any child care. They had during the summer that goes away. So there's just a real need for for cash and so you would typically if you loan balances under the new customers.
The increase this time of year I think what we're seeing now again, it's just if it really beginning stage when we'd see that but it is very different across the country. Some some school districts are fully going back to school. Some are split between virtual. So I think we are certainly seen we are seeing some demand come back although it's it.
Certainly much different and I think the other relevant coin is that it changes you know who is we monitor various school districts and and states that we operate in.
Plans have changed you know two or three times already so we remain really flexible.
No. The branches are really nice source to monitor and get the news you know and pretty short order from our folks so but we would expect next season continue see some increases although it may be maybe somewhat muted from the historical back to school and to the point Don made earlier, it's going to be very depend.
And on what kind of stimulus package gets passed.
And that May help drive more demand depending on what it is worth it gets passed or what kind of keep it more.
I'm not curve that's on the trajectory at its on.
Hi, far stride goes I mean, we're continue to be really excited about it and.
Terrific partner.
We kind of brought these states, we're taking a cautious approach one because we want to make sure that the credit lines up with the models and that the back is happy with what how it's performing.
And also just given the the unprecedented times and we don't want would be really calculated and and let the vintages see that little bit, but we do think it's an interesting opportunity and we're already in the 10 states around there's already a couple of states that we never operated at the core. So if we think about market share and you know TRID being truly additive to the portfolio that that's a really exciting compelling.
And some of the new states that will be launching with stride are also brand new states for so I think this year. We've said, it's not going to trying to be a big contributor, but we do you think that it's you know it positions us very well for next year and again. The last point is that the early results that were seeing are very much in line with what we have poor casket was stronger than expected from.
Credit perspective.
Great. Thanks very much.
Your next question comes from Vincent Camtek at Stephens. Please go ahead.
Okay. Thanks, Good morning, Thanks for taking my question.
Question.
Good morning, it's purging to see be a application counts are now a higher then treat coded but maybe if you could talk about the quality of applications in more detail just kind of curious to see.
The discrepancy between the application counts, you're getting versus the approvals counts and it broadly and investor questions, we get frequently but.
Do we need to see the stimulus and unemployment benefits and see the usual spike in loan.
See you recession.
Hey, Dave this is not limiting they'll take the second half of the question and let bill.
Talk about the application stuff I like the quality application question part of the question and I think on the stimulus. It's just it's.
You know, it's it's it's really hard to tell you know based upon.
I said some of it relates to just how does the what what did the nature of additional spend that's what I would say again and that holds true <unk>, Canada is a third of our business almost so no. We obviously watch that stuff closely as well that be the need for additional seemed those doesn't seem as pronounced there although unemployment.
<unk> unemployment Kennedy typically runs about.
2% higher.
There were 200 basis points higher or said another way than the U.S. number so.
So they are unemployment numbers are still above the U.S.. Although that's typically what you would see although both have kind of trended down although Canada, let's say, it's continuing to trend down while U.S., maybe kinda flatlining based upon a competing claims on there's a came out so trying to sort of gauge what additional stimulus or I mean, it's it seems like every hour.
Our that's another article whats out about whats you know the progress and the negotiations and what's on the table and what's not et cetera, So I would say.
Broadly speaking, we think you probably need you know that'd be the if if if that it's additional stimulus.
At the.
50 tapering off of stimulus.
Is consistent it kinda concurrent with an increased level decreased level of unemployment.
And those kind of one together then we think that will eventually lead to additional demand that's about a quality that we can oh, well weekend, where we can make you know really good loans, but you know how that is actually going to happen.
It's just you know, it's really hard to predict that but I think it is a.
Longer term matter, absolutely I think additional stimulus, it's clearly shown and it's not just off and as you know the kind of credit card balances are off you know I saw the $720 billion since since March so it's across you know consumer credit.
And in general, but Oh, gosh, I think I take it should work out for several long haul how we kind of get from pointed a point b in the U.S. and Canada is it's really hard to sort of predict so.
Oh, you're talking with application quality.
Yeah, Good morning Vincent.
So interesting is it would be start to see applications grow and and start to losing some of the the models to pre cobot ranges you know there's certainly some component and this is also very channel specific though we think about affiliate or direct it is a little different but we do see a bit of a dropdown component, where some people may be dropping out.
The credit box about a lower rates are higher quality or because they are tightening their until they come in car credit box, but there's also a component as well where.
Some of the scores like for like aren't as high as what we saw a pre code, which is why you know even at and some testing as we've gone back to pre cobot model levels. The application approval rate is not not the same but so there's ways to work on it I think we think it's encouraging because it's sort of proves that the models are are still working and appears.
Still rank ordering as we would expect so but that said, even though some of their some some lower scores obviously the the credit performance is really really good. So we continue to monitor in test and I think in some and some geography that some state we are back to pre covered levels and even over the last last.
Few weeks, we've gotten much closer lines there are getting much closer if not on top of each other so I think somebody that is sorting out, but and then lastly, I would say as you know even if some of the lower.
