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spk01: Good day, and thank you for standing by. Welcome to the Go Easy's fourth quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Farhan Ali Khan. Sir, please begin.
spk09: Thank you, Operator, and good morning, everyone. My name is Farhan Ali Khan, the company's Senior Vice President and Chief Corporate Development Officer, and thank you for joining us to discuss GoEasy Limited's results of the fourth quarter and full year ended December 31st, 2021. The news release, which was issued yesterday after the close of market, is available on Globe Newswire and on the GoEasy website. Today, Jason Mullins, GoEasy's President and Chief Executive Officer, will review the results for the fourth quarter and provide an outlook for the business. Hal Khoury, the company's chief financial officer, will also provide an overview of our capital and liquidity position. Jason Appel, the company's chief risk officer, is also on the call. After the prepared remarks, we will then open the lines for questions from investors. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our investor site. All shareholders, analysts, and portfolio managers are welcome to ask questions over the phone after management has finished the prepared remarks. The operator will poll for questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management's comments and responses to questions in any coverage. However, we would ask that it do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but I will direct you to the caution regarding forward-looking statements included in the MD&A. I will now turn the call over to Jason Mullins.
spk11: Thanks, Farhan, and welcome to the call, everyone. Today I will spend some time briefly discussing our strategy and the long-term performance of our business before reviewing the highlights of the fourth quarter and full year. Hal will then take a few minutes to talk about our balance sheet and funding capacity, following which we are excited to update you on our outlook for the future, our key initiatives for this year, and the new three-year forecast we published yesterday. First, I want to thank our team for their perseverance over the last several months. As the latest wave of the pandemic disrupted everyone's holiday season plans and requiring juggling between in-office and remote work, I truly appreciate the perseverance. Let's start by taking a brief look back at how we got here. From 2001 to 2009, Go Easy experienced its first major cycle of growth, driven by the expansion of our consumer leasing business, Easy Home. We developed a single household name brand, brought in a range of top quality products, introduced competitive pricing and payment plans, and built a network of stores coast to coast. To provide Canadians with easy and convenient access, to everyday household furnishings and electronics. As we could see the business would soon reach a state of maturity as we approached more than 80% of the market share, we pivoted and developed a business model that would fuel our next cycle of growth. In 2006, we introduced consumer lending and began testing a single-priced unsecured installment loan through a new brand, Easy Financial. The thesis at the time was simple, to offer consumers a better alternative to payday loans. through a product with a more affordable repayment schedule, and more importantly, one that would help them rebuild their credit. After several years of testing and refinement, we began to scale this new business. From 2010 to 2016, we worked tirelessly to develop a network of model line branches, develop a sophistication in credit risk management and data analytics, build the platform and infrastructure, and create a brand known for providing non-prime Canadians a second chance at access to credit. The simplicity of a single channel, single product, and single interest rate allowed us to scale quickly and capture some of the talent and market share left behind after the departure of Wells Fargo and HSBC Finance from non-prime lending in Canada. This year, in 2021, marked the fifth year of our third cycle of growth. In 2017, we began to execute on our current strategy. to diversify our range of loan products so that we can become the one-stop, full-suite provider for all forms of credit for a non-prime consumer, to expand our channels of distribution so that our customers can get access to credit in the most convenient manner possible whenever and wherever they are, expanding the geographies in which we operate, and to help our customers improve their credit and financial well-being by bringing down their cost of borrowing and gradually lowering their interest rate through our products and our pricing as we aim to help them graduate back to prime. Our current strategy and this current cycle has produced our greatest period of growth yet. This long history and track record of consistent performance highlights the organization's ability to adapt and evolve to changing market conditions, competitive dynamics, and consumer trends. Since the beginning of that first cycle of growth in 2001, we have compounded revenue growth at 13%, compounded normalized net income at 32%, and compounded the normalized earnings per share at 26%, producing total shareholder return of over 13,500%, a 20-plus year history to be incredibly proud of. Yet in the last five years, that growth rate has only accelerated. Since 2016, we have grown the consumer loan portfolio organically and through acquisitions from $370 million to over $2 billion. Revenue has compounded at 19%. Normalized net income has grown at a compound rate of 39%. And normalized earnings per share has grown at a compound rate of 34%. We are even more proud that we have now served over 1.1 million Canadians with over 300,000 active customers today. And that over the recent five-year period, we have reduced the weighted average interest rate for our customers from over 46% down to 33%. with over 60% of them improving their credit score and one in three graduating back to prime within 12 months of borrowing from us. And as I will speak to you shortly, we are just getting started. I'll now turn to our quarterly results. With the effects of the pandemic on consumer borrowing and repayment behavior largely behind us, the fourth quarter highlighted the true accelerated growth capability of our multi-product and multi-channel non-prime lending platform. During the quarter, we invested nearly $8 million in marketing and advertising across a range of media platforms. The strength of our campaign, combined with seasonal demand, resulted in a record number of applications for credit at over $300,000 in the quarter, up more than 50% from 2020. Quarterly loan originations surpassed half a billion for the first time in our history at $507 million. which led to organic growth in the loan portfolio of a record $134 million, more than a 100% increase from the fourth quarter of last year. This led to finishing the year with over $2 billion in consumer loans. All our products and channels contributed during the quarter. Applications for credit captured digitally through our web and mobile platforms or that of our digital partners accounted for 51% of all volume. 29% of all the new customers we acquired in the quarter were originated through point-of-sale financing with positive growth in every vertical, including retail, power sports, healthcare, and home improvement. Meanwhile, our auto financing business has performed exceptionally well, scaling to 5% of all new customers acquired during the quarter. Through the use of graduating our borrowers to lower tier pricing and lower priced products, we continue to bring down the weighted average interest rate for our customers. During the quarter, the weighted average interest rate in the portfolio declined to 33.3%, down from 37.8% last year. Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 41.4%. Total revenue in the quarter was a record $234 million, up 35% over the same period in 2020. Complementing the robust demand, credit performance has also made an orderly return to optimal levels. The net charge-off rate for the fourth quarter was 9.6% at the midpoint of our targeted range. resulting in optimized volume and risk dynamics. With credit performance now at a new steady state, our loan loss provision also remained flat at 7.87% versus 7.83% in the prior quarter, which we believe reflects the new structural credit risk of the portfolio and the overall economic environment. Operating income for the fourth quarter was a record $79.6 million, up 30% from $61.3 million in the fourth quarter of 2020. Despite the greater investment in advertising and higher provision expense related to the much larger loan book growth, we continue to experience the benefits of operating leverage. Total company operating margin in the quarter was 34%, down just slightly from 35.4% in the fourth quarter of last year. After adjusting for items related to the recent acquisition of LendCare, we reported record adjusted operating income of $86.4 million, up 41% compared to the $61.3 million in the fourth quarter of 2020. Adjusted operating margin for the fourth quarter was 36.8%, up from 35.4% in the prior year, highlighting the ongoing benefits of scale and the prudent management of operating expenses. Net income in the fourth quarter was $50 million compared to $48.9 million in the same period of 2020, which resulted in diluted earnings per share of $2.90. After adjusting for non-recurring items in both comparable periods, Adjusted net income was a record $47.6 million, up 36% from $35 million in 2020, while adjusted diluted earnings per share was a record $2.76, up 23% from $2.24 in the fourth quarter of 2020. While 2021 didn't go exactly the way everyone had hoped due to the lingering pandemic, it certainly finished on a high note for our business. The accelerated expansion of our point-of-sale channel through the investment in LendCare, the new rapidly growing automotive financing division, new easy financial websites, improvements to our products and pricing, major enhancements to our technology infrastructure, and the incredible grit and perseverance shown by our frontline team to take care of our customers were just some of the highlights from another productive year. With a record 68% of our management positions filled by internal promotions and a record employee engagement score of 84%, without a doubt, it is our people and our culture that were at the center of our success yet again. During the year, we committed to learning more about each other and how we could contribute to social causes in our communities. We ran our first ever workforce demographic survey, which validated the tremendous diversity and inclusion within our organization. We were thrilled to find that our workforce is made up of team members from 78 different countries, and we believe this incredible diversity produces a unity of talent from different backgrounds and experiences that create a culture of creativity and innovation. In support of our Black colleagues in 2021, we signed the Black North Initiative Pledge, demonstrating our commitment to equity and opportunity for members of the Black community in corporate Canada. In response to the extra challenges our team faced, we formed a partnership with the Canadian Mental Health Association and increased access to mental health-specific practitioners through our virtual healthcare provider. We also made great strides in strengthening our senior leadership team with the appointment of Jackie Thu as Chief Operating Officer for our Easy Financial and Easy Home operations, while also elevating Sabrina Amzini and Farhan Ali Khan to C-suite roles. Lastly, consistent with our values, we've made a meaningful impact in the communities in which our employees work and live. During the year, we donated over half a million dollars to charities and causes that serve others in need, our biggest year of donations to date. We've always rallied around our value of investing in our communities and operating with a purpose beyond a profit, and our ability to give back to meaningful causes in 2021 was a testament to that. We were privileged that the hard work of our team and the culture we have continued to cultivate did not go unnoticed, as GoEasy was certified as a great place to work in Canada, renamed as one of Canada's most admired corporate cultures for the second time, and placed on the TSX-30 list for the second time, ranking number seven overall for total shareholder return. For the full year, we funded nearly $1.6 billion in loan originations, up 54%. Revenue for the full year was $827 million, up 27%. After adjusting for the acquisition-related expenses, operating income for the full year was $317 million, compared with $216 million in 2020, an increase of 46%. During the year, we also recorded before-tax fair value gains on our investments of $115 million. Total net income for 2021 was $235 million, up nearly 80%. After adjusting for the one-time acquisition expenses and the gains on our investments, adjusted net income for the full year was $175 million, and adjusted diluted earnings per share was $10.43, increases of 49% and 38% respectively. Based on the 2021 adjusted earnings, the increasing level of cash flow produced by the business, and the confidence in our continued growth and access to capital going forward, the Board of Directors has approved an increase to the annual dividend from $2.64 per year to $3.64 per share, an increase of 38%. This marks the eighth consecutive year of an increase in the dividend to shareholders. I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook. Thanks, Jason. The fourth quarter and recent weeks of 2022 have been a highly productive period in developing our target capital structure. diversifying our funding relationships, and utilizing our excess capital capacity in a manner that will generate long-term returns for shareholders. Free cash flow from operations before the net growth of the consumer loan portfolio in the fourth quarter was 59.5 million, up 45% from 41 million in the fourth quarter of 2020. Approximately 25 million of our free cash was used for dividend payments and the purchase of capital and lease assets, with the balance of $35 million allocated toward funding a record quarter of $134 million in organic loan growth, the balance of which was funded through available credit facilities. We also elected to use an additional $62 million of our available capital in the fourth quarter and an additional $18 million in early January to opportunistically repurchase our shares at a level we feel is below their intrinsic value. Since November, we have used $80 million of our capital to repurchase approximately 444,000 shares. As Jason highlighted earlier, the performance of our business, rising earnings, and access to capital have led to lifting our annual dividend 38% to $3.64 per share. It is important to note that both our dividend policy and share repurchases are done on the basis that they can be sustained through future periods of economic stress. At year-end, our net debt to net capitalization was 65%, comfortably below our targeted leverage level of 70%. Subsequent quarter-end, we also announced enhancements to our secured revolving credit facility and securitization warehouse. On the warehouse, we syndicated the facility and increased the size from $600 million to $900 million of total capacity, while adding several marquee banks. On the revolving credit facility, we extended the term to reduced the limit slightly, improved the flexibility, and reduced the interest rate by 75 basis points when taking draws tied to the Canadian bankers' acceptance rate, and 125 basis points when taking draws tied to the bank prime rate. Between the two facilities, we are fortunate to have participation from five of the six major Canadian banks and total capacity of nearly $1.2 billion, a testament to their confidence in our business. Based on the cash at hand at the end of the quarter and the borrowing capacity under our recently amended credit facilities, we have approximately $978 million in total funding capacity, which is sufficient to fund our organic growth forecast for approximately three years through the fourth quarter of 2024. Inclusive of these amendments are fully drawn weighted average cost of borrowing reduced to 4.2%. incremental draws on the senior secured revolving credit facility