Q2 2023 CURO Group Holdings Corp Earnings Call
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Thank you and good morning, everyone Faro released its second quarter 2023 results before market open today, which along with supplemental information are available on our investor website at IR Dot <unk> Dot com.
So on Thursday August 3rd 2023, I would now like to turn the conference over to Nick Panna Reese. Please go ahead.
With me today are <unk>, Chief Executive Officer, Doug Clark, and Chief Financial Officer Izzy Dawood.
Thank you and good morning, everyone Carol released its second quarter 2023 results before market open today, which along with supplemental information are available on our investor website at IR Dot <unk> Dot com.
Today's discussion will contain forward looking statements based on the business environment as we currently see it.
As such it includes certain important risks and uncertainties.
With me today are <unk>, Chief Executive Officer, Doug Clark, and Chief Financial Officer Izzy Dawood.
Please refer to our press release issued this morning, and our Form 10-Q and Form 10-K for more information on the specific risk factors that could cause our actual results to differ materially from the matters described in today's discussion.
Today's discussion will contain forward looking statements based on the business environment as we currently see it.
As such it includes certain important risks and uncertainties.
Any forward looking statements made on this call are based on assumptions as of today and we undertake no obligation to update or revise these statements.
Please refer to our press release issued this morning, and our Form 10-Q and Form 10-K for more information on the specific risk factors that could cause our actual results to differ materially from the matters described in today's discussion.
The result of new information or future events.
In addition to U S. GAAP reporting we present in the supplemental materials certain financial measures that do not conform to generally accepted accounting principles.
Any forward looking statements made 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.
We believe these non-GAAP measures enhance the understanding of our performance.
Reconciliations between these GAAP and non-GAAP measures are included in the appendix to the supplemental materials with that I would like to turn the call over to Doug.
In addition to us GAAP reporting we present in the supplemental materials certain financial measures that do not conform to generally accepted accounting principles.
Thanks, Nick Good morning, everyone and thank you for joining us today.
We believe these non-GAAP measures enhance the understanding of our performance.
During the second quarter, we continued to execute on the business plan, we outlined in the first quarter.
Reconciliations between these GAAP and non-GAAP measures are included in the appendix to the supplemental materials with that I would like to turn the call over to Doug.
Our core fundamentals receivables revenue net charge offs and operating expenses came in more favorable versus our previous Q2 expectations.
Thanks, Nick Good morning, everyone and thank you for joining us today.
During the second quarter, we continued to execute on the business plan, we outlined in the first quarter.
Our core fundamentals receivables revenue net charge offs and operating expenses came in more favorable versus our previous Q2 expectations.
This was accomplished as we focused on responsible growth maintaining credit quality tightening operating expenses and commencing certain marketing programs.
On slide three of the earnings presentation, you can see some of these accomplishments from the quarter.
While we remain disciplined with loan originations given the still uncertain macro environment, we started putting the capital. We raised in late May to work, we grew receivables by 4% quarter over quarter. During what is generally a seasonally slower quarter.
We also made significant progress on multiple operational initiatives, including continued modernization of our technology infrastructure, which includes transitioning to the cloud and converting our U S branches into a single loan management system, which we expect to be completed late in 2023.
These initiatives will allow us to refine our focus on responsible growth in our direct lending business.
As reflected in the press release.
We have reached an agreement to sell our flexible business for approximately $55 million Canadian which we believe is the best option for our company. Our consolidated results. This quarter included a full quarter of <unk> and Q3 will also include partial results and we anticipate Q4, our consolidated financial results will no longer include <unk>.
We also pursued continued enhancements of the digital customer experience and introduced improvements to our credit risk capabilities.
These initiatives will allow us to refine our focus on responsible growth in our direct lending business.
As reflected in the press release.
We have reached an agreement to sell our flexible business for approximately $55 million Canadian which we believe is the best option for our company. Our consolidated results. This quarter included a full quarter of flexing and Q3 will also include partial results and we anticipate Q4, our consolidated financial results will no longer include <unk>.
