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spk01: Go Easy's second quarter 2022 financial results. 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 the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Farhan Ali Khan. Please go ahead.
spk00: Thank you, operator, and good morning, everyone.
spk10: 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 for the second quarter ended June 30th, 2022.
spk08: The news release, which was issued yesterday after the closing market, is available on Global Newswire and on the GoEasy website. Today, Jason Mullins, GoEasy's President and Chief Executive Officer, will review the results for the second quarter
spk02: and provide an outlook for the business. Al Khoury, the company's chief financial officer, will also provide an overview of our capital and liquidity position. And Justin Appel, the company's chief risk officer, is also on the call.
spk10: After the prepared remarks, we will then open the lines for questions from investors. Before we begin, I remind that this conference call is open to all investors and is being webcast to the company's investor website and supplemented by a quarterly earnings presentation.
spk02: 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 their prepared remarks.
spk10: The operator will call 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 However, we will ask that they do not quote callers unless that individual has granted their consent.
spk02: Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but will direct you to the caution regarding forward-looking statements, including the MD&A. With that, I will now turn the call over to Jason Mullins. Thanks, Farhan. Good morning, everyone, and thank you for joining the call today. This morning, I will spend some time reviewing the highlights from the second quarter, along with recent business trends. Hal will then provide an update on cash flows, investments, and our liquidity position before I discuss our latest outlook and revised forecast. During the second quarter, we were pleased to have achieved record performance in several major commercial and financial metrics, which continue to highlight the growth potential of our business. Our spring media campaign, which included new TV creative, radio, and an integrated digital video campaign, Combined with the ongoing efforts of our business development team to grow and nurture our merchant and dealer networks, collectively produced a 51% year-over-year increase in applications for credit, which topped nearly $400,000 in the quarter. The record level of applications led to a record level of loan originations and organic growth. Originations in the quarter were $628 million, up nearly 66% over the second quarter of 2021 and more than a 30% lift over last quarter. Elevated originations led to organic growth of $216 million, an increase of 191% over the same period last year and above our expectations for the quarter. At June 30th, our portfolio finished at $2.37 billion, up 32% from the prior year. It was also a record period for net customer growth, adding over 12,000 customers to the portfolio in the quarter. While all our products and channels are currently performing well, we experienced particularly strong performance in home equity lending, automotive financing, power sports financing, and cross-selling unsecured loans across our customer base. During the quarter, home equity lending volumes were at record levels, up nearly 170% year over year. This second mortgage product, secured by residential real estate, is primarily used for debt consolidation and major home repairs and is one of our best performing products with the lowest credit risk. These loans we issued in the quarter had average property values of approximately $500,000, which is 30% below the average price of a residential property in Canada, while the average loan-to-value ratio of loans issued in the quarter was below 60%, the lowest ratio of experience since we launched the product over five years ago. We also continue to make great progress toward our goal of becoming the leading non-bank, non-prime automotive financing provider in Canada. Our active dealer network has expanded to nearly 1,900 dealers, and our origination volumes top $50 million in the quarter for the first time, up over 450% year over year. We also entered into a strategic commercial partnership and made a $40 million minority equity investment in Canada Drives. Canada's largest 100% online car shopping platform and a long-standing lead generation partner. Through this new strategic partnership, we have become a preferred non-bank financing provider within Canada Drive's online automotive retail platform. Each year in Canada, there are more than 3 million used vehicles sold. Canada Drive's innovative and industry-leading platform enables customers to shop, purchase, finance, and trade in vehicles completely online, providing a superior customer experience from first click to delivery. Under our arrangement, we will be providing automotive financing for a committed portion of the non-prime borrowers who purchase and finance the vehicle through Canada Drive's platform. The investment, which is structured