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Edited Transcript of CURO.N earnings conference call or presentation 30-Jul-19 12:15pm GMT

Q2 2019 CURO Group Holdings Corp Earnings Call

Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of CURO Group Holdings Corp earnings conference call or presentation Tuesday, July 30, 2019 at 12:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald F. Gayhardt

CURO Group Holdings Corp. - President, CEO & Director

* Roger W. Dean

CURO Group Holdings Corp. - Executive VP, CFO & Treasurer

* William Baker

CURO Group Holdings Corp. - Executive VP & COO

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Conference Call Participants

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* Brian Dean Hogan

William Blair & Company L.L.C., Research Division - Associate

* John Hecht

Jefferies LLC, Research Division - Equity Analyst

* John J. Rowan

Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance

* Moshe Ari Orenbuch

Crédit Suisse AG, Research Division - MD and Equity Research Analyst

* Gar Jackson

National Investor Relations Institute - VP of Programs and Director

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Presentation

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Operator [1]

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Good morning, and welcome to the CURO Group Holdings Second Quarter 2019 Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Gar Jackson, Investor Relations for CURO. Please go ahead.

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Gar Jackson, National Investor Relations Institute - VP of Programs and Director [2]

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Thank you, and good morning, everyone. After the market closed yesterday evening, CURO released results for the second quarter of 2019. You may obtain a copy of our earnings release on the Investors section of our website at ir.curo.com.

With me on today's call are CURO's President and Chief Executive Officer, Don Gayhardt; Chief Operating Officer, Bill Baker; Chief Financial Officer, Roger Dean; and Chief Accounting Officer, Dave Strano. This call is being webcast and will be archived on the Investor Relations section of our website.

Before I turn the call over to Don, I would like to note that today's discussion contains forward-looking statements, which include, but are not limited to: our expectations regarding macro factors impacting the U.S. economy; the timing and pace of the rollout of our line of credit product in British Columbia; our belief that Zibby has a competitive advantage over its competitors; our revised financial guidance for 2019 and our underlying assumptions; scope, timing and operational and financial impact of regulatory activity in California; and our expectations regarding new products and partnership opportunities in the state; and the strengths of our company and operational model.

Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the statements made in today's call. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update 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. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in our earnings release. As noted in our earnings release, we have posted supplemental financial information on the investor portion of our website.

With that, I would like to turn the call over to Don.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [3]

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Great. Thanks, Gar, and thanks, everyone, for joining us today to discuss what was a very good second quarter and the continuation of good momentum coming out of our first quarter.

We executed well on a number of key areas and saw good growth in earning assets, revenue and net earnings. Overall, credit quality was very solid, with quarterly NCOs at 16.1% versus 18.8% in the second quarter of 2018, and with the most notable improvement in our Canadian line of credit product, where performance is running well ahead of our expectations.

Our new customer accounts were strong, even though we invested a bit less in advertising spend versus the second quarter of 2018. Some of that is due to timing in the U.S. between the quarters as year-to-date advertising spend in the U.S. is consistent with last year, with all of the overall reduction coming in Canada. In general, as we've been noting over the past couple of quarters, we're focused on growing our top line in a disciplined fashion to ensure that credit quality, operating costs and margins all deliver in line with our expectations.

Our revenue grew 11.4%, a bit faster than in Q1, with the U.S. growing at 10.5% and Canada growing 15.3% in U.S. dollars. I should point out that Canada actually grew 19.5% in constant currency. So really terrific quarter turned in by our Canadian colleagues. Roger will give you more detail, but we're incredibly pleased with how our product transition has worked out in Canada. The work is never really done, but I think this quarter in Canada, once again, demonstrated our ability to tackle product change in a large-scale and doing it the way that works for us in terms of loan volume and credit, while delivering great value and service to our underbanked customers.

CURO will be 22 years old next month, and our history shows countless examples of how we've navigated product and channel shifts, whether driven by consumer preference and demand, competitive dynamics or regulatory changes, and we consider managing these changes to be one of our key competitive strengths.

