CURO Group Holdings Corp Announces Second Quarter 2018 Financial Results

CURO Group Holdings Corp. CURO ("CURO" or the "Company"), a market leader in providing short-term credit to underbanked consumers, today announced its financial results for its second quarter ended June 30, 2018.

"CURO continued its strong growth momentum in the second quarter of 2018," said Don Gayhardt, President and Chief Executive Officer. "We are pleased to announce year-over-year loan growth of 26.9% and sequential loan growth of 14.1%, adjusted earnings growth in the first half of 2018 of 18.9%, and the execution of a milestone bank partner agreement that allows us to expand our lending footprint in the U.S. Our momentum, improvement in credit metrics and solid loan growth has further bolstered our confidence in our full year earnings guidance," Gayhardt concluded.

Consolidated Summary Results

Second quarter 2018 highlights include:

• Second quarter Revenue of $249.0 million, an increase of 14.8% over the prior year period
• Year-over-year loan growth of 26.9% and 14.1% sequential loan growth from first quarter of 2018
• Gross margin and earnings declined year-over-year due to changes to our loan loss recognition methodology (our previously disclosed Q1 Loss Recognition Change) that affected the prior year period. The change had the effect of reducing loan loss provisioning for installment loans well below normalized levels for the second quarter of 2017.
• Notwithstanding the effects of accounting methodology changes in 2017 on provision comparisons, credit quality improved meaningfully. First-pay default rates (FPDs) improved year-over-year for all Installment and Open-End products in the U.S. and Canada and were stable for Single-Pay. Net charge-off rates for our largest portfolio, Company Owned Unsecured Installment, improved 488 basis points sequentially from last quarter.
• Executed agreement with MetaBank® to provide consumers within the United States an innovative and flexible line of credit product
• Completed a successful secondary offering for existing stockholders of over 5.5 million shares of common stock at $23 per share

Year-to-date 2018 highlights include:

• Year-to-date Revenue of $510.7 million, an increase of 15.7% over the prior year period
• Year-to-date GAAP Net Income of $39.3 million, an increase of 19.1%
• Year-to-date Adjusted Net Income of $53.7 million, an increase of 18.9%
• 26.9% loan growth
• Completed a successful secondary offering for existing stockholders of over 5.5 million shares of common stock at $23 per share

Fiscal 2018 Outlook

We affirm our full-year 2018 adjusted earnings guidance, a non-GAAP measure that excludes the $11.7 million of debt extinguishment costs from the retirement of $77.5 million of the 12.00% Senior Secured Notes due 2022 and stock-based compensation. Our solid results for the first half of 2018 and above-expectation loan growth has further bolstered our confidence in our guidance. Our full-year 2018 guidance is as follows:

• Revenue in the range of $1.025 billion to $1.080 billion
• Adjusted Net Income in the range of $110 million to $116 million
• Adjusted EBITDA in the range of $245 million to $255 million
• Estimated tax rate of 25% to 27% for the full year
• Adjusted Diluted Earnings per Share of $2.25 to $2.40

Consolidated Revenue Summary

Three Months Ended June 30, 2018

The following table summarizes revenue by product, including CSO fees, for the periods indicated:

During the three months ended June 30, 2018, total lending revenue (excluding revenues from ancillary products) grew $30.7 million, or 14.8%, to $238.1 million, compared to the prior year period, predominantly driven by growth in Installment and Open-End loans. Geographically, revenue in the U.S., Canada and the U.K. grew 16.1%, 7.9%, and 23.3%, respectively. From a product perspective, Unsecured Installment revenues rose 17.4% and Secured Installment revenues rose 11.2% driven by related loan growth. Single-Pay revenues were affected primarily by regulatory changes in Canada (rate changes in Alberta, Ontario and British Columbia) and continued product shift from Single-Pay to Installment and Open-End loans in all countries. Open-End revenues rose 72.2% on organic growth in the U.S. and the introduction of Open-End products in Virginia and Canada. Open-End adoption in Canada accelerated this quarter as related loan balances grew $34.3 million sequentially from the first quarter. Even with the accelerated Open-End growth, Single-Pay balances in Canada only shrank sequentially by $1.4 million. Ancillary revenues increased 13.9% versus the same quarter a year ago primarily due to non-lending revenue in Canada.