as a convertible note, will convert into preferred shares on a defined terms. We believe strongly in the potential of Canada Drive's business and look forward to continuing our long-standing partnership. It was also a very strong seasonal period for the power sports category. which produced a 59% increase in origination volume over last year, driven in part by continued demand for key products, such as ATVs, RVs, and motorcycles. These are consumer categories that continue to show strong growth in consumer demand throughout Canada. The last area we continue to experience strength is in our strategy to cross-market our wide range of products to existing and former borrowers in an effort to graduate them to up the credit spectrum and to lower price products. To date, we have seen excellent lending volume and credit performance from pre-approving existing customers based on their credit profile and payment history. Due to the benefits of the existing relationship and the additional payment data on record, the loss rates of lending to existing customers that we already know is typically more than 25% better than when we lend to a brand new borrower. Over the past few months, we've also been making great progress on the design of our new digital lending ecosystem, which remains on track to pilot later this year. This new digital portal will unlock significant potential to communicate with our customers and maximize future lending. Altogether, we were pleased with the overall quality of the originations written in the quarter, which provides us further confidence in the long-term quality of our portfolio. During the quarter, we issued the highest proportion of low- and medium-risk loans in our history, had a record level of secured originations at 34%, saw home equity loan-to-value ratios fall to below 60%, experienced a 20% increase in the average income of our automotive financing customers year over year, and experienced diversified growth across all seven unique product categories. As our sources of originations continue to diversify, the weighted average interest rate paid by our customers continues to decline, reducing to 31.7% at quarter end, down from 33.7% last year. We remain on a quest to continue passing on the benefits of our scale and leverage to consumers in the form of lower prices. Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 39%. Total revenue in the quarter was a record $252 million, up 24% over the same period in 2021. Despite the elevated level of inflation, our customers and the overall portfolio continue to perform well. The annualized net charge-off rate was 9.3% in the second quarter at the lower end of our target range of 8.5% to 10.5%. Over the last several years, our business has structurally improved in a significant manner. Today, we have a diverse range of lending products sourced through a variety of channels, a growing proportion of secured loans, and a wide range of risk-based pricing that caters to the entire non-prime credit spectrum. While the consumer lending industry has fully normalized post-pandemic and experiences some economic headwinds, our loss rates are down nearly 30% from the 13.3% annualized rate we reported in 2019. With credit performance trending well, our loan loss provision rate reduced slightly to 7.68% from 7.78% in the first quarter of 2022, primarily due to the improved product and credit mix of the loan portfolio. We believe this level of provisioning reflects the appropriate credit risk and sufficiently contemplates further deterioration in the overall economic environment. We also continue to focus on delivering operating leverage from scale. During the quarter, our efficiency ratio, specifically operating expenses as a percentage of revenue, was 34.2% down 13% from 39.3% in the second quarter of last year. Operating income for the second quarter of 2022 was $85.2 million, up 52% from $56.1 million in the second quarter of 2021. Operating margin for the first quarter was 33.8%, up from 27.7% in the prior year. After adjusting for non-recurring items, we reported adjusted operating income of $88.7 million, an increase of 11% over the $79.9 million in the second quarter of 2021. Adjusted operating margin for the second quarter was 35.3%, down from 39.5% in the prior year. Net income in the first quarter was $38.3 million, which resulted in diluted earnings per share of $2.32 compared to $1.16 in the second quarter of 2021. Again, after adjusting for the non-recurring and unusual items on an after-tax basis in both periods, adjusted debt income was $46.8 million, up 7.2% from $43.7 million in 2021. Adjusted diluted earnings per share was $2.83, up 8.4% from $2.61 in the second quarter of 2021. As highlighted earlier, we experienced another quarter of accelerated organic growth at $216 million, or 142 million above the same quarter last year. As such, we incurred an additional loan loss provision expense related to the growth in our receivables. At a provision rate of 7.68%, the additional 142 million in growth resulted in an incremental 48 cents of provision expense on an after-tax per share basis. However, the incremental growth will produce earnings for years into the