CURO Group Holdings Corp. (NYSE:CURO) Q3 2022 Earnings Conference Call November 2, 2022 5:00 PM ET
Company Participants
Tamara Schulz – Chief Accounting Officer
Don Gayhardt – Chief Executive Officer
Roger Dean – Chief Financial Officer
Conference Call Participants
John Hecht – Jefferies
Vincent Caintic – Stephens Inc.
John Rowan – Janney Montgomery Scott LLC
Operator
Good day, and welcome to the CURO Holdings Third Quarter 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I’d now like to turn the conference over to Tamara Schulz, CURO’s Chief Accounting Officer. Please go ahead.
Tamara Schulz
Thank you, and good afternoon, everyone. After the market closed today, CURO released its results for the third quarter 2022, which are available on the Investors section of our Web site at ir.curo.com. With me on today’s call are CURO’s Chief Executive Officer, Don Gayhardt; and Chief Financial Officer, Roger Dean.
Before I turn the call over to Don, I’d like to note that today’s discussion will contain forward-looking statements based upon the business environment as we currently see it, including statements related to our future operational and financial performance. As such, it includes certain risks and uncertainties.
Please refer to our press release issued this afternoon and on our Forms 10-K and 10-Q for more information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements included in today’s discussion. Any forward-looking statements in this call are based on assumptions as of today, and we undertake no obligation to update or revise these statements as a result of new information or future events.
In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in today’s press release.
Before we begin, I’d like to remind you that we will — we have provided a supplemental investor presentation that we will reference in our remarks and that you can find it in the Events & Presentations section of our IR Web site.
With that, I would like to turn the call over to Don.
Don Gayhardt
Thanks, Tamara. Good afternoon, everyone, and thank you for joining us today. Before I turn to our results for the quarter, you probably saw that earlier today, we announced that Roger Dean is retiring as our Chief Financial Officer. Roger has agreed to stay with us in an advisory capacity through a transition period. Roger joined CURO in 2016. He was instrumental in all of the transactions that have transformed our company over the past 5 years. He’s worked tremendously hard and leave behind very talented team of finance and accounting professionals. I personally miss Roger’s leadership and friendship. And on behalf of everyone at CURO, and those who know him both professionally and personally, we all wish Roger and his family the very best.
We commenced the search for Roger’s successor and Tamara Schulz, our Chief Accounting Officer, will serve as Interim Chief Financial Officer. Tamara joined us last year from Capital One. She’s done a terrific job for us and we are confident to be equally good in this interim role.
Turning to our business review. I won’t spend a ton of time on macro comments other than to say that we do see a lot of data that suggests some economic weakness in both the U.S. and Canada. In the U.S., our customers are still working in a very tight labor market with consistent wage gains, particularly among lower wage hourly workers, and these gains appear to be offsetting the inflationary impacts of gas, groceries and housing.
We should note, as we have in the past, that Canada is seeing some impact on the downside of pandemic-related stimulus, but that stimulus was much more targeted and limited than in the U.S. with resulting inflation running about 150 to 200 basis points lower than in the U.S. Sustaining job market has shown some weakness over the past 3 months, and the Bank of Canada last week slowed their pace of rate increases.
So as we plan for 2023, our assumption is that we’ll experience some form of a mild recession in both the U.S. and Canada, one that has higher levels of employment and wage growth than in the past, but with higher interest rates, at least for the near-term.
One final macro point relates to the Canadian dollar, which after holding steady at about CAD0.80 to the USD for much of the year, depreciating rapidly over the end of the summer and has recently been trading at about CAD0.73 to the USD. It does not have a cash impact on us, but it does hurt us in translation on our Canadian revenue and earnings. And obviously, almost 10% decline during the quarter will meaningfully impact those results.
During the third quarter, we completed a series of transactions that dramatically repositioned our company. We discussed these at some length in previous calls. So I won’t spend a great deal of time to review other than to note that our results for the quarter are impacted by: one, the inclusion of results from our divested U.S. legacy business through July 7; two, a partial quarter of results from the First Heritage, which we acquired on July 13; and three, related nonrecurring items. Roger will review these items later.
Those transactions aside, I’d characterize our results for the quarter as mixed. We saw continued growth in earning assets in our direct lending businesses with Heights in our Canadian operations growing sequentially by 5% and 10%, respectively, and in constant currency of 21% and 29% since the beginning of 2022.
