Curo Group Holdings Earnings 2019-12-31

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PART I

ITEM 1.         BUSINESS

•	transparent approval process;

•	flexible loan structure, providing greater ability to manage monthly payments;

•	simple, clearly communicated pricing structure; and

•	full customer account management online and via mobile devices.

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•	214 U.S. locations: Texas (89), California (37), Nevada (19), Arizona (13), Tennessee (11), Kansas (10), Illinois (8), Alabama (7), Missouri (5), Louisiana (5), Colorado (3), Oregon (3), Washington (2) and Mississippi (2); and

•	202 Canadian locations: Ontario (133), Alberta (27), British Columbia (26), Saskatchewan (6), Nova Scotia (5), Manitoba (4) and New Brunswick (1).

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Shifting preference towards Installment and Open-End loans—Given our experience in offering Installment and Open-End loan products since 2008, we believe that Single-Pay loans are becoming less popular or less suitable for a growing portion of our customers. Our customers generally have shown a preference for Installment and Open-End loan products, which typically have longer terms, lower periodic payments and a lower relative cost than Single-Pay products. Offering more flexible terms and lower payments also significantly expands our addressable market by broadening our products’ appeal to a larger proportion of consumers. For example, our Installment and Open-End loans increased from 58.8% of total Company-Owned loans at the beginning of 2015 to 87.7% at December 31, 2019, with growth in Canada Installment and Open-End loans from $50.0 million in the third quarter of 2017 to $266.6 million in the fourth quarter of 2019.

•	Increasing adoption of online channels—Our experience is that customers prefer service across multiple channels or touch points. For the year ended December 31, 2019, our consolidated total revenue generated through online channels totaled $521.0 million and represented 46% of our total revenues for the year, compared to $444.1 million and 42%, respectively, for the year ended December 31, 2018.

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Increasing adoption of mobile devices—With the proliferation of improved smartphone service plans, many of our underbanked customers have moved directly to mobile devices for loan origination and servicing. According to a 2019 study by the Pew Research Center covering the U.S. and Canada, smartphone penetration among adults was 81% and 66%, respectively. In 2012, less than 44% of our U.S. customers reached us via a mobile device, whereas in the fourth quarter of 2019, that percentage had grown to over 85%.

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Unique omni-channel platform / site-to-store capability—We believe we have the only fully-integrated store, online, mobile and contact center platform to support omni-channel customer engagement. We offer a seamless “Call, Click or Come In” capability for customers to apply for loans, receive loan proceeds, make loan payments and otherwise manage their accounts, whether in store, online or over the phone. Customers can utilize any of our three channels at any time and in any combination to obtain a loan, make a loan payment or manage their account. In addition, we have our “Site-to-Store” capability, for which customers that do not qualify for a loan online are directed to a store to complete a loan transaction. Our "Site-to-Store" program resulted in approximately 278,000 loans in the year ended December 31, 2019. These aspects of our platform enable us to source a larger number of customers, serve a broader range of customers and continue serving these customers for longer periods of time.

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Industry leading product and geographic diversification—In addition to channel diversification, we have increased our diversification by product and geography allowing us to serve a broader range of customers with a flexible product offering. As part of this effort, we have also developed and launched new brands and will continue to develop new brands with differentiated marketing messages. These initiatives have helped diversify our revenue streams by enabling us to appeal to a wider array of borrowers.

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Leading analytics and information technology drives strong credit risk management—Curo is a bespoke, proprietary IT platform that seamlessly integrates activities related to customer acquisition, underwriting, scoring, servicing, collections, compliance and reporting. Our analytics team utilizes Curo to gather data and performance records for research and development purposes to assist in our continued development of new models. Curo is underpinned by nearly 20 years of continually updated customer data comprising over 85 million loan records (as of December 31, 2019) used to formulate our robust, proprietary underwriting algorithms. This platform then automatically applies multi-algorithmic analysis to a customer’s loan application to produce a “Curo Score” which drives our underwriting decision. This fully-integrated IT platform enables us to make real-time, data-driven changes to our customer acquisition and risk models, which yield significant benefits in terms of customer acquisition costs and credit performance.