For the quarter, revenue in the U.S. was $210 million, which is a record for the second quarter. Loan balances grew 11% to $408.3 million, led by good loan growth in our Open-end portfolios in Virginia and Tennessee. Loan loss provision increased as a percentage of revenue versus the second quarter of 2018, in part due to the change in our loss recognition policy for Open-ended loans, which Roger will review in more detail later, as well as ongoing mix shift to longer-term products and channel shift to online originations.

In Canada, we remain very focused on product transition as well as increasing awareness around the benefits and flexibility of our Open-end credit offering. Open-end balances stood at $219.2 million at June 30, 2019, and represent 81.6% of our total receivables in Canada, up from 42.1% at June 30, 2018.

Based on the success we've had in Ontario, we're planning to introduce a line of credit product in British Columbia later in 2019. British Columbia represented only 9% of total Canadian revenue for the second quarter of 2019, and we intend to undertake a more measured rollout than we had in Ontario, so any negative short-term earnings impact should be minimal.

Overall, we believe the U.S. economy continues to expand and fundamentals for our consumers remain strong. While consumer confidence numbers have bounced around lately, key measures such as consumer debt-to-income remain at cyclical lows. Canadian consumer confidence numbers remain near historic highs, while the rebound in oil and commodity prices has helped to stabilize key markets in the western provinces.

Two new opportunities where we continue to invest and that we're pleased with the progress are Revolve Finance and Zibby. Revolve is our demand deposit or DDA account, sponsored by Republic Bank based in Chicago that we introduced in March of 2019. This product provides our customers the full functionality of a bank account, direct deposit of a customer's paycheck, debit card, bill payment and even optional overdraft protection in an FDIC insured account for their deposits. We earn fees on account and card use as well, as well as for those customers who qualify overdraft protection.

With regard to Zibby, we recently participated in another follow-on investment round in Zibby, which is our lease-to-own online installment platform, which brought our fully diluted ownership in this private company to approximately 43%. As a reminder, we account for Zibby as a noncontrolling equity investment. This round was completed at a very compelling valuation, but as you can see in our add-backs, it did necessitate a noncash impairment charge on our overall investment.

Zibby continues to perform very well, particularly with key accounts such as Wayfair, Lenovo and Affirm. While Zibby is still a small player in this $48 billion addressable market, we believe that their online integration and service capabilities give them a durable competitive advantage over competitors who focus on brick-and-mortar retailers.

You can see in our release that we're raising our guidance for the full year 2019. We're a bit ahead of these targets after Q1. We had a very strong second quarter and feel good about our earnings level in the back half of the year. A good part of that is we don't believe there are any major gating elements in terms of product or process development that would prevent us from meeting or potentially exceeding our increased guidance. However, we're mindful that we need to continue to stay very disciplined on credit and collections, allocate ad spend dollars correctly, execute on the operating plan and, most of all, continue to deliver great value and service to our underbanked consumers. Overall, we think we'll have a very strong second half and deliver great results for the full year.

I'm going to handle a couple more topics before turning it over to Roger. In terms of regulation, at the state level in California, we expect the new law to pass in September, capping the APR on $2,500 to $10,000 installment loans at about 38.5%, making our current installment products no longer viable. Although this law does not impact our Single-Pay loan offerings in California.

For the record, we think the enactment of this new law will be a bad outcome for underbanked consumers as they will simply not qualify for options available at the low rates, and we know this because those options are available now. And many of these consumers may resort to borrow from unlicensed lenders who offer higher rates and limited consumer protections.

So we're preparing for an effective date of January 1, 2020, at which time any new originations would be subject to this cap. Outstanding installment loans would not be impacted and the related portfolios would run off over the course of 2020 and 2021.

For the trailing 12 months, the affected products represented approximately 13% of our consolidated revenue. We anticipate minimal impact in 2019 as we position our existing portfolio as it's set to run off over a 12- to 18-month period into 2021.

For 2020, given the combination of installment portfolio runoff, Single-Pay growth, new products and elimination of variable costs associated with installment originations, we expect that the state level EBITDA contribution from California for 2020 will be similar to 2019.

