Q2 2022 CURO Group Holdings Corp Earnings Call
[music].
Good day and welcome to the cure of Holdings second quarter 2022 conference call.
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I'd now like to turn the conference over to Tomorrow, So curios Chief Accounting Officer. Please go ahead.
Thank you and good afternoon, everyone. After the market closed today <unk> released its results for the second quarter 2022, which are available on the investors section of our website at IR Dot Euro dotcom.
With me on today's call are curious Chief Executive Officer, John J, Hart, and Chief Financial Officer, Roger Dean.
Before I turn the call over to Don I'd like to note that today's discussion will contain forward looking statements based on the business environment as we currently see it.
As such it does include certain risks and uncertainties.
Please refer to our press release issued this afternoon and on our Form 10-K, and 10-Q for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update or revise these statements as a result of new information or future events.
In addition to U S. GAAP reporting we report certain financial measures that do not conform to generally accepted accounting principles.
We believe these non-GAAP measures enhance the understanding of our performance.
A reconciliation between these GAAP and non-GAAP measures are included in the tables found in today's press release.
Before we begin I'd like to remind you that we have provided a supplemental investor presentation that we will reference in our remarks and that you can find at the events and presentations section of our IR website.
With that I'd like to turn the call over to Don.
Great. Thanks, Tim Good afternoon, everyone and thank you for joining us today.
The past few months have obviously been an eventful and incredibly exciting period for us as we speak.
So it's really close on the M&A transactions that we announced in May.
The sale of our legacy U S lending business the community choice financial for $345 million and our acquisition of first heritage credit.
$140 million.
<unk> was our third acquisition slightly over a year following a high chance last December .
Unfortunately earlier in 2021.
Going back to 2018, we had set strategic goals. The first transition our business in the longer term higher Belgium lowered credit products and second to diversify our channel offerings to point of sale and credit costs.
Closing of the recent transactions coupled with the related for answers it locked at a lower cost of funding more capacity for future business growth achieve those twin strategic goals.
We are pleased to complete the transactions given the turbulent market environment in the first half of 2022.
These transactions generated over $100 million.
Proceeds to.
We currently have more than $180 million of excess liquidity to fund our business once U S direct lending, Canada direct lending in flux.
Take a minute to describe each one of these business lines briefly.
U S direct lending, which is comprised of our heights financed first heritage businesses.
Operates at 523 locations in 13 states and make small mostly sub 2500 dollar.
And larger $2500, a 30000 dollar installment loans as well as insurance and other ancillary products.
As of June 30 on a pro forma basis without purchase accounting adjustments U S direct lending.
$730 million in receivables the gross interest your 47% and including insurance and ancillary income an annualized yield of approximately 54%.
Follow on customers with average FICO scores of six O four larger loan customers with 621 for the overall portfolio.
I'll point out that our more.
More recent large loan customers with average FICO scores approaching six board.
Kind of a direct lending, which is comprised of our cash money and Lynn direct brands is 209 locations in eight provinces with a very high performing Internet London show. This business had $468 million of grocery <unk> as of June 30, with blended yield for approximately 52%.
Over 20% of the loan book was originated online, which is often just over 12% pre pandemic.
Interest plus insurance and ancillary revenues.
Annualized implied yield of approximately 66%.
What city, our Canadian point of sale finance business at $627 million versus receivables at June 30th about 95% with prime customers with the average FICO score of 740. The average household income of approximately $100000 Canadian.
We're working with our team at Flex you add more non prime options, while we continue to onboard and optimize our largest merchant partner Pilgrim's largest home furnishings retailer in Canada.
As a prime business. The flexible currently you're at 14, 3% comprised of interest and fees from consumers at a discount for merchant partners.
As it continues to rapidly grow in size, we expect this yield to become closer to 18% to 19% as the pace of growth normalizing 2023, and a larger percentage of the book is higher yielding non prime earning assets.
Taken as a whole pro forma at June 30, we had combined gross flows of $1 8 billion with a weighted average interest yield of approximately 46%.