Flexiti’s loan book has continued its strong growth and ended the quarter at approximately CAD950 million or just under USD700 million, which is 128% higher than a year-ago and compared with approximately CAD250 million when we closed the transaction in March of 2021. So terrific progress in just about 18 months.
Growth rates in our direct lending book in both the U.S. and Canada did slow in the third quarter as credit tightening measures that we took beginning in April and May had the intended impacts, particularly in the lower credit tiers in the U.S. and in our LendDirect brand in Canada. We will talk about credit in more detail later, but we believe that we’re well-positioned to continue to grow our portfolio in both the U.S. and Canada in a disciplined way while generating good credit outcomes even amid more macroeconomic uncertainty.
We expect our consolidated loan book to grow in our fourth quarter, with more than 50% of that coming from seasonal holiday growth in Flexiti’s merchant base of more than 8,000 retail partner stores and online shopping sites. With that loan growth in Canada, we saw strong revenue growth in constant currency with our combined Canadian operations growing to CAD139 million or 11% sequentially and 43% year-over-year.
For Heights and First Heritage, their combined operations saw revenue growth of 10% and earning asset growth of 14% versus the third quarter of 2021, which includes periods prior to our purchase. While revenue growth was strong, it felt short of our expectations as our credit tightening had marginally more impact than anticipated, particularly in the lower credit tiers, which have higher relative yields and more of the revenue stream comes from upfront origination fees. This impact was most pronounced in the small loan segment of our U.S. direct lending, and we expect these impacts to continue for the next several quarters.
As we stated when we purchased Heights and First Heritage, our focus is on driving growth in a larger loan segment of higher credit quality borrowers. At the quarter end, of our $739 million U.S. loan portfolio, approximately 70% is in the larger loan category, and we expect to see that percentage continue to increase over time.
Excluding the divested legacy business, our net charge-off rate for the quarter in the U.S. improved by 120 basis points over the second quarter as we benefited from higher recovery rates. Some of these resulted from new centralized collection procedures and resources that we’ve added at Heights and having the works as First Heritage.
That said, net charge-off rates within the U.S. business are still trending higher than we anticipated as we are experiencing higher defaults on loans that originated at [indiscernible] in Q3 and Q4 2021, which is before we close on the sale. We expect the charge-off on these vintages to peak in Q4 and early first quarter 2023 before returning to a more normalized rate.
In Canada Direct Lending, we saw year-over-year loan growth of 19% and reported balances were relatively flat on a sequential basis, but up 6% on a constant currency basis. Year-over-year sequentially, net charge-offs increased 260 basis points and 90 basis points, respectively. We expected this increase in net charge-off rates as we return to pre-COVID performance levels.
Overall, I’d say the credit in Canada has normalized a bit faster than anticipated, but we are comfortable with current trends. And I would note that we now have more than 20% of our loan book originated at the internet channel, where we will see slightly higher charge-offs than in in-store originations to some mix shift there as well.
Our Canadian point-of-sale lending business, Flexiti, a modest increase in net charge-offs of 20 basis points and 30 basis points year-over-year and sequentially, respectively. As more of a Flexiti portfolio moves into revolving status from deferral periods where no payments are due, we will see charge-offs pick up, but yields will move higher as well. We should spend a minute on this as it is important to understand how this dynamic, coupled with continued loan growth will drive sequential earnings improvements at Flexiti.
In addition to the discount that Flexiti earned from its merchant partners, we also earn interest and fees from consumers, but only after the end of the promotional period. Given that this is largely a prime book, a significant portion of consumers will pay off the balance during the promotional period and more consumers did that during the pandemic. Also, and importantly, as the book is growing, it will, by definition, have more new customers in the deferral period. While the Flexiti loan book is on track to meet its expected loan growth of 80% to 90% for this year, we expect more modest growth of 30% to 35% in 2023.
So in terms of the composition of the portfolio, we expect a portion of Flexiti customers carry interest-bearing balances to increase of approximately 20% currently to approximately 30% by year-end 2023, and this could help gross yield on the Flexiti portfolio to conservatively increase by approximately 500 basis points by the end of 2023.
