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Edited Transcript of CURO.N earnings conference call or presentation 25-Oct-19 12:15pm GMT

Q3 2019 CURO Group Holdings Corp Earnings Call

Oct 28, 2019 (Thomson StreetEvents) -- Edited Transcript of CURO Group Holdings Corp earnings conference call or presentation Friday, October 25, 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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* Hugh Michael Miller

The Buckingham Research Group Incorporated - Director

* 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

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

* Vincent Albert Caintic

Stephens Inc., Research Division - MD & Senior Specialty Finance 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 Third 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 third quarter 2019. You may obtain a copy of our earnings release from 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 and how those factors impact our customers; the timing and pace of transitioning customers to Open-End loans in British Columbia; our belief that Zibby has a competitive advantage over its competitors; our revised financial guidance for the full year and fourth quarter 2019 and underlying assumptions; California state-level EBITDA contribution for 2020 and related expectations of total company earnings growth for 2020; the impact to our customers of mobile app availability on Android platform mobile devices and the resulting impact on our business; 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 that 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 on our earnings release, we have posted supplemental financial information on the Investors 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 to everyone for joining us today to discuss what's an excellent third quarter and the continuation of good results and momentum.

Our adjusted net income nearly tripled year-over-year on strong loan portfolio growth and performance and operating expense discipline. Through the first 3 quarters of 2019, we have produced 10.8% revenue growth, 37.2% adjusted net income growth and 40% -- and a 40% increase in adjusted diluted earnings per share.

For the quarter, our Canadian business delivered 30.3% revenue growth and $15.3 million of non-GAAP adjusted EBITDA versus a $3.4 million adjusted EBITDA loss in the prior year quarter. Suffice to say that a year later, we are incredibly pleased with how the product transition has worked out in Canada. Our team in Canada has been extraordinary. And we once again demonstrate our ability to tackle product change on a large scale and do it in a way that works for us in terms of loan volume and credit while delivering great value and service to our customers.

Our U.S. business also continued to perform well with 6.2% revenue growth, 11.7% net revenue growth and 23.3% growth in adjusted EBITDA over the prior year quarter. To get to these results, we executed well in a number of key areas and saw good growth in earning assets, revenue and net earnings. Overall credit quality was very solid with a quarterly net charge-off rate of 16.4% versus 20.0% in the third quarter of 2018.

The most notable improvement year-over-year was for Canadian open-ended -- charge-offs in Canadian open-ended loans, while the quarterly rate was just under 25%, which continues to be better than our expectations. Last month, we started to optimize our California Installment loan portfolios to be well positioned for the January 1, 2020, law change and its optimization is impacting our Unsecured and Secured Installment loan growth.

We continue to believe that macroeconomic trends are positive for our customers in both Canada and the U.S. In addition to the net charge-off rates that I just spoke about, another important indicator is the rate at which our customers cure delinquent loans. And these rates were essentially unchanged from the third quarter of 2018. We remain very disciplined as we work to keep our cost per funded loan and loan vintage credit results performing well and meeting or exceeding our expectations.

In Canada, we remain very focused on portfolio performance and our growing share with our market-leading open-ended loan product. Q3 of 2019 revenue was $16.2 million and like in the U.S., was the highest third quarter in our history. Open-ended balances stood at $237.3 million at September 30, 2019, and represented 82.8% of our total receivables in Canada, up from 71.6% at September 30, 2018.

Based on the success that we've had in Ontario, we began to slowly introduce the open-ended loan product in British Columbia last month and would expect to have qualifying Single-Pay customers transition to Open-End by the middle of 2020. British Columbia represents 8.5% of total Canadian revenue in the third quarter of 2019. And because of its different competitive dynamics versus Ontario, we can be more measured in B.C. transition with no material revisions to our earnings trajectory.

Two of the opportunities where we continue to invest and are pleased with the progress of are Revolve Finance and Zibby. Revolve is our demand deposit or DDA account sponsored by Republic Bank of 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, a debit card, bill pay and even optional overdraft protection in addition to an FDIC-insured account for their deposits. We earn fees on account and card use and for those customers who qualify, overdraft protection. So far, we have loaded almost $50 million on over 30,000 unique cards, so really good growth for a new product.

As we discussed last quarter, we recently participated in another follow-on investment around Zibby, an online virtual lease-to-own platform, which brought our fully diluted ownership in this private company to approximately 42%. Zibby continues to perform well, particularly with key accounts such as Wayfair, Lenovo and Affirm. While Zibby is still a small player but growing, we've almost doubled their leasing volume in a growing category, and we believe that their online integration, underwriting and service capabilities give them a durable competitive advantage over competitors who focus on brick-and-mortar retailers.

Overall, we say that we'll have a very strong final quarter to the year and deliver great results for the full year. You can see in the release that we're once again raising our earnings guidance for full year 2019. We'll announce 2020 guidance, along with our fourth quarter earnings, early next year.