<unk> the need for credit right now is its really unprecedented it's difficult for you know the customers to go.
Actually access it elsewhere, so remaining in good standing at making their payments. So they have availability is more important to ever and I think that is absolutely showing up in the numbers.
Okay, great. Thank you for that second question.
On our books specifically tremendous.
You're seeing there at 250% year over year I'm just wondering when you think about next couple of years, how you plan to develop mechanical business going forward.
And then also when I think about your 43% ownership it doesn't seem like cheerios stock.
Alex that ownership or the revenue growth potential.
Catapults generating so just wanting to get your thoughts on that thank you.
So it's obviously you know the company I mean were investor in the company, we try to or help or from a strategic standpoint, where we can't I think we've done a lot of good work there.
But you know specifically it kinda developing it yeah. It's you know, it's really a matter of food for the entire board of Oh go kind of hope to which is which includes awesome or some some some VC investors to kind of a walk on that I do think that.
Or the obvious everybody's been really pleased with the way. The team. There has has been able to to sign on some more high quality merchants and particularly the so the focus which dates back you know a couple of years now so really focusing on the online channels and some of the really good good technology.
She's they had to integrate across some of these different platforms is really really paid off a lot.
I think that the.
You know they yeah I think the businesses is on a trajectory where it you know from a or just front earnings progression operating leverage kind of the key metrics that you know it it ought to start the.
Perform but not on I think it is performing in a way where you know the the if he does it sort of like originations and how that rolls into gross revenue and how what operating margins look like enough in that sector that the business is going to it was good is going to perform at or close to what what are kind of comparable Matt.
Interest across Oh, the industry. So I think that's that's the good news and then from there I think it's a you know there's some we've kind of cross and I think that's sort of two threshold just kind of gone one step function in terms of of scaling up the business enough to get it to be profitable and get it too to to be consistently profitable and then as I think there's another step.
Function of scale. It gets you to sort of the consistent you know operating margins that you would see in some of the bigger companies in the industry. I think we're sort of you know what's the clearly made step one and I think we're sort of you know I would say go getting up the curve I'm actually metaphors here, but getting up the curve on step too.
Thanks very much.
The next question comes from John Rowan Janney. Please go ahead.
Good morning, guys.
Good morning, John.
That's it just the labor the kind of couple kinda pulp point, but if you do bring up your ownership when do you have to start consolidating the results.
Got it consolidates its not just a you know it's not just of 50.1 kind of question.
It's a lot of other things and I don't I wouldn't anticipate that for the foreseeable future that that regardless of how much we own than it would be something we would we would consolidate we'll try to.
Make sure that that you know that industrials have a a you know an appropriate amount of information whether it's presented on a consolidated basis or whether it's presented in some you know something in a table form and the and the footnote. Some people are going to full appreciation for them for the things are performance of the business or not yeah, we'll probably start.
Some of that in and in our third quarter reported.
Okay, and then I think they can just obviously makes it hard when they're department to measure huh.
Okay looking towards the fall there any ballot initiatives that you're you're watching.
Yeah, I'm not not not that that I'm, particularly aware of I think there were couple that were surface I know, Arizona was talking about the while but that kind of went by the by I think at our I don't believe in our state should have any.
Any real or are we doing a real volume that setting any concerns somewhat from a balance standpoint.
Okay, and just lastly, whats Roger what's the current Patrick to use.
I'm, sorry, I asked John <unk>, what's the correct tax rate to use.
Oh go in court for the rest of year will still be in that range of 25% to 27%. They are rate. This quarter was affected by several one time at one time items boat.
Opens in Canada, mostly in Canada, but 25 to 27 still the right run rate.
Okay. Thank you.
Thanks, Doug.
Our next question comes from Tom talked of Jefferies. Please go ahead.
Yeah. Thanks, guys. Good morning, glad everybody's well yep.
Most of my questions have been asked first one is that yet you look at the delinquency trends and you guys give a lot of great information out in the slides.
It looks like the early stage delinquencies have been flat you call. It flattish call. It since early June but the later stage buckets look like Theres modestly declining since that period. So your roll rates are pretty positive do you guys.
Have a sense for whats driving better roll rates and how do you think when you'll get the delinquency levels. How do you think about what that portends for call. It second half.
Charge off cadence.
Yeah, and then maybe even any thoughts into early next year.
Good morning, John It's bill appear well.
So I think your analysis is right on the I think the early stage delinquencies are first pay defaults have been very consistent science.
Since early June, but as you look through the different buckets that they continue to so what does go delinquent is carrying out you know all time right. So even if people roll into the wander 30 day bucket you know.
So many of them are carrying so many more than we've ever seen before and as continued really through every every bucket. In fact, we did a full vintage analysis across you know anything even things that were originated over a year ago as Don mentioned, 50% of what you have it's been originated during hope it but you didn't even customers that have been with us for a year all of it.
If you look better than they ever have so it's really across the board performance and I know, obviously, we think that.
The stimulus plays a role and it although it's really difficult to you know to.
Put that down to a number to determine what it is but as I said before some of this is anecdotal that we hear from customers assist that other sources of.
