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spk01: Thank you for standing by. This is the conference operator. Welcome to the ECN Capital second quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I'd now like to turn the conference over to Mr. John Wimsatt. Please go ahead, Mr. Wimsatt.
spk05: Thanks, Gaylene. Good afternoon, everyone. First off, I want to thank everyone for joining this call. Joining us today from the company are Stephen Hudson, Chief Executive Officer, and Michael Lepore, Chief Financial Officer. A news release summarizing these results was issued this afternoon, and the financial statements and MD&A for the three-month period under June 30, 2022, have been filed to CDAR. These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the presentation section of the company's website. Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I'll refer you to the cautionary statement section of the MD&A for a description of such risks, uncertainties, and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward-looking statements will prove to be correct. You should note that the company's earnings release, financial statements, MD&A, and today's call include references to a number of non-IFRS measures, which we believe help to present the company and its operations in ways that are useful to investors. The reconciliation of these non-IFRS measures to IFRS measures can be found in the MD&A. All figures presented in U.S. dollars are less explicitly noted, and with these introductory remarks complete, I'll now turn the call over to Stephen Hudson.
spk03: Thanks, John. John's about to review an exciting growth opportunity with you, Intercoastal Finance Group. I'd like to make just two comments before John walks you through this. Intercoastal is consistent with our business model of originating and managing financial both super prime and prime credit assets for our funding partners. And second, it utilizes our proven systems, processes, and strategies of Triad. With that, John, over to you.
spk05: Thanks, Steve. So we'll start on page six. As you guys all know, we've been pursuing a tuck-in strategy, and we're thrilled to announce ECN's second tuck-in investment in Intercoastal Financial Group, or IFG. IFG was founded in 1987 by Hans Cross, a proven industry leading entrepreneur, and is headquartered in Fort Pierce, Florida. IFG is a premier marine and RV finance company with more than 30 salespeople nationwide, driving more than $550 million in expected originations in 2022. Combined with SourceOne, ECN's marine and RV vertical will now produce more than $1.1 billion of originations for our lending partners. We expect IFG to earn between 12 to 14 million of adjusted operating income in 2023, and ECN paid a total consideration of $75 million, with $55 million pay to close and 20 to be paid over a couple years. So on 2023 earnings at the midpoint, ECN paid around six times 2023. On page seven, this is sort of a format you guys have seen before. It's just some highlights. As you can see, this is really super prime production with an average FICO score of 785 and a down payment of around 25%. Ticket size is a bit bigger than source one at $120,000, and 100% of production is sold through to 15 long-term lending partners without recourse. On page eight, we've included a list of the senior management team led by Hans Cross and Nikki Bates, president of IFG. Page 9 highlights the footprint compared to ECN's footprint with only Source 1. As you can see, we are now nationwide with loans generated in all of the lower 48 states. Page 10 expands on that footprint, highlighting the expanded coverage in key states. We significantly expanded our presence in the top five states for marine and RV lending. California, Florida, and New York are added to Texas in the top five. Florida becomes our number one state from having limited presence with Source 1. Finally, 75% of combined originations now come from the top 15 states. Page 11, we go through some of the loan characteristics of IFG compared to source one. Highlights include a bit larger ticket size combined with higher FICO's and down payments. In addition, very low charge racks at just five basis points with only a six month look back. Page 12, looks at originations. Page 13, weighted average FICO. Page 14 is the distribution of FICOs, and I'd just like to highlight that more than 50% of originations boasted 800 or higher FICO score. Page 15 runs through your average down payments. Page 16 is product mix. As you can see, IFG primarily focuses on marine finance with only about 12% in RVs. Finally, on 17, there is very little dealer concentration with the top 10 dealers making up just 13% of originations. As with all of our transactions, we've identified numerous growth opportunities. And on page 19, we believe, just like Source 1, there's a low-risk path to three to four times earnings at IFG over several years. As we said before on an earlier slide, we expect $12 to $14 million in adjusted operating income in 2023, which has grown at a CAGR of almost 16% since 2018. You've seen this slide or something like it before. We believe that all of these things, sorry, here on page 20, we outline the ECN playbook, which highlights some of the opportunity we discussed with Source 1. We will pursue all of these opportunities with IFG as well, including floor plans, servicing and licensing, improving and adding funding partners, enhancing processes and systems, and building our expanded loan menu. There's an opportunity to enhance IFG capabilities geographically as well. While they're currently national in scope, certain areas such as the Midwest or Northwest could be augmented to improve volumes. Finally, on page 21, we lay out some of the programs that will be additive. Some of this nomenclature we used before, specifically progress pay and complementary flow. We see opportunity to build these new programs, which can significantly enhance retail flow. Whether floor plan or any of these programs, we believe they will contribute meaningfully to growth in the coming years. With that, I'll turn it to Steve to run through the quarter.
