Q4 2022 CURO Group Holdings Corp Earnings Call
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Holding fourthquarter, 20th 22 conference call.
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I would now like to turn the conference over.
Marshall Chief Accounting Officer. Please go ahead.
Thank you and good morning, everyone.
It opened Te Teri released this results for the fourth quarter 2022, which are available on the investors section of our website at <unk> Dot <unk> Dot com.
With me on today's call or tourists, Chief Executive Officer, Dunk, Clark and Chief Financial Officer.
Before I turn the call over to doubt I'd like to note that today's discussion Wilkening 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 morning at 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 revise these statements as a result of new information our future events.
In addition to the U S gap reporting we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures to enhance the understanding of our performance.
Reconciliation between these gap in non-GAAP measures are included in the table sounds 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 a remark and that you can find it in the events and presentations section of our <unk> our website.
Would that I would like to turn the call over to Doug.
Thanks Tomorrow, good morning, everyone and thank you for joining is denied today for our first earnings call here Carol.
December wrapped up a transformational year for Carol while the first three quarters of the year were largely focused on the logistical aspect of the acquisitions and divestiture in the fourth quarter, we were able to focus on the operational execution of our new businesses and begin to put into motion our playbook to generate longterm sustainable.
Returns for investors.
While I'll leave it too easy to run through the queue for results, let me start by letting out the framework for how we will be managing the business in 2023 and beyond.
In December we streamlined our organizational structure and created clear alignment and accountability.
We will responsibly grow our loan portfolio, but we are taking a disciplined approach focused on resilient credit and will not cheat volume for volume stage.
Turning to slide for the deck, we ended the year with gross blown receivable balances of close to $2.1 billion.
This represents a 10% and 35% increase of where we ended the third quarter 2022 in December of 2021, respectively.
The fourth quarter growth was largely driven by our flex the business coming out of a strong holiday shopping season in Canada.
We saw a more modest growth in our direct lending businesses as the steps we have taken to tighten underwriting continued to take hold.
Beginning in the first half of 2022, we began tightening credit, particularly in our lower credit tears and increased pricing on certain products.
We did this in reaction both to the growing uncertainty in the macroeconomic environment and rising interest rates.
And remember with R. U S consumer base, especially in the lower credit segments, the acutely feel the impacts of inflation.
Unemployment rates for our customers remain as historically low levels.
And while they had notionally benefit from the rise and minimum wages.
Macroeconomic impact of inflation on this borrowing base lowers net monthly incomes, therefore, creating smaller net disposable income margins.
In addition, the excess savings are borrowers were able to build during the pandemic due to the various government stimulus programs has evaporated and they have since returned to the levels, we had seen prior to the pandemic.
On the loan collection and servicing front, we have moved later stage servicing out of the branches and created a centralized team with expertise to help these borrowers.
We have also ruled out additional loss mitigation tools to help get our customers back on track and minimize our losses.
Turning to slide five we expect <unk> to peak by the end of Q1 as a tightening we did across the portfolios.
With the improvement in servicing as I just mentioned takes hold.
While it's still early we are encouraged by the early states delinquency improvements we are seeing across all of our businesses.
And if you look at the top of slide six you can see the improvements in delinquencies across our portfolio segments.
In fact, our heights large loan portfolios are current 31, plus delinquencies are showing a 15% to 20% improvement over Q3.
On the small loan side are 31, plus delinquencies are relatively flat.
Of our large loan balances as of the end of December over 50% originated in the second half of 2022 posts credit tightening.
On the first heritage portfolio recent credit performance as encouraging as early stage delinquencies are starting to come down from where they were in the middle of the fourth quarter.
And we expect to see further improvement in 2023 as the lone selection servicing capabilities are centralized with heights.
And the direct lending business in Canada, we also experienced a decline in queue for delinquencies.
Similar to R. U S direct lending business, we identify the vigor a variety of opportunities to help mitigate delinquencies in charge offs.
In Q4, we rolled out additional tools for our consumers, including partial payment options and making it easier for them to make payments using debit cards.
Beginning in January we changed our charge off policy to 180 days to align with the rest of our charge of policies across the company.