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Multi-faceted marketing strategy drives low customer acquisition costs—Our marketing strategy includes a combination of strategic direct mail, television advertisements and online and mobile-based digital campaigns, as well as strategic partnerships and other commonly used modes of marketing. Our Marketing, Risk and Credit Analytics team uses Curo to cross reference marketing spend, new customer account data and granular credit metrics to optimize our marketing budget across these channels in real time and to produce higher quality new loans. In addition to these diversified marketing programs, our stores play a critical role in creating brand awareness and driving new customer acquisition.

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Focus on customer experience—We focus on customer service and experience and have designed our stores, website and mobile application interfaces to appeal to our customers’ needs. We continue to augment our web and mobile app interfaces to enhance our “Call, Click or Come In” strategy, with a focus on adding functionality across all our channels. We invest considerable time and resources on web design and mobile optimization to ensure our websites are quick and responsive, and support the mobile phone brands and sizes that our customers use. Our stores are branded with distinct and recognizable signage, are conveniently located and typically are open seven days a week. Furthermore, we employ highly-experienced store managers, which we believe are a critical component to driving customer retention while lowering acquisition costs and maximizing store-level margins. As of December 31, 2019, the average tenure for our U.S. store managers was approximately nine years, for district managers it was approximately 12 years, and for regional directors it was approximately 14 years.

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Strong compliance culture with centralized collections operations—We consistently engage in proactive and constructive dialogue with regulators in each of our jurisdictions and have made significant investments in best-practice automated tools for monitoring, training and compliance management systems, which are integrated into Curo. In addition to conducting semi-annual compliance audits, our in-house centralized collections strategy, supported by our proprietary back-end customer database and analytics team, drives an effective, compliant and highly scalable model.

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Demonstrated access to capital markets and diversified funding sources—We have raised nearly $2.2 billion of debt financing across nine separate offerings and various credit facilities since 2010, most recently in August 2018. This aggregate amount includes $690.0 million of 8.25% Senior Secured Notes due 2025 and a C$175.0 million Non-Recourse Canadian revolving facility due 2023 to support growth of multi‑pay products in Canada. We also have U.S. and Canadian bank revolving credit facilities to supplement intra‑period liquidity. Additionally, we raised over $90.0 million in our IPO. We also executed a non-binding letter of intent for an additional $200 million Non-Recourse Revolving Credit Facility to fund our growing U.S. portfolios in February 2020. We believe our access to the capital markets and diversified funding sources is an important significant differentiator as competitors may have trouble accessing capital to fund their business models if credit markets tighten. For more information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

•	Experienced and innovative management team—We believe our management team is among the most experienced in the industry with over a century of collective experience and an average tenure of nearly nine years. We also have deep bench strength across key functional areas including accounting, compliance, IT and legal.

•	History of growth and profitability—Throughout our operating history we have maintained strong profitability and growth. Between 2010 and 2019 we grew revenue, Adjusted EBITDA and Adjusted Net Income at a compound annual growth rate of 21.1%, 20.5% and 21.6%, respectively. For more information on non-GAAP measures, see Item 6.

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Leverage our capabilities to continue growing Installment and Open-End loans—Installment and Open-End loans accounted for 77.6% of our consolidated revenue for the year ended December 31, 2019, up from 19% in 2010. We believe that the revenue growth for these products reflects our customers' preferences. We anticipate that these products will continue to account for a greater share of our revenue and provide us a competitive advantage versus other consumer lenders with narrower product focus - for example, legacy Single-Pay storefront lenders. We believe that our ability to continue to be successful in developing and managing new products is based upon our capabilities in three key areas:

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Underwriting: Installment and Open-End products are more affordable and provide better utility for customers but require increasingly sophisticated underwriting and decisioning to optimize customer acquisition cost while balancing credit risk with approval rates. Our analytics platform combines data from over 85 million records (as of December 31, 2019), supplemented with predictive data from third-party reporting agencies.