future, creating significant value for shareholders in the long term. With that, 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. Shortly after the quarter end, we announced another meaningful enhancement to our balance sheet and liquidity position, a $500 million increase to our securitization facility, which stepped up from $900 million to $1.4 million. The facility continues to bear interest on advances payable at the rate of one-month Canadian dollar offer rate plus 185 basis points. Based on the current one-month FEDOR rate of 2.94% as of August 8, 2022, the interest rate would be 4.79% prior to interest rate swaps. As a general practice, we will continue utilizing interest rate swap agreements on the Securitization Facility to generate fixed-rate payments on the amounts drawn to assist in mitigating the impact of increases in interest rates. Swap locks in an interest rate with a maturity that is roughly equivalent to the weighted average life of future cash flows from the underlying securitized loan collateral. As we draw incremental funds from the facility, the rate for each swap draw is equivalent to the sum of a locked-in forward CEDAW rate plus 185 basis point spread. As the securitized loan collateral reduces over time, the hedge loan balance amortizes down accordingly. As at the end of June, 93% of the company's drawn debt facilities were fully hedged. Inclusive of these recent enhancements, at quarter end, we had approximately $1.09 billion in total funding capacity, which we estimate is sufficient to fund our organic growth through the second quarter of 2025, providing us with nearly three years of funding runway. Equally important is the cash-generating capability of the business. During the quarter, cash flow from operations before the net growth of the loan portfolio was $56.9 million, up 18% from $48.2 million in the second quarter of 2021. With cash flows projected in the back half of the year, the business now generates approximately $300 million of annualized free cash in order to hold the portfolio flat. Free cash flows are then prioritized to first fund organic growth, followed by investing in new lines of business or new capabilities, and then finally repurchasing our shares for distributing dividends. We also estimate that if we were to run off our consumer loan and consumer leasing portfolios, the value of the total cash repayment paid to the company over the remaining life of its contract would be approximately $3.3 billion, at a rate that would extinguish all external debt within 15 months. In addition to funding the record level of organic growth in the quarter, we also invested $15 million as part of the $40 million minority equity investment in Canada Drives, mentioned earlier by Jason. And we also returned $20 million of capital to shareholders by repurchasing approximately 170,000 of the company's shares. We had an average price of $118.55. While the strong growth and additional uses of capital temporarily increased the leverage of our business, finished the quarter with a net debt to net capitalization ratio of 70%, in line with our historical target. Nonetheless, the strong cash flows of business will result in gradually de-levering the balance sheet over time. During the second quarter of 2022, we also recognized the $6.8 million pre-tax net fair value loss on our investments, which was mainly related to marking to market the unhedged contingent shares of our investment in firms. The unrealized fair value loss in a firm during that period was partially offset by the realized fair value gain in the related total return swaps on our hedged shares. Since the initial shares of the firm were obtained on January 1, 2021, the company has recognized a realized gain on the non-contingent portion of the investment in the firm and its related total return swaps of $66.3 million. a realized gain on the swaps related to the contingent portion of the investment in a firm of $25.4 million, and an unrealized fair value loss on the contingent portion of the investment in a firm of $4.5 million. Including the cash received on the initial sale of paid rights to a firm, the total realized and unrealized gains amount to $109 million relative to the initial investment of $34 million made in 2019, or approximately 3.2 times the initial investment. continue to hold our vested shares, and since quarter end, the price of the firm's shares has already recovered meaningfully. With three years of funding capacity, over a billion dollars in liquidity, and a sound strategy in place to manage interest rate risk on our debt, our balance sheet is well equipped to fund the recently revised growth outlook that Jason will now discuss in further detail. Thanks, Al. It has been an excellent start to the year for our business, with first half organic loan growth of $340 million, and a net charge-off rate of 9.1%, below the midpoint of our target range. These results are a true testament to the business model and performance of our team, who work passionately to serve the over 8 million non-prime Canadians, seeking access to credit and an opportunity to rebuild their credit. Given recent trends, the broader environment, and the confidence