Six Months Ended June 30, 2018

The following table summarizes revenue by product, including CSO fees, for the periods indicated:

During the six months ended June 30, 2018, total lending revenue (excluding revenues from ancillary products) grew $66.6 million, or 15.8%, to $488.8 million, compared to the prior year period, predominantly driven by growth in Installment loans in all three countries and Open-End loans in the U.S. and Canada. Geographically, revenue in the U.S., Canada and U.K. grew 16.8%, 9.5%, and 24.4%, respectively. From a product perspective, Unsecured Installment revenues rose 19.5% and Secured Installment revenues rose 12.4% because of loan growth. Single-Pay revenues and combined loans receivable were affected primarily by regulatory changes in Canada (rate changes in Alberta, Ontario and British Columbia) and continued product shift from Single-Pay to Installment and Open-End loans in all countries. Open-End revenues rose 61.5% on organic growth in the U.S. and the introduction of Open-End products in Virginia and Canada. Earning assets for our Open-End product in Canada, which we began offering in the fourth quarter of 2017, was $47.3 million as of June 30, 2018. Ancillary revenues increased 13.3% versus the same period a year ago primarily due to non-lending revenue in Canada.

The following table presents revenue composition, including CSO fees, of the products and services that we currently offer:

For both the three and six months ended June 30, 2018 and 2017, revenue generated through the online channel was 43% and 36%, respectively, of consolidated revenue.

Loan Volume and Portfolio Performance Analysis

The following table summarizes Company Owned gross loans receivable, a GAAP balance sheet measure, and reconciles it to gross combined loans receivable, a non-GAAP measure including loans originated by third-party lenders through CSO programs, which are not included in the consolidated financial statements but from which we earn revenue and for which we provide a guarantee to the lender:

Gross combined loans receivable by product are presented below:

Gross combined loans receivable increased $101.4 million, or 24.6%, to $513.8 million as of June 30, 2018 compared to $412.4 million as of June 30, 2017. Geographically, gross combined loans receivable grew 23.6%, 33.8% and 36.0%, respectively, in the U.S., Canada and U.K.

Unsecured Installment Loans

Unsecured Installment revenue and gross combined loans receivable increased from the prior year quarter due to growth in the United States, primarily in California, and growth in the United Kingdom. Gross combined Unsecured Installment loan balances grew $31.4 million, or 14.6%, compared to June 30, 2017, but the comparisons are affected by mix shift in Canada from Installment to Open-End. As expected, Canadian Installment loan balances declined by $19.4 million while Open-End balances in Canada grew by $51.3 million year-over-year.

Because of the aforementioned effects of the Q1 Loss Recognition Change on the first half of 2017, we utilize sequential trends in analyzing net charge-off rates and allowance levels. Net charge-off rates for Company Owned Unsecured Installment loans improved 488 basis points sequentially compared to the first quarter of 2018. Similarly, net charge-off rates for Unsecured Installment loans Guaranteed by the Company improved nearly 2,000 basis points versus last quarter. FPDs reflect the number of payments made by customers compared to the number of payments scheduled to be paid during a period. First-pay default metrics cited in this release are calculated based on originations from January through May of 2017 and 2018. FPDs for Company Owned Unsecured Installment loans were stable overall to the same periods last year but improved for California which is the largest portion of the portfolio. FPDs for Unsecured Installment loans Guaranteed by the Company improved by an average of nearly 140 basis points, or 8%. The improvement in net charge off rates, FPDs and the related underlying improvement in cumulative loss development trends in open vintages resulted in lower required allowance coverage for Unsecured installment, primarily due to: (i) loan growth proportionally being driven by the extension of more credit to our best customers, (ii) tightening of credit scoring and approval rates during first quarter's U.S. income tax refund season and (iii) continuing improvement in scoring models.

Secured Installment Loans

Secured Installment gross combined loans receivable balances as of June 30, 2018 increased by $7.4 million, or 9.2%, compared to June 30, 2017, primarily due to growth in Arizona, while related revenue grew 11.2%.