spk03: Great. Thanks, John. Turning to slide 23, a small recap on the tuck-in strategy that John has spoken about in the past. In addition to today's important IFG announcement, the company is pursuing a number of modest tuck-ins of both super prime and prime credit originators. four things I'd like to highlight for you on slide 23. First, we have four additional platforms that are currently under executed LOIs with several others in early stage. In terms of operating scope, these smaller tuck-ins will fit as part of Source 1 and IFG. Second, these transactions are consistent with the ECN's proven business model, and we set the criteria for that. Third, all of these opportunities leverage Triad's extensive funding partner network successful platforms such as floor plan and servicing, as well as its very successful take share and make share strategies. And finally, the current environment is presenting prime credit origination platforms at attractive valuations and attractive structures to ECN. Turning to slide 25 on the second quarter, a few highlights. Nine cents, which is the high end of investor day guidance of eight to nine. Quite proud of that. Our 22 guidance remains at 29 to 31 cents with higher triad and source one and slightly lower KG. Specifically on triad, Q2 originations up 45%, approvals up almost 30%. We are raising guidance for 22 to 70 to 75 million. And third, under triad, the housing affordability crisis is driving record shipments, both at triad and through the full industry. On source one, Originations are up 33%, approvals up a very significant 83%, which bodes very well for H2 and into 23. We're raising guidance on Source 1 to $13 to $15 million, and we're quite proud that we've added four new funding partners, including M&T Bank, which we have a significant relationship with. On Kessler, we're lowering our guidance primarily due to slower credit card investment management activity. The KG pipeline remains robust. and it's expected to track well in the latter part of 20, early part of 23. We're reducing our income guidance from 46 to 46 to 52 from 55 to 60 million. Turning to triad, you know, I challenge the management team to think that they're eagles here and they've soared past their expectations with income for the quarter up at 19%, a 45% increase year over year, originations up by a similar, floor plan assets at $280 million. As you remember, we've talked about this in the past, but our floor plan dealers have three times the growth in our retail originations than non-floor plan. The 280 bodes very well for originations for the latter part of 22 and into 23. And I mentioned earlier, guidance up. Turning to page 28, a couple of observations on program updates. That fourth bullet on the page, we've added up 530 new communities in year to date. That's significant. That's a 30% growth in communities that can now access our full menu of products. It's a strong indication of what's going to occur in late 22 and into 23. And as I mentioned to you, floor plan at 280 with a yield of 9%, most floor plan dealers will have three times the growth in our core retail business than non-floor plan dealers. Turning to the affordability crisis, it's the combination of the impact of rising costs and prices on traditional site-built homes combined with higher interest rates, which has created this unprecedented demand for manufactured housing. You see it on the left-hand side of this page with year-to-date manufactured housing industry shipments up 14%, and both May and June up over 20%. That compares favorably to existing traditional home sales, which are down 15% year-to-date. And then finally, on the latter part of this slide, 22 shipments are up 16% year-over-year, the fastest shipping rate growth since 1994. Some industry commentary, all of which is robust, but on Skyline's recent call from Skyline's CEO, it's a combination of rising rental rates combined with higher interest rates and inflationary pressures have created this unprecedented demand for affordable housing, and we see no abatement of that. Turning to CAVCO, you know, manufactured housing is now an option not considered by traditional site-built homes. People are now electing manufactured homes over site-built simply because it's affordable and it lasts a longer life of the asset. Turning to page 31, our managed credit. portfolios, our strong credit performance continues both in delinquency and in losses. 32 are originations I spoke to earlier. They give you the monthly and quarterly breakdowns, strong and robust. And on page 33, we're reading our origination guidance of 1.6 to 1.4 to 1.6. Originations are projected to grow at 44% at the midpoint of that range. We've increased our floor plan balance as part of our take-share strategy in the marketplace. That floor plan balance does not include the rollout of inventory or floor plan finance in the marine and RV business. We've raised guidance to $70 million, $75 million, and EBITDA margins have improved to 54% due to better mix, i.e. more core loans. With that, John, I'll pass it back to you.