bearing a rate of approximately 2.75% and incremental draws on the securitization facility bearing a rate of approximately 2.37% prior to interest rate swaps. We also estimate that once our existing and available sources of capital are fully utilized, we can continue to grow the loan portfolio by approximately $200 million per year solely from internal cash flows. With that as a backdrop, I would like to talk about interest rates for a moment. As everyone knows, we are entering a period during which rates are expected to rise. However, there are four distinct reasons why GoEasy remains sheltered from rising rates having an impact on the cost of borrowing on our drawn debt balances. First and most significant is the effect of mix shift. Much like our consumer loan portfolio is shifting towards lower-priced consumer loans, so too is our debt stack. we expect that nearly all funding to support our three-year organic growth plan going forward will be from lower-cost secured funding facilities. As a result of the shift in mix, even if the rates on those facilities were to rise, they are still projected to remain below our current drawn cost of debt of 4.9% per quarter for some time. Secondly, all the draws we have made to date on the securitization warehouse and those we will make in the future have interest rate swap agreements put in place to hedge the interest rate risk and fix the rate going forward. As a result, the impact on rising rates only affects incremental securitization draws, resulting in a much slower and gradual impact on the overall cost of borrowing. Third, as noted earlier, The rate charged on our secured revolving credit facility was recently reduced with the amendment we announced in January. As a result, we have secured a greater degree of buffer before rising rates affect our actual total cost of borrowing. Lastly, our 2019 unsecured note became eligible for early redemption this past November at a premium level that will reduce further this coming November. Those notes were priced at a coupon of 5.375%. However, subsequently in 2021, we were successful in issuing an additional note at a full 100 basis points lower with a coupon rate of 4.375%. As a result, we believe there's an opportunity if we were to refinance the 2019 notes to reduce the new coupon rate even amidst a rising rate environment. Altogether, we estimate the interest rates need to rise by nearly 200 basis points before we experience an impact of the current cost of borrowing on our drawn debt balances. Turning briefly to the management of our investments, in November 2021, we entered into a seven-month total return swap agreement to substantially hedge our market exposure related to an additional 75,000 contingent shares related to the equity we hold in a firm. The swap effectively results in the economic value of this edge portion of our contingent equity being settled in cash at maturity for $163 U.S. per share, net of applicable fees. Prior to the fourth quarter, we had previously entered into a nine-month total return swap agreement to substantially hedge our market exposure related to 100,000 contingent shares related to the equity held in a firm, with those shares being settled in cash at maturity for $110.35 U.S. per share, net of applicable fees. To date, we have substantially hedged our market exposure related to 175,000 of the 468,000, or nearly 40% of the total contingent shares held in Affirm. As such, the value of our hedging arrangements exceeds any impact from the recent reduction in Affirm's share price, minimizing the net exposure. Furthermore, we are optimistic that the portion of the contingent shares we have assumed will vest in 2022 will improve as the performance of Affirm Canada's formerly paid rate unfolds. So with nearly $1 billion in total liquidity and a highly diversified capital structure that is providing shelter from the impact of rising rates, we are in an excellent position to fund the ambitious growth plans we have published. With that, I'll pass the call back over to Jason. Thanks, Al. As we continue to execute on the four pillars of our strategy, we have never been more excited about the future of our business. In our release yesterday evening, we provided a new updated outlook, which contains a forecast for the next three years. Note that due to recently introduced IFRS disclosure requirements, we have made some small amendments to the KPIs we typically provide, including moving from adjusted operating margin to reported margin, although the main commercial drivers of the business continue to be provided. Altogether, the forecast is consistent with or better than our previous forecast provided last year. We expect to organically grow the loan portfolio by roughly 75% to approximately $3.5 billion in 2024, driven by the growth and execution of our current suite of products and channels. Our outlook, which contemplates a broadly stable competitive and economic environment, provides a range of guidance to account for unanticipated headwinds on one end or the benefit of our initiatives performing better than planned on the other. We also remain on a quest to reduce the cost of boring for our customers. By optimizing for an 8% to 10% return on receivables that in turn produces over a 20% return on equity, we can deliver attractive long-term earnings growth and shareholder return while concurrently passing along rate reductions to our customers and expanding their relationship with us. Over the next three-year period, our strategy will bring down the weighted average interest rate we charge our customers to below 30%, while the total yield with the ancillary revenues gradually declines to approximately 35%. The constructive economic backdrop and the strength of our risk management and analytics practice results in a stable outlook for credit performance. We expect the annualized net charge-off rate of our portfolio to oscillate between 8.5% and 10.5% throughout 2022 and 2023, gradually declining in the outer period. Excluding any new investments or additional share repurchases, the strength of our internal cash generation will also lead to a gradual de-levering of our balance sheet while the business continues to reap the benefits of scale and the operating margin and corresponding profitability expand. To drive this growth, we will continue to invest in our business. During the year, we plan to spend approximately 3.5% of our revenues on marketing and advertising through the launch of a new TV and digital video campaign. We also plan to invest approximately $30 million of capital into real estate and technology, including our digital and point-of-sale platforms, core lending solutions, and data infrastructure. In 2022, we will be focused on driving sustained growth through three key strategic growth initiatives. To date, we have assembled a powerful lending business with multiple products and acquisition channels. However, we have not yet fully monetized the power of this platform. Today, many of our customers not only fail to be presented offers for loan products they are eligible for, but many of them would not even be fully aware of the wide range of borrowing options available. Moreover, the cross-selling activity that is done uses a basic approach of email marketing and phone-based selling. Therein lies a tremendous opportunity. We think of our business as a lending ecosystem for non-prime Canadians, a one-stop shop where they can get access to all their borrowing needs from a single trusted provider. In 2022, we will begin to develop a self-serve digital portal through a mobile app that will give prospects and customers alike access to easily see the wide variety of financial services available and dynamically provide them with loan offers tailored to their credit profile and borrowing needs. We hope to launch version 1.0 by end of this year and then begin our journey toward the end state, where non-prime borrowers never have to apply for credit again. By way of investments in data, decisioning, and digital, consumers will simply download our app, provide some basic information and consent, then begin to instantly preview the credit products they are eligible for. We think this digital portal will extract maximum