Approximately 53% of our U S portfolio has a weighted average interest rate of less than 36% and all of our line of credit.
Portfolios in Canada have apr's below the federal rate cuts.
In terms of geographic distribution of our portfolio is split 60 40.
The U S. While the revenue base is roughly evenly split between the two countries.
Setting aside all the transactions for a minute.
Roger will cover more of our numbers later.
A very good quarter from an underlying growth perspective across all of our businesses in Canada, our direct lending and point of sale lending portfolios grew 29% and 183% respectively.
Or your sequential loan growth was 6% for heights.
4% for Canada, direct lending and 16% for flexi.
From a credit perspective trends continue to normalize to pre pandemic levels in the quarter. So largely flat in some cases improved NCL rates and benign delinquency trends in line with what we're seeing across the industry.
But we have seen diseases or channels evidenced credit performance that mountain in line with our expectations. We've addressed this by selectively tightening credit.
Our lower credit tiers, and by increasing prices on certain products and tiers.
We've also increased loan servicing collection capacity in both the U S and Canada.
Our third quarter is off to a very good start both in terms of origination and credit.
We'll be very disciplined in our marketing credit decisioning not chasing volume for volume's sake demand remains very good and we are in many cases, having success attracting increasingly better credit quality customers as we noted earlier.
Since I've seen average FICO score for new customers increased by over 20 points versus pre pandemic levels.
Broadly speaking about the macroeconomic environment. The external factors that are impacting our business in both the U S and Canada. We are seeing overall economic conditions deteriorate from the period of Covid recovery that we saw in 2021 in early 2022.
We think it's important to differentiate between the two countries.
Laurence we're seeing better overall conditions in Canada, we think most people two reasons. The first is the Canadian economy is I've seen the whiplash effect from the ending of Covid related stimulus, which was more muted there.
In the U S government spending in the range of 25% to 28% of GDP on stimulus for individuals and businesses, whereas in Canada. The ratio was closer to 8% to 10%.
So were many Canadian businesses benefited from increased demand from stimulus payments in 2021 and 2022.
Return to normal or the Covid hangover solid permanent there's not nearly as impactful as it is for U S businesses.
In many areas, we see flux these merchant partner supporting sales flat to down 5% year over year, while in the U S, particularly bigger ticket items volumes in some cases off more than 15% year over year.
Secondly in Canada.
The benefits of about 17% of GDP from natural resources, which is about four times the figure in the U S and there's a lot of the commodities prices in the first half of two.
2022, certainly contribute to better growth in the first half of the year north of the border.
I think one of the factor worth mentioning is what we see in credit quality generally in Canada, which is to say like for like it's just better.
I've been lucky to have one consumer finance businesses in Canada for more than 25 years now and have deep experience in Canadian consumers, who are similarly, situated to U S. Consumers in terms of income and other key demographics simply demonstrate higher propensity to pay off their obligations.
Of course, Canada, not without issues, most notably inflation.
Well it looks to be a housing bubble, particularly in the greater Toronto area.
Ratio of home values are household incomes has been spiking.
Back to pre Covid periods, and a related reduction in <unk>.
Housing starts does have a direct impact on flexi lease financing volumes with bigger ticket furniture and appliance Berkshire partners.
So well its not without some concern we do like having cantered to help balance out some of the economic issues, we're seeing in the U S.
And in the U S. We are continuing to see our customers take home pay increase although negative real wages have been impacting consumers across the board in the U S.
And this has led to a fairly rapid dissipation of higher savings balances that had been accumulated during COVID-19.
Based on our data as well as publicly available information. It does appear that this phenomenon is having a greater impact of lower income consumers, which makes sense given the fixed nature of much of the COVID-19 stimulus.
However over overall employment data continues to look favorable Friday's jobs report in the U S providing a great upside there as well as initial jobless claims about ticking up from Covid recovery levels are still suggesting a relatively tight labor market as does the level of job openings.
Looking at our businesses at this point in the cycle, we certainly we're happy to trade our legacy businesses for the better credit quality Heights enforced heritage customers.