A couple of other key topics before turning it over to Roger. In terms of regulation, at the state level in California, we're preparing for the effective date of Jan 1, 2020, for AB 539 in our Installment portfolio as we run off over the course of 2020 and 2021. During the quarter, we saw a small decline in our California Unsecured and Secured Installment loan balances as we began to change the credit composition of the portfolio to reduce risk in 2020 and to optimize portfolio cash flows and earnings.

For the trailing 12 months ended September 30, 2019, these products represented 13% of our consolidated revenue. All current portfolio positioning from this change is included in our 2019 updated guidance. We said on a number of occasions, but it bears repeating. For 2020, given the composition of Installment -- the combination of Installment portfolio runoff, growth in our Single-Pay product and the elimination of variable costs associated with Installment originations, we expect that California state-level EBITDA contribution in 2020 will be essentially on point with 2019. Of course, at this point, with the continuation of current macroeconomic trends, we'd expect that the rest of the U.S. and Canada will post healthy earnings growth next year. So we think overall, we're very well positioned for earnings growth in 2020.

A quick word on MetaBank and bank relationships in general. After almost 18 months of hard work by a lot of people in our team, we decided to direct our efforts elsewhere during the quarter, so we mutually agreed to terminate our partnership agreement with MetaBank. But during the quarter, we did enter into a new agreement to offer analytics, marketing and servicing support to another bank and look forward to discussing this arrangement more in the near future.

So in summary, the first 9 months of 2019 have been very positive. And I think that this quarter has once again demonstrated the strength of our company and our operating model. We are a strong and growing company with strong cash generation capabilities. We have the strongest omni-channel model in the consumer finance industry. We continue to prove our ability to custom navigate and rapidly adapt to regulatory competitive changes across all markets we serve. And we continue to invest in our people, processes and technologies to remain at the forefront of innovation. And we use this innovation as well as our scale to the benefit of our underbanked consumers.

And with that, I'll 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. Good morning. Consolidated revenue for the quarter was $297.3 million, up 10.3% compared with last year's third quarter. For the quarter, revenue in the U.S. was $237.1 million, the highest in the -- the highest third quarter in the company's history for the U.S. U.S. loan balances grew 5% to $444 million, led by good growth in our Open-End portfolios in Virginia and Tennessee, offset somewhat by California portfolio repositioning.

Adjusted EBITDA came in at $67.1 million, which was up 73.8% year-over-year. But most of us recall that Q3 last year was affected by what we expected to be and has turned out to be a very successful product transition and market share expansion in Ontario, Canada.

Consolidated adjusted net income and adjusted EPS rose dramatically year-over-year. That was a result of: one, Canada's year-over-year success; two, healthy U.S. asset earning -- U.S. earning asset growth and credit quality improvement; three, carefully managed expense growth; four, interest savings from last year's refinancing and managed utilization of our Canadian ABL facility; and five, opportunistic repurchases of our common shares.

As an update on our share repurchase program that was announced in April, during the third quarter, we've repurchased 1.9 million shares on the open market with an additional 700,000 shares of open market repurchases in October through the end of the day yesterday. In addition, we also purchased -- repurchased 2 million shares from FFL, a related party, and a private transaction at a 3% discount to the market price at the time. In total, we have repurchased 4.9 million shares through yesterday at what we believe to be very attractive valuations. At this point, we have $14.5 million remaining and available repurchases under the plan, which is continuing.

Next, I'll comment on advertising customer accounts and cost per funded loan, or CPF, before moving to loan portfolio performance. As a backdrop, it's important to note that there's a fundamental shift in the composition of our portfolio year-over-year that drives a meaningful change in advertising patterns in new customer accounts, especially in Canada. So while metrics on new customer accounts were lower, they're generally in line with our expectations and we're pleased with the new customer accounts.

Looking at new customer and advertising stats, we added 168,000 new customers this quarter. That is down about 16.8% from last year. For the 9 months ended September 30, we acquired 438,000 new customers and our site-to-store capability added 31,000 new customers in Q3. Consolidated cost per funded loan was $96. That's down $7 or 6.7% year-over-year. Breaking it down by country, U.S. advertising was down $3.4 million and new customer accounts were down 16% year-over-year for 3 reasons.

First, we had to manage the decrease in Avío customer acquisition as we allow our new machine learning models to mature. Second, we selectively reduced Installment loan customer acquisition in California in advance of regulatory changes. And third, we had a regulatory change in Ohio earlier this year that affected our customer acquisition in that state year-over-year. With the U.S. reduction in new customer volume, especially from Avío, U.S. cost per funded loan was down $3 year-over-year to $98.

Moving on to Canada. Canada advertising was down $1.5 million year-over-year almost entirely because Q3 of 2018 was elevated for the Ontario market transition and this year that is more normalized. Canadian new customer accounts were down, but that's really -- that's not really apples-to-apples year-over-year. As a better comp, our Canadian new customer accounts were up sequentially versus Q2 of this year by 6.4% and cost per funded loan in Canada was $84, which was down $28 from the same quarter a year ago.