we have in our growth initiatives, we have revised our three-year commercial forecast, consistent with past practice at the midpoint of the year. The most notable revision is the increase we have made to the loan growth of the portfolio, which we now expect to finish this year between 2.6 and 2.8 billion in consumer loan receivables, then scale to between 3.8 and 4 billion in 2024. In consideration of the broader macro environment, we have also moderated the level of anticipated reduction in our loss rate, which we expect to remain stable for the balance of this year and throughout 2023, then gradually stepped down in 2024. After stress testing the portfolio, we believe the series of proactive credit model enhancements we employed and plan to implement, combined with the improving credit and product mix of our portfolio, will continue to provide a partial shelter against deterioration in economic environment in the near term, producing resilient credit performance going forward. When combined with the greater level of growth and expanding margins from operating leverage, the net effect of these forecast updates is positive to the overall business. Turning to the upcoming quarter specifically, we expect the loan portfolio to grow between $180 and $200 million. As our portfolio continues to evolve and average APRs decline, we expect the total yield generated on the consumer loan portfolio to decline to between 37% and 38% in the quarter. we also continue to expect stable credit performance at the midpoint of our target range, with the annualized net charge-off rate remaining between nine and 10%. As we highlighted during the call last quarter, there is an exhaustive list of reasons why non-prime consumers fare well during periods of economic weakness. Moreover, our disciplined approach to growth and credit risk positions as well to carefully utilize model enhancements and product mix to safely navigate our portfolio through periods of turbulence in the macroeconomic environment. In fact, as we've noted before, when banks tighten credit criteria in a downturn, non-prime lenders often originate some of their best performing cohorts of loans. I want to once again thank our entire team for their outstanding efforts so far this year. They truly play an essential role in the financial system. by serving the millions of hard-working Canadian families that rely on us for access to credit to fuel their everyday lives. With those comments complete, we will now open the call for questions.
spk01: Thank you. And as a reminder, to ask a question, simply press star 11 on your telephone. One moment while we compile the Q&A roster. Our first question comes from Etienne Ricard with BMO Capital. Your line is open. Thank you, and good morning.
spk10: As part of your revised three-year forecast, you left the net charge-off range broadly unchanged. What is giving you confidence first in the macro environment and second in underwriting standards standards as portfolio growth accelerates?
spk02: Sure. I'll kick that one off and then Jason has anything to add. So I guess the way we think about providing targets and ranges in our forecast consistent with past practice is to try to make an informed and educated estimate as to what we think the future of the business is going to look like and to contemplate a series of potential headwinds and tailwinds, and that informs the range that we provide. And obviously, one of the potential headwinds at the moment is a level of economic deterioration, and we believe we've factored in a degree of that now into our projections. Obviously, if the degree of deterioration is more mild, we would expect credit to perform better and likely in the lower end of our ranges, while if it's a little bit more severe, likely in the higher end of our ranges. And, of course, if there's a very catastrophic economic scenario, we would have to, as always, revise our outlook. At the moment, we believe that the proactive credit model adjustments and enhancements we've made and continue to make, combined with the credit and product mix shift that we're seeing, which conspires to improve the credit quality of the portfolio, is essentially acting as a shelter or an offset against deterioration that we see in the economic environment. And so that gives us quite a bit of confidence that in the next near-term period, we'll continue to see quite stable credit performance. When we look at the originations that we're producing at the moment, they're of our highest credit quality, as I noted in the remarks. We see quite a number of signs around a mix of credit, a mix by product, certain product level attributes that allow us to gain even more confidence in the go-forward performance of the portfolio Because the quality of the originations we're booking today are inherently better than the existing book. And therefore, that means your portfolio over time is actually improving. So we feel quite good. Obviously, the accelerated growth, it's important that the origination quality is very high given the current environment. And based on what we're seeing, we feel quite good about the credit environment and how we can perform over the next couple of years.