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Turning to slide four we ended the quarter with over $2 1 billion in gross loans receivable, a 4% increase versus the prior quarter.
We will continue to balanced solid demand with responsible growth, particularly as we gradually pick up our marketing efforts in Q3.
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Within the U S. We focused our growth initiatives towards our near Prime large loan and secured loan portfolios as we continued to improve the overall risk profile of our U S portfolio through these efforts.
Turning to slide four we ended the quarter with over $2 1 billion in gross loans receivable, a 4% increase versus the prior quarter.
We will continue to balanced solid demand with responsible growth, particularly as we gradually picks up our marketing efforts in Q3.
In our direct lending business in Canada. We also saw a solid demand for our open ended product with both new and existing customers.
Within the U S. We focused our growth initiatives towards our near Prime large loan and secured loan portfolios as we continued to improve the overall risk profile of our U S portfolio through these efforts.
Our U S loan management system conversion will simplify management of U S branch operations using a single platform and will create a more stable operating platform that enables rapid deployment of system enhancements.
In our direct lending business in Canada. We also saw a solid demand for our open ended product with both new and existing customers.
Our U S loan management system conversion will simplify management of U S branch operations using a single platform and we will create a more stable operating platform that enables rapid deployment of system enhancements.
We continue to work on introducing new secured lending products in both the U S and Canada, such as an auto secured product that we expect to rollout later this year.
This conversion will also allow us to scale, our operating model to a holistic lending approach for both small and large loans across all U S branches, which should increase efficiency enable growth and improve servicing.
We continue to work on introducing new secured lending products in both the U S and Canada, such as an auto secured product that we expect to rollout later this year.
These products should should allow us to reduce overall credit risk, while increasing our average balances was secured customers.
Alongside our increase in secured lending we remain committed to increasing our mix of larger balance in longer duration products, which will continue to derisk and simplify the predictability of our business results.
Despite the ongoing macroeconomic uncertainty in the U S and Canada, our consumers continue to hold up relatively well in terms of demand and credit performance.
While we have not seen unexpected consumer stress our team continuously monitors our customer data as well as industry wide trends to ensure we stay ahead of any potential negative outcomes.
Turning to slide five our credit quality continues to improve driven by tightening in underwriting we began in 2022, along with the positive impacts from the enhancements to our customer servicing capabilities.
As a reminder, our direct lending portfolio was split between the U S and Canada, each of which are impacted by a different macroeconomic factors.
Excluding the change in charge off policy, we made in our direct lending business last quarter. The net charge off ratio improved by 270 basis points showing improvement in both the U S and in Canada.
Turning to slide five our credit quality continues to improve driven by tightening in underwriting we began in 2022, along with the positive impacts from the enhancements to our customer servicing capabilities.
Moving to slide six you can see the delinquency trends also remained consistent with prior quarter.
To summarize through the first half of this year, we have made meaningful progress towards executing with excellence and strengthening our foundation and responsible growth. We are encouraged by the growth opportunities that we see in both the U S and in Canada.
Excluding the change in charge off policy, we made in our direct lending business last quarter. The net charge off ratio improved by 270 basis points showing improvement in both the U S and in Canada.
Moving to slide six you can see the delinquency trends also remained consistent with prior quarter.
I will now turn it over to easy to give you more detail on our Q2 results and then I'll close with some final thoughts.
To summarize through the first half of this year, we have made meaningful progress towards executing with excellence and strengthening our foundation and responsible growth. We are encouraged by the growth opportunities that we see in both the U S and in Canada.
Thanks, Doug and good morning, everyone as Doug highlighted we maintained positive momentum in Q2, evidenced by solid core results that were more favorable than our expectations.
I will now turn it over to easy to give you more detail on our Q2 results and then I'll close with some final thoughts.
Second quarter gross loan receivables up to one 4 billion were slightly above both the prior quarter and the high end of our guidance, but there remained below year end 2022.
Thanks, Doug and good morning, everyone as Doug highlighted we maintained positive momentum in Q2, evidenced by solid core results that were more favorable than our expectations.