Next, I'll spend a little time covering overall loan growth and portfolio performance. First, a few highlights at the product level. U.S. company-owned Unsecured Installment loan balances declined $6.1 million or 3.7% year-over-year. This was entirely due to California portfolio optimization. The rest of the U.S. grew 6% year-over-year. Canadian Installment balances shrank because of the expected mix shift to Open-End. So consolidated company-owned Unsecured Installment balances decreased 5.7%. Similarly, U.S. Secured Installment loan balances declined by 1.8% versus the same quarter a year ago. And again, that's entirely due to California portfolio optimization. Excluding California, the title portfolio grew 10% -- 10.5% year-over-year.

CSO loan balances were down slightly. But if you'll recall, the law change in Ohio eliminating the CSO model, became effective April 27 of this year. So good growth in Texas to replace those Ohio balances. As expected, Single-Pay loan balances were affected by Canadian regulatory change and transition to multi-pay products. Canadian Single-Pay balances declined 2.8%. But similar to the last couple of quarters, there was -- we had solid growth in U.S. Single-Pay loan balances, which grew 4.1% year-over-year.

Moving on to loan loss reserves and credit quality. Our consolidated net charge-off rate improved over 350 basis points versus the third quarter of 2018 with all products improving, except Unsecured Installment and Single-Pay. The company-owned Unsecured Installment net charge-off rate rose year-over-year. But that's as we've discussed for the past several quarters, those rates -- those rate comparisons continue to be affected by mix shift away from Canada and the effect of credit line increases and our unseasoned Avío portfolio. Single-Pay net charge-off rates rose year-over-year in Canada. And that's pretty much from a fully phased-in impact of Ontario extended payment plan rules that went into effect July 1, 2018. U.S. Single-Pay net charge-off rates were flat year-over-year.

Next, a few comments on CECL. As you may know, last week, the Financial Accounting Standards Board voted to defer to January 1, 2023, the CECL effective date for companies that qualify under SEC rules as small reporting companies or SRCs. CURO qualifies as an SRC for this purpose. And at this point, we will elect to defer CECL adoption past January 1, 2020.

Turning to our capital structure and liquidity. Our total available liquidity position at the end of the quarter was approximately $105 million. This is comprised of: one, excess unrestricted cash of approximately $14 million; U.S. revolver capacity of $25 million; and Canadian revolver capacity of over $7 million; and undrawn borrowing base availability in our Canadian SPV Facility of $58 million.

Finally, I'll close with our outlook for the remainder of 2019. Our revised guidance is revenue in the range of $1.145 billion to $1.150 billion, a decrease from prior guidance of $1.154 billion to $1.170 billion because of the California Installment loan repositioning, as Don mentioned earlier. Adjusted net income in the range of $125 million to $135 million, that's narrowing our prior guidance of $120 million to $135 million. Adjusted EBITDA in the range of $260 million to $270 million, an increase from prior guidance of $250 million to $265 million. Adjusted diluted earnings per share in the range of $2.75 to $2.85, an increase from prior guidance of $2.55 to $2.80. And our adjusted effective income tax rate, we still expect to be in the range of 26% to 27%.

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) The first question today comes from Bob Napoli with William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [2]

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Just a question on the -- so what is the share count today, Roger, as we see, there, the fully diluted share count with the purchases you made, it looks like 43 million shares?

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [3]

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Correct.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [4]

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Okay. And then just your thoughts, I mean, on returning capital. It's pretty aggressive. Would you expect to continue to return capital next year, I guess, I mean maybe not at the same level? But is that kind of a long-term strategy with your stock at this price?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [5]

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Yes, I mean, Bob, obviously, you're right, we've been buying a bunch back. And I don't think we've made any -- we have a good bit remaining in the current authorization. I'll probably pass on predicting what's beyond the existing program until we sort of get through our budgeting and capital planning for 2020. But I would expectantly give you guidance for 2020 early next year and we'll give you some more thoughts about that.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [6]

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And then -- I don't know if you -- Don, Roger, I know you're going to give full outlook in 2020 next quarter. But just with the growth you're seeing in Canada, I mean do you still -- at what inning are you in, in the growth? And would you expect to see that growth decelerate a lot into next year? And can you grow the U.S. revenue? I know you said you'd grow earnings. Would you be able to grow revenue in the U.S. next year with the changes in California?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [7]

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Yes. I mean obviously California -- to answer the end of the question first, California is a big -- the second biggest state after Texas. So we'll -- we would expect that, as we said, the earnings contribution in California should be pretty solid and kind of right on top of what we are going to deliver in 2019. The top line will come -- will soften a little bit there as that portfolio runs off. The rest of the business in the states should be -- is healthy and should remain pretty healthy. But if you look at U.S. sort of third quarter earnings growth over the full year, you can see some of that deceleration. But again it's a little early to be -- to predict all the way out through the end of 2020. But the rest of -- the underlying trends of the business are, in the states, are really, really healthy.