spk08: Maybe just to add again to that two points, one would be not all of the macroeconomic issues are necessarily headwinds for our business. Most recently, obviously, with inflation hopefully peaking at its rate, we see some potential improvements as we look in the back half of the year, and lower inflation is obviously good for the non-prime consumer. And the second point, just to reiterate, is because we're regularly and constantly looking at the book and tweaking around the edges of the portfolio, because the portfolio experiences a pretty decent rate of churn year to year, fairly significant improvements can have a substantial impact on overall products and portfolio performance inside of 12 to 18 months. So we've been making credit adjustments. ongoing now since the fourth quarter of 2021, which combined with obviously our shift in product mix gives us a fair degree of confidence that we have a reasonable amount of buffer built into the portfolio should we look at a potential mild or even moderate series of economic challenges moving forward. So that's basically what conspires to give us a good feeling overall.
spk10: Have you seen any indications of tightening underwriting standards by client lenders?
spk02: as a result credit migration into your application volumes um we so we believe that is occurring although it's hard to for sure validate that um the signs that we would point to that we believe are indications of such would be the fact that as noted earlier within individual products we're seeing improvements that look healthy. So, for example, the fact that loan-to-value ratios on our home equity originations are improving, the fact the average income of our auto loan customers has lifted. At the individual product level, signs like that would suggest that there is the possibility that credit is tightened in the more prime end of the spectrum and pushes some better customers down into our territory. It's not a perfect science because our business strategy has been to improve credit quality, and so inherently it's hard to delineate exactly which characteristic, but certainly that would give us some indication of such. The other indication is we have seen in certain point-of-sale verticals and in automotive, some of the more prime-like lenders increase rates and change the rate they charge at various credit tiers. Typically, that rate increase at various credit tiers is often combined with or accompanied by or a sign that they probably made some credit adjustments as well. So, you know, we know historically that that tighter credit criterion prime can benefit the quality of originations by non-prime lenders. It's just hard to, you know, very specifically say for certain to what degree that's occurring, but we think it's there at some level.
spk10: Understood. And on geographical expansion, I'd like just to touch again on performance in the province of Quebec. What do you see as your next priorities in that province and what progress has been made in the past couple of years as it relates to loan growth and credit losses?
spk02: Yeah, so it continues to remain a priority province for us. We have always had the view that long-term that province can represent its proportionate share of the population. Maybe under index a little bit, just based on the fact that we're going to have a slightly tighter credit criteria in the province. But today you can see at the end of the quarter, it was about 12% of our book as a whole. And we know it represents 22% of the population, roughly speaking. So that would imply there's still quite a bit of runway for growth there. As we've noted in the past, the credit performance of loans in Quebec, and this is across most products, differs than the rest of the country, and you need to have specifically unique credit models for that territory. And so, as a result, as you accumulate more data in the province, you need to constantly optimize and revise your credit models there to continue to dial them in to be more accurate. And given we've been in Quebec for, say, five years versus the rest of the country for 15 plus, we're earlier in our journey at building models that are as predictive. But we are happy with the quality of those models today, such that we're continuing to grow the portfolio there with confidence. So I feel great about Quebec. And while there's still work to do with our expansion efforts and our credit strategy, it's performing well. And it's a growing part of our business.
spk10: Thank you very much.
spk00: One moment for our next question, please. Our next question comes from the line of Nick Preve with CIBC.
spk01: Please proceed. Okay, thanks.
spk09: You'd edged up the 2023 guidance for net charge-offs very modestly to reflect a bit more of a conservative stance. Jason, you had alluded to the fact that you've been kind of continuously tightening the credit box since late last year. Just given that you're adopting a little bit more of a conservative stance, given the evolving macro outlook, do you see a more meaningful tightening on qualification criteria in the second half of this year, or are you pretty comfortable with where the credit box is today?
