goeasy Ltd.

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.

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 However, we would ask that it do not quote callers unless that individual has granted their consent.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.

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.