Slide eight of the earnings presentation shows summary results for the quarter Rev.
Revenue of $209 million was flat sequentially, but towards the higher end of our expectations with flat quarter over quarter results were driven mainly by continued execution of our strategy to migrate towards longer term and lower risk products or.
Second quarter gross loan receivables up to one 4 billion were slightly above both the prior quarter and the high end of our guidance, but there remained below year end 2022.
Slide eight of the earnings presentation shows summary results for the quarter.
<unk> gross margin post charge offs, a key indicator of our risk adjusted return on our assets was flat versus prior quarter at 14%, excluding the impact of the change in charge off policy during Q1.
Revenue of $209 million was flat sequentially, but towards the higher end of our expectations.
Lat quarter over quarter results were driven mainly by continued execution of our strategy to migrate towards longer term and lower risk products.
Net revenue post provision expense was $130 million was $146 million in the prior quarter, primarily driven by a higher provision for loan loss expense due to a catch up brick progressions.
Our <unk> margin post charge offs, a key indicator of our risk adjusted return on our assets was flat versus prior quarter at 14%, excluding the impact of the change in charge off policy during Q1.
Q1, 2023 was artificially lower due to changes in direct lending charge off policies.
Net revenue post provision expense was $130 million was $146 million in the prior quarter, primarily driven by a higher provision for loan loss expense due to a catch up at progressions.
Our pre tax loss, plus provision was $57 million or $48 million, excluding $9 million in debt modification fees.
Interest expense continued to be impacted by rising benchmark rates as well as higher debt levels, increasing to 66 million about 59 million sequentially.
Q1, 2023 was artificially lower due to changes in direct lending charge off policies.
Operating expenses of $108 million decreased 8% sequentially from $118 million.
Our pre tax loss, plus provision was $57 million or <unk> $48 million, excluding $9 million in debt modification fees.
Excluding a $10 million one time restructuring charge recognized in Q1 'twenty three.
Interest expense continued to be impacted by rising benchmark rates as well as higher debt levels, increasing to 66 million about 59 million sequentially.
Operating expenses are flat sequentially. Despite the impact of our annual merit increase inflationary pressure on wages increased originations and servicing cost due to load growth and higher expenses from system conversions in Q2.
<unk> operating expenses of $108 million decreased 8% sequentially from $118 million.
Excluding a $10 million one time restructuring charge recognized in Q1 'twenty three operating expenses are flat sequentially. Despite the impact of our annual merit increase inflationary pressure on wages increased originations and servicing cost due to load growth and higher expenses from system conversions in Q2.
Our operating expense ratio improved to 21% from 23% sequentially other.
Other expenses of $12 million, primarily represent debt modification expenses and miscellaneous expenses related to the sale of our legacy U S direct lending business and catapult losses.
Net charge offs of $68 million increased sequentially from $59 million and our reported net charge off rate was 13% versus 11, 5% sequentially.
Our operating expense ratio improved to 21% from 23% sequentially.
Other expenses of $12 million, primarily represent debt modification expenses and miscellaneous expenses relate to the sale of our legacy U S direct lending business at catapult losses.
On a normalized basis.
Large offs decreased by 214 basis points.
We remain optimistic that our focus on responsible asset growth and the actions we have taken on collections should continue to drive relatively stable credit quality.
Net charge offs of $68 million increase sequentially from $59 million and our reported net charge off rate was 13% versus 11, 5% sequentially.
Net loss for the quarter was $59 3 million or $1 45 per diluted share.
On a normalized basis charge offs decreased by 214 basis points.
Pre provision net income remained relatively flat at $23 million this quarter.
We remain optimistic that our focus on responsible asset growth and the actions we have taken on collections should continue to drive relatively stable credit quality.
Turning to our segment results on slide nine if you recall last quarter, we re align our external presentation to match, how we manage our direct lending business, we combined our U S direct lending in Canada direct lending into one direct lending segment.
Net loss for the quarter was $59 3 million or $1 45 per diluted share.