Liquidity are just not available so having their account open active and being able to actually get money is really important. So they know they're very focused on on keeping up and then and keeping availability in their life credit and things like that so I think it's hard to that looks like going forward. I mean, I think everybody is being to see what that looks like.
From a stimulus perspective.
And to the extent it if it doesn't get gone or its at a lower level.
You start you certainly may see like what could go up at that but that also would drive demand as well. So it's a little bit you know, it's a little bit of a back and forth there, but as far as what we see today across the whole.
Portfolio and all the buckets it looks very very healthy and lastly, I would say is that when you have fewer accounts and delinquency your ability to contact customers through all the various means we have our collections.
A recovery folks I mean, they're just even that much more effective because you've got capacity to talk with those customers and work with them and get them on payment plan. So.
Great encouraging from that perspective.
And John It's Roger Good morning, I think diversification is also driving Canada is just performing.
Unbelievably well as dawn mentioned earlier because of one because they are you know because they made it to the pandemic butter and are getting back to work and <unk> you know, Ontario opened completely last week I think for two weeks ago.
And so and that that combined with the payment protection insurance in Canada. You know, it's just in Canada is performing well.
Oh, yeah unbelievable levels from a credit perspective, and at this point appears to be way less sensitive.
You know two or two to a stimulus and things like that.
So I think that provides a good balance you know because some of the uncertainty in the U.S.
Okay. So you can part of it seems you grapple with then geographical sorry, and then you can back to Bill I mean, some some of the performance guide gets better maybe more focused interaction between the customers is that yes, it's sort of an act the oh.
Opera take away.
I think that's right as Don mentioned that has prepared remarks, we haven't carload are laid off single person. So our team about full capacity and when you just have you know.
Fewer customers rolling into delinquency that team's ability to contact them and work on a payment plan or some kind of arrangement to get them back into good standing is just just increase there's just there's just less inventory that they they have to work. So the effectiveness of penetration rate from titration rights are all really sort of off the charts right now it's all of those folks although working.
Finally, our are engaged Dan and try to help customers each day.
Okay, and then yes, I mean, just maxes out of curiosity than anything else I mean, how about foreign yeah.
You know it's down we would have expected that because of the regulatory changes in California that went into effect this year.
What degree has the current environment impacted that migration relative to what you would have expected yeah. They before it all went down.
Yeah, It's it's it's interesting gone up but the.
But.
The California portfolio performance by almost every metric.
Has been almost exactly as we expected it through goes through the through the first half of the here both in terms of.
Run off and in terms of credit performance I think it's because it's you know so it was a longer term product was very manageable.
On a relative basis, very manageable payments or am I think it's I I. It's one of <unk> I would say it has performed pretty much exactly as we almost nearly exactly as we expected it to as we've moved through the first out figure.
Okay, and then last question and I think it's question's been asked in a variety of way because people talking about catapult support, but you're sitting on about it liquidity.
In cash and that yeah, you talked about the difficulty to try to do a deal in this type of environment that all make sense, but I guess, one where I'm wondering if you're at a point in time, we start to feel comfortable in a position to try to deploy that excess cash and liquidity.
Would you look to be bar I made this would you prioritize maybe distressed branch based lenders differently than you might prioritize.
Call that you Didnt type type of vendors like how to alter how do we think about how you're looking at those opportunities going forward given the success of some of your recent investments.
Yeah, John it's it's a really good question I think probably.
I think we talked about this a lot come up from have come a retail standpoint.
There you know there just aren't that many people that they have to operate the kind of real keep retail, but we do a large format stores.
10 to 12 Windows lots assigned lots of parking 2500 square foot branches versus kind of.
Let me say kind of middle of a block minimal in the center branches. So doesn't mean that there aren't opportunities out there, but what they're there you know there's.
I'm guessing it in the in the industry today in the states and believe token correctly. There's probably you know maybe 12000 stores that are still what are in a small dollar thinks they're somewhere in that in that neighborhood and I would guess you're probably looking at at a number. That's you know sub 15% to 20% of those that are that didn't look and feel.
Like.
Our kind of Kinda branch network. So its not its not a big thought a big universe, but it doesn't mean that there aren't some out there.
Like Canada, you know probably given that more of the business is still branch base. Then you look at daily we get those stats on the relative amount of business that's and.
Or online versus branch based they probably have a little bit more appetite in certain markets, maybe some of the world War markets et cetera in Canada that ER to do some sense of branch acquisition I think more so we'd be focused on as I said cards and within Canada to the extent, there's other other online opportunities.
They're going to focus the probably more tilted to sort of as Sid you said kind of fintech opportunities as opposed to branch opportunity, but we're not you know we're not we're not we're not willing anything out on on that front.
Hi.
Thanks, guys very much the color.
Okay, great. Thanks.
This concludes our question and answer session I would like to turn the conference back over to Mr., Don Gayheart for any closing remarks.
Great. Thanks, everybody up please stay safe and stay healthy and we'll talk to you again after we finish up our third quarter. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.