spk08: That's a good question. I would say we would continue to see our ability to tighten around the edges. As you know, credit lags. So any type of business you're going to underwrite literally today isn't really going to start to impact your performance until at least two, three, if not four quarters from now. And as we've indicated before, with economic uncertainty on the rise in the country, we would proactively anticipate some small tweaks around the edges in an effort to maintain the loss rate within the targeted range that we've identified. So the short answer is yes, we would envision to continue to make changes. But because we've been making those periodically along the way, we don't view them as being as substantive as, let's say, we were to do them all at once. in which case they would have a much more pronounced effect of slowing growth and obviously driving loss rates up in the near term as a result of that. So, yes, we do plan on making periodic changes, but nothing more substantive in nature than we would have already been making over the course of the last couple of quarters.
spk09: Okay, that's helpful. And this is more of an accounting nuance than anything else, but I noticed that the provision rate has actually come down in the first six months of the year despite the macro outlook. arguably deteriorating over that timeframe. Is that strictly a product of mix shift or is there anything else driving the evolution of the provision rate there?
spk08: It's primarily a result of product and credit. Obviously, as we continue to focus and build more business in the secured ranges with home equity lending, auto lending, and power sports, notwithstanding the fact that these are better quality customers, they obviously generate much lower delinquency rates and, much more importantly, lower charge-off rates. So that's principally what's moving the provision rate down. And as we said before, as we improve our ability to learn from our underwriting over time, we continuously update and feed the models that drive our provision logic period over period. And those combined with the obviously improved credit mix shift is what's overcompensating, if you will, for the otherwise adjustments we are making for macroeconomic change. So the best way to think about it is we are reflecting a somewhat deteriorating macroeconomic environment in the provision, but that's being more than offset by the underlying credit quality in the business we've been originating for the past couple of quarters now.
spk02: And maybe I'll just bolt onto that just to indicate that with the increase in volume overall, we continue to build on the overall balance sheet provisions and over $180 million at the end of the second quarter as well.
spk09: Understood. Okay. No, that's helpful. And then last one for me. It's been a while since the federal government has made any comments about examining the criminal code rate of interest, and it was absent from the latest federal budget. Is there any update on that front? Like, have you initiated consultations or had any other contact regarding an examination of the rate?
spk02: Yeah, so we've been in regular contact with the federal government as part of our regular government relations strategy. We had a meeting with them about a month ago to talk about the consultation. Consultation has come out. They put out a consultation, which we feel, given our meetings with them, we've kind of helped shape and help inform based on the discussions that we've had. We will, as we said before, respond to this and any other consultations that have been done in the past or will get done in the future. Our view on the regulatory stability has remained unchanged. We think that in all the discussions we've had with regulators over the years, as you start to unpack the reality and unintended consequences of making a change and how it's punitive to Canadians, In all those cases in the past, it's revealed the complexity of the issue and not led to any change in the regulation as it's something that can cause disruption to borrowers and push them into high-cost products like payday loans and other things. So we continue to believe that that is and will be the case here. Having said that, and as we've said before, there's a difference between sort of lobbying on behalf of the customer segment in an effort to sustain the current regulatory environment and the realities of our business and the impact to our business. As noted, our average interest rate has come down very significantly. It's at 31% today. And so even in the low probability that there were a change, our business today is in an excellent position to accommodate a lower overall rate cap. And every day that passes, that mix and evolution of that business is further de-risking the business overall. from any future regulatory change. So we're in active dialogue. We participate in these kind of consultations all the time. From all the conversations we've had, we think the likelihood is that everyone will realize the value and the stability of the current regime. But we also know that the business evolution is there to support a change and allow us to continue to achieve our growth objectives.
spk09: Yeah. Okay. All right. That's very helpful. Thanks very much.
spk01: One moment for our next question, please. Our question comes from the line of Gary Ove with Jardin Securities.
spk04: Thanks. Good morning. First question, Jason Mullin. I heard you say some of your peers have increased their rates. I know probably you can't touch down your installment loans, but wondering of your other product buckets, are there possibility for you to raise rates on those products?