Comparatively we think we're in a great spot both in the U S and in Canada. Our market positions are very good we have a lot of durable competitive advantages relative to our peers.
While we use financial technology, our direct lending business is a bit of well for the 25 years and been through many cycles.
Great discipline in operating credit models, and we're going to stick to that and as I said earlier, we're not going to chase volume or growth.
Tightened some areas and I suspect, we'll do more given current trends.
As we look at our businesses now we love the three businesses that we have.
New U S direct lending comprises Hudson for Heritage, Canada, direct lending, which surpassed my one direct grants and flexibility.
Our Canada point of sale businesses. These businesses are all very well positioned in the markets in which they operate they have significant untapped growth profitability opportunities and exceptional leadership.
As we said when we announced the transaction in May we put a lot of time and energy into M&A and the related financing activity, but that's now in the rearview mirror and were excited about 100% of our efforts and running these businesses and maximizing the potential and the value of these businesses.
To that end.
And to ensure the best allocation of our time and capital we've decided to close our op plus the revolve brand debit card and DVA products.
Which mostly appeal to the customer base that we sold the community choice.
Also play to refine our first phase credit card marketing and origination points.
Card offering was also targeted to the legacy U S customer base.
In the near term, we plan to increase marketing the first phase the height small loan customers with good credit history, as well as introducing larger balanced card product.
From near Prime Heights at first heritage customers likely in 2024.
We're going to focus very hard on originations and what we spend for customer acquisition costs.
Our focus on funding focus on credit.
We continue to be very focused on operating expenses.
No question in this current environment with recession two years right.
Interest rates high inflation and potential job losses trending up we continue to evaluate the ongoing right sizing of our cost base.
And we're being more selective on new projects and new opportunities.
But as I said.
There's a lot of confidence in the business and the leadership team.
So we're going to keep investing in people processes and technology to help our businesses continue to grow our operating expenses as a percentage of our earning asset base decline meaningfully.
I'll close by commenting on our financial outlook for 2022, and 2023 that we provided on may 19th.
The forward interest rate curves or SEDAR and sulfur stupid dramatically during the second quarter before moderating a bit although a lot of outcomes that would result from those curves being overly aggressive some of which were already who loses that magnitude would increase interest expense or a variable rate ABL facilities like we still are.
Turning to the lower end of the 2022 and 2023 ranges.
I'll now turn the call over to Roger to review the details of our second quarter 2022 results.
Thanks, Don and good afternoon.
Adjusted net loss for the quarter was $11 $3 million or 28 since adjusted loss per share compared to 40 cents adjusted diluted earnings per share in the second quarter of 2021.
The primary drivers of the year over year decline in earnings.
The loan loss provision dynamics of strong sequential loan growth and NIM.
I'm always in credit performance, the second quarter compared to the lingering COVID-19 impacts on demand and loss rates in the second quarter of last year.
Our U S business also returned to normal tax refunds seasonality and the related traditional impact on Q1 and Q2 earnings.
Interest expense also rose year over year on higher nonrecourse ABL borrowings to support loan growth and additional senior note issuance to fund in part the hydro acquisition in the fourth quarter of 2021.
Total revenues in the second quarter increased $117 million or 62% year over year.
<unk> added $74 million of revenue and.
In Canada point of sale lending contributed $24 million or 230% growth compared to the second quarter of 2021.
Canada direct lending revenue rose 22, 1% year over year.
Consolidated operating expenses for the quarter increased $47 million.
Compared to the prior year, driven primarily by the expense base that we acquired with heights complexity, along with post pandemic normalized advertising spend.
Gross loans receivable grew year over year by just over $1 billion or 127%.
Primarily driven by our acquisition of hikes in December and its strong year to date 2022 loan growth, which contributed $492 million of balances.
Continued growth in flex, we added $406 million in loan balances year over year.
Canada and U S direct lending excluding hoist finance.
<unk> gross loans receivable.
Grew 29% and 10% respectively versus the second quarter of 2021.