Pre provision net income remained relatively flat at $23 million this quarter.
It also removed the reporting of adjusted net income essentially providing performance detail by geography.
Turning to our segment results on slide nine if you recall last quarter, we re align our external presentation to match, how we manage our direct lending business, we combined our U S direct lending in Canada direct lending into one direct lending segment and also remove the reporting of adjusted net income essentially providing performance detail by geography.
This simplifies the process of modeling the company going forward.
On slide 10, you can see more detail on our allowance there was no significant change in allowance as a percent of gross loans since adopting C for last quarter, the $13 million increase in dollar allowance was primarily driven by Canada point of sale loan growth and the updated fed forecast unemployment and the seasonal model.
This simplifies the process of modeling the company going forward.
On slide 10, you can see more detail on our allowance there was no significant change in the allowance as a percent of gross loans since adopting seasonal last quarter. The $13 million increase in dollar allowance was primarily driven by Canada point of sale loan growth and the updated forecast unemployment and the seasonal model.
Turning to slide 11, net interest income increased sequentially and net interest margin remained stable versus prior quarter when excluding the change in the charge off policy for Q1, even.
<unk> interest expense increased sequentially.
Let's turn to slide 12, and go through a bit more detail on operating expenses on the left side of the page you can see that during Q2, our consolidated operating expenses on a reported basis continued to improve to $108 million from 118 million sequentially.
Turning to slide 11, net interest income increased sequentially and net interest margin remained stable versus prior quarter when excluding the change in the charge off policy for Q1.
Even if interest expense increased sequentially.
Excluding the impact of restructuring expenses in Q1 expenses were flat sequentially and below our expectations, partially driven by delayed advertising and marketing expenses as we are finishing our branch conversions.
Let's turn to slide 12, and go through a bit more detail on operating expenses on the left side of the page you can see that during Q2, our consolidated operating expenses on a reported basis continued to improve to $108 million from 118 million sequentially.
However, we expect to increase advertising and marketing expenses in Q3.
On the right hand side of the page you can see our operating expense ratio trends by our two businesses.
Excluding the impact of restructuring expenses in Q1 expenses are flat sequentially and below our expectations, partially driven by delayed advertising and marketing expenses as we are finishing our branch conversions.
Similar to last quarter, our operating expense ratio in direct lending continue to improve though we had a modest uptick in our Canada point of sale business.
As we have highlighted before one of our key priorities is to improve operating efficiency over the long term by driving scale and continued expense management, which allows us to invest in branch conversions and other efficiency efforts.
However, we expect to increase advertising and marketing expenses in Q3.
On the right hand side of the page you can see our operating expense ratio trends by our two businesses.
Similar to last quarter, our operating expense ratio in direct lending continue to improve though we had a modest uptick in our Canada point of sale business.
On Slide 13, you can see our leverage and liquidity summary on the left hand side net leverage increase in Q2 due to additional liquidity and capital raise in May 2023, and our interest coverage ratio ticked down slightly on the right hand side of the slide total cash in capacity also improved.
As we have highlighted before one of our key priorities is to improve operating efficiency over the long term by driving scale and continued expense management.
It allows us to invest in branch conversions and other efficiency efforts.
On Slide 13, you can see our leverage and liquidity summary on the left hand side net leverage increase in Q2 due to additional liquidity and capital raise in May 2023, and our interest coverage ratio ticked down slightly on the right hand side of the slide total cash and capacity also improved.
Lastly, moving to our outlook for the second quarter on slide 14.
For Q3, 2023, we expect receivables to be in the range of $2. One five to $2 25 billion and for revenue to be in the range of $210 million to $220 million.
Net charge offs are expected to be between 12, 5% and 15, 5%.
Lastly, moving to our outlook for the second quarter on slide 14.
Our operating expense is expected to be in the range of $108 million to $118 million on a reported basis with that I will turn it back over to Doug for some final comments.
For Q3, 2023, we expect receivables to be in the range of $2. One five to $2 25 billion and for revenue to be in the range of $210 million to $220 million.