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Collections and Customer Service: Installment and Open-End products have longer terms than, for example, Single-Pay loans. Longer duration drives the need for a more comprehensive collection and a credit-default servicing strategy that emphasizes curing a default and returning the customer to good standing. We utilize a centralized collection model that eliminates the need for our store management personnel to contact customers to resolve a delinquency. We have also invested in building new contact centers in the countries in which we operate, each of which utilizes sophisticated dialer technologies to help us contact our customers in a scalable, efficient manner.

•	Funding: The shift to larger balance loans with extended terms requires more substantial and more diversified funding sources. Given our deep and successful track record in accessing diverse sources of capital, we believe that we are well-positioned to support future new product transitions.

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Serve additional types of borrowers—In addition to growing our existing suite of loan products, we are focused on expanding the total number of customers that we serve through product, geographic and channel expansion. These efforts include expansion of our online channel and continued selective additions to our store footprint. We continue to introduce additional products to address our customers’ preference for longer-term products that allow for greater flexibility in managing their monthly payments.

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Continue to bolster our core business through enhancement of our proprietary risk scoring models—We continuously refine and update our credit models to drive additional improvements in our performance metrics. By regularly updating our credit underwriting algorithms, we continue to enhance the value of each customer relationship through improved credit performance. By combining these underwriting improvements with data-driven marketing spend, we believe our optimization efforts will produce margin expansion and earnings growth.

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•	Increase approval rates to our applicants—Growth and optimization of customer acquisition spending depends on maintaining high approval rates balanced with credit risk management. We continually improve our scoring models to optimize a profitable balance of application approval rates and portfolio performance.

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Expand credit for our borrowers—Through extensive testing and proprietary underwriting, we have successfully increased credit limits for customers, enabling us to offer “the right loan to the right customer.” The favorable customer acceptance rates and credit performance have improved overall loan-vintage and portfolio performance. For the year ended December 31, 2019, our average loan amount for Unsecured and Secured Installment loans was $607 and $1,326, respectively.

•	Continue to improve the customer journey and experience—We continuously seek to enhance our “Call, Click or Come In” customer experience and execution, with projects ranging from continuous upgrades of our web and mobile app interfaces to enhanced service features to payment optimization.

•	Enhance our network of strategic affiliate marketing partnerships—Our strategic affiliate partnership network generates customer applicants that we can close using our diverse array of marketing channels. By further leveraging these existing networks and expanding the reach of our partnership platform to include new relationships, we can increase the number of overall leads we receive.

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Marketing Expansion—We reach our customers using a multi-channel approach, including addressable TV, text to apply and enhanced digital ads utilizing our site-to-store concept to stay ahead of the continually developing landscape of our customers behavior and needs. These approaches are incorporated into our core marketing and we recently expanded our sponsorships by signing with certain major events, such as NASCAR auto racing, to expand our brand awareness.

•	average age of 39 for applicants and 41 for borrowers;

•	applicants are 47% male and 53% female;

•	41% are homeowners;

•	45% have a bachelor’s degree or higher; and

•	the top five employment segments are Retail, Food Service, Government, Banking/Finance and Business Services.

•	have immediate need for cash between paychecks;

•	have been rejected for traditional banking services;

•	maintain insufficient account balances to make a bank account economically efficient;

•	prefer and trust the simplicity, transparency and convenience of our products;

•	need access to financial services outside of normal banking hours; and

•	reject complicated fee structures in some bank products (e.g., credit cards and overdrafts).

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•	range of services;

•	flexibility of product offering;

•	convenience;

•	reliability;

•	fees; and

•	speed.