Turning to some of the expense and earnings improvement steps that we announced in our earnings release. In addition to credit normalization and other factors impacting operating results, our earnings outlook has been negatively affected by increases in forward benchmark rates for variable rate debt as well as the currency impact that we discussed earlier. Since we announced our decision to sell our legacy U.S. business we purchased First Heritage in the spring, forward curves and currency have impacted our 2023 outlook by more than $45 million. To mitigate these expected headwinds, we are executing on a number of initiatives to materially improve by 2023 earnings.
Let’s start with expenses where we are taking immediate action to lower our operating costs across both the U.S. and in Canada. In Canada, we are closing 59 branches and consolidating those units into our remaining Canada Direct Lending stores, which was 149 cash money stores remaining with still very strong networks in most Canadian metro areas.
This consolidation capitalized on the strength of our online channel, which I mentioned earlier and demonstrates the more limited need for our line of credit customers to visit branch locations. We’ve also reduced store headcount in certain markets to better align with branch traffic. Collectively, we expect these actions to save us $13 million to $14 million on an annual basis.
In our Canada point-of-sale business, we’ve identified additional opportunities to defer planned staffing additions and other expenditures, which will result in savings of approximately $5 million. In the U.S., beginning this month and through the first quarter of 2023, we plan to close approximately 10% of our U.S. Direct Lending stores. We are targeting both lower-performing stores as well as stores where we have overlapping footprints. This consolidation capitalizes on in-depth analysis of local market density and continuing improvement in centralized digital operations. We expect these store closures to result in annual savings of $10 million to $12 million.
In addition, we have also made a difficult decision to suspend indefinitely the rollout of our first phase non-prime credit card. This card was meant to appeal to customers of our U.S. legacy business and the rapid change in the macroeconomic environment for funding costs, credit performance and liquidity considerations significantly alter the return horizon for this initiative. We will continue to work on a larger balance card product that appeals to our current U.S. Direct Lending customer base, but do not expect to launch any new offerings in this area in 2024 at the earliest. We expect the suspension to result and potential operating savings of approximately $7 million.
Across our geographic footprint, we are consolidating certain back office functions as well as reducing our corporate office footprint, both to reflect the changes in our businesses through the acquisitions and sale and how our employees work post-pandemic. We expect to receive approximately $5 million to $7 million of operating expense savings by consolidating corporate office functions and space.
Summing it up through the consolidation and rationalization across our Canadian and U.S. operations and our corporate functions and office space, we expect to see a net annualized improvement in adjusted pretax income of approximately $40 million to $45 million, while reducing our overall headcount from approximately 4,000 employees to between 3,500 and 3,600 employees. We also expect to incur pre-tax nonrecurring restructuring charges in the fourth quarter of 2022 in the range of $5 million to $7 million related to these initiatives, of which $3 million represents cash costs.
Looking at risk-adjusted revenue to address the margin compression we’ve experienced due to rising interest rates, we are permitted and appropriate based upon the competitive environment. We are working in three areas: First, adjusting pricing to consumers in all three business units. Second, adjusted discount rates reflect to reflect higher base rates; and three, adding more resources and debt mitigation tools for consumers. While we expect that the ongoing shift in the portfolio to Flexiti the U.S. Direct Lending at larger loans will modestly reduce our overall yield. These measures taken together to improve our risk-adjusted yields in 2023 across our entire portfolio by 100 to 125 basis points.
In conclusion, we believe we have identified revenue enhancements and operating expense reductions, which should result in a meaningful improvement in pre-tax earnings in 2023, which will help offset the increase in interest expense due to rising rates, a weakened Canadian currency and other economic headwinds. And the extent and duration of these headwinds makes it difficult for us to provide any forward outlook at this point. We do feel very confident that we are well-positioned to continue to grow our business in a very disciplined fashion and to deliver a solid and sustainably profitable business in 2023 and beyond.
I will now turn the call over to Roger to review the details for our third quarter 2022 results.
Roger Dean
Thanks, Don. Adjusted net loss for the quarter was $12 million or $0.29 adjusted loss per share compared to $0.15 adjusted earnings per share in the second quarter of 2021. The primary drivers of the year-over-year decline in earnings were: one, decreased revenue in our U.S. segment as product mix in the U.S. shifted with the acquisitions of Heights Financial and First Heritage and the sale of our legacy U.S. Direct Lending business; two, increased interest expense attributable to rising benchmark rates and increased borrowing to support in part, the acquisition of Heights and loan portfolio growth; and three, increased loan loss provisioning on sequential loan growth and loss rates returning to pre-pandemic levels.