spk05: Thanks, Steve. On page 34, we'll review Q2 for Source 1. Adjusted operating income of $5.3 million for the quarter was ahead of budget on origination growth of 37%, which compares to 35% for the first six months since we acquired the business. We continue to add new lending partners who have had strong progress on growth initiatives such as floor plans, licensing, and servicing. After a solid first half, we are raising our 22 origination guidance to 550 to 625 million and our adjusted operating income before tax guidance to 13 to 15 million. On page 35, we give a program update. As you can see, momentum is strong with approvals up 76% and originations up 37% in Q2. Page 36. We update some of our progress on our growth initiatives. In addition to new reps that we added in Florida and Southwest earlier in the year, we've now added a rep in the Northwest in Q2. We expect to have a Northeast rep here before the end of the year, and we should have full coverage across the entire United States before year-end, which was one of our goals early in the year. Our servicing project is on track to be completed here in Q3, and licensing is moving forward and will make substantial progress before year-end. We've launched our marine and RV floor plan initiative with several source one dealers and continue to add underwriting and process personnel to handle growth. As with last quarter, we added some industry comment from Brunswick One Water and Thor on page 37. As you can see, retail demand remains strong. Marine inventory is still a challenge, but RV inventory has basically returned to normal. In addition, fuel prices still do not appear to have much of an effect on customer behavior. Page 38 reviews originations, just like with Triad. And finally, on page 39, we're raising our guidance from Investor Day after a fantastic first half. Originations are now expected to be $550 to $625 million and are more than 15% ahead of plan through June. Adjusted operating income is now expected to be $13 to $15 million, up from original guidance to $12 to $14, and EBITDA margins are an exceptional 66%. On page 40, we moved to the Kessler Group. Q2 adjusted operating income before tax was $12.9 million, which is down a modest 4% year-over-year and, frankly, a bit below budget. Revenues were up 28% year-to-year, primarily as a result from increased pay-for-performance marketing. Partnership services were largely in line with forecasts and up 23% year-to-year. CCIM, however, had lower revenues from portfolio runoff of legacy portfolios and delayed transaction closings due to current market environments. On page 41, we discuss CCIM a bit more. We've seen the timing of transactions delayed in the current environment. Our current expectation is a deferral of portfolio closings largely into 2023, but not lost opportunity. Performance of existing portfolios remains exceptional, and it's driving strong investor demand. And as the environment calms down over the coming quarters, we expect activity to pick back up. On page 42, we look at 22 guidance and as a result of the delay in CCIM revenues primarily, we are lowering our KG guidance from 55 to 60 million to 46 to 52 million for 2022. If you look at the various segments of KG, the partnership services business is largely on track to hit guidance for the year. The marketing business, while a bit behind guidance in the first half, saw material pick up in the second quarter, as you would expect given activity you might have read about in terms of credit card marketing. We feel really good on that for the year. It's just the CCIM business and closing those portfolio transactions. Today, we're going to have to see how it comes together in the back half of the year, but we're really looking for 23 for a resume pickup in that business. With that, I'll turn it over to Michael to run through the consolidated financial summary. Thank you, John.
spk04: Turning to page 44, Q2 is another solid quarter for each of our operating businesses. Total originations in our secured consumer loan segment were $613 million compared to $262 million in the same prior year quarter. This includes $232 million in originations from Source 1. The growth in originations drove adjusted EBITDA to $38.9 million from $23.4 million, and adjusted operating income before tax to $28.5 million from $16.4 million in the prior year quarter. Turning to page 45, key balance sheet highlights are an increase in total assets of over $160 million compared to Q1, primarily driven by an increase in floor plan loans and help for trading finance assets at Triad. Debt was up over $450 million from Q1, reflecting the increase in finance assets at Triad, the funding of the IFG acquisition, and the payment of the accrued tax liability from the gain on the sale of service finance. Subsequent to quarter end, we increased our capacity on our senior revolver to $900 million from $700 million previously. Turning to page 46, Key income statement highlights are Q2 adjusted EPS was $0.09 per share at the higher end of our investor day guidance range and in line with consensus for the quarter. Key P&L items to note, growth in loan origination revenues was driven by the growth in total originations. Lower asset management and servicing revenues was driven by lower CCIM revenues at KG due to the impact of the sale of our portfolio investments in Q3 2021. which is partially offset by higher servicing revenues at Triad due to the growth in managed assets there. The increase in marketing revenues is driven by the growth in KG's paid for performance marketing programs, as noted by John earlier. Finally, higher interest income was driven by the increase in floor plan loans on balance sheet. Turning to page 47, higher business segment operating expenses were largely driven by the higher revenues at each of our businesses. Corporate operating expenses of $4.4 million compared to $6.5 million in the prior year quarter, reflecting our cost reduction efforts subsequent to the sale of service finance. With that, I'll turn it over to Steve for the closing summary.