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A “full payment test,” under which the lender must make a reasonable determination of the consumer’s ability to repay the loan and cover major financial obligations and living expenses over the term of the loan and the succeeding 30 days. Under this test, the lender must take account of the consumer’s basic living expenses and obtain and generally verify evidence of the consumer’s income and major financial obligations. However, in circumstances where a lender determines that a reliable income record is not reasonably available, such as when a consumer receives and spends income in cash, the lender may reasonably rely on the consumer’s statements alone as evidence of income. Further, unless a housing debt obligation appears on a national consumer report, the lender may reasonably rely on the consumer's written statement. As part of the ATR determination, the 2017 Final CFPB Rule permits lenders and consumers to rely on income from third parties, such as spouses, to which the consumer has a reasonable expectation of access and permits lenders in certain circumstances to consider whether another person is regularly contributing to the payment of major financial obligations or basic living expenses. A 30-day cooling off period applies after a sequence of three covered short-term or longer-term balloon payment loans.

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A “principal-payoff option,” under which the lender may make up to three sequential loans, ("Section 1041.6 Loans") without engaging in an ATR analysis. The first Section 1041.6 Loan in any sequence of Section 1041.6 Loans without a 30-day cooling off period between loans is limited to $500, the second is limited to a principal amount that is at least one-third smaller than the principal amount of the first, and the third is limited to a principal amount that is at least two-thirds smaller than the principal amount of the first. A lender may not use this option if (i) the consumer had in the past 30 days an outstanding covered short-term loan or an outstanding longer-term balloon payment loan that is not a Section 1041.6 Loan, or (ii) the new Section 1041.6 Loan would result in the consumer having more than six covered short-term loans (including Section 1041.6 Loans) during a consecutive 12-month period or being in debt for more than 90 days on such loans during a consecutive 12-month period. For Section 1041.6 Loans, the lender cannot take vehicle security or structure the loan as open-end credit.

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If two consecutive attempts to collect money from a particular account of the borrower, made through any channel (e.g., paper check, ACH, prepaid card) are returned for insufficient funds, the lender cannot make any further attempts to collect from such account unless the borrower has provided a new and specific authorization for additional payment transfers. The 2017 Final CFPB Rule contains specific requirements and conditions for the authorization. While the CFPB has explained that these provisions are designed to limit bank penalty fees to which consumers may be subject, and while banks do not charge penalty fees on card authorization requests, the 2017 Final CFPB Rule nevertheless treats card authorization requests as payment attempts subject to these limitations.

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A lender generally must give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumer’s checking, savings, or prepaid account. The notice must include information such as the date of the payment request, payment channel and payment amount (broken down by principal, interest, fees, and other charges), as well as additional information for “unusual attempts,” such as when the payment is for a different amount than the regular payment, is initiated on a date other than the date of a regularly scheduled payment or is initiated in a different channel that the immediately preceding payment attempt. A lender must also provide the borrower with a "consumer rights notice" in a prescribed form after two consecutive failed payment attempts.

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ITEM 1A.     RISK FACTORS

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•	it may be more difficult for us to satisfy our financial obligations;

•	our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions or general corporate purposes may be impaired;

•	we must use a substantial portion of our cash flow from operations to pay interest on our debt, which reduces funds available to use for operations, invest in our business, pay dividends to our stockholders and use for other purposes;

•	we could be at a competitive disadvantage compared to those of our competitors that may have proportionately less debt;

•	the terms of our debt restricts our ability to pay dividends; and

•	our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited.

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If two consecutive attempts to collect money from a particular account of the borrower, made through any channel (e.g., paper check, ACH, prepaid card) are returned for insufficient funds, the lender cannot make any further attempts to collect from such account unless the borrower has provided a new and specific authorization for additional payment transfers. The 2017 Final Rule contains specific requirements and conditions for the authorization. While the CFPB has explained that these provisions are designed to limit bank penalty fees to which consumers may be subject, and while banks do not charge penalty fees on debit card authorization requests, the 2017 Final Rule nevertheless treats card authorization requests as payment attempts subject to these limitations. While the CFPB has indicated it has received a formal request to revisit the treatment of debit cards under the Payment Provisions, it has not done so to date. If the CFPB determines that further action is warranted, it would likely need to commence a separate rulemaking initiative.