spk02: There is. You know, in essentially all of our product categories, we have average rates today that sit very competitively in the marketplace and well below current regulatory limits. So theoretically, we could increase rates on any range of our products. That has not been our intent or our strategy. Even with the slight increase we've seen on the cost of funding, we still are executing the strategy to bring down the average rate, still finding that the strategy to graduate customers progressively to lower rates and accepting the lower risk adjusted margin does still lead to greater lifetime value and long-term profitability for the business, and it's a win for the customer. There are times where in certain categories, certain credit tiers or certain products, depending on the consumer and competitive environment, we make small pricing adjustments. That's just part of your ongoing optimization of trying to derive the right price for each loan that you offer. In the whole, the average rate we charge across the majority of our products is and will continue to decline.
spk04: Got it. And then while I have you, I think in the past you've talked about potential credit card offering. I know you and your team always are studying new product launches in the background. Can you give us an update on where that stands? And I'm assuming there's no growth of that big into your three-year outlook.
spk02: Correct. So we have just started our strategic planning cycle for this year in preparation for next. During that strategic planning process and that cycle we do a full review of the landscape, competitive landscape, consumer market, consumer trends, determine where we think we are in the maturity cycle of our existing product range and then try to think about when is the right time to start to research and build a future product knowing that we want to keep expanding the range. So no comment at this moment. We have not yet had that planning cycle and determined yet if we're going to move forward with any other products in the near term. Certainly that still remains the strategy in the longer term. As we said before, the benefit of having seen OneBain launch their Brightway credit card product is just continuing to give us more capability to monitor and benchmark our competitors and how that's going for them. So we're quite happy at this point to fit and absorb the data. And many of the products we have today, automotive financing, certain point of sale verticals like healthcare and home improvement are still quite early stage in their build-out. So there's plenty to keep us busy. And then just to Clarifying the last point you raised, you are correct. No new products are contemplated in our forecast and our outlook. That forecast and outlook is built up purely on the existing product suite that we have today.
spk04: Okay, perfect. And then maybe for Jason DePaul, I think you mentioned you put in credit enhancements during kind of Q4 of last year. Is that kind of what drove the higher quality origination that we're seeing in the quarter? And maybe you can help me reconcile the credit tightening there against the still very robust growth that you expect looking out.
spk08: Yeah, I'd say it was partially driven by the credit adjustments. Those credit adjustments, again, because we've done them over several quarters, are not dramatic or significant in nature. When you compile them all, they obviously would add up to be more significant. But probably more than that, it's the harder push toward the secured side of our business, providing both power sports, automotive, and home equity lending. That would be the primary conduit that's really having a more favorable and overall pronounced impact on the total portfolio from a mixed perspective. That would just help me to contribute to continual, stable, predictable losses that fall within our guided range.
spk04: Okay. And then maybe just lastly, I'm going to sneak one in, just a numbers question. So your net debt, net cap stands at 70%. If you execute on your three-year target and assuming no buybacks or M&A, where could that trend down to in 23 and 24? Yeah.
spk02: Hey, Gary and Tal here. Great question. So, you know, naturally as the portfolio continues to mature and with the cash flows that are that are being generated by the business, you know, we would certainly expect to de-lever and reduce from that overall 70% net cap rate, you know, call it two, 300 basis points, you know, over the course of some time.
spk04: Okay. That's helpful. Those are my questions. Thanks very much.
spk01: One moment for our next question, please. Our next question comes from Jamie Gloin with National Bank Finance. Please go ahead.
spk06: Thanks. Good morning. Probably going to nitpick here, but just looking at the delinquency rates on the last Saturday of the month in June versus March, the uptick really looks like it was driven by the 1 to 30-day segment. So maybe not all that concerning, but potentially a leading indicator. So wondering if you have any additional color as to – you know, maybe the types of borrowers or what are some of the factors that are driving that delinquency a little bit higher in that aging segment? Hey, Jamie, it's Jason.