Since the end of last quarter gross loans receivable grew $152 million or 9%, primarily due to growth in Canada point of sale lending of $85 million or 16% sequentially and U S direct lending of $54 million or 8% sequentially.
On the credit quality side, our credit metric trends for Q2 were consistent with what many of our peers have reported overall with continuing trends towards orderly normalization, but still favorable to pre pandemic run rates.
Our consolidated quarterly net charge off rates for the second quarter improved year over year by 60 basis points.
Our portfolio mix continues to shift to lower loss rate products for loans originated by high complexity or a bigger percentage of our overall loan portfolio.
Obviously, the acquisitions have distorted year over year comparisons.
But if we look at the year to date performance metrics for our continuing businesses that as flexi Canadian direct lending and heights combined.
Q2 of 2022 net charge off rate improved 10 basis points.
And pass through rates increased 100 basis points sequentially compared to Q1.
Both metrics remain below comparable 2019 levels.
Looking at it by business U S. Net charge off rates improved 617 basis points year over year, while past due rates increased 100 and.
Two basis points to a year ago.
U S net charge offs improved by 374 basis points, we will pass through rates increased by 141 basis points. Both comparisons are affected by our <unk> acquisition at the end of December .
If we take out of the numbers U S. Net charge off rates were 630 basis points higher year over year, while past due rates were 200 basis points higher.
Sequentially U S. Net charge off rates were up 290 basis points and the pass through rate was up 90 basis points.
Net charge off and pass through rates were up 30 basis points and.
160 basis points, respectively versus first quarter.
And as a direct lending net charge off rates increased 150 basis points in the past the rate was up 276 basis points compared to Q2 of last year.
Sequentially Canadian direct lending net charge off rate improved 50 basis points.
While past due rates increased 60 basis points.
Yeah.
But Canada point of sale.
Stable and consistent net charge, all catastrophe rates trends over the past year.
You'll see in our balance sheet the assets and liabilities of the business was sold on July seven 2022 were reclassified for accounting purposes.
Held for sale as of June 30th.
The disposition and related reporting will be included in our financials next quarter.
Yeah.
And as we previously announced in July we refinanced and expanded the existing heights nonrecourse asset backed warehouse facility and we entered into a new nonrecourse asset backed warehouse facility to support our first heritage business.
Total providing $650 million of funding capacity.
Each was priced at.
425 basis points over one month, so far with a 91% advance rate on new originations and two year revolving period.
Additionally, the maturity of our U S. Senior revolver is extended to August 31, 2022 in order to process the impact of the sale of the U S legacy business.
Two of the banks in the syndicate have processing relationships with the salt business and have elected to drop out of the facility, which is what we expected.
Therefore, we expect the facility to renew a capacity of at least $40 million compared to $50 million previously.
As of July 31st 2022, as Don mentioned, we had over $180 million of available liquidity, including unrestricted cash and undrawn capacity on the various ABL facilities.
100 $180 million.
It includes the impact of the <unk>.
The change to the senior revolver Butler.
In a recent meeting our board authorized a quarterly dividend at <unk> 11 per share.
And in closing I'd like to Echo Dons comments about the transformational nature of the past six quarters transactions.
Which we're now focused on executing to their full potential.
An exciting time at <unk> as we're well financed and position. Thanks, Ken Thanks to our historical strengths in credit marketing and technology.
<unk>, a diversified and growing portfolio of businesses.
This concludes our prepared remarks, and I'll ask the operator to begin the Q&A.
Yeah.
We will now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
And our first question will come from Moshe Orenbuch of Credit Suisse. Please go ahead.
Great. Thanks, Congratulations Roger for getting all the moving parts in sequence there.
Thank you Mark.
Sure.
I guess.
Yes.
To some degree I'm not sure we really care that much about how the legacy U S business ex Heights was performing right I mean, I think the real question is.
The expected performance of <unk>.
And first heritage as we go forward and is there you know given given your commentary about the customer base and about the acquisitions is there like.