For Canada, certainly it's going to -- from a top line standpoint, we think we'll continue to see good numbers. We're going to -- we talked earlier in the year, we were hoping to get our adjusted EBITDA in Canada, this is in U.S. dollars, to bounce back from $26 million last year. And we thought if we had a good year, we could get close to $50 million. It looks like we're going to be in the mid-to-high 50s for Canada, so really, really good year. We would expect earnings growth to be good in Canada next year. But again, it's just not going to -- it's not going to double again next year. But it should be pretty solid. So you put non-California U.S. plus Canada together, and I think that makes for a pretty good -- plus Canada together makes a pretty good year. And then California, depending on the exact timing of what happens to the portfolio there and potential new products there, that's what we're kind of working on planning for right now.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [8]

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Just last question, what else on a regulatory front are you watching today? Where do you see things that need attention?

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

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I mean I'd think from -- I think again, we go through the bigger states that we're in now, I think that we'll -- I think Arizona will be -- we'll see some legislative and potentially ballot initiative action there next year. And that's probably the biggest thing that we're looking at right now in terms of big contributions from U.S. states. And Canada, I think for the most part, the product transition there, the regulatory picture looks pretty good. In fact, on the kind of legacy Single-Pay, we may see some movements back in places like Alberta that put in place more restrictive laws over the past couple of years.

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Operator [10]

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The next question today comes from Moshe Orenbuch of Crédit Suisse.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [11]

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I guess for starters, Don, you alluded to this new bank relationship. It sounded like it was more advisory than balance sheet-oriented. Could you just maybe flesh that out of a little bit?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [12]

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Yes, Moshe, it is -- I think you just have to sort of take it for what we said it. It's an arrangement we provide -- obviously, the bank makes a loan and we provide underwriting and marketing and servicing work to the bank as -- to help them make that loan. As I said, I guess -- we'd rather sort of leave it at that. And once we sort of have something that's out in the marketplace, we'll -- both in terms of what the agreement says and what the product structure is, we can be a little more definitive about it.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [13]

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Okay. And does that preclude you from any other types of relationships? Or is it just something that's still open?

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

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No. It does not preclude us from other relationships. Yes. And we do have a lot of bank relationships, right, already in terms of debit processing and the merchant processing side of things and ACH stuff. Obviously, we have bank partners that are behind the card products, both our Opt+ reloadable card and the Revolve product, the DDA product we talked about with the Republic Bank of Chicago. So we've got a number of current bank relationships that we're always looking in those areas for growth and good partners as well.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [15]

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Right. And it looked like a lot of the yields on quite a number of your products were up. Is that something that's just a lag because of the rise in rates in the past? Or is there a pricing action? And how should we think about that as we go into 2020?

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [16]

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It would all be mixed. The California portfolio with the repositioning, that hasn't -- it didn't grow. And it's the lowest yielding in the Unsecured Installment products. So that would have some impact on -- that mix shift would have some impact on Unsecured Installment yields. But we didn't make any pricing decisions yet.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [17]

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There's not price -- it's all mix and timing.

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Operator [18]

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The next question today comes from John Hecht of Jefferies.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [19]

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Congratulations on a good quarter. First one is just thinking -- I know you're not going to give specific guidance next year until next quarter. But just thinking about some of the developments and migrations in some of the big states like California plus kind of the product emphasis that you're going through, how do you think about -- and it's a little bit of a follow-up from the last question from Moshe. How do we think about how the mix shift will affect product margins and yields and so forth on a consolidated basis next year?

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

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I guess it's -- obviously, the California Installment portfolio is the big part of the overall unsecured portfolio. So you'll see that -- again, absent any new products in California, you'll see the balances come down and the overall yields on our Installment portfolio will go up just because of the way that transition is done. And then some of that will also go into the Secured Installment.

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [21]

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Yes. You'll see the same effect on the title book because California's yield is much -- is quite a bit lower than -- our title is basically Arizona and California. And the title -- and California yields were quite a bit less than Arizona.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [22]

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But I think otherwise this is something that you should see, there's not a lot of -- we don't have any sort of meaningful new states. We continue to see really solid growth in states where we've gone into the past couple of years. We've seen good growth this year and we expect that to continue. But at the end, the California stuff aside, I don't think the yields -- would I expect any yields and -- the earnings contribution of the yields on those portfolio -- yields should be about the same. The portfolio should grow and we should see good earnings contribution growth from those states as well. And as I mentioned on Canada, we're going to finish the year from an adjusted EBITDA standpoint in the mid-50s at least and maybe higher, you should continue to see really solid margins and earnings growth in Canada as well.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [23]