The charge of policy change in Q1, 2023 will result in a one time lowered charge off for the first quarter is only loans will be charged off will be for legal reasons, such as bankruptcy abroad.
However, charge offs will revert to a more normalised right beginning in the second quarter.
We are excited about these changes that are being made to the way we service our Canadian direct lending customers and believe that this will have a meaningful meaningful benefit to delinquency and net charge offs rates and later 2023 and into 2024.
I will now turn it over to busy to run through our queue for results and then I'll close with some thoughts about our business and where we will be focusing our efforts in 2023.
Thanks, Doug and good morning, let me start by taking you through our queue for results on slide seven for.
For the fourth quarter revenue was $217 million.
Here over a year decrease was 3% despite an increase in receivables.
Decreases primarily driven by a sale of our legacy business and transition towards a lower risk and more sustainable business model.
It is further evidenced by the decrease in net interest margin post charge offs from 39% to 18%.
Interest expense of $55 million was up 93% over the prior year, representing an increase in debt to support receivable growth and an increase in interest rates.
Operating expenses is $126 million in Q4 and included $13 million, a restructuring expenses, primarily associated with our previously announced store closures in Canada, and the U S and other cost saving initiatives.
Other expenses of $148 million, primarily represents a goodwill impairment associated with R. U S direct lending and Canada point of sale segments.
Net charge offs of $74 million, representing a charge off ratio of 15%.
Charge off ratio of sequentially higher as expected driven by higher delinquency rates in the second and third quarter as Ducks Sheraton's earlier comments recent delinquency trends pointed lower charge offs in the future <unk>.
Provision built in other credit changes were $21 million for the quarter.
Our net loss for the quarter was $186 million or $4.60 per share compared to a net loss of $29 million or 72 cents per share in the fourth quarter of 2021.
Excluding the impact of goodwill impairment and restructuring expenses are pre tax loss X provision was $48 million.
Re provision income will be a key metric for us as we move into 2023, because I believe it to be a good measure to evaluate the underlying performance of our company without the quarterly volatility caused by Loanloss provisioning, especially as we will be adopting seasonal and the first quarter of 2023.
Before we move out the space I want to highlight some additional metrics that we will also be focused on in the future.
First we added net interest margin post charge offs quite simply this is a risk adjusted return on our assets, we'd like this matrix because it hold us accountable to ensure that we're getting the appropriate returns commensurate with the credit risk re underwriting while also balancing out the cost of funding.
Another metric we are introducing as in Opex ratio I'll speak to that later in the presentation.
Turning to slide eight you can see how the business results for our segments buildup to these key metrics I just mentioned as.
As Doug discussed earlier internally, we really don't differentiate between the direct lending businesses by that I mean, we have the same teams developing strategy managing and running those businesses.
The primary difference is which side of the board of the customer reside and how we choose to finance a business.
So while all the central us expenses that support the direct lending business that.
And the U S segment. These expenses should be looked at on the total direct lending basis.
This does not apply to our point of sale of <unk> business, where they're operating expenses is largely self contained.
The net charge off ratio is 21% for a direct lending business and 4% for Canadian point of sale business.
Net interest margin post charge offs are 25, and 70% respectively.
On slide nine you will see the allowance spilled. This quarter. This is largely driven by loan growth and credit normalization we discussed.
Also I'll note on January 1st we adopted the Cecil allowance model for credit losses.
This will replace our current incurred loss accounting model, while we're still finalising. The detail. We expect the adoption of this accounting requirement to his belt and a day, one allowance built of between $130 million to $140 million.
We will recognize this noncash accounting adjustments through our opening retained earnings.
Turning to slide Ken our fourth quarter net gross margin post charge offs was 18%.
Large year over year decreases attributable to the strategic shift we made an early Q3, but we sold our high yielding yet higher credit loss legacy U S business.
Declined from last quarter is due to credit tightening across all of our businesses and a mixture of U S offerings as large loans became a bigger percentage of the overall portfolio at the focus on better credit quality in the face of macroeconomic uncertainty.
A slide 11, we will turn our attention to expenses for the fourth quarter are reported expenses were $126 million and includes $13 million of restructuring charges that I mentioned earlier.