Total revenues in the third quarter increased $5 million or 2% year-over-year. Canada Direct Lending revenue was $13 million or 19% year-over-year and Canada POS increased by $16 million or 143% as compared to the third quarter of 2021. In the U.S., revenue decreased by $24 million or 18% because of the sale of the legacy U.S. Direct Lending business. For perspective, the sold business had revenue of $127 million in the third quarter of last year. For this third quarter, the combination of Heights and a partial quarter of First Heritage added $97 million in revenue.
Consolidated operating expense for the quarter decreased $6 million or 5% compared to the prior year, primarily driven by the divestiture of the U.S. Direct Lending legacy business in July 2022, partially offset by the acquisition of Heights Finance and First Heritage.
Interest expense increased $24 million year-over-year. Of the increase, approximately $20 million was attributable to higher average borrowing levels. That is growth at Flexiti and Canadian Direct lending increase for the senior notes tack-on and new facilities for Heights and First Heritage. The remainder of the increase was due to increases in the benchmark rates for Flexiti and Canadian Direct Lending facilities.
Gross loans receivable grew year-over-year by over $1 billion or 115%, primarily driven by the acquisition of Heights in December 2021 and First Heritage in July 2022, which contributed $509 million and $225 million to the balances, respectively. For Canada, it’s worth mentioning that the Canadian dollar weakened by 7% during this third quarter, with 4% of the decline occurring in the last 2 weeks of September. This negatively affects year-over-year and sequential loan comps. Flexiti loans grew 143%, adding $388 billion in loan balances year-over-year. Canada Direct Lending grew 19%, adding $74 million in loan balances year-over-year.
Since the end of last quarter, gross loans receivable grew by $114 million or 6%, primarily driven by the acquisition of First Heritage and Canadian POS lending growth of $63 million or 10%. The increase is offset by the sale of the legacy U.S. Direct Lending business. Excluding the loans sold with the divestiture of the legacy U.S. Direct Lending business, gross loans receivable grew $302 million sequentially, of which $225 million came from the First Heritage acquisition during the quarter. Canada Direct Lending was relatively flat sequentially, but on a constant currency basis increased by 6%.
On the First Heritage acquisition for accounting purposes, we are required to account for the loans and other balance sheet amounts acquired at fair value as of the date acquired. We have included a brief summary of the purchase accounting on Page 13 of our investor presentation. The fair value of the loan portfolio incorporates the credit losses expected to be realized on that portfolio. So at day 1, there is no allowance for loan losses for the acquired portfolio. The roughly $18 million discount has been accreted into revenue over the life of the loan portfolio.
Charge-offs related to this portfolio will be recognized in provision. So while these entries should be neutral to risk-adjusted revenue, the geography on the P&L will be different than our originated loans. Also, over time, we will be building allowance on loans originated post acquisition as well as any further credit deterioration that was not included in the initial valuation of the acquired portfolio.
We are also on track to adopt the CECL accounting standard on January 1. We are still finalizing all of our processes and procedures, including review with our external auditors. But we expect that adoption on January 1, 2023, will have a material impact by increasing the allowance for loan losses with a corresponding reduction in shareholders’ equity. We expect the day 1 impact to be similar to what our peers experienced upon their adoption as of January 1, 2020.
On the liquidity and funding side, we announced during the quarter, we put in place new non-recourse revolving warehouses to support our U.S. business, and we also expanded the capacity and extended the maturity on our Flexiti facility. The maturity date for these facilities now extend through 2025. In August, we renewed our U.S. revolver for 12 months.
At the end of the third quarter, we had $118 million of available liquidity, including unrestricted cash and undrawn borrowing base capacity on our various warehouse facilities. As Don mentioned earlier, we expect to fund, among other cash inflows and outflows, approximately $3 million of cash restructuring charges in the fourth quarter of 2022. Given the payback, we believe this is an attractive investment, and we have incorporated the use of cash and all of our liquidity projections.
With respect to our dividend, while we feel comfortable that our current liquidity position would allow us to make this quarter’s payment, we are prioritizing cash and liquidity needed to fund our growing loan book and to make investments, including the cash restructuring costs in the fourth quarter to deliver sustainable profitability with our new business model in 2023 and beyond. As such, we are suspending our quarterly dividend, and we will continue to review with our Board going forward.