value from our full suite financial services institution and dramatically improve the customer experience for our consumers. Secondly, we will continue to invest in our auto finance programs. Through both the dealership and direct-to-consumer channels, we believe we can be the number one non-prime, non-bank auto lender in Canada. Over the course of the year, we plan to scale from approximately 1,400 dealer partners today to over 2,200 by year-end, while continuing to scale up our direct-to-consumer offering through auto finance advertising and enhancements to our digital approval process. Lastly, we will be working on several initiatives to scale our point-of-sale lending business through our LendCare brand. From enabling consumers to pre-qualify for purchase financing on our partners' websites, to integrating directly into the sales platforms of our merchants, to developing a full-spectrum solution in partnership with other prime lenders, we anticipate a meaningful lift in originations from financing everyday large-ticket purchases for our customers. We are already experiencing a positive start to the year. During the first quarter, we expect to grow the consumer loan portfolio between $80 and $100 million during the quarter, nearly tripled the growth in the first quarter of 2021. On the revenue side, we expect the total yield generated on the consumer loan portfolio to decline to between 38.5% and 39.5%, driven in part by fewer days in the quarter, while the net charge-off rate should remain at the midpoint of our targeted range, finishing between 9% and 10% in the quarter. As we reflect on our business, we are proud of our achievements, but far more excited about our future. As meaningful as the recent 2 billion milestone was, it only suggests that we have now just captured 1% of the market share for non-prime credit in Canada, with future opportunities abroad expanding our market even further. Yet none of this would be possible without the incredible team that works day in and day out, providing honest and responsible financial products that help put non-prime Canadians on the path to a better tomorrow. We are truly just getting started. With those comments complete, we will now open the call for questions.
spk01: Thank you. As a reminder, you'll need to press star 1 on your telephone. To withdraw your questions, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Ricardo Canseco with BMO Capital. Your line is open.
spk06: Thank you, and good morning. jason on the integration of land care could you provide an update on the launch of the cross of your marketing campaigns as well as you know what origination benefits have you seen to date as it relates to merging both on the writing models back in november yeah absolutely so um so as we mentioned last quarter uh all of the call it
spk11: Back office integration that we needed to complete primarily in the finance department is now pretty much now done. And then on the key initiatives, the point of sale platform integration got completed at the beginning of the fourth quarter. We've already seen several million of originations coming through the second look financing that's now being offered by plugging in the former easy financial credit model in and behind the LendCare platform. So now that is done. We're still only gradually rolling it out to the merchants and the verticals. We're doing it in a testing and cautious manner like we normally would, but it's going well and we're already seeing some good lift. We also launched our first cross-sell campaign this past fourth quarter as well, where we went and looked at lending care customers that would qualify for TD Financial loans and launched an offer to those customers, again, doing it in a small, controlled way in which we could test and learn. Again, also saw several million of originations produced off that first campaign. So going well, and we're quite optimistic about the contribution of those tactics on the business going forward.
spk05: Okay, great.
spk06: I'd like to raise the topic of accelerating inflation. So first on loan growth, I think how sensitive are your underwriting models to the rising cost of living? And the second perspective, on credit losses, how do you think about the impact of rising inflation on the non-prime borrower's ability to repay?
spk11: Yeah, that's a great question. I'll make a couple comments and then Jason will talk and can chime in as well. So first of all, when we do an evaluation of a consumer for credit, we calculate an affordability algorithm. And so we're able to adjust the debt-to-income ratio or payment-to-income ratios based on the changing environment. We have models that based on the individual's credit, based on the individual's income, allows for different levels or different thresholds of the payment that we provide and the product we provide relative to their current debt and their current income. So at the moment, it's something that we're looking carefully at, but thus far, debt-to-income ratios have remained quite stable. And in fact, the average income of our consumers over time has actually been rising. So for the consumer set, that we're specifically booking loans for, that ratio has actually improved slightly as a result of higher average incomes. As it relates to the impact just longer term, we believe that our current guidance, the range we've provided, accounts for being able to weather through headwinds related to inflation to a certain level. If you look at the current Bank of Canada outlook today, they expect inflation will remain elevated, but by the end of the year begin to drift back down to around 3%, which should then intersect with approximately where wage growth will be. And as long as you get to the point where inflation and wage growth neutralize, then generally speaking, the average Canadian is in good shape. I think it's also important to note that, you know, For several years, up until only just recently, wage growth did exceed inflation. And so the recent spike in inflation is really at the moment only a temporary matter. Provided that it does decline gradually over the next year or so, as supply chain opens back up with economic reopening and rising rates start to begin to help correct inflation, then we think we've got a comfortable range to manage credit risk. If, of course, inflation does run much higher all the way through this year and into next year and beyond, then that's where, as we see that unfold, we have the ability to adjust our credit tolerance. We can do that either by changing the debt-to-income threshold that we allow so that consumers have more remaining income for those other discretionary expenses, or we can do that by adjusting the actual credit floors that we're using to determine which customers we accept. So that's kind of how we think about it. We believe it's adequately accounted for to a degree today. We think provided the outlook for the economy does trend the way it's been recently forecasted, will be in excellent shape. But we're also confident that if it goes the other direction and it's prolonged, we can make the appropriate adjustments.
spk07: Jason, the only other comment I would add to what Jason Mullen said is because the vast majority of our customers are not owners of their homes but renters of their homes, They tend to be somewhat insulated from the impacts of inflation as it relates to interest rate risk, which is really the predominant concern that one would typically have for lenders in rising rate environments. The good thing about the go-easy customer is the majority of the debt that they hold is fixed rate. It is not tied to movements in interest rates. Therefore, while upward inflation movements would typically result in a higher cost for the borrower because lenders would be moving their rates up on things like their mortgages, the vast majority of our customer base would largely be shielded from that impact. And one of the largest components of customers' expenses is their rent or mortgage payments. So it's another piece of why we feel pretty good about having an appropriate buffer in place as inflation remains high, but we also have the capability to toggle pretty quickly if we see that ratio getting out of hand.