And the fourth quarter, we took actions that eliminated $20 million of expenses and Ah reinvesting. These savings in 2023 to improve the capability and our operations to help support execution of our strategy.
On the right hand side, you can see our operating expense ratio the.
The Canadian point of sale business continues to build scale and the direct lending platform they start to show incremental progress.
This will be a key metric for us going forward to measure improvement on the efficiency of our operations.
Turning to slide 12, with a summary of our deck facilities and interest rates sensitivity effectively two thirds of our debt, it's fixed but still impacted by the increase in base rates.
Our corporate get has a fixed rate of 7.5% and maturity five years from now and our lending activities are supported by various facilities with multiple counterparties in the U S and Canada.
To note in the first quarter or Canadian revolver was terminated.
A slide 13, we will focus our attention on our leverage and liquidity. Our leverage has continued to increase as we transitioned our business model and continued to grow our balance sheet. Our interest coverage ratio has also decrease the last several quarters, the lower profitability and higher interest expense.
In the appendix, we have provided the details of how we view the calculations.
With a growth in our business. We have also seen a deck facility capacity decrease where.
We're actively working on adding an additional $100 million liquidity and capacity in Q1.
Finally on slide 14 is a quick overview of our outlook for fourth quarter.
Until Doug and I'd get more familiar with the company, we will provide an outlook for the upcoming quarter and focus on key areas, where we are driving results for.
Q1, 2023, we expect receivables to end at between two and $2.05 billion in revenue of $195 million and $215 million.
Net charge offs are expected to be 15% to 17% on a normalized basis.
Ah reported charge up amounts of Q1 will be lowered by approximately $20 million of 40% to 16% as a harmonized our charge off ratios and policies across the direct lending businesses.
Ah reported operating expense and Q1 is expected to be flat versus Q4 2022.
With that I will turn it back over to Doug to share closing remarks.
Thanks to Z as I've just passed by 90 day, Mark as CEO I wanted to share my thoughts on our overall business and what excites me about the path, we are laying out for long term value creation for our investors.
Or direct lending business comprised a pipe burst heritage and our Canadian segments provide a tremendous platform for growth.
As we continue to mature our capabilities in each of these segments, we anticipate attractive growth improving delinquencies in charge offs and expanding margins. We have a terrific team of talented professionals in place and I'm highly confident in our ability to execute our strategy and deliver meaningful results to our shareholders in inverse.
<unk> the.
Flex the teams is build a great product and platform in Canada.
However is largely Brian books that operates on high volumes with dinner margins in our core business. It may benefit from lower cost of funds.
As such we continue to evaluate all options as it relates to our <unk> business to help increase profitability.
2022 was a tumultuous year for <unk> as we completed our strategic transformation.
We did not deliver on the results that we intended and that our investors deserve.
We understand that we must perform better.
On slide 15, we've laid out our long term vision for Carol.
Across all of our lines of business, we will be focused on ensuring steady yields on our lending product stabilizing losses, improving our cost structure and strengthening our overall liquidity.
Both <unk> and I need to spend more time with our businesses before we are ready to share our long term targets.
So the bullet points on the slide captures our areas of focus and where we will be leaving the company as we continue to formulate our longer decision.
This concludes the prepared remarks and will now ask the operator to begin Q&A.
We will now begin the question and answer session.
The question.
And one on your Touchtone phone.
If you are using.
Pick up your handset.
<unk>.
Is it any time your question has been addressed and you would like to withdraw your question, please textiles and too.
At the time, when I paused momentarily to assemble Iraq.
The first question today comes standup Marcy Orangish with credit. Please. Please go ahead.
Thanks.
And welcome.
Gentlemen, thanks, especially Dizzy.
Get to talk to you again.
The first thing I guess I was hoping to get a little more clarification on is when you said you know talking about additional or.
Other options with respect to flex city are.
Are you talking about options with respect to funding you're talking about options with respect to kind of ownership of the business kind of give us a little more flesh that out a little bit.
Well she has a dog thanks, great talking to you again, certainly we are considering alternatives for the business, it's clear that with our cost of funding we are not necessarily the best partner reflects city as said they have a fantastic platform and we really want them to be able to realized everything that they've got in their strategy and so we're actively seeking.