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A lender generally must give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumer’s checking, savings or prepaid account. The notice must include information such as the date of the payment request, payment channel and payment amount (broken down by principal, interest, fees and other charges), as well as additional information for “unusual attempts,” such as when the payment is for a different amount than the regular payment, initiated on a date other than the date of a regularly scheduled payment or initiated in a different channel than the immediately preceding payment attempt. A lender must also provide the borrower with a "consumer rights notice" in a CFPB-prescribed form after two consecutive failed payment attempts.

•	the amount we may charge in interest rates and fees;

•	the terms of our loans (such as maximum and minimum durations), repayment requirements and limitations, number and frequency of loans, maximum loan amounts, renewals and extensions, required repayment plans and reporting and use of state-wide databases;

•	underwriting requirements;

•	collection and servicing activity, including initiation of payments from consumer accounts;

•	the establishment and operation of CSOs or CABs;

•	licensing, reporting and document retention;

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•	unfair, deceptive and abusive acts and practices;

•	discrimination;

•	disclosures, notices, advertising and marketing;

•	loans to members of the military and their dependents;

•	requirements governing electronic payments, transactions, signatures and disclosures;

•	check cashing;

•	money transmission;

•	currency and suspicious activity recording and reporting;

•	privacy and use of personally identifiable information and consumer data, including credit reports;

•	anti-money laundering and counter-terrorist financing requirements, including currency and suspicious transaction recording and reporting;

•	posting of fees and charges; and

•	repossession practices in certain jurisdictions where we operate as a title lender, including requirements regarding notices and prompt remittance of excess proceeds for the sale of repossessed automobiles.

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•	ordering remedial or corrective actions, including changes to compliance systems, product terms and other business operations;

•	imposing fines or other monetary penalties, including for substantial amounts;

•	ordering the payment of restitution, damages or other amounts to customers, including multiples of the amounts charged;

•	requiring disgorgement of revenues or profits from certain activities;

•	imposing cease and desist orders, including orders requiring affirmative relief, targeting specific business activities;

•	subjecting our operations to additional regulatory examinations during a remediation period;

•	revoking licenses required to operate in particular jurisdictions;

•	ordering the closure of one or more stores; and

•	other impactful consequences.

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•	our operating and financial performance and prospects and the performance of other similar companies;

•	our quarterly or annual earnings or those of other companies in our industry;

•	conditions that impact demand for our products and services;

•	our ability to accurately forecast our financial results;

•	the public’s reaction to our press releases, financial guidance and other public announcements, and filings with the SEC;

•	changes in earnings estimates or recommendations by securities or research analysts who track our common stock;

•	market and industry perception of our level of success in pursuing our growth strategy;

•	strategic actions by us or our competitors, such as acquisitions or restructurings;

•	changes in government and other regulations;

•	changes in accounting standards, policies, guidance, interpretations or principles;

•	arrival or departure of members of senior management or other key personnel;

•	the number of shares that are publicly traded;

•	sales of common stock by us, our investors or members of our management team;

•	factors affecting the industry in which we operate, including competition, innovation, regulation, the economy and other factors; and

•	changes in general market, economic and political conditions in the U.S. and global economies or financial markets, including those resulting from natural disasters, health emergencies (such as the recent outbreak of coronavirus), telecommunications failures, cyber-attacks, civil unrest in various parts of the world, acts of war, terrorist attacks or other catastrophic events.

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•	permit our Board of Directors to establish the number of directors and fill any vacancies and newly-created directorships;

•	authorize the issuance of “blank check” preferred stock that our Board of Directors could use to implement a stockholder rights plan;

•	provide that our Board of Directors is expressly authorized to amend or repeal any provision of our bylaws;

•	restrict the forum for certain litigation against us to Delaware;

•	establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings;

•	establish a classified Board of Directors with three staggered classes of directors, where directors may only be removed for cause (unless we de-classify our Board of Directors);

•	require that actions to be taken by our stockholders be taken only at an annual or special meeting of our stockholders, and not by written consent; and

•	establish certain limitations on convening special stockholder meetings.