I will wrap up by saying what a privilege it has been to be part of CURO’s journey since 2016. I’ve worked with some of the best and most talented people, a very knowledgeable and engaged Board of Directors and great advisors. And I’ve known many of the investors and analysts on this call for over a decade, and I’ve thoroughly enjoyed the engagement and support. I will likely miss it all on some level. But after 38 years in accounting and finance, I’m ready to slow down a bit and [technical difficulty]. This concludes our prepared remarks. And I will ask the [technical difficulty].
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from John Hecht of Jefferies. Please go ahead.
John Hecht
Hey, guys. Roger, best of luck. Sad to see you go, but I’m sure we will keep in touch. So congratulations on a big move. So let’s see just — I guess, just trying to, I guess, take out some of the noise from the acquisitions and all the moving pieces there, I guess, acquisitions and sales of loans portfolio, can you maybe tell me what organic growth was? I know there’s no perfect science to this, so you’re going to have to maybe take a gauge at it. Organic growth was quarter-to-quarter, so from Q2 to Q3 in Flexiti and then the Direct business in Canada and then the U.S. business? Just trying to get a sense for what is organic momentum for those three categories.
Roger Dean
Sure. Hey, John, thanks for the comments by the way. So I think at the beginning of our earnings release, we added some tables that kind of unpacked the moving parts at a very summary level. And if you look at the loans and ignore what we sold, the U.S. Direct Lending business was up — obviously up 40% sequentially, but $225 million of the growth — of the $300 million of growth came from the acquisition of First Heritage. So if you — Heights grew 8% sequentially organically.
John Hecht
Yes.
Roger Dean
Canadian Direct lending was flat sequentially, but that was currency driven. In Canadian dollars, it was 6% sequentially.
John Hecht
Okay.
Roger Dean
But the reported numbers were flat because of the — because we took the hit of the weakening of the Canadian dollar on September 30. So — and then POS grew 10% sequentially.
Don Gayhardt
In U.S. dollars, though.
Roger Dean
Yes, in U.S. dollars. It would have been like 14% in Canadian.
John Hecht
Okay. And given what your — Don, you mentioned just being a little bit more, call it, surgical from a credit perspective. How do we think — I guess, seasonally thinking about seasonality and you guys getting a little bit more selective, what would you — how would those — what do you think happens to that type of growth for the next few quarters?
Don Gayhardt
Yes. So John, I think obviously, you’ve got — particularly in the Flexiti business, right, you’ve got that merchant base, which is a lot of big ticket stuff is geared to holiday shopping. So I think that our expectation is that, that business, that portfolio in kind of in U.S. dollars is probably going to grow mid-teens, maybe mid to high teens through the end of the year. The balance of the portfolio, I think the U.S. business starting at a base of 7.30% to 7.40%, we could see maybe $20 million, $30 million of portfolio growth there, given kind of where we are from a credit perspective.
And then I think Canada Direct Lending will go up probably 3% in U.S. dollars for the fourth quarter. Again, we are kind of adjusting for where the trend was versus some of the credit tightening measures. But then if you go forward to the end of Q1, you will still see Flexiti is still going to grow, although it won’t — it obviously will be coming off of the holiday period. The rest of the portfolio [indiscernible] a little bit, the rest of the portfolio will shrink a little bit. So from Q4 — from December 31 to March 31, it’s very little growth in there because of the — we still — the small loan portfolio at Heights has some real income tax impact. So that will be — we will see the biggest amount of shrink in that portfolio. But that’s $200 million of the total earning asset base right now.
The large loans will kind of run in place maybe grow a touch. And then, as I said, Canada Direct Lending will grow in touch and Flexiti will grow. But the whole portfolio will be relatively flat December to March. And then it’s really hard to — with the kind of the macro situation, we are anticipating some continued growth in the portfolio sequentially across the balance of ’23. And we feel like, as I think I said in the content, Flexiti is going to grow from year-end, it will grow 30%, 35% by the end of Q4 most — by the end of Q4 of ’23 most of that, though, is just within the existing — the full year of the existing merchant base that they have now does not assume that they sign any more meaningful kind of enterprise merchant partners.
John Hecht
Okay. And then I guess, sort of a similar question, but turning to credit, because you guys do give the NCO rates by channel, I guess, the U.S. Direct Lending, Canadian Direct Lending and POS. Were those are, again, understanding the seasonal considerations, but you’re still talking about seeing some weakness or normalization, what’s the kind of normalized level for those three categories of loss rates? Or are we kind of in the zone at this point when thinking about seasonality?