spk03: Thanks, Michael. On slide 39, just three observations. The first is the IFG investment results with Source 1 in a nationwide sub-superprime and prime originator with over more than $1 billion in annual originations. a significant step forward for these companies and ECN strategy. Second, we're reconfirming our 22 guidance as well as our 23 guidance. We will update 23 guidance on our Q3 call. And finally, second quarter was extremely strong at $0.09 ahead of our budget and at the high end of our range provided on investor day. With that, operator, we'll open the call for questions.
spk01: Certainly. We'll now begin the question and answer session. If you have a question, please press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please lift your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Nick Preeb with CIBC Capital Markets. Please go ahead.
spk02: Yeah, okay, thanks. First of all, congratulations on the transaction. Just a point of clarification, and apologies if this has been covered, I'm still digesting a lot of this, but if I caught that correctly from Michael's comments, the $75 million purchase price, that was financed using a draw on the senior credit facility. So where does that take your pro forma leverage? I know that the credit facility is a bit of a hybrid in the sense that it finances both floor plan assets as well, as well as acquisitions. What does your pro forma leverage look like, or how much availability do you have remaining post-transaction here?
spk04: Thanks for the question, Nick. If you turn to the MD&A, the liquidity section, it'll take you through what's available subsequent to quarter end and subsequent to this acquisition on the senior line. It's effectively about $260 million.
spk02: Okay, and then I think I also caught in the prepared remarks that there are four additional platforms currently under a letter of intent. Are you referring to potential bolt-on acquisitions that you would expect to announce that are similar in scale to Source 1 and IFG? Did I catch that correctly?
spk05: Well, I would say that we have four different transactions that we're currently under LOI. We have several others that are in earlier stage in the process. I wouldn't necessarily characterize them all as the same size as IFG and Source 1. Some could be smaller, but they could be sort of fill-in type things. Like think about a geographic situation where they've got some teams or some origination capability or some new products.
spk02: Got it. Okay. And I'll sneak one last one in. The 2023 EPS guidance wasn't changed, but I think you signaled that the acquisition is expected to be $0.06 more. Why defer the update to the 2023 EPS guidance? Is there anything that you're waiting for to update until next quarter? Just looking for a bit of clarification on that.
spk03: Nick, it's Steve. We've got four transactions under LOI. We will have other stuff to announce. We're going to do it all at once.
spk02: Okay. Okay. All right. Fair enough. That's it for me. I'll pass the line. Thank you.
spk01: The next question is from Jeff Kwan with RBC Capital Markets. Please go ahead.
spk10: Hi. Good afternoon. I just was wondering about those transactions at Kessler you said are kind of getting pushed out to 2023 in credit. What exactly, I guess, is driving the delay in terms of getting those done until next year?
spk05: Jeff, you know, over time, what we've seen is that Kessler's business was, say, more affected by COVID than Triad and Service Finance at the time. And what we've seen is just with the overall market environment, you've just seen some difficulty settling on valuation and some other things in certain transactions. And what we've seen is just a push out in terms of when we think things might close. And so We're trying to be prudent about thinking about how the rest of 22 is going to look as we get into 23. We still think the pipeline is quite strong. At this point, we're not seeing things fall out of the pipeline, so it just feels like deferrals to us. But once the environment calms down a little bit and pricing can become a little more transparent, I think we can move forward with some of these transactions. I just can't. tell you with any degree of certainty that they're going to close here in the next quarter or so.
spk10: Are these deals where you had previously announced them, but there was some sort of, I guess, turbine, the agreement that the buyers, I guess, were able to renegotiate?
spk05: This would be additional. These would be additional portfolios that we have yet to announce or close. So this is pipeline. This is true pipeline. Um, like, you know, we've said in the past, we think that this business can do one to 3 billion in a normal year. Uh, what we've seen is the market environment has caused a situation to delay a lot of transactions and we're just, you know, we're waiting to waiting through it and who knows, maybe we'll get some stuff closed and towards the end of the year this year and things look better. But, uh, until we start feeling like that's going to happen, we're going to push this out to 2023. Okay. Got it.
spk10: Got it. Got it. And then my other question, same thing on, on Kessler is the, um, the marketing program, you know, economy is still reasonably okay, but there's concerns about the direction that it's going. Are they seeing any changes in terms of their clients' interest and appetite for those services?