A partner for them that can help them grow.
Got it.
There was some discussion over the last couple of quarters about trying to enhance the yield both from fish kind of.
Hoping that at some of the existing customers would be borrowing and then kind of migrating into the the nonprime consumer is there any change. There is that you know has that happened at all can you give us a little bit of an update.
There's been a a.
A slight increase in the number of consumers going through the revolving product and the flex the business, but nothing material as of yet as we think about long term yield on that product.
Got it.
And then.
I guess I was sort of hoping that there would be a reduction in expenses as opposed to flat you talked about reinvesting the savings I guess.
Can you kind of give us a.
Thought about how to think about the evolution of your.
Of your operating expenses.
A little bit past Q1, yes.
Yeah sure he and most of all good to talk to you again I'm sure we'll be chatting later in the day as well in terms of our expenses kind of what we have W. Announcer store closures to obtain some corporate expenses out so the data is helping our overall.
Expenses be lower in 2023 by roughly $20 million.
We have done that the Reinvestments are primarily in terms of collection operations. It.
As in <unk>.
Store wages for our employees.
Investment in from the moving from data centres of cloud, but overall our goal is to ensure that opex ratio improves up 90% of our expenses are fixed Ah close to it. So as a result, the structural changes in those expense reductions are just going to take longer than just going in and.
To your expenses right and left.
That being said.
Feel pretty good that opex ratio over time.
We'll add needs to improve and we'll probably discuss that a little bit more on our next at Q1 call and Doug and I have been able to spend more time going through the expense based on the business.
Got it and the last one I guess I was.
Trying to understand the comments about you know.
Kind of improving delinquency.
That.
Guidance in the first quarter for losses, which she said.
You said fourth quarter was 15 and that on a normalized if you kind of you know hadn't made the change 15 to 17 for the first quarter.
So.
I guess and kind of squaring that I thought you had said that that fourth quarter, which was sort of peak. So maybe could you just kind of discuss how you're you're thinking about those charge offs and since.
Since you're kind of only given guidance one quarter out like.
What will it take to to see reduced charge offs and <unk>.
When can we what's the timeframe.
But mostly this Doug.
We I think the 31 plus delinquencies your best indicator of future charge offs, which is why we shared those charged so obviously you with a 180 days.
Charge of window, what's rolling in the queue for was the Q3 ish type delinquencies often times. So if you track her delinquency chart. That's why we would say charge offs seemed to be peeking in Q1, and then we would as those 31 plus delinquency buckets come through rolled through we would anticipate lower charge us beyond.
That.
Got it okay. Thank you.
The next question comes from John .
Okay go ahead.
Hey, I'm <unk>.
Okay. Thanks.
Good good thanks very much.
Yeah, I guess, just making sure I understand the moving parts of the provisional keyboard I will be happier.
So bill.
<unk>, that's a capital charge, obviously not approved.
<unk>.
That is correct.
And then and then we should just go beyond that that provision will account for charge offs.
Amen.
As well as any moviegoing growth.
That kind of the way to go about provision Q1.
In total yes, so it's a combination John of charge offs and the allowance spilled right and on the allowance spelled we're transitioning C. So as.
As you can imagine I'm trying to get comfortable getting my arms surrounded how that will perform as our business mixed changes. So so we're not providing any guidance on it but the way you're thinking about is correct.
The allowance spilled going forward well roughly.
And will roughly be based on loan growth or even the.
Changing expectations, good and bad MD on the portfolio.
And then.
And then I just want to make sure you're since we were 15% to 70% charge off rate, you're adding to it actually.
Actually going to be the results.
On a on a recorded basis are going to be $20 million below that.
Yeah.
It's incredible timing.
So.
Q Q bamboo.
Ketchup quarter weather's elevate like.
Like.
There'll be eligible for that.
Change and timing or will it just said balanced over the course of the year.
Get back to normal in queue to.
So it isn't that cute.
Yeah, maybe maybe John if I described the change effectively it harmonizing our policies.
But first heritage.
A 90 day care charge offs to 180 day charge off so effectively there is a period, where you know you gotta have the balance of stay on the.