Roger Dean
No, I think we are — I think as Don mentioned on the call, in the prepared remarks, Heights is still — it’s still above what we expect because of those 21 vintages are still working their way through.
Don Gayhardt
Yes. I think maybe the trailing 12 annualized rate is maybe a couple of 100 basis points above where we would like it to settle. But the — in Heights business, the delinquencies — and again, it’s not — I don’t think you get a clean cut in the — because we still had the legacy stuff. But in the Heights business, the delinquencies came down. The early stage stuff came down from June to September. So — and we feel like the — if you track the subsequent vintages, you get into the end of last year or the first part of this year, the subsequent vintages, the curves are performing better than the stuff that was being written in sort of, call it, June to October period of last year. So we feel good about our ability to, again, to get the trailing 12 rate down another — down a couple of 100 basis points.
John Hecht
Okay. And then some of the measures you’re taking for expenses in this quarter, how much of the kind of run rate expenses do you think go away once all the dust settles there?
Don Gayhardt
Yes. So I think if you go — John, if you go to page — I know it was a lot of words in the script because there were a lot of initiatives. But if you go to in our earnings deck, if you go to Page 14, I think it is, hold on a second. Page 12, I’m sorry, Page 12 on our earnings …
John Hecht
Okay. I apologize that when you started the call, this wasn’t up and now it is. So a lot of the questions I have are answered in this.
Don Gayhardt
I know. We had some technical difficulties with Business Wire this afternoon. But anyway, if you look at that page, John, the Canadian store closures have happened. They have been — and so that will start — we will start realizing that in November. The Canadian U.S. deferred spend occurs over the course of 2023. U.S. store closures, we said those are going to — those are starting. Those are starting, three quarters of those. We are talking circa 50 stores. 30 of those will happen in this quarter. The balance will happen in the first, probably by the end of the first quarter of ’23. So kind of two-thirds maybe this quarter and the balance in the first quarter next year.
Roger Dean
The first phase suspension, that’s tough decision, but the related costs that people have been laid off, and so that happened. The corporate office function consolidation and closures, the closures have occurred. We closed, we consolidated corporate offices, those have all occurred. The corporate office functions, some of that’s tech dependent, and that’s probably going to get achieved by the first half, by end of first quarter and …
Don Gayhardt
Yes. I would say most of that happens this quarter, though, John. It’s — yes. So there’s a little bit of it that will lead into the first quarter of next year. But most of that $5 million to $7 million will normally happen this year.
John Hecht
Okay. Well that’s all very helpful. And I will get back in the queue, because I’ve asked a few questions, but thanks very much.
Operator
The next question is from Vincent Caintic of Stephens. Please go ahead.
Vincent Caintic
[Technical difficulty] taking my questions. And Roger, well deserved and well earned. We are going to miss you, but after 38 years, it’s well deserved. So congratulations. So, a couple of follow ups. In terms of the pricing power, I know you were talking about passing on the consumer. On the Flexiti side, and you’re talking a bit about the merchants and maybe getting some discount rates. Sort of wondering what you’re seeing there and what you’re seeing with merchant engagement, especially ahead of the holidays that what the — maybe opportunities are for getting some merchants? And then if you can talk maybe about the difference since we don’t — I don’t cover many Canadian companies, just how the differences are between that Canadian consumer versus a U.S. consumer. Thank you.
Roger Dean
Hey, Vincent, thank you. Just to make sure, Vincent, the first part of the question, you’re talking about the new merchants?
Vincent Caintic
Yes. Just in terms of — so just hearing from the U.S. based guys like Synchrony and Brad talking about, well, maybe the consumers were facing macro headwinds, but actually maybe the merchants are engaging more or maybe there’s pricing opportunities there in terms of the discount rate. Just maybe making it a broad question though in terms of what you can do with Flexiti.
Roger Dean
Yes. I think we said probably a bit of –overwhelmingly, the merchant base contractually, we have — and again, it works a little bit differently with each contract, so almost I’ll give you a blank answer. But we generally have the ability to pass along interest rate increases, so base rate increases and the [indiscernible] in the form of higher discounts. So I think that some of it is consolation to make sure, just as a reminder on that point.