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ITEM 1B.     UNRESOLVED STAFF COMMENTS

ITEM 2.         PROPERTIES

ITEM 3.         LEGAL PROCEEDINGS

ITEM 4.         MINE SAFETY DISCLOSURES

PART II

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ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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ITEM 6.         SELECTED FINANCIAL DATA

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Adjusted Net Income and Adjusted Earnings Per Share, or the Adjusted Earnings Measures (net income from continuing operations plus or minus loss (gain) on extinguishment of debt, restructuring and other costs, certain legal and related costs, loss from equity method investment, goodwill and intangible asset impairments, certain costs related to the disposition of U.K., transaction-related costs, share-based compensation, intangible asset amortization and cumulative tax effect of applicable adjustments, on a total and per share basis);

•	EBITDA (net income from continuing operations before interest, income taxes, depreciation and amortization);

•	Adjusted EBITDA (EBITDA plus or minus certain non-cash and other adjusting items);

•	Adjusted effective income tax rate (effective tax rate plus or minus certain non-cash and other adjusting items); and

•	Gross Combined Loans Receivable (includes loans originated by third-party lenders through CSO programs which are not included in our Consolidated Financial Statements).

•	they do not include cash expenditures or future requirements for capital expenditures or contractual commitments;

•	they do not include changes in, or cash requirements for, working capital needs;

•	they do not include the interest expense, or the cash requirements necessary to service interest or principal payments on debt;

•	depreciation and amortization are non-cash expense items reported in the statements of cash flows; and

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•	other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures.

ITEM 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

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•	Gross Combined Loans Receivable—balances in 2017 included Installment loans that were up to 90 days past-due with related accrued interest, while such balances periods prior to March 31, 2017 did not include these loans. Past-due Company-Owned Installment loans receivable as of December 31, 2019, 2018 and 2017 were $61.0 million, $66.9 million and $57.2 million, respectively.

•	Revenues—for the year ended December 31, 2017, revenues included accrued interest on past-due loan balances, while revenues for periods prior to March 31, 2017 did not include these amounts.

•	Provision for Losses—prospectively, loans charged off on day 91 included accrued interest. Thus, we adjusted allowance coverage rates in 2017 to include both principal and accrued interest.

•	Salaries and Benefits—include personnel-related costs for our store operations, including salaries, benefits and bonuses and are driven by the number of employees.

•	Occupancy—includes rent expense for our leased facilities, as well as depreciation, maintenance, insurance and utility expense.

•	Office—includes expenses primarily related to bank service charges and credit scoring charges at store locations.

•	Other Costs of Providing Services—includes expenses related to operations such as processing fees, collections expense, security expense, taxes, repairs and professional fees incurred as part of store operations.

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Advertising—costs are expensed as incurred. Advertising includes costs associated with attracting, retaining and/or reactivating customers as well as creating brand awareness. We have internal creative, web and print design capabilities and if we outsource these services, it is limited to mass-media production and placement. Advertising expense also includes costs for all marketing activities including paid search, advertising on social networking sites, affiliate programs, direct response television, radio air time and direct mail.

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Corporate, District and Other Expenses—include costs such as salaries and benefits associated with our corporate and district-level employees, as well as other corporate-related costs such as rent, insurance, professional fees, utilities, travel and entertainment expenses and depreciation expense. Other income and expense includes the foreign currency impact to our intercompany balances, gains or losses on foreign currency exchanges and disposals of fixed assets and other miscellaneous income and expense amounts.

•	Interest Expense—includes interest primarily related to our Senior Secured Notes, our Non-Recourse SPV facilities and our Senior Revolver.

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