And the commentary that you made about kind of generally being able to choose just to a slightly better customer could you just discuss kind of the outlook into the back half of the year.
Yes, yes.
I'll give you some comments and let Roger can obviously hum.
Uh huh.
Yes, I think that.
Just as a quick they'll heights and poor service together.
<unk> ended the quarter almost seven $730 million in.
And receivables.
We expect.
Look at some of the June 32.
December .
31 period since at the end of the year, we'll see growth somewhere in the.
Across the two quarters.
We will see growth.
Overall somewhere in the mid teens.
Sequential basis since.
7% a quarter somewhere in that range or in that range, some decent growth, but nevertheless, we have we have definitely.
Certainly the bottom line.
So some of the credit box.
And in Canada as well.
We have.
Yes.
Just just trimmed a little bit there.
Reyes.
Minimum credit scores incomes.
We do this kind of credit offers et cetera, So I mean, it's not.
It's not a one size fits all approach.
Granular about how we do it by product and by Simpson.
Bye bye.
By channel.
But then the stairs.
So we feel like we've got.
Good luck as I mentioned.
Attracting whether you look at sort of a smaller loan side.
The heights for salaries doesn't have a large alongside in both in both cases, we're seeing on the credit quality in inbound customers cutting batteries. So it gives us an opportunity to be so not only the overall originations were taken a little bit of that but we're also with the balance at more approval.
<unk> is better so.
So in personal lines was up pretty good for the back half of the year, let's say looking.
And.
In the 'twenty three.
And I suppose you have.
Hum.
A number of new branches and some that I sort of have in the pipeline bottom with slowing that down a little bit.
But thats somewhat that's contributing to some of the growth that you're talking about there as you look into 'twenty. Three we would expect that those numbers at 15 point that mid teens 14, Kimpton was a growth rate would probably come off by.
By maybe 300 basis points, probably in 'twenty, when you're looking at kind of low double digit growth.
Portfolio Im sorry, Im sorry, Youre looking it at a high single digit growth.
And that portfolio so.
I think that we feel.
Hum.
From a from a.
Credit quality standpoint, but the moves we've made both on the on the credit box and also adding.
We've added some some servicing and collections capabilities, where we're building out some late stage.
Our capabilities in both of those businesses.
<unk> landscape capability was neither of them really hard.
And helping on the recovery side.
So let's take the <unk>.
Charge offs are going to improve our like for like basis, probably by a couple of hundred basis points.
Results of a bump in the winter season.
Hard to say I mean, if our forecast implies that we will see.
Uh huh.
Our jobs in that.
Business, probably be consolidated U S direct lending business would be somewhere in the.
12, 17% range in 2020.
Across 2023, so none of ours have any sort of thoughts about that.
The only thing that's super important.
I set up here, but I think that.
It's always important I think to look at.
The growth rates that are in.
When you're kind of comparing not just our business lines to one another but also sort of externally.
Some of the growth rates.
That are out there that are being posted by.
Some of the appeal.
Kind of a more broadly defined.
Group are so far in excess of the numbers that I'm talking about I think just the general rule was a lender that grows the fastest has the highest credit losses.
Okay.
Something of a rule of law has kind of led by I think.
Feel good about where we are sort of.
The kind of growth embedded in our quality and kind of disciplined growth, we're getting in that business. So.
And I would say in general both of those businesses.
For surgeons are performing.
So the earnings targets that we gave out when we bought we bought those businesses.
Do you have anything else to add though.
Yes, I'd, probably I think just a couple of quick quick.
Quickbooks to add on.
I think we said when we got we set our outlook when we announced the transaction back in May and Don mentioned in the prepared remarks that.
The interest.
The variable rate interest curve headwinds are probably driving those results.
Across the board are probably driving us towards the lower end of the range.
Our outlook that we gave.
If you also recall when we announced the deals.
We said that look if you break down that debt.
The outlook, we said Q3.
We expect it to be around breakeven.
Our little better and then Q4 I believe we said, 26% to 32 cents a share.
You know that.