spk06: And how would the average debt-to-income rate for your customers compared to the Canadian average, for example?
spk11: Well, if you look at their total debt levels, because only 20% of our customers are homeowners versus close to 70% for the Canadian average, our customers on average carry about a third less debt. total debt as a ratio to their income. So as Jason said, that lack of homeownership just means less mortgage liability and less mortgage debt. And again, that is also the particular liability that's often most sensitive to changing rates. And so they're a little bit sheltered from that particular impact.
spk06: Great. Last question from me on capital deployments. Could you remind us of strategic benefits you'd be looking for in a potential international target?
spk11: Yeah, sure. So as we've talked about now for a couple years, we think acquisitions are going to be an important part of our growth plan going forward. I think the first and most important thing to note is that we've got a really great organic growth plan in front of us, vis-a-vis the forecasts we shared last night. And so for us, an opportunity has to meet a very high standard of strategic fit and financial accretion for it to make sense. You know, we're not interested in putting the organic growth plan that we have at risk. It can really only make sense if it's an excellent fit. In terms of the type of business we're looking for, much like what we did with LendCare last year. It's a business that fits in line with our plan to offer a range of financial products to non-prime borrowers. We would be looking for a business where there's not yet been the full investment made into widening the product range and expanding the channels of distribution. So for us, it's about really looking for something that's right down the fairway of non-prime consumer lending where we can bring all the expertise that we've developed over the years with our business here in Canada to bear by helping build the competency in data analytics, widening the range of products, expanding channels of distribution, and then really focusing on that customer-centric message about helping them bring down the cost of borrowing and helping them graduate back to prime. So it's really a business that has the underlying platform that allows us to layer that strategy on top of.
spk06: Thank you very much.
spk01: Thank you. Our next question comes from Stephen Bowen with Raymond James. Your line is open.
spk05: Thanks, guys. Let me just start with, I guess when your 2024 guidance, I noticed that there's a, you know, I guess a marked slowdown in the number of physical locations or physical stores. I'm just curious if that is implying there's like a, a physical saturation that you have, or is this a structural shift to other channels and you don't need more stores? I'm just curious if that's, you know, are things going more online and that's kind of what your thoughts are, you don't need more stores?
spk11: No, in fact, the outlook we have for openings over the next three years is very much in line with our plan all along. We had always thought that there would be the capacity for between 300 and 350 retail branches in Canada, and at that point we would have branches essentially in every community throughout Canada, giving well over 90% of the population easy, convenient access to a branch. So we're really just finishing building out that infrastructure. As far as the additional growth in the business is concerned, yes, for sure, some of that comes from new products and new channels, as we noted earlier. But more importantly, I think, is to think about the fact that today our average loan book per branch is only $4 million. If you compare that to the books of our competitor, Fairstone, or the loan books of the incumbents in our space I referenced earlier, Wells Fargo and HSBC Finance, they would have an average loan book per branch of approximately $10 million. So a lot of the growth going forward, even though we're not going to be necessarily adding new branches, will be the process of the maturity cycle that our existing network will go through. And by just that measure alone, you can see how we believe the business has the capacity to more than double before we reach anything close to the average loan bulk per branch of the competitors and the incumbents in our market.
spk05: Okay, that's good color. And I guess the second question, now that you've started to roll out the auto lending product, you're saying it's accelerated. Can you talk about trends in credit, repo, anything color on the credit side of that business that
spk11: So generally speaking, the credit in the automotive space that we've seen has performed very well. Loss rates are below, at or below our current portfolio average, given the secure nature. We focused on primarily a more near-prime-like customer with our auto loan offering. So I think we've been very prudent about managing the credit risk associated to growth in auto Over the last eight months that we've scaled that program up, largely through our partnership and our investments with LendCare, we've seen really steady, consistent growth and really steady, consistent credit performance. So our model, which is to try to keep testing and learning and gradually growing a business, So that as you see performance of loans and the various historical vintages trend, you can get a sense of how they're doing relative to your expectations is the same approach we've taken here. And I think as we mentioned in the past, you know, LendCare had been doing testing in the automotive market for a number of years prior to the acquisition. So, you know, we were in a fortunate position where the jump-off point for getting into that business and really beginning to invest in auto financing, we already had a subset of data we could use and leverage in terms of establishing pricing and credit tolerance. So that's kind of how we've approached it, and we're very happy with how it's going.
spk07: Okay, that's great. Thanks, Jason.
spk01: Thank you. Our next question comes from Gary Ho with Desjardins Capital. Your line is open.
spk10: Great, thanks, and good morning. First question, Jason. I noticed just last week there was a transaction in the Canadian point of sale space with Financit. I just want to see your thoughts on it, just given the space, and it sounds like you want to accelerate your growth there. I think these guys are more prime or near prime. Do you see the space heating up in terms of deal activity? kind of what's thrown into your desk today?
spk11: No real change on our outlook related to the competitive environment, to be honest. Finance, as you referenced, is a business focused exclusively on prime and almost exclusively on home improvement. So they really only occupy one sliver in a different credit segment of the market that we're specifically focused on, and so that transaction we don't think changes the landscape really for us at all. Obviously, we remain focused predominantly on near prime and non-prime borrowers, and in that particular segment, the competitive landscape hasn't changed much. Certain verticals are a little more competitive than others. Auto, for example, is one in which there are more market participants. You know, we believe we've engineered a program in each individual vertical that relative to the others offering those products is highly competitive. And I think the other thing I would state is that, you know, we really have a fairly significant leading position now in non-prime lending, so we certainly have more scale and, you know, are a profitable business. That's not always the case for some of the other companies that we're competing against, which makes it a little bit more difficult for them at times.
spk10: Got it. Okay. And then we haven't gotten a recent update just on your potential product launches. I know you did your auto loan a couple of quarters back. You always kind of have something on the hopper. Just wondering what's in the pipeline, what are you guys testing in the background, and what could be coming to market over the next couple of years?