The <unk> team continued to execute our strategy during Q2 and I remain very enthusiastic about our long term opportunity with overall consumer credit performance in line with our expectations. We do have the confidence to continue to move forward with responsible growth.
Net charge offs are expected to be between 12, 5% and 15, 5%.
Our operating expense is expected to be in the range of $108 million to $118 million on a reported basis with that I will turn it back over to Doug for some final comments.
With that I would like to open up to Q&A.
The <unk> team continued to execute our strategy during Q2 and I remain very enthusiastic about our long term opportunity with overall consumer credit performance in line with our expectations. We do have the confidence to continue to move forward with responsible growth.
Okay.
Thank you.
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With that I would like to open up to Q&A.
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Hi, John already on the line.
Can you give a formal.
Hello, they should be able to hear you know just one moment.
When you guys doing.
Hello.
Just one moment the line was disconnected I'm going to get back in touch with the house, just just bear with me.
Hello.
Hey, operator, yes, it's a security and ready for Q&A.
It's Jackie.
Yeah.
Yes, yes, you can John sorry looks like technical difficulties.
Somewhere in the ether world. So you've got Dogger and is it a year or so hey, John Good morning, guys. Thanks, very much good quarter congratulations on that.
None of them that no worries at all.
Congrats on.
In the bathroom.
The strategic resolve complexity I guess one question you guys are growing.
Despite seasonality of portfolio grew maybe.
Maybe where are you getting new customers.
Any characteristics around.
Astral acquisition costs or the type of customers you're getting.
John .
We grew pretty modestly really for the U S direct lending business and I'm not going to exclude flex. The most of our if you look at the growth segments Flex V grew.
Like 50, some million last quarter, while the direct lending grew about $18 million we.
We are just now starting to ease back into the marketing program. So most of that growth is pure organic growth of either graduating customers or customers tapping into existing credit capability. So in Q3 again, we will start using it back into the marketing programs that we have that are aligned to our kind of credit risk appetite.
Okay.
It sounds more organically going at this point and then maybe I think you guys gave sort of a longer term balance sheet leverage goals now that you're in the process of selling but we are going to get a little liquidity from that.
Think about balance sheet leverage into the later part of this year.
Yeah.
Jonathan I'll take that question, yes, effectively as part of what we discussed in the capital raise in May and a flexible solution.
What once it closes that gives us the amount of capital and liquidity.
Our liquidity to basically get us to profitability and then eventually us covering or a recourse interest as well.
So how the math works out as you know.
After all the tangible book value adjustments as flex it he has grown balances and stuff, we expect to net about 50 to 60 million USD and proceeds from.
On the flexible sale net net when it's closed.
And that gives us the runway to grow the balance sheet.
<unk> to add what he called the right leverage.
And they're basically in a slowly work our way into profitability you've seen it like in every quarter, we've made improvements and we expect that trajectory to continue.
Our overall goal still is.
If you look at tapping its in the appendix to hit that direct lending.
NIM less net charge offs of 26% to 31% Opex in that 26% to 30% and we've talked about this in the past I think John with you and others about the magic number roughly is about $1 five an asset then.
And where it can be very very careful how we get there because just rushing to get there.
We don't ever want to make sure we do not take an undue risk that doesn't give us the right risk adjusted returns.
It's basically still not still but it's on a path to our execution to get to the right point, where hopefully not three to four years, we can refinance the debt we have.
Okay Super helpful.
And then just I mean.
You guys talked about the delinquencies look like there.
Stable, if not improving I mean.
Heightened credit I mean.
As you will see that occurred in some of your expectations, there, but I mean anything to shut up there or is it just feel like consumers.
Consumers kind of stabilizing as we kind of are deep into this inflation interest rate cycle and not much too.
Maybe not much to focus on and not much the variability for the near term in terms of good credit from your perspective.
Yes, John This is Doug again, yeah, I think youre exactly right I think we're seeing a very stabilized credit environment. Obviously, we took a lot of actions last year that are there that are.