On the receivables.
Not what you call it go through charge offs.
Oh, sorry on the C D.
First heritage Alice corrected.
Learning to.
And it's just the first heritage platform.
Sorry, guys Canadian the Canadian direct lending platform that's it okay.
And then and then.
Yeah, It sounds like you're right side, some branches and Nicole.
Or we think about branch versus non <unk> through the mail in terms of milk as.
As well as kind of yields and overall performance.
John have you seen as far as the number of branches or.
Can you clarify your question.
Yeah, just sort of like the mix.
The different channels the branches.
I guess you you change some of the products.
Got the Canadian business in a couple of different legacy U S.
Store platforms the mix.
Mixed now and the kind of in the branch network that pretty much to wait and see what the.
The channels going forward or should there be other changes that we should talk about.
Oh, no I think it's.
It's predominantly a branch based business, we have a small portfolio, Canada that is online only as we you you've heard the word I've used mature mature our credit risk broad capabilities, we anticipate growing our online channel in Canada, but that is not in the next two Q. So overall.
Overall, it's who will remain a primarily branch based business in 2023.
Okay.
My last question is just talked about.
Bowls for liquidity, even old term, but just thinking that.
Overall, the changes in interest rates I mean, I know before we're curb a few more smaller rate hike.
But it has the impact.
<unk> of the changes in the right market, whether it's on yields of products.
And or your cost of capital cause that largely bubbled bubbled in your margins or are there other things.
But we should be taking it out of a Mexican quarters now.
Largely been embedded John good question.
Most of our rate exposure expects like a third of it is.
Is exposed to or if you think about roughly two little over.
Two and a half billion in debt 800 would be still exposed to variable rates.
So it would take a pretty meaningful increase in where we are now for that to a meaningful impact margins.
Alright, I really appreciate that thanks very much.
The next question comes from John Rowland panel.
Please go ahead.
Good morning, guys.
John is you're welcome.
Thanks.
So I guess I'm, just trying to wrap my head around kind of the path to profitability and how that relates to <unk> you.
You know I had you know that must have been under the impression but thought that what are the paths of improved results with just a slowdown in growth in flex it ain't getting more customers into the portion of the contracts that are actually paying.
Is that now I'm not on the table because flex it. He just wants to continue to grow and they need a better funding source and what Carol can provide I'm. Just curious you know between the two options of slowing growth, one and basically looking to offload the business too.
Is one now off the table.
I wouldn't necessarily say that John I think we're evaluating the first option, which is finding a strategic partner for them to continue to accelerate again. They just they have a great solution that they built and I think with the right partner. They can continue to accelerate that business. So that is our our priority. If that's unsuccessful then of course were.
Have to look at how to how to return to profitability.
Quicker manner on our flexi platform.
Okay and then just one question on the the guidance you said operating expenses would be flat sequentially, but there were a bunch of restructuring expenses. If I look at the you know the adjusted earnings table in the financial supplement are we talking about operating expenses on a normalized basis or are we talking about operating expenses, including the restructuring costs Auto reported Bay.
So that includes all the restructuring that's.
Restructuring Gonna continue or is there just it's actually I will run right no we're going to have a little bit more <unk>.
<unk> the first couple of quarters here.
John still kind of working through that.
I would say the above abundance of caution I would just assume a flat operating run right into Q1.
Okay alright, thank you.
[noise]. The next question comes from Vincent.
Mmk twisted and please go ahead.
Okay. Good morning, Thanks for taking my questions and as he get to talk to you again.
So.
Wanted to focus on the U S business.
So I understand that there's a lot of moving pieces and.
<unk> been in the seat for a short period of time, but that Doug.
Having come from the high <unk>, maybe if you could kind of talk about where we are now and where.
You see that path to profitability and.
Sort of what a normalized this looks like for the U S.
Alright, thank you.
Yeah. Thanks, Vincent so we have.
Two platforms in the U S.
First first heritage and Heights.
You'll continue here hear me talk about maturing Artur capabilities.
Those business models are both immature in many ways and I kind of introduced that we.
We introduced late stage collection centralized collections teams.