Secured Installment Allowance for loan losses and CSO guarantee liability as a percentage of Secured Installment gross loans receivable improved from the first quarter of 2018 from 14.7% to 12.4%. For the three months ended June 30, 2018, delinquency rates of 17.4% and net charge offs of $9.0 million were consistent with the first quarter delinquency rates of 17.9% and net charge offs of $8.7 million. Net charge off rates for Secured Installment rose 282 basis points sequentially versus the first quarter of 2018. FPDs have improved an average of nearly 200 basis points, or 11.9%, versus the same periods last year. The lower required Allowance for loan losses and CSO guarantee liability as a percentage of gross combined loans receivable is largely due to FPD trends, origination mix and modest improvement in vintage cumulative loss development.

Open-End Loans

Open-End loan balances as of June 30, 2018 increased by $64.3 million, or 240.0%, compared to June 30, 2017 from year-over-year growth in Kansas and Tennessee of 26.9% and 20.6%, respectively, the third quarter 2017 launch of Open-End in Virginia, conversion of most of Alberta's Unsecured Installment loans to Open-End loans and the launch of Open-End loans in Ontario. Open-End adoption in Canada accelerated this quarter as related loan balances grew $34.3 million sequentially from the first quarter.

The Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable declined year-over-year and sequentially, primarily due to geographic mix and seasoning of the U.S. portfolio. At June 30, 2018, Canadian Open-End gross loans receivable comprised 56.4% of the total, compared to none at the end of the prior year quarter. FPDs for the U.S. Open-End portfolio have improved an average of approximately 50 basis points, or 2%, versus the same periods a year ago primarily because of seasoning and scoring improvements in mature states, and are improving sequentially as the Virginia new market portfolio seasons.

Single-Pay

Single-Pay revenue and loans receivable during the three months ended June 30, 2018 declined slightly year-over-year, primarily due to regulatory changes in Canada (rate changes in Alberta, Ontario and British Columbia) and continued product shift from Single-Pay to Installment and Open-End loans in all countries compared to the three months ended June 30, 2017. Even with the aforementioned accelerated Open-End growth in Canada, Single-Pay balances in Canada only shrank sequentially by $1.4 million. Provision for losses and net charge-offs were consistent for the quarter and Single-Pay Allowance for loan losses as a percentage of gross loans receivable remained consistent sequentially.

Reconciliation of Net Income and Diluted Earnings per Share to Adjusted Net Income and Adjusted Diluted Earnings per share, non-GAAP measures

Reconciliation of Net Income to EBITDA and Adjusted EBITDA, non-GAAP measures

For the three months ended June 30, 2018 and 2017

Revenue and Net Revenue

Revenue increased $32.0 million, or 14.8%, to $249.0 million for the three months ended June 30, 2018 from $216.9 million for the three months ended June 30, 2017. U.S. revenue increased 16.1% on volume growth. Canadian revenue increased 7.9% as volume growth offset regulatory impacts on rates and product mix. U.K. revenue increased by 23.3%.

Provision for losses increased $26.5 million, or 40.6%, to $92.0 million for the three months ended June 30, 2018 from $65.4 million for the three months ended June 30, 2017. Refer to "--Segment Analysis" below for further explanations on the provision for losses.

Cost of Providing Services

The total cost of providing services increased $7.1 million, or 10.2%, to $76.6 million in the three months ended June 30, 2018, compared to $69.5 million in the three months ended June 30, 2017 primarily because of increased customer acquisition spend analyzed further in the segment discussions that follow.

Operating Expenses

Corporate, district and other expense increased $2.1 million, or 5.7% primarily related to increased headcount and $1.0 million of additional share-based compensation expense.

Provision for Income Taxes

The effective tax rate for the three months ended June 30, 2018 was 25.0% compared to 39.4% for the three months ended June 30, 2017. As a result of the 2017 Tax Act, the corporate income tax rate for the U.S. decreased from 35% to 21%, effective in 2018. No tax benefit is recognized for losses in the U.K.