So — and then there are — within each merchant there’s — if you’re from Synchrony Brexit, you have a variety of different sort of promotional programs that are being run with merchants. And so may be 90 days same as cash, 12-month, equal monthly payments. And all of those are going to have kind of different economics, different discount rates et cetera, with the merchants. And a lot of the hard work in that business is working with merchants to help align these promotional programs with — advertising spending have as well as sort of product introductions and initiatives. In some cases, we have multiline retailers that have different brands. They may have an appliance store but also opening some mattress stores and trying to work with them on rollouts and new promotions.
So there’s a whole — and that’s, I think the team up there that’s what they’re really, really good at is working across this and making sure that we are both maximizing the opportunity for the retailers to sell through, so they get higher — more financing, higher conversions, but also doing it in a way that doesn’t — in an environment where gross margins have been strained at the retail level, shipping costs. And again, for furniture retailers and lumber, et cetera, so it’s been a tougher — inflation environment, the supply chain environment has caught them as well.
So I guess what I would say is it feels like the supply chain pressures and the gross margin pressures are abating to an extent. And that given, I think the economic climate and certainly, there’s a lot of demand for — demand for consumer credit remains pretty good in the U.S., likewise in Canada. We feel like it sets us up for a pretty good holiday season with the merchants, and we’ve — I think most of the work to set up new programs has kind of been [indiscernible] they involve new discount rates, et cetera. That’s already been worked out with the retailers.
So I think we’re just doing everything in CURO to make sure we’re supporting the merchants, so they can sort of finish the year strong and what’s been — and I will sort of get into the next question, which is Canada did not see the run-up in retail fed by stimulus that we did in the U.S., but they did see some of it. And if you track the bigger, LFL Group is our biggest partner up there. They’re a publicly traded company. So they’ve seen sales kind of bounce [indiscernible], but generally kind of keep moving in the right direction and not sort of see a big sort of whiplash effect from the — certainly some of the online bigger ticket retailers, the furniture retailers that have seen in the U.S.
So I think the consumer in — the environment in Canada, the economy is generally pretty good. I mentioned that the labor market isn’t quite as tight as it is in the U.S. So you’re not seeing the 1.7 job openings for every applicant kind of thing. But the flip side of that is inflation is lower, and the Bank of Canada last week sort of surprised everybody by — at least most people by only raising 50 basis points and signaling, hey, we want to make sure we are balancing strength and ongoing strength in the economy with the need to contain inflation. And again, I haven’t had a little in of time to read today’s going on in the Fed world, but it does seem like the Fed — what I read is the Fed quickly is — the Fed is going to continue to raise.
So there’s a little bit of a divergence there. I think almost in my view, entirely owing to the amount of stimulus that was spent in the U.S. and the effect that, that had on inflation. So we feel good about the Canadian consumer, I’ve said a million times. An average Canadian consumer, similarly situated, similar FICO, similar income, all the same kind of ability to repay metrics that you’d run in the U.S., that customer is going to pay — payment rates over time are going to be 15% to 20% higher than what you see in the U.S. And the flip side, obviously, is delinquencies and charge-offs for similarly situated customers are going to run lower. There’s a million reasons and theories about why that happens, but it’s certainly just in my 25 years of experience doing business up there.
Vincent Caintic
Okay, great. Very helpful. Thank you. Separate question, last question. Just on the capital structure, your funding structure, how should we think about that in terms of a rising rate environment, perhaps if you can give us some sensitivity? And is there a — are you comfortable with your current capital structure? Or should we maybe see it evolve? Thank you.
Roger Dean
Yes. I think it will evolve. What’s most immediate is we are — you might have saw that we posted a deck because we were at the ABS Conference launching a U.S. securitization transaction that we expect to close just after the first of the year. And deals are still getting done. Regional just priced, I think, last week and — opportunity. So the ABS markets are still — they’re not as — certainly not as attractive as they were 6 months ago, but deals are still getting done. So we expect to, for the U.S. business to do a securitization, just sometime in the first quarter.
Flexiti will tap securitization markets again middle of next year. And we are evaluating some potential opportunity even for the Canadian Direct Lending business for similar securitization as we start to put the Flexiti non-prime assets collateral into — combining that Flexiti non-prime collateral with our Canadian Direct Lending collateral. So that’s really the biggest thing we have on the plate. We will continue to work to expand our senior revolver and more bank participants in that. But the big thing is securitization of the U.S. — the Heights large loan portfolio.