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Okay. And then turning to credit, obviously good year-over-year credit trends. Don, you mentioned in your remarks something about the improvement of curing delinquent loans. I'm wondering if you can just give us an update on kind of the overall credit environment and what you guys are doing from a strategic or execution perspective to improve the, I guess, curing and managing delinquency trends?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [24]

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Yes, I think, the funny thing is we've looked at -- if you look at -- obviously, the delinquency rates were good. The net charge-off rates were really good for the quarter. But if you sort of unpack that and you look at what goes delinquent and the rate at which those not only -- loans ultimately cure, but the rate at which those cure is really important. The collection folks will say, "What are the roll rates?" When something goes from 0 to 15 and rolls into the 16 to 30 bucket and the 31 to 60 bucket, how does that -- what do those trends look like? And that's really good -- that's as good a kind of live data as you can get on the health of our consumers, we think. And as I said, those numbers, both in the U.S. and Canada, those rates, the cure rates, the roll rates, were sort of spot on where they were in the third quarter of last year. So we think that's a really healthy sign.

If you look at the rate, our approval rates, they're actually kind of down a little bit year-over-year. And that's the U.S., Canada, kind of across the board. But again if you unpack that, that is a question to you, "Is it the customers? Is it credit quality of the new customers degrading? Or is it something we're doing?" And it's very much the latter. Again, Bill is -- Bill and the marketing folks, we have a discussion every month. And a lot of that discussion is they're talking to us about business that we may be kind of left on the table. But that's where we're trying to be really disciplined about the credit of the new -- quality of the new customers, but also the acquisition costs there. So net-net, I think we're still a bit more -- if you look at our internal credit metrics, we're a bit tighter than we were a year ago. But I think that's showing up in the overall results.

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John Hecht, Jefferies LLC, Research Division - Equity Analyst [25]

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Okay. And then a final question, turning a little bit to expenses. I know you guys talked about, I guess, more productive in marketing and then less marketing demand in certain geographies. How do we think about your goals and targets for marketing expenses next year, given that you've grown fairly aggressively in certain markets with less marketing than you had a year ago? And what are kind of the demands and strategic objectives next year in that regard?

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William Baker, CURO Group Holdings Corp. - Executive VP & COO [26]

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Yes, John, it's Bill. I think -- we look at it monthly. So I mean it really does depend on what the market looks like, what the cost per funded looks like, what the credit looks like. And I think that's going to continue to be the case. I mean I think we'll continue to be disciplined. We're testing a lot of things. I think like-for-like, we could have a lower cost per fund. But we continue to test different channels and try to expand things. So I think it will be pretty similar to this year on a -- as a percent of revenue. But again, I think if we see opportunities, we will spend more. And I think if we see efficiencies, we're disciplined enough to leave a little bit on the table as well. So I think that's going to be a very similar strategy.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [27]

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But obviously, I think the overall ad market in our little corner of the world is really healthy. We're just not seeing -- the competitive side of things is really good. We're not seeing large companies or new companies that are raising lots and lots of money that go out and embark on big brand building and advertising campaigns to sort of scale their business up. It just isn't -- that's more in sort of payments and prime credit and bank account products and that kind of stuff. We're just not -- in our end of the world, the subprime lending part of the world, the ad market is really rational and healthy and we're -- I think -- as I said, we probably, net-net if you talk to our marketing people, they're saying we have -- there are opportunities that are -- there are more opportunities than we can probably get after in a way that keeps cost per funded and vintage credit performance in line.

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Operator [28]

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The next question today comes from Vincent Caintic with Stephens.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [29]

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So first, just I guess another follow-up on California. But on the -- so appreciate the comment about the California EBITDA contribution, the expectation that it should be unchanged in 2020 versus 2019. I'm just wondering what sort of assumptions are in there. So let's say if you're shrinking, maybe you have a provision benefit, but -- or if you have, say, you're able to transition those customers and you have growth there, where it sits, EBITDA unchanged. Just kind of wondering maybe what you have baked in there or maybe both scenarios kind of get you to the same situation.

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [30]

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Yes. I think our base case that we've been referring to Vincent -- it's Roger. Our base case that we've been referring to basically has a runoff of big Installment book with allowance release to your point. That book rolls off if the contribution to net revenue -- there's still some of that book left by the end of the year, but most of it, 85%, will amortize over the course of 2020 with an outside contribution. Because really, you don't have any losses on new loans or new customers. And then we're going to pick up some Single-Pay volume. And our base case thinking of this, we're not -- the Single-Pay customer pickup is not a moonshot. But you're going to pick some up, and it doesn't take much Single-Pay to make -- to replace a lot of Installment.

And then there's a lot of cost that go with it. So I mean there's a lot of variable costs associated with -- especially unsecured book in California, whether it's obviously marketing. That's where the most of the marketing spend is -- was. There's data costs, it's the most expensive product to underwrite from a data cost perspective. There is debit -- financial -- merchant processing fees because the customers predominantly pay with cards, debit cards for that product. So once you take out all those variable costs...