spk11: Yeah, sure. So, you know, first of all, I would reiterate that our three-year forecast is is not predicated on the launch of any net new products. It's really built on the basis of the products and the channels that we have today, the testing and the learning that we've already done, so our confidence in the ability to achieve the forecast from the suite of the offerings that we have at the moment is very high. In terms of potential new products, though, we will start to do some research and analysis on the possibility for introducing a card product in the future. We think there is, in the medium term, the possibility for a secured card whereby a consumer that falls below our current credit tolerance level today can obtain access to a secured credit card in order to build credit. If you take a look at a major credit card brand like Capital One, They have a very large and robust secured card program, and they use it as really a feeder source for consumers that are students, new Canadians, or just have Flemish credit, and they're able to get access to a secured card, monitor the payment history, and then gradually graduate them up. So that's a product that when we look at the fact that we have tens and hundreds of thousands of applicants that unfortunately we still have to decline for credit, It's a really big opportunity there. You know, longer term, you know, we think there is the possibility for the opportunity for just a general purpose non-prime card. You know, once we get to the point where we've built out the infrastructure, the platform, the brand, and we've got a big user base, that is a possibility as well. The good news is that the largest kind of peer in our competitive space, one main in the U.S., launched a general purpose credit card product to their base. It's very similar to ours last year, and so far it's gone well, but we're able to kind of just sit back and monitor and look at what they've done, how they do it, how it performs before we have to make those kinds of decisions. So For right now, we're very happy with the product range that we have. We think it does all the lifting in terms of fueling the growth forecast. But over the next couple of years, we're certainly going to be, you know, continuing to do the market research on what potential products we might add in the future.
spk10: Okay, perfect. My next question, you've been pretty aggressive with your buyback in Q4. Al, you also mentioned also, you know, so far in Q1 as well. So looking out, you know, How do you think about your NCIB, just given where the share price is trading today?
spk11: Yeah, hey, Gary, it's Al here. So, you know, as per our strategic sort of plan, where we feel that the share price has been depressed, given market conditions, we'll continue to evaluate the market. to determine whether a share buyback would be appropriate. We felt that given where the share price was going through November or through January, we felt that was a great investment on our part given the intrinsic value there. With our leverage continuing to naturally reduce with the great cash flows coming through the business, we feel that, first and foremost, continuing to use our capital and deploy that capital for the growth of the overall loan book would be number one. You know, the product diversification categories that Jason referenced earlier as well, number two. And then, you know, where our leverage position is quite nicely, currently at 65% net debt to net cap, Relative to our target of 70%, we feel that there's still room there to continue to be active in the market around share buybacks. Hey, Gary, we're in a fortunate position where even if you take the forecast that we provided, which, as noted earlier, accounts for 75% increase in the loan book, as Hal said, the business will continue to still naturally de-lever For us, it's really about figuring out as we accumulate that extra capital capacity and survey the opportunity for potential acquisition investments. In the event there's a great opportunity, then that's clearly where we would like to use the capital because that's going to be strategic things that really do fuel the long-term growth of the business. In the meantime, and in the interim, when the share price is at a level we think is below its value, then it's how we can use that extra capacity in our balance sheet to offer to buy shares, and that'll be the approach going forward.
spk10: Okay. Perfect. And if I can just sneak one more in for Hal, just a quick numbers question. There was a $3.4 million integration cost that was removed from the capital aid in your adjusted number. First, what did that pertain to? I think there was some reference to software write-off. And then second, did that all flow through in the corporate segment?
spk11: Yeah, sure, Gary. So we had planned through the course of our LendCare integration our auto and POS platforms that we had on the easy financial side to merge and integrate those to create synergies as part of our synergizations. uh with uh with land care so effectively what you're seeing is uh uh the write down on those particular assets as we uh integrate with the uh with land care platforms and as noted earlier gary we're essentially done the main pieces now so uh we kind of you know tried to get to completing all those major projects in 2021 so pos platforms integrated the auto platforms now integrated so So those are now mostly completed, and you won't really see any other material integration costs going forward. Yeah, you'll really just, in terms of the adjustments, be really just seeing the amortization on our intangible asset as part of the initial acquisition flow through the P&L on an adjusted basis.
spk10: And, sorry, Hal, did that $3.4 million all flow through to corporate or something that came through on the easy financial side?
spk11: No, that's in the corporate segment.
spk10: Okay, because if I do back that out, your corporate adjusted income would have been negative $13 million, which is pretty low versus last number quarters. Any comments there?
spk11: Yeah, so we actually, at year-end, we have accruals that we put in place And one of those rules would be around compensation, around our incentive program. So we made an adjustment in the fourth quarter that actually improved our overall profitability, lowered expenses. But you should see that normalize in Q1 back to more recent levels.
spk10: And can you quantify that by any chance?
spk11: Yeah, so it was in around the range of $4 million in the aggregate around those overall accruals that I just referenced. So then Gary, the corporate bucket, was probably like in the 17 million range per quarter. That's kind of where you can expect it to start off this year. So more consistent with the second and third quarter. And then total salaries and benefits was running in the low 40 million range in the second and third quarter. That's about where you'll expect that line to pick up as well. So it's similar to what you would have seen in Q3 is about what you'll see in terms of jumping off point beginning this year or a little higher.
spk10: Perfect. Okay, thanks for the additional color.
spk01: Thank you. Our next question comes from Jamie Gowen from National Bank. Your line is open.
spk02: Yeah, thanks. First one, Hal, for you. I just want to clarify, you made a comment around interest rate sensitivity and a 200 basis point increase before funding costs are impacted. Just correct me if I'm wrong or provide more clarity. So the funding cost as it stands today versus a fully drawn funding cost, let's say, over the course of the next two or three years, that fully drawn funding cost could withstand a 200 basis point increase before it reaches the cost that we're facing today. Is that the right way to understand it?