We also continue to work on a number of new product and partnership opportunities that could give us the ability to serve our California customers with larger, longer-term loan products. As I noted earlier, we've had a lot of practice and long-term success adapting to state and provincial regulatory changes as we most recently demonstrated in Ontario over the last year.

But even absent any meaningful contribution from new product partnership opportunities in California, the relative stability in 2020 California earnings contribution, combined with non-California earnings growth, positions us well for overall earnings growth in 2020. And over time, if we aren't able to transition the California installment book into alternative products, the significant cash from liquidation of the legacy portfolio, along with our strong operating cash flow could be applied toward other new product opportunities in different markets or, at the very least, we think upwards of $180 million of cash in 2020 would be available for substantial debt reduction or additional share repurchases with the corresponding impact on our earnings per share.

So in summary, the first half of 2019 has been very positive, and I think this quarter's once again demonstrated the strength of our company and our operating model. We're a strong and growing company with strong cash generation capabilities. We have the strongest omnichannel model in the consumer finance industry. We continue to prove our ability to successfully navigate and rapidly adapt to regulatory competitive changes across the markets we serve. And we continue to invest in our people, our processes and technologies to remain at the forefront of innovation, and we use this innovation as well as our scale for the benefit of our underbanked consumers.

Just a final note before I turn it over to Roger. You may have seen our release from last week where we announced the addition of 2 new Board members: Gillian Van Schaick and Beth Webster. Both Gillian and Beth have long careers in financial services and banking, where Gillian's experience concentrated in compliance, most recently, where she was Executive Vice President and Head of U.S. Regulatory Compliance at HSBC. Previously she'd been at JP Morgan and Goldman Sachs. Beth's background is in human resources, most recently as EVP and Head of Human Resources at TD Bank. She had long stints at Fidelity and Citigroup before moving to TD.

Gillian and Beth bring different but terrific backgrounds that complement the strong operational, financial and digital marketing backgrounds of our other Directors, and while we've only had the benefit of their participation at 1 meeting, we're very happy to have them on board and look forward to their help and guidance going forward.

And with that, I will turn it over to Roger.

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [4]

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Thanks, Don. Thanks a lot. Good morning, everyone.

Consolidated revenue for the quarter was $264.3 million, which was up 11.4% compared with last year's second quarter. Adjusted EBITDA came in at $53.7 million. And as we expected, was down a bit year-over-year, mostly because of U.S. provision comps. Last year, our allowance coverage was lowered from Q1 to Q2 of 2018, which had the corresponding impact of reducing loss provision expense in the second quarter of 2018.

As Don mentioned earlier, our net charge-off rate improved meaningfully versus the same quarter a year ago. I'll talk more on that in a minute. Canadian adjusted EBITDA was up 19.1%, so that's great progress from the transition to and growth of our Open-end loans in that market. Adjusted net income was up slightly year-over-year on lower interest expense following last summer's refinancings and adjusted EPS rose 20.9%.

Next, I'll comment on advertising customer counts and cost per funded loan before moving on to portfolio performance. We added almost 147,000 new customers in the U.S. and Canada this quarter. That's down slightly versus the same period last year. I'll break it down a little by country. But starting with consolidated, cost per funded loan was lower than the same quarter a year ago at $75 compared to $81 in Q2 of 2018. Breaking it down by country, U.S. cost per funded loan was $77, that's down $2 versus Q2 of last year. U.S. new customer counts were down 3.6% and 50.7% of U.S. new customers were acquired online in the second quarter.

Internet new customers were down 2.7% year-over-year as we pulled back a bit on customer acquisition for Avío, while new machine learning decision models are implemented. Store new customers were down 4.4%, very similar trend to what we've seen for the past several quarters, and our site store capability added 27,000 new customers to the stores this quarter compared to 22,000 in Q2 of 2018.

Canadian costs per funded was $62, that's down $25 from the second quarter of 2018. But admittedly, advertising in Canada was elevated in the second quarter of 2018, primarily because we increased spend ahead of the July 1, 2018, Single-Pay regulatory changes in Ontario and the product transition to Open-end.