spk05: Well, I don't know. I mean, there's been a bunch of articles recently in like the Wall Street Journal talking about how the credit card businesses are out there pretty aggressively marketing for new customers. We saw obviously a big jump quarter over quarter in marketing spend and marketing revenues in I think that's reflective of sort of what's going on out there in the marketing world. I mean, I guess if you saw a situation where the economy turned down or took a meaningful turn one way or the other, that could change. But as of right now, we think the appetite for marketing is still pretty strong.
spk08: Okay.
spk01: Thank you.
spk05: Thanks, Jeff.
spk01: The next question is from Tom McKinnon with BMO Capital Markets. Please go ahead.
spk09: Yeah, thanks very much. Just continuing on with Kessler, if I look at page 15 of the MD&A, it looks like revenues actually for Kessler is up year over year, but it's the OPEX that seems to be a lot more elevated here. And that's forcing both the EBITDA and the adjusted operating income before tax to be generally flat to down. So can you help me understand what's happening with respect to that? And is it just because of the business mix? Thanks.
spk04: Hi, Tom. It's Michael. Thanks for the question. As we noted at Investor Day, our new Pay for Performance marketing program is a bit of an accounting difference compared to our historical accounting programs, whereas under the old marketing programs, it was accounted for on a net revenue basis. paid performance, we recognize the gross revenues and the expenses. So that's why you see the increase in revenue and also the increase in operating expenses. And the margin obviously gets compressed as a result of that. We're still making money, but any expenses, gross accounting is going to give you a lower margin than net accounting.
spk05: If we were stuck with net accounting, you'd have similar margins as you had in the past. It's just we're now, the accounting changed to gross accounting.
spk09: Okay, and I mean, you've tried different programs. You've announced new portfolios with respect to Kessler Group, but it still just seems to be a bit of a stalled car here. Is it strictly the environment, or what's the aptitude for clients to take on some of these additional services that you have? Is there any execution issues here? Just trying to dig down a little bit deeper into Kessler. Or is it just strictly the macro environment?
spk05: You know, look, I think a lot of it is the macro environment. Obviously, since we've owned Kessler, we've tried to transition it somewhat from a real transaction-oriented business into something that can generate longer-term earnings and earnings growth. And, you know, like anything, when you do a transition like that, there's always – some issues that arise, but I wouldn't say that's where we are at this point. I'd say we have a series of high-quality products, and it's just a matter of time before we get them going, and I think the macro environment is really affecting the CCIM business really only. If you look at the year-to-date in the partnership services business, you're right on track to where we guided for the full year, and While the marketing business is a bit slow, you've seen a material pickup in the second quarter over the first, and it still looks really good for the year. So it's really just the CCIM, and that's really, in our view, a macro environment. The pipeline still looks strong.
spk03: I would add just two more things. I think if you reflect upon this most recent quarter in Q2, there was lots of statements about the health of the U.S. consumer and their spend. I think those have largely been dispelled. and the consumer analysis shows to be very strong. That wasn't the case during the quarter. There was a lot of back and forth on it, and then interest rates impact value. I think we've got a more stable interest rate environment backing up a bit. I think both of those return to saying the consumer is confident, and a more stable interest rate environment will get these portfolios going.
spk09: Great. And just a couple quick number questions. On IFG, I think you're talking about 12 to 14 in OpEx returns. or pardon me, adjusted operating earnings in 2023. This thing closed July 1st, and I think the increment in 2022 is just $4 million. So why is it so much lower in 2022 than what you're telling us for 2023?
spk05: Tom, it's just like all our other boat business. It's their seasonality. You earn more money in the first half than the second half because the selling season is really that April, May, June, July season. period, it starts to slow down in the back half. So we expect that IFG will make somewhere close to $10 million for the year in 2022, and we'll get somewhere between $4 million and $5 million, but we're just being a little bit conservative at $4 million right now. So we'll have to see how it plays out and what the volumes look like in the back half of the year, but we feel pretty good about that $4 million number, so that's where we are.
spk09: Sounds good. And the corporate expense guide, I think it was $12 million to $14 million for 2022. Is that changing? Is that increasing?
spk04: Hi, Tom. Obviously, given our year-to-date expense, we're going to be a little bit over that, but we've also outperformed in our businesses, so we're not updating the line-by-line guidances. We still think we're going to be over in the overall EPS range.
spk09: Okay. Thanks for taking my questions.
spk04: Thanks, Tom.