Don Gayhardt
Yes, first up in the Q, yes.
Vincent Caintic
Great. Perfect. Thanks very much.
Operator
[Operator Instructions] The next question is from John Rowan of Janney. Please go ahead.
John Rowan
Good afternoon, guys.
Roger Dean
Hey, John.
John Rowan
Roger, echo everyone’s sentiment. It’s certainly been nice to work with you over the last few years. Certainly, keep in touch.
Roger Dean
Thanks, John.
John Rowan
As far as closing stores, I mean, you’re basically closing stores, I assume that you bought from Heights and First Heritage, right? And there’s no other stores that you have in the U.S. Am I correct?
Roger Dean
Sure. In the U.S., yes.
John Rowan
Okay. And just to be clear, you’re pulling the $2 to $2.40 guidance for 2023?
Roger Dean
Well, we gave it as an outlook. John, we just said, we feel like given where we are in the macro does — giving forward outlook it doesn’t make sense for us right now.
John Rowan
And a lot of that goes back to interest expense? I’m just — the ramp-up in interest expense has been pretty steep, and it seems to be almost one-for-one with changes in the Fed funds rate? I mean, just how sensitive are you? I mean, what’s the percentage of your funding that’s fixed versus floating in nature?
Don Gayhardt
So John, I will just — [indiscernible] again. No, we did — as we said, it’s about $40 million of increase from — once the curve started moving up kind of in March of last year, that’s our ’23 outlook, that $40 million pre-tax and then currency, which is — we don’t move money back and forth. So it’s not a cash issue for us, but certainly it will translate into that EPS number that we gave. But Roger, give you the breakdown. But obviously, part of — as we just talked about vintage move — having portfolios that we can moving out of the warehouse in the securitization transaction helps both from a duration standpoint and a fixed versus diverse floating standpoint as well.
John Rowan
Okay.
Don Gayhardt
Roger, what’s the breakdown, do you know?
Roger Dean
It’s about half. We have $2 billion in debt and half of it is fixed rate and half of it is floating.
Don Gayhardt
Right. And that’s why I say the base rates have gone up 350, 400 basis points. That’s kind of that $40 million number right there.
John Rowan
And then you said 30 to 35 — I think it’s 30% to 35% growth in the point-of-sale business for next year. Is that correct? And you said you would end this year about where you expected. Can you remind me where you expect it to end this year and refresh my memory, if I’m correct, on the 35% growth for ’23?
Don Gayhardt
So the question is where are we on just the point-of-sale portfolio?
John Rowan
Correct. [Indiscernible] gave guidance for 35% growth in ’23?
Don Gayhardt
Yes, that’s just going to — just get you the number here.
Roger Dean
We also said it’s going to grow about — it’s going to grow. They’re going to have — the next 6 weeks, it will be the holiday season. So — and then — go ahead, sorry.
Don Gayhardt
Okay. So we expect that portfolio, which is about U.S., about 690 now will end in the $800 million range U.S. dollars at the end of the year.
John Rowan
And then 35% growth on top of that. That’s [indiscernible].
Don Gayhardt
35% growth next year. Yes. And again, I make the point that’s part of why we’re talking about sort of the yield stuff, which is there’s that maturation business, and you start to look at what you get in ’23, where we think the business will move from being — so it’s kind of a cash P&L profitable business. Now if you add back depreciation and amortization and provision impact and the MDR, which isn’t — we don’t disclose that separately, but we do it in that — there’s a denim to — in the earnings deck. So we think it will move — it should be a GAAP profitable business at the pre-tax line early in, we hope, early in ’23. But even with, because of that growth, an ongoing healthy dose of provisioning of a major [indiscernible].
John Rowan
Does the revenue yield in that business still go to about 5% as you get past kind of that cohort of consumers that are in the promotional period?
Don Gayhardt
Yes. I think it should grow pretty ratably over the year and exit by the time you get to Q4, you should have that whole 500 basis point increase.
John Rowan
Okay. All right. Thank you very much.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Don Gayhardt for closing remarks.
Don Gayhardt
Great. Thank you, everybody for joining us. Again, we’ll talk to you. Look forward to speaking to you again for our year-end call, and I will add my thanks and good byes and good wish to Roger and his family as well. So thanks, everybody. Have a good evening.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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