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [31]

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And there's collection and servicing, too, is another -- it's a big component. That's a longer-term loan, so it's a more complex servicing operation to support that as well. If we end up -- if there are replacement products there on the Unsecured Installment side, apart from the Single-Pay side, you'll see some of those cost come back in but you'll also see the top line. And I don't -- it's not our -- to the extent we're able to find replacements there, I think those products from a credit standpoint will perform in line. It's not like starting -- I wouldn't be like we're starting up a greenfield state, where you're going to see very high ad spend and very high credit costs early on as you build the book and wait for that book to kind of season. I think it will be a little different dynamic in California. But that's not -- the last part of it I just talked about is not included in the comments we're making about EBITDA being flat year-over-year.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [32]

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Okay, got you. So kind of when we think about 2020, there's just going to be some adjustments, but it kind of sets up for -- that should be a good run rate into 2021. So it's kind of like an even expectation.

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [33]

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Yes. And we said again, 2021 is dependent upon some replacement products and quite frankly speculation of what the California market is going to look like by the time you get to 2021.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [34]

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Right, that makes sense. Okay, perfect.

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [35]

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We think -- history would suggest there will be a lot less competition.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD & Senior Specialty Finance Analyst [36]

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Right. So that makes a lot of sense. I guess broadly just the bank partnerships, just kind of wanting to get an update on the progress, the enthusiasm on that, when we can expect more -- how much appetite there is for that. And also kind of relatedly, but has the, I guess, regulatory environment or political environment had been a determinant in appetite from your discussions with bank partners?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [37]

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I'll answer the last part, I mean there are a lot of -- we have a lot of bank partnerships for a lot of products and services now. There are a lot of folks across our industry and across the marketplace lending in general, that have a lot of bank relationships. So I think that it's not -- in the discussions we've had, I guess I don't believe there's a big impact from political regulatory environment on those conversations. I think -- it's early in the morning here, so maybe our enthusiasm doesn't come all the way through the phone here, we need a little more caffeine. But we're -- across all our businesses, I think we're enthusiastic about what we're seeing. And regulatory change is always out there. It's always been a part of this business for -- and I've been in it -- this will -- I'm dating myself, but going on 30 years. And it's always a part of what is in the landscape and in what you're planning for and kind of building your business around.

So everybody, every business has -- different businesses have different risks. Some people have product obsolescence and internationally, choose to worry about, et cetera and trade, et cetera, we don't have those. We have regulatory issues that we've -- I've always had to deal with. But I think we've positioned our business and structured the business to be responsive of that kind of stuff. And that includes some of the bank stuff. And so we're -- we love the bank partners we have now across a bunch of different things, not just lending stuff. And we're looking forward to continuing those and hopefully expanding those relationships next year.

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Operator [38]

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The next question today comes from John Rowan with Janney Montgomery Scott.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [39]

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Okay, I just want to think about something very broadly as we go into next year. Am I right that your float shares are around 15 million today? That sound about right?

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [40]

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No, more in the 14 million range.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [41]

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Okay. So you have 14 million in float, which is, I don't know, a little over $200 million worth of public float, right? And how much money are you going to -- you said you're going to -- 80-some-odd percent of the California book is going to amortize next year, right? I mean can you remind me again what cash flow you're expecting to come in just in 2020 off of the California book?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [42]

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I think, John, I think it's between -- if you look at that book, obviously a lot of it's going to pay off, we're going to get and we'll continue to get interest on the stuff that's current. So we'll get interest on the current book, we'll get payoffs. And then you net out sort of the charge-offs. If you do all that math together, next year it looks like on that book, it's roughly $130 million of cash flow between fees and interest and payoffs and principal paydowns.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [43]

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Okay. So I mean that's a lot of...

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [44]

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And you get a little bit -- you'll get a little more in 2021 as well, but...

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [45]

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No, I know. You have -- you have 85% of the total payoff in 2020 to 15%.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [46]

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I think that's probably about right. Yes.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [47]

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But the issue I'm having is just kind of fundamentally understanding what you're going to do with the cash, right? I mean you can't buy back stock because you basically will buy back almost the entire float, right? You just don't have the float to buy it back. I mean sure, you could buy back blocks from your private equity investors if you wanted to continue down that route. But what other uses of cash do you have, other than squeezing the float of what's a relatively thin float, to begin with? What opportunities do you have to repay debt? Are there any call provisions in some of the bonds that are out? I just want to understand, short of the money just sitting there on the balance sheet, what you're going to do with it.