Next, I'll spend a little time covering overall loan portfolio growth and performance. First, I'll cover a few highlights at the product level. U.S. company-owned unsecured installment loans grew 9.9% versus the same quarter of last year. Canadian installment balances shrank because of the expected mix shift to Open-end products, so consolidated company-owned unsecured installment balances grew 2.8%.

CSO loan balances were down slightly year-over-year. But you'll recall that the law change in Ohio eliminating the CSO model became effective April 27 of this year, and the balances in Ohio had run off, so it's good growth in Texas to replace that run-off at this point. As expected, Single-Pay loan balances were affected by Canadian regulatory change and transition of multi-pay loan products.

Canadian Single-Pay balances declined $12.2 million or 25.8% versus the same quarter a year ago because of that transition in the third quarter of last year at Ontario. U.S. Single-Pay loan balances actually grew 9.9% year-over-year, which is accelerated over what we've been seeing.

Moving on to loan loss reserves and credit quality, our consolidated net charge-off rate improved over 270 basis points versus the second quarter of 2018, with all products improving, except unsecured installment. The company-owned unsecured installment net charge-off rate rose year-over-year, and as we've discussed for the past several quarters, the unsecured installment net charge-off rate comparisons are affected by mix shift away from Canada, the effect of credit line increase initiatives and our unseasoned Avío portfolio.

The CSO unsecured installment -- our CSO unsecured installment net charge-off rate was also up a bit year-over-year from credit line increase initiatives in Texas, but delinquency rates for CSO improved year-over-year.

Don mentioned earlier the better-than-expected performance of Canadian Open-end portfolio. The annualized net charge-off rate for Canadian Open-end this quarter was just under 25%. If you recall from our previous calls and disclosures, we didn't expect to reach annualized net charge-off rates in the mid-20% range for this product until Q4 this year. So we're really pleased with the performance in Canada. The portfolio is seasoning well and our customers are just paying us back very well on that product.

As you'll see, the delinquency rates for Open-end have also improved even sequentially from first quarter. Because of the relative moves in net charge-off rates and delinquency trends, we made some adjustments to allowance coverage by product, most notably an increase in company-owned unsecured installment allowance coverage and a reduction for Open-end loans.

I'll close by recapping capital structure and liquidity. Our total available liquidity position at the end of the quarter was nearly $165 million. This is comprised of excess unrestricted cash of about $38 million, U.S. revolver capacity of $50 million, Canadian revolver capacity of over $7 million and undrawn borrowing base availability on our Canadian SPV Facility of $67 million.

Finally, under the terms of our $50 million share repurchase program that was announced in April, the company purchased in the open market 1,038,500 common shares through last Friday, and 39.1 million remains available under the program for future repurchases.

This concludes our prepared remarks, and we'll now ask the operator to begin Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [2]

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Operator, could you repeat that? You broke up?

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Operator [3]

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(Operator Instructions)

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Gar Jackson, National Investor Relations Institute - VP of Programs and Director [4]

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Yes, operator, we could not hear. (Operator Instructions) That's it. And we're ready to take our first question.

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Operator [5]

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We will take the first question from John Hecht with Jefferies.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [6]

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Can you guys hear me?

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Gar Jackson, National Investor Relations Institute - VP of Programs and Director [7]

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Yes, we do. I apologize. The operator is almost unintelligible. So sorry about that, but go ahead, John.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [8]

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No worries. So first question just is the -- you had the accounting change for the Open-end product to conform the allowance and provision to the other products. Is that accounting change now kind of fully baked in where the run-rate is where it should be?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [9]

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Yes. Q2 was -- yes, good question. Yes. Q2 was much better around the run-rate because you're, obviously, moving to 90 days, we didn't -- but John, if you look at the pro forma table in our MD&A for the Open-end loans, we kind of showed you what the pro forma would look like. And the short answer is the pro forma is basically aging all loans as if we didn't do this prospectively. And so it really gives you a good illustration of kind of where we came out. And we did see improvement in Q2, but that's I think -- and long answer to a short question, yes, that's -- we saw much more normalized net charge-offs in Q2.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [10]

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Okay. Second is Canada. I think you had much better EBITDA performance and operating performance than we expected. And I know, Roger, you cited some improved credit characteristics there. I'm wondering can you just give us an overall update and with respect to volume and demand and so forth there as well?