For the six months ended June 30, 2018 and 2017

Revenue and Net Revenue

Revenue increased $69.2 million, or 15.7%, to $510.7 million for the six months ended June 30, 2018 from $441.5 million for the six months ended June 30, 2017. U.S. revenue increased 16.8% on volume growth. Canadian revenue increased 9.5% as volume growth offset regulatory impacts on rates and product mix. U.K. revenue increased by 24.4%.

Provision for losses increased $45.8 million, or 36.0%, to $173.0 million for the six months ended June 30, 2018 from $127.2 million for the six months ended June 30, 2017. Refer to "--Segment Analysis" below for further explanations on the provision for losses.

Cost of Providing Services

The total cost of providing services increased $10.6 million, or 7.7%, to $148.1 million in the six months ended June 30, 2018, compared to $137.4 million in the six months ended June 30, 2017 primarily because of higher customer acquisition spend.

Operating Expenses

Corporate, district and other expense increased $9.6 million, or 13.7% primarily due to $5.1 million in additional compensation expense related to increased collections activity, online customer support and technology headcount and $2.7 million of additional share-based compensation expense.

Provision for Income Taxes

The effective tax rate for the six months ended June 30, 2018 was 29.9% compared to 37.8% for the six months ended June 30, 2017. As a result of the 2017 Tax Act, the federal corporate income tax rate for the U.S. decreased from 35% to 21%, effective in 2018. The provision for income tax as of June 30, 2018 includes an additional accrual of $1.2 million for adjustments to estimates of the tax on prior years' foreign repatriation and an estimated GILTI tax of $0.6 million. The $1.2 million additional provision on prior years' foreign repatriation was the result of additional interpretative guidance from the IRS issued during the first quarter of 2018 while the GILTI provision is a new, continuous requirement under the 2017 Tax Act.

Segment Analysis

We report financial results for three reportable segments: the U.S., Canada and the U.K. Following is a recap of results of operations for the segment and period indicated:

U.S. Segment Results - For the three months ended June 30, 2018 and 2017

Second quarter U.S. revenues increased by $26.4 million or 16.1% to $190.1 million.

U.S. revenue growth was driven by a $64.2 million, or 21.1%, increase in gross combined loans receivable to $367.7 million at June 30, 2018 compared to $303.6 million at June 30, 2017. We experienced volume growth primarily from Unsecured Installment receivables, which increased year-over-year $44.0 million, or 27.6%. Secured Installment receivables increased from the prior year period by $7.4 million or 9.2%, and Open-End receivables increased $12.9 million, or 48.3% compared to the prior year period. Open-End growth was driven by year-over-year expansion in Kansas and Tennessee of 26.9% and 20.6%, respectively, and the 2017 third quarter launch of Open-End in Virginia.

The increase of $20.0 million, or 38.5%, in provision for losses was primarily driven by the increase in combined loans receivable and the aforementioned 2017 Q1 Loss Recognition Change.

U.S. cost of providing services for the three months ended June 30, 2018 were $54.1 million, an increase of $5.4 million, or 11.1% compared to $48.7 million for the three months ended June 30, 2017, primarily due to $4.5 million, or 57.1%, higher advertising costs. Advertising for the U.S. online channel comprised $3.4 million of the year-over-year increase, $2.6 million of which related to our new Avio installment loans. U.S. store advertising rose 22.2% year-over-year. Advertising as a percentage of revenue was 6.5% and in the range we expected given the ramping of Avio and mix shift to online.

Corporate, district and other operating expenses remained consistent with the same period in the prior year. Interest expense increased $2.0 million, resulting from interest on the additional 12.00% Senior Secured Notes issued in November 2017.

U.S. Segment Results - For the six months ended June 30, 2018 and 2017

U.S. revenues increased by $56.6 million, or 16.8%, to $394.7 million for the six months ended June 30, 2018.