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

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Well, I mean so for starters, we have asset-backed debt. We have our Canadian ABL facility that we could pay down, doesn't have any sort of prepayments, et cetera. We generally do open market repurchases. The bonds are not callable until 2021 maybe. And then we could call them at half -- at 1% plus half the coupon, which would be 1.04% or something. But we can do open market repurchases of those before that. And then we've got our existing business, which is really healthy. I mean Canada is a really healthy business. We're evaluating potentially maybe opening more. We've got our LendDirect brand up there, which has been -- we have 12 of those stores open, which just offered the line of credit product in kind of a desk-and-chair sit down environment. It's a loan office environment, it's not a service counter environment, like our Cash Money brand or our Speedy Cash or Rapid Cash brands in the States. We've actually opened -- we're piloting some of kind of pop-up stores in shopping malls in that brand. So the Canadian business is really healthy and retail expansion there looks really attractive.

We haven't been very active in the M&A market. A lot of it has just been the valuations of we think have been sort of not -- for private sellers haven't been all that great. Maybe that will start to change. We're going to be really disciplined and try to be really opportunistic there. And then Zibby is a great platform. We've continued to invest in that platform. We -- again, we don't have any sort of special rights to buy that business. But it is -- if Zibby continues to grow and needs capital we'll -- we love the management team and we love the path they're on. And that's another place that we could deploy some investment capital. It's -- we want to be -- I think the last thing we want to do is get really rigid about and say, "This is exactly what we're going to do," because we just don't know what opportunities are going to be out there. It is great and we do a lot of discussions internally with our team about -- we've got -- California is disappointing. We don't -- the outcome there, I don't think it's good for consumers. But this is -- we got our -- it's not as if we don't have -- we've got good people, good products, good technologies and we have a lot of capital. So we'll go out and figure out great ways to keep growing the business with that capital.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [49]

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Okay. You mentioned repurchase bonds in the open market. The bonds are below par if I'm not mistaken. Wouldn't that be -- I know one of the private guys had some trouble with this. I mean wouldn't the rating agencies consider that as strategic default?

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [50]

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Not at the levels that we're talking about. As we understand it, I mean they do have -- there are times when they did, but that's when...

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [51]

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When people bought bonds back in the 40s and 50s. I mean our bonds are trading in the high 80s. So again, this doesn't trade a lot. So I'm not saying that's like a super liquid, active market. But it's not -- not at the levels we're talking about.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [52]

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And then last, just with the termination of the Meta deal, I mean is there -- did you have any rights? Did you have to pay -- I mean would you have to pay a termination fee? Or do you have any rights to even litigate to try to get back some of the fees that you put into that product? I mean is it really just them not upholding their end of the bargain to get that product up and roll -- out and rolling? I mean I know there was a management change there, which seemed to stop everything. But I was just curious if you had evaluated any of those options on your end.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [53]

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No, the discussions with Meta were always amicable. I mean it's disappointing that it ended up where it is. And I think we did everything on our end, both contractually and just from a business standpoint. But again, things change and people change and management and leadership changes. And I think we could sit here and cry over spilled milk and break a bunch of stuff or we can go out and keep looking for ways to grow the business. So I think -- and continue to find good partners. So I think we chose to put our energies in the latter and not worry about what Meta did or didn't do. And that's -- it's a good bank and they're good people. It didn't work out. But we're -- I mean, I sound like Bill Belichick here, but we're moving on. And we feel good about where we are.

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [54]

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Okay. Last question, Roger, I think you had some comment about 2020 earnings being higher than 2019. I wasn't sure about that. I didn't really get it written down quite fast enough. Can you just repeat what you said in that vein?

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [55]

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I'm sorry, 2020?

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John J. Rowan, Janney Montgomery Scott LLC, Research Division - Director of Specialty Finance [56]

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I thought you made a comment about 2020 earnings outlook.

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Roger W. Dean, CURO Group Holdings Corp. - Executive VP, CFO & Treasurer [57]

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No, I mean I think when we talked about -- obviously, on an earlier question, we talked a lot about California. But the rest of the business, we expect everything other than California to grow next year. It's all healthy. We're going to see outsized growth in Canada, the asset balances, the average loan balances are already there as we exit this year. So yes, I think -- we feel good about the prospects for healthy earnings growth in 2020. But as Don said earlier, we're working through all our plans and our budgets and everything right now.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [58]

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And you've got -- operating leverage continues to be healthy across the business. You've seen that in the results in this quarter and that should continue. And then you're going to get the benefit of a full year of all the -- from an EPS standpoint, you get the benefit of all the repurchases, both the open market repurchase and the one-off deal we did with FFL. That will factor into the share count calculations there as well as next year, so -- but you're going to see, I think forgetting the EPS, the weighted share count calculations, you'll see good earnings growth in dollars, which will translate again into a little bit better EPS growth, given the share count reduction.

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Operator [59]

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The next question is a follow-up from Bob Napoli of William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [60]

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Just wanted to ask about the Revolve product and what the potential is for that over the next several years. It seems like it has some good traction.