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William Baker, CURO Group Holdings Corp. - Executive VP & COO [11]

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John, it's Bill. Yes, I mean, we -- as, I think, Don and Roger said, we're pleased with what we're seeing. It really is a combination of things. We continue to see very strong demand. I think we really have the acquisition model honed in from an underwriting perspective. And then we continue -- for customers that we turned down, we put them in the Single-Pay product. And then after they prove credit performance and creditworthiness, we then offer them the Open-end loan. And I think that strategy has worked very well.

From a scale perspective, on the advertising side, I think we've got that in a good spot. And we just see good performance. Our collection numbers continue to sequentially improve. And I think that's the combination of the customer really getting a feel for the product, how to properly use it. Utilization continues to be in a range that we're very comfortable with. And from a collections perspective, I think our people become more adept at working with the customer and servicing. It's something Don talks about a lot. You're financing these loans, servicing them, and being able to offer it to the customer in a competitive fashion. So we're really pleased with what we're seeing. And I think that gives us the confidence to, in a very measured fashion, move into British Columbia.

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [12]

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Yes. John, just for perspective. We saw 30 -- we saw $35 million of sequential loan growth Q1 to Q2 in the Canadian Open-end book.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [13]

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Okay. And final question is just it looked like a few positive things going on in the business. But I'm wondering if maybe you can just characterize what are the key drivers that allowed you to increase -- from your perspective, what's the key drivers that allowed you to increase guidance?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [14]

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Yes, John, it's Don. I think Canada is really -- there have been -- we were -- I think we try to be pretty measured in how we talked about that and forecasted it. But we feel like in that business -- so last year, we did look at our -- we break out the -- if you look at last year, we did 20 -- in adjusted EBITDA, we did $25.9 million in Canada. And I think at this point, our belief, I think we had talked about maybe we could get into the high 40s there, I think -- for 2019. I think adjusted EBITDA for Canada is going to come in -- our belief it's going to come in, in the low 50s now. And depending on credit performance, it might even do better than that for the full year. So that's a doubling of adjusted EBITDA out of that market.

I think domestically, I think we just -- we feel good about credit. We feel good about where our customers are. Newer portfolio, as you know, as we talked about Virginia, our Open-ended line of credit book in Tennessee, the credit has been pretty solid. And from a demand standpoint, demand continues to be really good. And it's good quality demand. And I think for us, the key is just to sort of make sure we spend the right amount of advertising dollars in the right places and not -- we're not really kind of chasing new customers that much. I think we probably have a bit more demand than we think we can sort of take on right now in terms of new customers. So we could take on more new customers, that might get the ad spend and the credit numbers a little bit out of whack. So we're really focused on the ad spend numbers and the credit -- or that gross margin. So risk-adjusted revenue, minus the ad spend is really kind of the key focus for us right now.

So the business is in a good spot. And I think our people are working well. Our store base is really delivering great results. A lot of it -- we talked about leads to stores, where customers come online and end up closing the loan. So that continues to perform very, very well. So I think there's a lot of little things adding up to a good first 6 months and a good outlook for the rest of the year.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [15]

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Great, guys. Congratulations on a good quarter.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [16]

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Thanks.

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William Baker, CURO Group Holdings Corp. - Executive VP & COO [17]

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Thanks, John.

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Operator [18]

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We'll take our next question from John Rowan with Janney.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [19]

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Don, I was wondering if you could drill down a little bit further into California. I know you gave us a 13% revenue number, and I appreciate that. But is there any reason to believe that the bottom line contribution from that product in Canada is significantly different than the revenue contribution or EBITDA contribution? Whatever you want to say, I mean, is there a very asymmetrical or abnormal loss rate relative to your other products? Just help us frame up more of the potential bottom line impact as you look out more to 2021 after the portfolio has matured off.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [20]