spk01: The next question is from Vincent Cantick with Stevens. Please go ahead.
spk06: Hey, thanks for taking my questions, and congratulations on the acquisition. So first, just on that acquisition and the pipeline, so you mentioned the four LOIs. Maybe if you could talk broadly how the market is looking for acquisitions. I'm guessing valuations maybe have rationalized a bit. And if you could put a framework on how you're thinking, like what's your size appetite for total acquisitions?
spk05: As we stated from the beginning, one of the things we think is so interesting about the marine and RV space, it is quite fragmented. There's a lot of smaller players that are out there. That lends it two ways. One, you've seen valuations come down overall, but just smaller players, typically we can negotiate probably even better valuations on average. We feel pretty good about that sort of five to seven times kind of range for acquisition prices on current year earnings. And remember, we're always looking at these businesses through ECN's lens of what we can do with them. We're typically looking at something where EPS can grow quite a bit. So over a relatively short period of time, we think that multiple that we paid can contract meaningfully. From a valuation perspective, I think we feel pretty good about that. Typically, when we're talking to a target, we're right up front with exactly how we think about how to value these things, and the conversations move forward from there. So we're not surprising anybody, and it's worked well for us here to date. In terms of total appetite, like I've said, I think there's a pretty significant opportunity in the marine and RV space. We continue to look at different kinds of tuck-in acquisitions. Again, there's lots of capabilities. There's lots of different products. There's lots of different geographies that we can attack, and hopefully over the next couple of quarters we can really round out this platform at ECM.
spk03: I think the key of it here is that we've had a track record of investing with strong, proven entrepreneurs, service finance, triad, Source One and now IFG, and I think that these entrepreneurs have been looking for a stable, informed source of capital, whether it's floor plan or complementary flow or other proven make or take share and deeper funding bases. Funding bases are bank partners who are broader and deeper and better on terms. And I think that when they meet us and we chat through it, they can see the value created. And then they have, you know, You look at the IFG, there's continuing financial interest by Hans Cross. It's of a significant nature. So he will continue to enjoy upside with us, and I'm quite excited. I think that the numbers we put out there for IFG are conservative with respect to 23, and look forward to outperforming them.
spk06: Okay, great. Thanks. And, yeah, I think that roll-up story makes a lot of sense. Secondly, and on the other side of it, the funding side, If you could talk about maybe the discussions you're having with your funding partners, the banks, the credit unions, insurance companies, and so on, and what their appetite has been as maybe interest rates have risen, and we were talking about inflation and other things, so if you could talk about how your discussions have been on the funding partner side. Thank you.
spk03: So on the pricing issue, as you know, we're a price taker, so we've been able to in both businesses pushed through 150 basis points of price increase. So that's just fine. We continue to be, maybe John can speak to source one, but at Triad we're oversold, Vincent. There's no available loans in 23, so we're now at a 24. But the performance of the manufactured housing loan portfolios has been exceptional. I think our partners at Blackstone have commented that they're the best risk-adjusted assets in our portfolio. Maybe, John, you want to provide some color on SourceOne?
spk05: Yeah, so in the SourceOne business, you know, on the Prime and Super Prime side, or IFG and Epic side, we kind of have unlimited funding because you're talking about the biggest banks out there, and they just, if you can present paper that meets their criteria, they're going to buy it. On the SourceOne side, where we're dealing with more smaller banks and credit unions, we continue to add capacity there, continue to add new credit unions and all things considered, we feel pretty good about where we are on the funding side. But we're going to keep looking and keep adding more funding partners over the coming quarters.
spk06: Okay, great. Very helpful. Thanks very much.
spk01: The next question is from Jamie Gloin with National Bank Financial. Please go ahead.
spk07: Yeah, thanks. Yeah, just want to dig in on Gessler a little bit more here just to make sure I understand. The CCIM pushout, is it Is it that, uh, investors, third-party institutional investors are just not interested in the space at this point, given the market backdrop, or is it that you can't find the right valuation to go out and purchase, uh, purchasing portfolios, which.