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William Baker, CURO Group Holdings Corp. - Executive VP & COO [61]

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Bob, it's Bill. I mean I think -- we agree. We think there is a lot of opportunity. We currently only offer the product within our branches. I think we want to continue to optimize it and get a little bit more data. But we think expanding the channels is the big opportunity. The uptake has been more impressive than we thought, the product features are strong. So as we think about finding a retail partner with a couple of thousand, four walls, I think that could be really, really impressive. But I think -- the bigger thing with Revolve is getting customers on direct deposit. When you think about the benefit to the customer and also just the profitability, it just -- it really extends the life of the account. And that's what we're really focused on, which takes some time to do, but it really does expand the feature and functionality of the card. So it's certainly something we're going to talk about next year, expanding beyond -- and whether that's direct to consumer or different channels with retail partners. And I think we're going to look at all of that.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [62]

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How many of those, I guess, 31,000 cards or whatever, what -- do you have a percentage? Or when you're adding customers, how many do you get on -- what percent do you get on direct deposit? Are you offering that in how many states right now?

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William Baker, CURO Group Holdings Corp. - Executive VP & COO [63]

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We offer in all of the locations that we operate in. So it's 14 states in the U.S. We don't operate in Canada just yet. But I think it's probably a little early to give the exact percentage because we're still -- it's still growing. I mean think about a customer who signs up for direct deposit. It oftentimes can take a couple of paychecks for that to come through, just depending on the company's policy. So I think it's probably a little early to give you a number there. But I think we're happy with it, and I think customers see the clear benefit. It is different than prepaid. They do see it as a checkless checking account. And I think they utilize it a little bit different as well. So we can probably give you a better stats here, just give us a quarter or 2 to have it mature a little bit.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [64]

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And then just on Zibby, is that business -- I mean is the outlook for that business to become profitable in the next year or 2? Or where does that business stand from a profitability perspective?

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [65]

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Yes, I mean you could see -- Bob, this is Don. Obviously, we started accounting for that under the equity method in this quarter. You can see the operating loss there as -- we put in our numbers. I think the management's plans and expectations -- and obviously, our belief is as board members of that company, that business is going to keep growing. And it should be a business that sometime in 2020 breaks even and starts to -- it's got a fairly expensive debt capital structure. And it's a company that continues to grow. It's that balance where how quickly can you return or you form capital. Do you go out and get more capital to support the growth and -- to bring down the cost of the -- on the liability side of the balance sheet. But it's a small growing company with a fairly expensive right side of the balance sheet. And I think they're very focused on -- and we're helping them focus on bringing down the cost and the liabilities. But there are various ways to kind of go about that. But we would expect that business would make some money overall next year and really turn really, really solidly profitable in 2021.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [66]

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And you compare that business to the Progressive business. Is that...

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [67]

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Well, I mean like me comparing myself to -- I don't know. Again, I'm not going to get into football analogies. I'm not going to compare myself to Tom Brady here. But Progressive is -- it is in -- we are in the same industry, very successful, very, very large company, really successful company. I think everybody in that industry at some level aspires to be Progressive. So right now, we're a fraction of their size. I do think the thing that we have that we focus on a lot and that the management team focuses on a lot is that it is a -- I want to say an entirely online platform. And that's a very different animal than managing a large storefront and a bunch of storefront relationships because the customer online is essentially coming directly to us as opposed to having a salesperson, somebody in the store that's kind of in the middle of the transaction, so -- and that adds an element of operational complexity and there's risk, there's -- and there can be issues where the salesperson is motivated to kind of close the sale. And maybe you're not getting 100% -- a customer providing the information and your models may have to sort of adjust for that kind of stuff. So I think Zibby again is very focused on the online cyber things only. And that's somewhat unique in that end of the world.

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Operator [68]

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This concludes our question-and-answer session. Pardon me, there is another question that did come in. The next question today comes from Hugh Miller of Buckingham.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [69]

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So I guess assuming that you are successful at some point in potentially creating a substitute product with a bank in California, can you just give us a sense of kind of how we should think about the start-up process for that type of initiative? How long is the testing phase? How long does it take to kind of start to originate product and really ramp that portfolio? If you can just give us a feel of kind of how that process might go, that would be very helpful.

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [70]

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Yes, Hugh, this is Don. I think we're going to leave our comments as we kind of read them out there. It's just too early in the -- we do have a signed agreement. We're working hard. We're really pleased with the conversations we're having. But the sort of the -- be in any way of kind of definitive about when, where, how that's going to roll out, I think it's just too early. So give us a little time to keep working on it and we'll -- when we have something that -- when we feel like we can give you a better outlook, we'll give it. But we're not there today.

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Operator [71]

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

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Donald F. Gayhardt, CURO Group Holdings Corp. - President, CEO & Director [72]

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Great. Thanks, everybody, for joining us today, and we will look forward to talking to you again sometime in the end of January. Have a good day.

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Operator [73]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.