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Yes. John, so just as a kind of a high-level view, I mean, that -- those -- the Canadian -- the California installment book is domestically, it's at the low end of the curve from a yield perspective. So again, it's our -- some of our lowest yielding top line yield products. And if you look at over -- internally, the way we account for it, the loan losses are about 52% of total revenue. So it's a -- which is -- if you look at our overall numbers, that's a lot higher than the weighted average across the whole business. And you can look at -- you can look just from that. If you look at our unsecured installment loan loss rates in our -- the detailed table breakouts, you can see that could -- I think that California represents about 90% of that unsecured installment portfolio. And you can see those loss rates there. So it is -- while we like the business, we like the product, the customers are -- it's California, so people make -- it's a higher income state. The average customer in that portfolio, their average annual income is just shy of $50,000. So it's -- on balance, it's a better customer from a household income perspective, a little bit higher FICO score than our average portfolio, but it's a lower-yielding product. And when you kind of do all the math out, just the loss rates alone, eat up about a little more than half of the total revenue.

So I think what we're focused on is some of those customers may end up kind of dropping down and borrowing from us in our Single-Pay book. And we're focused on finding and continuing to look at other product opportunities and partnership opportunities to serve that customer base.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [21]

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Okay. And just to be -- I mean, make sure I got this correct. So California is 90% of the U.S. unsecured installment when I look through these breakout tables?

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [22]

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Yes. John, it's actually a little lower than that, Don. It's about 70 -- if you consider this -- the title and the unsecured...

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [23]

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Oh, the title, I...

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [24]

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If you consider title plus the unsecured.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [25]

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So the unsecured plus the secured book, you got to add both those together, yes. Go ahead.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [26]

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Okay.

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [27]

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It's closer to 70%. It's closer to 70% on the combined book of the total of those 2.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [28]

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Okay. Okay. And then what's the status with Meta?

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Unidentified Company Representative [29]

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So we continue to talk to Meta, and we continue to talk to other banks about partnership opportunities. And when we have more stuff definitive to say, we'll say it.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [30]

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Okay. And lastly, Roger, what's your thinking on seasonal implementation and the new rules governing companies with low floats?

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [31]

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Yes. So as it stands right now, obviously, it's still moving. It's not final this delay. But as it stands right now, technically, we would qualify for a delay to 2023. And so then the -- but we're still evaluating. That doesn't -- obviously, that doesn't necessarily mean that we won't early adopt. As you know, John, that stuff's hot off the presses. And it's actually still moving a little bit in terms of what happens if we qualify as a SRC, small reporting company, which we did at June 30, which is the measurement date, which means we qualify for the delay. And then I think there's still -- it's still settling around what happens if that -- when that changes in the future. Because 2023's a long -- God forbid, the stock price goes up, things like that, but -- so we're still evaluating it, John.

And again, I think the other thing that just I would emphasize, again, is just because we can delay doesn't necessarily mean we're going to.

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Operator [32]

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We'll take our next question from Brian Hogan with William Blair.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [33]

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The first question, I appreciate the California update and outlook. But just looking long term, and with California and potentially moving to different products, the customers there doing that, I guess, what are your thoughts on longer-term revenue growth, and with that, the margin outlook? I think you've been consistent with that margin around 22%. I mean do you anticipate that margin moving longer term? And what's the driver of that as well as that revenue growth there?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [34]

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So let me just make sure I understood the question. So you're talking about just -- is this specifically California or you're just talking about overall margin growth?

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [35]

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Just overall longer term. The impact of California, what your thoughts are. I mean is it a high single-digit type growth business with a 22% margin? What are your kind of thoughts on the overall business?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [36]

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Yes. I mean, I think that it's hard to -- we talked about next year, we think we'll get -- I think we'll probably see as -- a lot of this is dependent upon what we do in terms of replacement product. I think we feel very good about being able to find products and partnerships that will serve our -- the customer base in California that wants this longer-term larger installment loan or possibly as a line of credit product. So I don't -- I think if we can -- if those products and partnerships work out into 2020 and 2021, being able to grow the business at a low double-digit number, I think we can do that.