We're still refining our underwriting capabilities, we're still implementing a single platform for the business. So we have a lot of technology work and we will be expanding our secured lending business. So what I would say when it comes to.
Ah heighten particular, there's growth through product mix, but there's also grow through improved NCO margins, we talked about the declining delinquencies I do believe that will continue to have a stabilization of that and improve our margin in that business and in heights case, we opened.
I believe 39 branches last year. So we will continue to look and work towards a branch expansion program on the first heritage business platform. It is.
It was I guess more immature than heights, and so that's great that many more opportunities so aligning their underwriting philosophies too.
<unk>.
If you go back to hide.
Heights historical.
Information when prior to <unk> acquisition Heights grew their portfolio by I believe it was about 30% in 2021 over 2020, something like that and a lot of it was.
Addressing the underwriting philosophy, and making sure we right sized loans to to risk and so that is a huge opportunity refers heritage and then of course Ah secured lending as I mentioned for heights will be an opportunity to expand and eventually potentially branch expansion.
Okay, Great. That's super helpful. Thank you and then switching to.
Liquidity to kind of follow up with their so if you could.
Talk about kind of the.
The environment out there for for getting liquidity, what do you think is the right sized.
For you know, where you want a position to liquidity and balance sheet going forward.
Yeah, that's a great question and it's definitely something we've been thinking about one of the I'll answer in the following way before I get to the punch line.
One thing so you do see and the disclosures are made in your part of the company. The unit economics are strong right. So in terms of making alone we can generate good excess spread Doug.
Doug's outline where we can see improvement in that as well as we mature some of the the operations in collections processes across R. U S businesses. That's number two I think the biggest thing is making sure that when we expand and grow our business. We have the capacity to do that we are our lending partners <unk>.
Instead, our performance that are still within within.
Within the covenants and with an acceptable limits with our facility talking to all our lending partners. We are seeing that we will have access to to liquidity and capacity to grow the business in a way that makes sense and that's important because.
You probably are thinking through it that's our path to profitability right.
We I will say that right now in Q1 my goal is to raise $100 million in capacity slash liquidity, we're making good progress that we have great support of our lenders and our bondholders they.
They see the performance of the asset so.
Fingers crossed that we should be able to execute on that at least the near term and then in Q1 or Q1 call as Doug laid out we will talk about a net leverage kind of goal for us down the road, which will encompass kind of where I see like long term liquidity and capacity needs to be.
Great. That's very helpful. Thanks, so much.
As a reminder, if you have a question. Please <unk> one one to answer the question queue.
The next question is a follow up for Mercy or English.
Credit Suisse. Please go ahead.
Let's see your line is now open.
Great just wanted to follow up on that Cecil commentary [laughter] in the first quarter. It likely would he'd probably you know after having the day one at <unk>, giving you expect loans to be lower that unless there's an adverse change in credit quality.
You would probably see that reserve falling in Q1, right I mean, that's Thursday could happen otherwise yeah.
There was a mix also right so even though overall loads of falling I think we see growth in one versus the other we're still kind of working through that but that's a fair I mean, you can restart that illusion right.
Okay, Alright, just wanted to just wanted to clarify.
Clarify that thank you.
The next question comes from John Bowen Mcdonald, Thank God.
Sorry, I was just one follow up here, obviously is he it sounds like you're you know task strict with generating some liquidity for the company is selling fluffy.
<unk> or.
Or possibly selling flex it a part of that liquidity equation, you know just forget about whether or not that creates earnings I missed that part of.
The model to generate liquidity.
Not in John It says you are not in the near term.
Near term that would clearly working with our lenders to create the right capacity for growth.
One of the things that you think about <unk>. The biggest thing is making sure we have the right advanced rates in the right capacity because it is a prime business with lower losses.
And the and the first Q outlook and everything that that is not considered as part of our liquidity generating initiatives.
Thank you.
This concludes our question and answer session I would like to turn the conference back up like your dad clock running clothing online.
Yep. Thanks, Thanks, everyone for joining US. This morning is stated as he and I look forward to sharing more of our of our plans in the upcoming Q1 earnings call Hope everyone has a great day. Thanks.
Okay.
<unk>. Thank you for attending today's presentation you may now disconnect.
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