spk11: Yeah, that's right, Jamie. So, you know, basically if you look at the, as you put it, the fully drawn rates that we're at currently in or around the high 4% range with the work that we've done to improve and optimize our debt stack, our incremental draws will be on our revolving credit facilities. And those, you know, just kind of given the rates that we've been able to establish in will give us a nice natural buffer relative to the rates on our high-yield notes that are proportionately taking up a higher component of our overall debt stack. So you'll see that just naturally as a product of the overall mix in the debt stack, our overall cost of funds continuing to improve, notwithstanding a rising rate environment in that regard. And then just lastly, just to note that we continue to swap out and hedge any incremental draws that we take on our securitization facility as part of the normal course.
spk02: Right, and it does not factor in a redemption of the high-yield notes that are outstanding today that would, I guess in theory, be attractive to redeem in November of this year.
spk11: That's right. So that would be another opportunity, and we'll keep a close eye on the rate environment to unwind that with the premium on the call option, unwinding our hedge. We've got some tax adjustments that we'd have to take in, deferred finance cost adjustments. So we'll look at that relative to the cost of – you know, calling that 2019 note early relevant to the rate environment. But we do think that there's going to be an opportunity there as we, you know, look at the rates and the outlook through the balance of the year.
spk02: Great. For Jason Appel, is there any color you can provide around the performance of the core subprime unsecured borrower relative to the more secured or higher quality risk adjusted borrower, whether it's within the GoEasy platform or the LendCare channel. Can you talk about some of the how those borrowers have performed recently as we've seen a little bit higher inflation rates and maybe even a little bit on the interest rate side as well, how those borrowers have performed. Are there any differences in the credit performance?
spk07: There's a little bit of a difference, only because your secured borrowers clearly will overall generally prioritize you for payments. and our expansion of our own home equity product is, you know, as we've emerged out from the pandemic and customers have returned to their what we call pre-pandemic behaviors, we aren't really seeing any material change in the way in which our secured borrowers are performing. We are, however, as you would expect to see, some normalization of behavior from your unsecured borrowers. But I would say because of the structural changes we've made to the underlying loan portfolio over the past couple of years, both before the pandemic began and certainly throughout the pandemic where we modified our underwriting, we're now carrying a less risky unsecured book than we did two years ago. So while the market has certainly returned to normal behaviors on the part of unsecured borrowers, much like they were before the pandemic, we're not seeing the same degree of that impact on our overall portfolio, because proportionally there are fewer of them compared to secured. And secondly, the underlying credit mix of those customers is better. I'd say that while the market has normalized, we've seen a bit of a disproportionate benefit in the overall credit quality of our book, certainly on the secured side for reasons which I've mentioned before, but also on the unsecured because of some of the adjustments we've made, including the continued movement of risk-adjusted pricing, which tends to attract a better overall credit quality customer, even on the unsecured side.
spk11: Maybe just to add to that, James, put it another way, if you'll recall, the guidance we had received provided just before we did the LendCare acquisition was that the EZ Financial book, which at the time, as you know, was largely unsecured, albeit the home equity portfolio was about 10% of the book, we had guided the loss rate range of between 10.5 and 12.5. So call it a midpoint has been the 11th for that business. There has been no change to our now performance or outlook portfolio. of that segment and that part of the book. So while, as Jason said, credit has now normalized in the last couple quarters, you can see that for the total portfolio, we're expecting stability both in the first quarter and the balance of this year at these levels, and we're seeing that stability in both the secured side and the new now run rate of the unsecured portion as well.
spk02: Okay, that's helpful. Last one, Jason Mullins, you talked about the outlook for the auto portfolio and becoming the number one non-bank player in that market. I suppose that's more than just a 2022 target, but within that, can you talk about where you sit today, what's the size of that market now, and the I guess how do you plan or what's the strategy to grow from the 1,400 dealers to 2,000 dealers as one of the strategies?
spk11: Yeah, sure. So I guess the first thing I would say is if you look at the approximately $200 billion non-prime credit market, albeit it came down a little bit through the pandemic to around $185 billion or so, if you look at that market and unpack it, and categorize it into four categories, installment loans, lines of credit, credit cards, and auto financing. Auto financing would be the largest category amongst those four. It would represent over $50 billion of the 185 marketplace. So if you think about the business today, the vast majority of our portfolio, nearly the whole $2 billion, is essentially in the smaller segment of that market, the installment loan category. And yet OTO represents this large and significant portion of that non-prime credit market. So although we're not breaking out exactly the proportion of the portfolio, it is a reasonable size portfolio today. In fact, you know, we think relative to where we are relative to Some of the other lenders within the non-prime market were probably at or soon surpassing some of the smaller players. So we've done quite a good job in the last eight months. And so the outlook for us is we think that given the brand, the scale of the business, the platform, the cost of capital, we can definitely be the number one non-bank, non-prime player. For us, that means not what's inside the window of the three-year forecast we've provided, but beyond. scaling the auto loan portfolio north of a billion in consumer loan balances. That's the level we would need to see that auto business grow to before we'd be in the position of approaching number one in the industry. So clearly, you know, a very significant opportunity for growth over the long term.
spk02: Great. Thanks for that, Collar. That was it for me.
spk11: Okay. Thanks, James. Operator, is there any other questions in the queue?
spk00: Thank you. Our next question comes from Marcel McLean from TD Securities. Your line is open. Okay, thanks for taking my question.
spk08: I was wondering if I was going to get on here. So in terms of the loan growth forecast you guys have provided, it looks like you're looking to grow about half a billion dollars a year for each of the next three years, which would imply about 70% growth over where we are today. A few questions on that. You know, it looks like you're looking to open a fewer amount of stores this year than you did last year and over the next few years. Just wondering where the growth is coming from, how you break it down between the new auto product, your traditional insecure product, and your other products. And secondly, if you're expecting the average credit score of your consumer to remain relatively stable, is that going to change at all?