That headwind that we're talking about it if you look at the curves doesn't really hit until the fourth quarter. So we still think we still feel good about that.
The former outlook for Q3, and it says that.
That's probably maybe a little better we feel a little better about it but.
I think that you know.
If you kind of break out the exit at that point.
Yeah.
Three still stands as we as we issued it.
Back in May.
Q4 is probably at the low end.
Because of interest cost headwinds and as we move through next year again, Theres a lot of puts and takes but.
So.
Okay.
I don't know if thats helpful, but thats very yes, that's.
That's very helpful. Thanks, Don also maybe just a quick follow up.
<unk> had strong growth, but basically probably a little soft relative to what your original expectations were.
Is that more a question about the integration of the partner partner or is it more about pushing.
Pushing the non prime through there like what do you see as the.
The way that that gets closer to your original expectations.
Yes, I think most I think one of the bigger the business isn't just going to be.
Yeah.
Sales and approvals, we're seeing across our merchant partners again as a reminder.
We're working hard to expand and diversify the merchant base, but it's largely concentrated in furniture appliance electronics some larger ticket.
<unk> thousand 500 dollar kind of pick up items.
While our biggest partner is.
Oh, it's all great largest home furnishings retailer in Canada.
Our March quarter and reported their March quarter was off on.
Comp store growth was about about 5%.
And obviously, so while our numbers are going up as well as we're.
Integrating them into our platform.
Continue to see really good growth, but it was a little below our original expectations largely because of them.
Lower sales there that's somewhat titled stimulus.
Seamless Theyre also very levered to housing starts.
So in the prepared remarks that housing starts are often done in Canada as they are in the U S. So.
Buying furniture blogs websites for new housing.
Rental new rentals are off as well so that'll have an impact.
The other sort of macro where she was just missed is normalizing of credit there. So.
So we expect credit over time, there to be charge offs in the 4% to 5%. They are running 60 basis points a quarter now so some kind of well below where we think some of that to book you'll see the book season, those will go up a little bit but.
So we're seeing.
Customers, while it is normalizing customers are still continuing to pay off.
And the promotional periods. So are not so theyre not rolling into earnings.
Revolving balances so to still get the merchant discount rate and we get some fees on that but we haven't given the earnings the interest earnings. So that's that continues to be on.
A challenge now.
I think we're still really happy with the progress were making again onboarding of merchants won't that won't tell what's triple Berry.
Origination base of the company is not something that.
Just.
That just doesn't fall off the trees.
Peter and his team did a really terrific job of what we were just up there for a board meeting.
Really highlighted mccain's assemble them and what the prospects are there it's happening a little slower than we'd like but it's still happening and the progress is still there and I think the long term there. So it's really.
Really promising as I said, a lot of work being done to try to add some new merchants that'll that'll diversify outside of <unk>.
Some of the larger ticket.
Categories.
Great Thanks, and congrats again.
Okay.
Our next question comes from John Rowan of Janney. Please go ahead.
Good afternoon guys.
Hey, Joe Hey, Donna if im not mistaken did you just give guidance on the charge off rate for Heights, and first heritage business combined I shouldn't make sure I got it if you if you didn't say.
Say it.
Yes, yes, we did we said that we thought it would it would be for the.
In the back half of this year.
Suddenly start late in the back half of it should we would expect it to be.
And in the high single digits low low double digits.
For the combined businesses and then.
In 2013, you would expect it to be and when.
Kind of low teens call. It 12 13 number for.
23.
Okay and then.
Just so I understand because it looks like the U S. NCO rate here for Q2 was 11%. It does that is that exclusive of the.
Loans held for sale I'm, just trying to get an idea of that space that number that 11% is just heights.
Got it.
John Youre looking at the chart.
I'm just looking at the press release it has no net charge off rate by by segment and it shows total U S. NCO rate of 11% I want to make sure I sort of.
No if that number excludes the loans held for sale.
So no. It would include that that would be for the whole segment, including the business was sold.
Okay.
Alright.
Recently, we've only owned it for free.
Right.
Yes.