spk05: Where does the breakdown happen? It's not the investors. We still have strong demand from, from our, from our investors. It's really more things like settling on valuation with portfolios. it's the sellers of the portfolios. We see this frequently or we've seen this frequently. Whenever there's challenging market environments, whether it's COVID or it's this or whatever, you've seen a lot of activity just kind of slow down, especially when you're talking about transaction activity within the credit card space. And I think the first half of this year into the summer, with interest rate changes and thoughts around whether we're having a recession or we're not having a recession, I think there was a lot of a lot of the sellers were sitting back trying to figure out what they wanted to do um and you know we had some things that we thought we'd get closed here in the in the second or third quarter and it just looks like it's going to be pushed out so um it's not it's not so much demand from investors like i think investors still like the product most credit cards are floating rate product so it's not so much an interest rate issue directly it's really more you know, where the sellers are sitting today and where, you know, what portfolios we can actually shake loose and close, uh, what the timing looks like around that. So, uh, you know, we still feel pretty good that we'll get a lot of those, uh, deals closed to just probably not going to be on a timeframe, uh, in the next quarter or so.
spk07: Yeah. Yeah. Understood. And, uh, and my takeaway from the good revenue growth number and, uh, operating income decline is that CCIM is a pretty high margin business, and so when you shift maybe more to marketing, which is lower margin business, that's what's driving the impacts here.
spk05: Yeah, it's also, like Michael said, it's a bit tricky because we had to change some of the accounting around the marketing because the programs changed a little bit, which makes the marketing business a bit lower margin than it would have been otherwise, even though we're generally speaking making the same amount of money on a dollar of capital, similar type return. We just now print everything gross. That said, yeah, CCIM is quite profitable. The margins are really exceptional. So to the extent that we have issues there, it just gets trickier from an EBITDA margin perspective. But even so, I mean, the EBITDA margin in the quarter was kind of in line with where we sort of guided for the year. It's really just... When we see those things pick back up again, you'll see some of that growth look more normal.
spk07: Great. Switching to the M&A story, I understand the dry powder is at $250 million. You could do a couple of these IFG transactions and Source 1 transactions, and I think that's That's quite crucial to drive the attractive accretion that you're generating on these deals. So I just want to confirm that the four LOIs that you have in place now, maybe some more, like the likelihood of seeing any dilution on an equity basis is, would it be fair to characterize that as very, very low?
spk03: We can fund these four deals from our balance sheet as is.
spk05: Yeah, actually, we can fund these four deals and several others that We may or may not do. They're still way early stage. But the deals that we're talking about doing here, I would characterize them as small, not bigger than, say, IFG and SourceOne. These are really the incremental platforms that we need to round out the product set, round out the geographies, round out what we need to do. to then take this business and do all the things that we can do with it, whether it's the floor plan, whether it's the progress pay, all the different things that we're talking about doing, licensing and servicing, et cetera, which is going to help us grow these businesses like we have with, say, Triad or Service Finance before it. We'll be in a really good position to do that after we finish buying some of these things, but I don't see a situation where we're anywhere close to going through our capacity on what we have right now in the pipeline.
spk07: Okay, great to hear. And last one for me. M&A expenses in the quarter, is it to close the IFG and to pursue others? 5.6 maybe for Michael. What's the outlook for M&A expenses over the next couple of quarters as you're closing out a few more deals here?
spk04: I mean, it's obviously hard to say on... depending on the transactions, but yeah, that was for those expenses related to IFT as well as the others that we're looking at for sure. On the M&A side, I would, as John said, the pipeline activity, they're generally a bit smaller, but the number of them as well, so in and around that area is probably, in and around that area or less is probably, if we close, that'll be around that number.
spk00: Okay, thanks very much. I'll leave it there.
spk01: Once again, if you have a question, please press star, then 1. The next question is from Stephen Boland with Raymond James. Please go ahead.
spk08: Thanks. Maybe you could just remind me what the materiality threshold is for your tuck-in deals in terms of press releasing, because IFGs, you know, based on your guidance and what they expect to add next year is going to be adding like 15% to your, um, your operating income. Is it based on assets? Is it based on other, some other metrics? Cause I would have thought that was kind of material to, to basically press release.
spk05: I'm not, I'm not, I'm not exactly sure what the rule is, but you know, we check with obviously our attorneys on these kinds of things. We did the same thing with source one. Remember we acquired source one and then announced it at, at investor debt. So, um, You know, we have good advice on what we would need to do, what we don't need to do from a materiality perspective.
spk03: It's a long time since I've printed practice accounting, Steve, but I think $4 million on 22 earnings is not material. It's about a cent a share, less than a cent a share.
spk08: Okay, so it's current earnings, not future, like, you know, guidance earnings kind of thing that's basically right now. Correct. Okay.
spk04: Support guidance is not really considered. It's whatever you're – doing now? $50 million on a $1.4 billion balance sheet?