And I think from a margin standpoint, it's -- the bank partnerships are great. You have to sacrifice a little bit of the economics there because you have a bank partner there that's going to need a good rev share. But I think, probably, if you look at our overall -- our adjusted EBITDA margin this year, for the full year, it's going to come in somewhere probably in the 22%, 23% range. And I think that the way the operating model works because around 50% of your -- or 53% of your total cost structure is loan loss provision and ad spend, that's pretty variable with revenue. And beyond that, it's store costs, call center costs and corporate costs. And you get a decent amount of operating leverage there. I think this year, we expect our adjusted EBITDA margin to go up about 200 basis points, maybe a little bit more over the course of the year.

So I think if the rev growth stays in the low -- the, call it, 10% to 12% range, you should continue to see a modest expansion of the adjusted EBITDA margin. And I think the big -- as you -- a lot of that is dependent on filling the demand in California with bank partnership opportunities. And we feel like that we've got a good -- a really good opportunity to do that.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [37]

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Yes, appreciate that. That's helpful information. And Canada, obviously, you expanded quickly into Ontario last year and rolling out into British Columbia later this year and in what may be a more measured pace. I mean, I guess, the rollout to maybe the rest of Canada, and obviously, it's -- a vast majority is in Ontario, I understand that, but, I mean, what is the overall Canada opportunity for the line of credit product?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [38]

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So we have the product in Ontario and Alberta now. So just big picture. Ontario is 60%, maybe 65% of our total business there so -- and then Ontario -- we said, B.C. is about 9%, Alberta is about the same amount. So between Ontario, B.C. and Alberta, you're talking about 85%, roughly 85% of the total business. So with the completion of B.C., will be -- the overwhelming part of the business is going to be in the -- we'll have line of credit in the overwhelming majority of the stores and online in those different provinces, so. We -- but -- so -- and Canada is 24% or something of our total business. So I'd sort of make the point again that B.C. is 9% of 24%. So it's a really small part of our total revenue. And we'll do it at a more measured pace. So the impact we saw in Ontario where we had adjusted EBITDA, that we made $9.8 million in the second quarter of '18, then we lost $3.4 million in the third quarter. And that was -- so that had a real impact on the overall results. We're not going to see anything like that as we go into B.C.

I think longer term, the business -- the credit's really good there. The customers really love the product. We're really starting to get some traction offering it online as well. And it's worth noting again that for, I think, a whole lot of reasons, which we won't try to unpack here, the online financial services market in Canada is kind of way behind where it is in the States. So as customers in Canada, not just underbanked customers and our specific customers in this product, but in general, as online financial services become a bigger part of the overall market there, I think we've got a great product. And a lot of competitors of ours went up to Canada and tried to start an online business and couldn't get any traction there. So we've been at it for a long time. We love where we are online there. And I think as the channel shift starts to take place, as it has in the U.S., as it has in the U.K. and a lot of other markets, I think we're in a great position in Canada.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [39]

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All right. And then last question from me is kind of along the lines of maybe M&A and investment activity. You mentioned Zibby upfront and your additional investments there. And you offered some nice color around that. But can you talk a little bit more around Zibby and maybe other maybe additional products that you're looking at to maybe add on? And would you eventually bring Zibby in-house, if you will? Or just kind of your thoughts around that, please?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [40]

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So, yes, I'm going to intentionally not answer the last part of that question. We've got some great partners in that business, some really good B.C. firms and kind of growth equity firms that are invested in that business alongside of it. I mean obviously, we continue to invest in it and put our dollars. So we're kind of -- we voted with our feet in support of the management team there and what they're doing.

It makes a lot of sense for us. It is a very similar customer. It's -- and kind of when you boil it down, we're essentially making a $700 to $1,000 credit decision for low 600 FICO borrowers. So I think we've been able to help a lot in that and help that business grow and -- but at the end of the day, it's that management team there that's really going out and landing big national accounts like Wayfair and Lenovo laptops and working with partners like Affirm. So we'll -- if the opportunity comes up to invest more money in the business and the terms make sense, whether it's just another round or a control investment, we'll take a hard look at that. And we like that team a lot. And I think that product, as a part of our business, makes a lot of sense.