No no we expect for Q2, it's the entire U S.
Jonathan It's a lot of which makes sense, because it's a quarterly rate at 11%.
The business we sold runs.
80% annualized was running normally.
So that's a blend.
Okay, Alright, that's it from me thank you.
Okay.
Our next question comes from John Hecht of Jefferies. Please go ahead.
Hey, guys afternoon, and thanks for taking my questions.
I mean, you really diversified the business you've got multiple channels in different geographies and in different products and I guess the question would be just given kind of where your MAGE may be focused on in terms of the credit exposure as well as the consumer usage of the product what would you guys expect to kind of mix shift over the <unk>.
Next few quarters in the current environment.
Yes.
Ticket was swung out so.
There are clearly the fastest growing part of the business will be.
Well the pricing of the business, which.
We expect to see sequentially.
15% growth there in the third quarter and 25% growth in the fourth quarter.
Because you are teasing out.
The sequential numbers, so you have seasonality that with holiday shopping there.
We would expect that it would be.
Still over 50% growth there in 2023, that's a full year of L. S. L. Onboarding plus some other newer merchant partners as well as some.
Some growth.
Non.
Non prime so.
Look our estimate would be would likely see an earning asset base.
It is.
In U S dollars, but constantly.
It's close to $3 billion by the end of <unk>.
2023.
<unk> should be.
The neighborhood of <unk>.
60%.
Above that number.
And then on the on the.
And if you got them back that implies Canadian direct lending business, we would expect that that business would grow somewhere in the low double digits in 2023, so call it 10% to 12%.
And then as I mentioned earlier in the U S direct lending business and expect that business to grow high single digits or eight 9%.
You said you roll all those together you can see the mix shifting so it's going to be.
The.
Kind of rank order.
Flexibility will be the fastest growing business by pretty wide margin kind of in the direct lending that SaaS is U S direct lending.
But the kind of the fruits.
So that that will certainly shift the mix I.
I think we said it.
We're 60 40 now Canada.
Earning assets will get the 60 40 minutes about.
I'm just sitting here I guess, if you're able to obviously higher yielding stuff in the U S. So.
From a revenue standpoint, so closer to 50 50.
Yeah, Okay. That's super helpful and then.
Across the sectors are you seeing the competitive opportunities develop just given kind of the changing backdrop and <unk> or is it affecting customer acquisition costs in any of your markets or products.
I actually think it's Ben.
Certainly and if you look at the U S direct lending as I mentioned.
Even though were tightened some at the bottom of the credit box, we're seeing better opportunities.
Uh huh.
We're improving that's coming in it.
Higher psychos and higher.
Higher average incomes.
Just better credit quality is something we're improving now so that feels better and I suspect that some of that may just be coming from.
Some of the competitive issue certainly some of them.
The Super high growth.
Fintech businesses out there.
I think there has to be some spillover just given how much volume.
What they were.
The good thing when writing.
Okay.
Obviously, we're probably seeing a little bit.
Less of that in Canada, It seems like a little bit more of a static.
Credit environment, but I was just.
Our market business has a great deal I mean, we think that.
Together, we're probably the number one or two in our sector.
The direct lending side.
And we feel like the flex.
Flex is getting to that will be in that kind of a position by the end of 2023 or from a.
Mark the business in a market share standpoint so.
Good good good share and will continue I think to get.
But the volumes just given the.
I think our products are well positioned there both on the direct lending side, what flexi has to offer.
Adding some non prime options to help that retailer for our merchant partners drive more sales.
Okay. That's very helpful. Thanks, guys.
The next question comes from Bob Napoli of William Blair. Please go ahead, hi, good afternoon. Thank you.
So.
I've asked this question before but I mean, it's super high growth of flexing.
The.
Relatively young business.
Yes.
Profitability of that business is going to be a big driver, where Kieran stock price goes how confident are you and the financial model for flexing.
I owned it for.
I guess a bit over a year now.
Year, and a half or so so how confident are you in the profit model for <unk>.
Yes.