U.S. revenue growth was driven by a $64.2 million, or 21.1%, increase in gross combined loans receivable to $367.7 million at June 30, 2018 compared to $303.6 million in the prior year period. We experienced volume growth primarily from Unsecured Installment receivables, which increased year-over-year $44.0 million, or 27.6%. Secured Installment receivables increased from the prior year period by $7.4 million, or 9.2%, and Open-End receivables increased $12.9 million, or 48.3%, compared to the prior year period. Open-End growth was driven by year-over-year expansion in Kansas and Tennessee of 26.9% and 20.6%, respectively, and the 2017 third quarter launch of Open-End in Virginia.

The increase of $35.2 million, or 34.8%, in provision for losses was primarily driven by the increase in combined loans receivable as previously discussed.

U.S. cost of providing services were $103.0 million, an increase of $6.3 million, or 6.5%, compared to $96.7 million for the six months ended June 30, 2017. The increase is primarily due to $5.0 million, or 39.5%, higher advertising costs.

The $5.7 million increase of corporate, district and other operating expenses includes $4.0 million of additional compensation expense, primarily due to increased collections, online customer support and technology headcount and $2.7 million of additional share-based compensation expense.

Canada Segment Results - For the three months ended June 30, 2018 and 2017

Canada revenue improved $3.4 million, or 7.9%, to $47.0 million for the three months ended June 30, 2018 from $43.6 million in the prior year period. On a constant currency basis, revenue was up $1.6 million, or 3.6%. Revenue growth in Canada was impacted by the product transition from Single-Pay loans to Unsecured Installment and Open-End loans and the impact of regulatory rate changes in Alberta, Ontario and British Columbia.

Single-Pay revenue decreased $1.6 million, or 4.6%, to $33.3 million for the three months ended June 30, 2018 and Single-Pay ending receivables decreased $1.1 million, or 2.2%, to $47.3 million from $48.4 million in the prior year period due to mix shift in Ontario where we launched Open-End loans in the fourth quarter of 2017.

Canadian non-Single-Pay revenue increased $5.0 million, or 58.4%, to $13.7 million compared to $8.6 million the same quarter a year ago on $31.9 million, or 74.5%, growth in related loan balances. The increase was primarily related to the launch of Open-End products in Alberta and Ontario in the fourth quarter of 2017.

The provision for losses increased $4.1 million, or 39.4%, to $14.4 million for the three months ended June 30, 2018 compared to $10.3 million in the prior year period, because of upfront provisioning on relative loan volumes (total Open-End and Installment loans grew sequentially by $20.9 million this second quarter compared to $10.9 million in the second quarter of 2017), and mix shift from Single-Pay loans to Unsecured Installment and Open-End loans. On a constant currency basis, provision for losses increased $3.5 million, or 33.7%.

The cost of providing services in Canada increased $2.1 million, or 11.8%, to $19.4 million for the three months ended June 30, 2018, compared to $17.3 million in the prior year period. Advertising rose 19.4% due to increased spend for online and stores to support the ramp up of our LendDirect brand. The increase in non-advertising cost of providing services was due primarily to an increase in salary expense and occupancy expense from higher store counts. We have opened seven LendDirect stores since the second quarter of 2017. On a constant currency basis, cost of providing services increased $1.3 million, or 7.3%.

Canada operating expenses remained relatively flat to the same period in the prior year. Total operating expense increased to $4.8 million in the three months ended June 30, 2018, from $4.4 million in the prior year period.

Canada Segment Results - For the six months ended June 30, 2018 and 2017

Canada revenue improved $8.1 million, or 9.5%, to $93.3 million for the six months ended June 30, 2018 from $85.2 million in the prior year period. On a constant currency basis, revenue was up $4.2 million, or 4.9%. Revenue growth in Canada was impacted by the product transition from Single-Pay loans to Unsecured Installment and Open-End loans and the impact of regulatory rate changes in Alberta, Ontario and British Columbia.

Single-Pay revenue decreased $1.5 million, or 2.2%, to $67.6 million for the six months ended June 30, 2018 on related Single-Pay ending receivables decrease of $1.1 million, or 2.2%, to $47.3 million from $48.4 million in the prior year period due to mix shift in Ontario where we launched Open-End loans in the fourth quarter of 2017.