spk11: Yeah, sure. So we don't provide the specific and exact breakdown at the product level, but what I can do is maybe bucket it a little bit for you. So today, about 30% to 35% of our portfolio is securities. And that really represents home equity loans, power sports lending, automotive financing, and home improvement lending. With the unsecured loan and retail point-of-sale finance and healthcare point-of-sale finance falling into the unsecured bucket. Clearly, the unsecured loan, the straightforward unsecured loan, is the largest product today. That's been the one that we've historically built the business on. That proportion of secured volume we would expect to grow from about 30% to 35% today to between 40% to 50% over the three years of this plan. So clearly that would mean that there has to be good quality growth in all the categories, including unsecured lending. but we will see a little bit of a shift towards more secured products, whether that be auto, power sports, home equity, et cetera. So hopefully that helps provide a little bit of clarity and explanation. As it relates to the average credit quality of the customer, we think the average credit score will be mostly stable with a little bit of an increase. Clearly the products that we're migrating into often will attract and result in us retaining a slightly more near-prime customer. So that would result in the average score gradually climbing over that period.
spk08: Okay, thanks. And then secondly, in terms of your new initiative, how do you see the split of your originations coming in – and how that's going to shift over the next three years from your in-person and online channels and point of sale, et cetera. How is that going to – presume that the online channel and point of sale would have the lowest customer acquisition cost. Can you give some more details there?
spk11: Yeah, so we don't expect the mix of application volume to shift meaningfully over that three years. Online, which represents about half the application volume, and point of sale, which represents a third of the application volume, and then the balance coming from sheer kind of walk-in traffic to our retail outlets, we think that that volume and that mix is pretty steady and pretty stable. It has been now for a few quarters, and we think it'll be pretty consistent going forward. Clearly, as the economy is now reopened again and there's less COVID restrictions, we anticipate a little bit of a resurgence in volume coming through the retail channel and just consumers walking into our retail outlets. But on the flip side, given the number of new merchants and dealerships we're going to add through point of sale and auto, and given the investments we're making in digital, that will largely offset that, and I think all the channels will deliver pretty proportionate
spk08: Okay, okay. And then lastly for me, just on the higher charge operation we saw this quarter, like it did come in at the bottom end of your range you had provided for us last quarter, but still a noticeable step up quarter over quarter. Just wondering what was different about this quarter that caused that pretty big jump, and what can you offer that would give us confidence that we're not going to see this continue to rise materially from here? Because right now we're sort of at the midpoint where you said this is a sort of a steady state, but what caused the jump from last quarter that's not going to continue to rise from here?
spk11: Yeah, so if you'll recall back in about the early to mid part of the summer, we started to make it clear that as a result of the excellent distribution of vaccinations, as a result of the reopening of the various industries within the economy, that was going to start to result in borrowing behavior returning to normal and credit performance returning to normal. And if you think about it, because our charge-off rates are such that they charge off in the 90 to 180-day window, then it's the fourth quarter when that normalization really actually starts to be prevalent within the portfolio. And so that's how the performance of the year unfolded, and it's right in line with our expectations and where we anticipated to be. If you look at our charge-off rate in the fourth quarter, 9.6%. Our guidance for Q1 is between 9% and 10%, and our guidance for the full year is between 8.5% and 10.5%. So we're providing a forecast that we think is – that we're very confident in and we think is a clear indication – that all the metrics we're seeing around delinquency, payment performance, mix of the book, are all coming right in line with what we have engineered and optimized to be the ideal mix and the ideal relationship between volume and losses. I would also note that, as mentioned in my earlier remarks, we've been providing these sort of forecasts since the third quarter of 2012, so just coming on 10 years later. of providing these forecasts and pretty much all of those forecasts we've delivered on. And that's really because we believe that the range we've provided is very reasonable, properly accounts for any headwinds or tailwinds being captured within the range. And then equally because, as Jason spoke to you earlier, the credit models that we use and the affordability calculations that we use give us the ability to make adjustments dynamically. If we see a trend that we're uncomfortable with and the quality of the applicants and the delinquency, we can very quickly make adjustments so that in the then subsequent quarters, we start to see a shift in the mix of the book, and that helps us ensure that we travel within the range in a stable manner.
spk08: Okay, thanks. That's it for me. Thank you very much.
spk00: Thank you. Our next question comes from Brian Joseph from Imperial Capital Partners. Your line is open.
spk04: Hi, guys. Trudeau mentioned in his mandates potentially changing the rate of interest. Any thoughts on what could happen there?
spk11: Yeah, I'll make a couple comments. Yeah, sure. I'll make a couple comments. What the government has done is suggested that they're going to run a consultation on the non-prime lending market and interest rates and payday loans. Over the last several decades, we've seen similar type consultations done at the federal and the provincial level. And so at this point, we do expect the consultation to get done, but much like in the past, we think that once they unpack and really understand the significant role that non-prime lending plays in the financial system, much like those past instances, it's unlikely to result in a change. We think the probability of there being a change is low. If there is a change, we think it's more likely to be in the payday loan market. The payday loan market is the market I think regulators have a greater concern over. It's certainly a product that is much less helpful to the borrower, more expensive, doesn't help them rebuild credit, whereas the product category that we're in serves a very meaningful purpose. It not only provides access to critical financial products, but helps people rebuild and establish credit. So we're not sure when the consultation will come. Expect it to come at some point, likely this year. We think they'll be looking carefully at input from consumers and from industry. And if it trends the way it has in the past, we don't anticipate a change. Having said that, our business is in an excellent position today. Our average interest rate has trended down for the last five years, as highlighted earlier. The weighted average interest rate today sits well below where the current rate cap is in Canada. Our strategy and our model is intended to continue to drive that rate down. So while we'll certainly be advocating for our customers and advocating on behalf of non-prime Canadians, to try to make access to credit as open and free as possible. Our business is in excellent shape to be able to evolve and adapt. So that's how we think about it today.
spk04: Very helpful. Thank you, and kudos on the great quarter. No problem.
spk00: Thank you. And I'm showing no further questions from our phone line, and I'd like to turn the conference back over to Jason Muller for any closing remarks.
spk11: Great. Well, thanks, everyone, for joining today's call. If there's no more questions, then have an excellent day, and we look forward to updating you again at the next quarter. Have a fantastic day, everyone. Bye now.
spk00: Thank you. This does conclude today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.
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