So in terms of other stuff, we like our card businesses a lot. We've got our Opt+ debit card platform that continues to perform really well and be a great additional sort of service to our customers, where they can take money, draw other -- take the proceeds of an installment loan or just kind of take a draw on their line of credit and put that money on the Opt+ card, kind of a checkout. The Revolve Finance product, which is a real bank account replacement product, is working great. And as that has an overdraft feature on it as well for customers who direct deposit with us. So I think the card business is something we're going to continue to look at, and potentially, even look at ways to partner with other retailers to offer our cards through. Right now, we only offer our cards through our location and to our online customers. But we're looking hard at potentially partnering with other retailers, both online -- both brick-and-mortar retailers and online retailers, to offer our cards through those retailers. So we -- I think we'll continue to invest in the card side of the business as well.

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Operator [41]

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And we will take our next question from Moshe Orenbuch with Credit Suisse.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [42]

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Actually, most of my questions have been asked and answered. Maybe you could just kind of talk a little bit about what you're seeing in terms of the competitive environment, kind of putting together the last couple of questions? And how that's kind of directing you as to where you're -- you should be putting your efforts and marketing dollars?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [43]

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Yes, I'll start. Maybe Bill has some thoughts as well. But I think the competition continues to be, I think, pretty sensible. We don't see anybody doing anything that is, I'd call it kind of irrational or uneconomic where people are just trying to come in and like buy share.

You always worry when there's lots of big dollars raised in some of these investment rounds that you hear about, and a lot of those dollars immediately get plowed into advertising to build brand and gain share and gain scale. But I still think that we see very little of that, that is in the, call it, the underbanked space. Most of that is in either payment products or in prime or near-prime products.

So the numbers we see, whether it's -- and obviously, you guys publish that direct mail piece, which we read avidly, but whether it's direct mail, some of the online channels, the affiliate relationships and how that trickles down into our online business and our leads to store programs. And we still see -- and as I said, honestly, we probably see a bit more -- looking back at the second quarter, I think probably you could maybe argue that we left a little bit on the table in terms of new customers and top line and loan volume because we wanted to make sure from an ad spend and a credit quality standpoint, we were kind of really dialed in there. So I don't know, Bill, if you have any additional thoughts there?

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William Baker, CURO Group Holdings Corp. - Executive VP & COO [44]

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No, and I think I would echo those comments. I would just highlight the online demand that we're seeing predominantly in the U.S., but also growing in Canada. And I think that obviously gives us a real opportunity to service the customers online. But keep in mind, we have that leads to store, site to store program, which helps us sort of further take advantage of that. So yes, I think we're really pleased with what we saw through the quarter, and I think we're bullish on that demand through the end of the year, again, in a very controlled fashion, both from a marketing cost and an underwriting perspective.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [45]

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Got you. And we were quite impressed with the expense control in the quarter. Any thoughts as we go forward? Like is there more to come? Is it stuff that you'll be investing in? How should we think about that scene in the second half?

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [46]

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Yes. I think, Moshe, it's Roger. Yes, I mean, I think we've kind of settled in on kind of a run-rate from a quarterly perspective at this point, sequentially. Certainly, on the corporate side, there's nothing that's going to cause that to change over the course of this year in either direction, significantly.

Store costs, the non-advertising costs of providing services are pretty -- very stable as well kind of sequentially. And we did make -- if you recall, as we headed into the year, we did a rev and we did some other things, and we're seeing the payback on that at this point. And we've got to kind of rightsize for lack of a better word, re-rightsize.

And then on the advertising, obviously, third quarter is our biggest quarter from an -- seasonally, from an advertising perspective. So you'll see a little bit of -- you'll see an increase in Q3 versus Q2 on a percentage of revenue basis and then kind of coming back down a little bit in Q4. But other than that, again, another long answer to a short question, but I think we've got a really stable cost base right now.

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Operator [47]

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This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Don Gayhardt with -- for closing remarks.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [48]

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Great. Thanks, everybody, for joining us. We look forward to talking to you again after our third quarter release, towards the end of October. Thank you.