Canadian non-Single-Pay revenue increased $9.6 million, or 60.0%, to $25.7 million compared to $16.0 million the same period a year ago on $31.9 million, or 74.5%, growth in related loan balances. The increase was primarily related to the launch of Open-End products in Alberta and Ontario in the fourth quarter of 2017.

The provision for losses increased $6.4 million, or 31.1%, to $26.9 million for the six months ended June 30, 2018 compared to $20.5 million in the prior year period, because of relative loan volumes and mix shift from Single-Pay loans to Unsecured Installment and Open-End loans. On a constant currency basis, provision for losses increased $5.3 million, or 25.6%.

The cost of providing services in Canada increased $4.2 million, or 12.2%, to $38.6 million for the six months ended June 30, 2018, compared to $34.4 million in the prior year period. The increase was due primarily to $1.4 million, or 34.2%, higher advertising costs compared to the prior year period and an increase in occupancy expense from higher store counts. We have opened seven LendDirect stores since the second quarter of 2017. On a constant currency basis, cost of providing services increased $2.6 million, or 7.5%.

Operating expenses increased $1.9 million, or 24.2%, to $9.7 million in the six months ended June 30, 2018, from $7.8 million in the prior year period, due to increased collections and customer support payroll expenses from seasonality, increased volumes, expansion of the LendDirect business and product shifts from Single-Pay loans to Unsecured Installment and Open-End loans. On a constant currency basis, operating expenses increased $1.5 million, or 19.0%.

U.K. Segment Results - For the three months ended June 30, 2018 and 2017

U.K. revenue improved $2.2 million, or 23.3%, to $11.8 million for the three months ended June 30, 2018 from $9.6 million in the prior year period. On a constant currency basis, revenue was up $1.5 million, or 16.0%. Provision for losses increased $2.5 million, and on a constant currency basis, increased $2.1 million, or 66.0%, due to upfront provisioning on volume growth and the high percentage of new customers in the origination mix. Installment loans in the U.K. grew sequentially by $3.7 million in the second quarter compared to $1.9 million in the second quarter of 2017.

The cost of providing services in the U.K. decreased $0.4 million, or 10.5%, for the three months ended June 30, 2018 compared to prior year period due to reduction in costs related to the completion of store closures in the third quarter of 2017, partially offset by higher customer acquisition spend. On a constant currency basis, the cost of providing services decreased $0.6 million, or 16.4%.

Corporate, district and other expenses increased $1.5 million, or 35.4%, to $5.7 million for the three months ended June 30, 2018 compared to the prior year period. This increase includes costs related to customer redress pursuant to a complaint resolution process for all lenders in the U.K. The cost in the second quarter of 2018 to administer the complaint resolution process and the direct customer redress paid or accrued totaled $1.4 million, an increase of $0.9 million compared to the prior year period. On a constant currency basis, corporate, district and other expenses increased $1.2 million, or 27.6%.

U.K. Segment Results - For the six months ended June 30, 2018 and 2017

U.K. revenue improved $4.5 million, or 24.4%, to $22.7 million for the six months ended June 30, 2018 from $18.3 million in the prior year period. On a constant currency basis, revenue was up $2.5 million, or 13.9%. Provision for losses increased $4.3 million, and, on a constant currency basis, increased $3.5 million, or 62.9%, due to volume growth.

The cost of providing services in the U.K. increased $0.1 million, or 1.5%, for the six months ended June 30, 2018 compared to prior year period due to higher customer acquisition spend offset by a lower cost basis upon completion of store closures in the third quarter of 2017. On a constant currency basis, the cost of providing services decreased $0.5 million, or 7.4%.

Corporate, district and other expenses increased $1.9 million, or 22.1%, to $10.7 million for the six months ended June 30, 2018 compared to the prior year period. This increase includes costs related to customer redress pursuant to a complaint resolution process for all lenders in the U.K. The cost in the six months ended June 30, 2018 to administer the complaint resolution process and the direct customer redress paid or accrued totaled $2.9 million, an increase of $2.0 million compared to the prior year period. On a constant currency basis, corporate, district and other expenses increased $1.0 million, or 12.0%.