spk08: Yeah, I mean, if it's a balance sheet metric, I get that. It just seems like it's moving the needle on your future earnings, which seems material to the stock, in my opinion. But anyway, you've obviously done the test. There's a number of, I apologize if you've addressed this, on slide 39, when you talk about originations at source one, and it says IFG to add $4 million in 2022 to I don't know if you addressed that. It's under the origination tab.
spk05: Unfortunately, I think that bullet ended up in the wrong place. It was $4 million worth of adjusted operating. I'm not sure... I believe what was supposed to happen, that was supposed to be an origination number. Steve, I'll come back to you with it. It shouldn't be that material. Okay, I just thought it was weird.
spk08: So now you've got these two marine RV financing businesses, but I haven't heard anything about integration, about synergies. Source one, you're still adding reps, adding stakes. So is there any thought about integration in terms of the operational side? I mean, are reps going to be competing with different dealers in the same states? I'm just trying to get an idea of what kind of integration plans are for these two businesses.
spk03: Well, I think, first of all, we're using the systems and processes of Triad. So even though floor plan is being introduced to both Source 1 and to IFG, it's off the Triad systems and processes. You know, expanded menus off triads. So, you know, it's more injecting those expanded menus and services into those two businesses. I think the overlap has been modest. You saw the source one and IFG overlap. It's really been incremental to territory. So we don't see a lot of overlap and redundancy. And these are very modest-sized businesses. So Michael just plugs his accounting systems in. There's no need to integrate accounting systems. So I think the integration... costs and benefits are extremely modest. You know, I'm very wary of large, of any sort of synergistic savings. So we just simply, we simply don't go into those transactions.
spk08: Okay. I appreciate that. Thanks very much.
spk01: We have a follow-up question from Jamie Gloyne with National Bank Financial. Please go ahead.
spk07: Yeah, I was actually going to ask about something similar as Steve's question there. Just in terms of these sales staff that were added in Florida and California, I believe, at SourceOne, are they currently funding new loans at this point? And, you know, to Steve's point or Steve Boland's point, would you expect to maybe – pause on further sales staff hires given the exposure that IFG is providing to Source One.
spk05: Yes, our Florida rep has done fantastically. She was the first one we added. She's added significant originations in Florida to Source One. Our Southwest rep, we added, I believe, in May, so he hasn't been around for quite as long, but he's up and running now and had a really nice month of July And then our Northwest rep we just added at the end of July. So he's just finishing up training. So I wouldn't say that he's actually bringing in any new originations at this point, but we'd expect him to here in the coming weeks or months. We would like – we're going to find a Northeast rep for Source 1 here coming up. There's some differences in the business models with SourceOne and IFG, for example. IFG is a bigger correspondent lender. They deal with dealers as well, but they deal with bigger transactions. SourceOne is a bit different. They're dealing with smaller transactions. They're directly on some of the dealer systems, directly through to the banks. There's some differences here. Adding a northeast sales rep or a northwest sales rep is not a conflict versus what IFG is doing.
spk03: I think the simplest way to think about this is that source one is freshwater boats, for the most part. And then IFG is principally saltwater boats. And there's a little bit of overlap, but not a lot. Hence the difference in price points.
spk07: Okay, great. That's good color on that front. In terms of the other question on IFG, and just to get a sense as to potential risks in a downturn, the chargeback data that you've provided, and you can answer this question for both IFG and SourceOne, how much of a track record or how far back does that go? Would those chargeback rates of five basis points and 60 basis points apply during, let's say, the global financial crisis?
spk05: Yeah, I mean, IFG... you've got quite a long track record. I mean, it was founded in 1987. Chargeback rates are not such a big deal there because it's only a six-month look back. So you're talking about a six-month look back for either a prepayment or a loss, a credit loss. Within six months of the origination, you would owe the fee you earned back. You don't have any principal risk, right? So that one I don't I don't think it will be materially different in almost any environment. I mean, maybe you see it go up a couple basis points or down. Source ones is a little bit longer, so they have a little bit more exposure. But it's been pretty consistent for quite a long time. So, you know, we feel pretty good about it. Remember, we're not taking credit losses in a true sense. There's no principal risk here. We don't have any recourse to the boat or the boat loan or anything like that. It's really just the fee that we earned.
spk08: Got it. Understood.
spk05: And, again, it's designed to protect the bank because the bank is paying a premium for that asset, right? If they get prepaid or take a loss in the first six months, they lose the entire premium that they paid.
spk07: Yeah. Understood. That's good, Paul. Thank you. Thanks, James.
spk01: As there are no further questions registered, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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