Like I said earlier when so I think most of that's my question is and it's it's it's it's not it's not happening as quickly as we envisioned a year ago and I think there's a there's a lot of macro there I don't think from a from an execution standpoint.
So great about what we're doing there.
In source a bunch of the.
Customer service collection operations were building out a much more robust kind of credit.
Function there.
Roger has been working hard with the team up there on the Treasury side.
On the funding side. So I think the pieces are in place I think for that business to be very successful and very profitable.
Over the long haul I think the.
Between rate the rate pressures on one hand.
Hum.
The macro with just sort of overall retail retail in software and certainly it's taken us longer to get to where we want to be there.
I am.
Absolutely confident that businesses.
It's about the right partners.
I think we're a good partner for them and preparing for them I.
I think the pet side of things continuously get better.
So I feel great about went up.
Southern company, that's got really really good leadership.
Yes.
The top but I think I'm really built out.
It's not easy to sort of scale, the business up and having a triple in origination volume.
But to do that.
It's been they've been doing it the right way credit's been good.
It's applying seven important customer, but there are plenty of examples of people that have been twice.
The blowout prime credit portfolios.
Perform from a credit standpoint.
Feel good about where it's where it's going.
We should push to accelerate our alumina zasada, but I'm not at all.
Disappointed about where are we where we want the work that they've done and where it's going to get there.
Thank you and then just I mean, you've talked about tightening credit.
Been discussed, but can you be a little more specific about where you're tightening credit.
Yes, so I think that the.
Joe I would say, it's as I mentioned, it's probably other than I think complexity fun stuff.
Some of them are in every area.
Hum.
The U S. If I if I look at the U S direct lending business, it's been more on the there was a big hit.
<unk> core of that business are called southern management, and they do sort of the.
$700, a $200 solvent loans.
Yeah.
15 months in duration.
The tightened more in that business, because that's the lower credit quality.
Customer and in particular the stuff that's over we've also cut on the durations or the credit offers that are sent over 12 months when we have.
We've moved to reduce those.
We had I think.
That was our U S card business.
Cut back there will probably be on the.
Our loan book, that's 2025% lower than in 'twenty three than we are.
We had anticipated and that's really just from a competitive standpoint I think.
John we.
We have seen some competitive pressures in that business.
Not just even the economics aren't as attractive as we thought in the beginning of the year. So whenever we're more cautious about how we roll that business out Canada direct lending.
New credit offers again lower tier.
Credit quality customers.
Of lower credit.
Lower offers or just hard denials and we've also moved so.
We have some risk based pricing.
So the increase in pricing and a lot of that was really just more to reflect sort of cost of funds.
In addition to sort of.
The credit itself, so I don't want to divulge.
There's something I'd, rather not give too much detail about it.
Yes, I think it's been well it's been across the board, but done in a very sort of granular and some targeted way except for the I'd say the prime end of the.
Flexibly originations for now.
And consumer demand for loans.
With the tightening still had some some pretty good growth broadly, but what are you seeing as far as consumer demand for credit.
It's certainly we looked at the I think the the New York said put up their data over the weekend and you saw a lot of.
Kind of increases other than sort of the mortgage stuff.
Auto slowing down somewhat but not totally on the consumer side. The unsecured side continued good growth I think the demand continued to be good and I think that's mostly tied to.
Two the employment markets.
And honestly, if you saw that in the job numbers on.
On slide eight so, but I think it's at a point where we.
<unk>.
Feel like demand is good enough that we can still grow the business in a thoughtful and disciplined way.
Hum.
While still.
Being a little bit more selective on credit so.
I think I don't so far that we've seen that continue this.
This quarter.
Both demand being pretty good quality demand being pretty good.
Credits.
<unk> been pretty good.
Thanks, Thank you I appreciate it.
Thanks, Bob.
This concludes our question and answer session I would like to turn the conference back over to Don J Hart for any closing remarks.
Yes. Thank you everybody for joining and we look forward to talking to you again after our third quarter.
Concludes thanks very much.
Okay.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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Hum.
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