Through in the numbers today, but as we sit here today, we're not seeing any unusual stress on the consumer.
Demand remains solid.
Our consumer isn't necessary the headline consumer that youre seeing as far as the tech layoffs et cetera. As you know so we're not seeing anything unusual right now, but obviously, we always closely monitor it.
Look at it on a regular basis.
Alright, guys, thanks very much.
Your next.
Question comes from Vincent <unk>.
Kaine tick from Stephens. Please go ahead.
Hey, good morning, Thanks, very much for the questions and good core results this quarter.
And it was also good to see the flexi sale executed and so I was wondering kind of a broad question is there any other.
Transition items are large strategic items that you think needs to get done from here in terms of our strategic business reviews are balance sheet changes or anything like that or are we.
Or are we kind of said steady state going forward. Thank you.
Thanks, Vincent Yes, very steady state head down chopping wood quite frankly.
We just need to execute the plan and that means really being tight on sufficient on our expense structure make sure we're taking appropriate risk on the credit box and starting to grow back into our balance sheet, So really nothing <unk>.
<unk> transaction will be the kind of the last I think in the deal side for a while for for Carol.
Okay. That's great. Thank you and then kind of related to that the target ranges that you have in slide 16 of your deck.
All of those target ranges.
Do you.
In order to get to those ranges are there any.
Anything that really needs to happen in terms of.
Getting scale or just the macroeconomic environment need to improve with your consumer or are you already kind of underwriting or are operating at that level and just kind of.
A matter of time thank you.
Yes sure Vincent are by the way are really good question I think there's two parts to it so in our long term direct lending target. There was the opex ratio I believe it's about.
23% to 26% in Q2 of print at 30% I think they're it's managing expenses, so basically growing scale versus expenses not going up.
So I think we're on a path there we continue to see opportunities and most of it should drop to the bottom line by it but there's still room to invest where it drives future efficiency. So that's one half of the equation. The second one is our NIM post charge off target of 26% to 31%.
Today, we are at 19% and there I think the things that Doug just mentioned getting into lower yielding lower risk.
You know high balance low APR.
Installment loans secured by an auto title.
Yes, the latter John I mean, we're focused on.
We run.
As a point, we've been running secured programs in the U S for some time, but of our total book of $1 to less than 20% is actually secured so when you kind of think about long term growth opportunities.
Getting into the <unk>.
Lower APR lower charge offs wider margin higher balanced programs.
That's certainly something we're focused on we've been doing it for several years at the Heights business, we're expanding it to first heritage were introducing it in Canada, So, but yes, it's the lower APR lower charge off program.
Okay, and then lastly for me the third quarter guidance that you provided.
Does that assume the inclusion of flexi or the divestiture because it seems like youre going to have to really going to complete the deal before the end of the third quarter, which is why the third quarter would include part of it I shouldn't make sure I understand what's in that guidance figure.
Right now it assumes we have <unk> through all of Q3 right now anticipate closing would be sometime in September obviously, the biggest step is outside our control on the competition Bureau in Canada, which we believe should be.
Our regular process. So it's going to we're going to have flex the probably for probably half of September if not most of it so that the guidance includes that.
If anything changes there will probably put something out too.
To adjust the estimate for Q3 correct.
Okay, great. Thank you very much.
There are no further questions at this time I'll now I'll turn it back to Izzy Dawood for closing remarks.
Yes. Thank.
Thank you operator, just a couple of things.
Our prepared remarks as you saw the flexing. The announcement came late so inherited a fair amount of scrambling in our and there.
There are a couple of things that I just want to reiterate one is obviously the net cash proceeds we expect again after all said and done with the closing adjustments somewhere between $50 million to $60 million USD on our flexible sale as it continues support the growth of that business and we've seen tremendous progress there and the second item.
<unk> is our year end forecast for cash, which I had mentioned on our last call of $100 million to $140 million USD that remains intact as well.
So we are on track on both those elements and obviously the <unk> sale.
It has a big role to play in that as well.
So with that I'll turn it back over to the operator.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Thank you.
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