spk08: I'm glad you brought that up. It gives us an opportunity to maybe provide some additional clarity on some of the what may be perceived as counterintuitive aspects of continuing to grow your secured business, which overall, as we mentioned before, drives improvements in credit. The way to think about it is that our secured portfolios, which are obviously made up of residential, real estate, auto, power sports, are generally characterized by what we call higher total dependency rates, and that's because obviously they have much longer aging cycles, up to 180 days, and also because they're not impacted in the same way that unsecured portfolios are by the impact of insolvencies. However, as we said before, because these secured portfolios have much more lower roll rates of customers we pay on a regular basis and also have significantly higher recovery rates, they're able to generate much lower charge-offs than, let's say, our typical unsecured loans, which fill up lower delinquency rates but have higher charge-off rates because we have to incorporate the fact that the lower rates of delinquency in subsequent buckets are longer, and we also have to factor in the impacts of it. So necessarily a jump in the total delinquency doesn't necessarily correspond to an increase in the level of risk in a portfolio. In fact, it's actually quite opposite from a charge-off perspective, even if it would appear that the delinquencies are higher.
spk02: If you think about it, it's a little bit counterintuitive, but to expand on Jason's point, our unsecured credit products would have delinquency in the mid-single digit, but charge-off rates in the low double digit, whereas the secured products, specifically power sports and auto, would have delinquency in the higher single digit, but charge-off rates several points below that in the mid-single digit range. So, the shift in product mix towards those secured categories will look as though the delinquency is rising, but doesn't manifest itself in the charge-off rate because, as Jason said, the roll from each bucket to the next is lower. And then if you do experience a roll to the very end of the charge-off cycle, you have an asset you can recover that then generates recovery that offsets that charge-off to lower the net charge-off rate. So that mid-shift, you'll see, even if you go back for the last year, you'll see that the delinquency over that period has gradually stepped up. But yet our charge-off rate, you know, was 9.6 in Q4, 8.8 in Q1, 9.3 in Q2, and we're starting to be stable again. So over the entire period, you'll have seen that kind of already evidence itself in the way the business is performing.
spk06: Okay. So I would take it as the step up in that 1 to 30 segment reflects far more secured loans than maybe Q1 2022. Correct. That's right. Yeah. The loans are obviously much larger than that in terms of your performance. Right, right. And nothing to speak of in terms of deterioration or softening of payment or collection rates, I suppose, as well.
spk02: Nothing that's concerning. We have seen small pockets in certain credit and product segments, some small signs of deterioration. And so that's part of what has informed our updated and enhanced outlook, which is that if there's going to be a level of deterioration in certain areas, then our product and credit mix shift should be what acts as an offset. So you could have deterioration in certain parts of your business, but if the mix of your business is shifting sufficiently toward better parts of that business, the aggregate performance is going to remain quite stable. And that's the effect that we're seeing. So, yes, we've seen a little bit of deterioration in a few pockets, but nothing material and nothing that concerns us or provides any downside to our view about the outlook we've provided.
spk06: Understood. Thank you. One for Hal, just on the hedged credit facility. I'm just trying to think about maybe an inflection point. Do you have any further color around maybe the duration of those hedges and Obviously, the CEDAW rate has spiked up a lot more in the last couple of months, which as the book rolls into those secured facilities, we should see the interest rate rise maybe a little bit faster than what it has over the last couple of quarters. Just wondering if you have a little bit more in terms of timing and duration of the hedges that would be at, I would say, lower CEDAW rates.
spk02: Yeah, hey, Jamie, great question. So, you know, first and foremost, what I would say is that, you know, our overall position is to hedge, you know, all or nearly all of debt that we take on the balance sheet. And as it stands today, you know, over 93% of our drawn debt we actually have hedged. You know, first piece would be around our high-yield notes. Those will move in lockstep with the defined maturities. And the second piece would be around our securitization warehouse facility. And, you know, as we bring on new product verticals, obviously the life of those loans will vary depending on the product vertical, but generally speaking, on average, say, we're in around two-year amortization period on that debt. But you're right, as we take on incremental draws, given the current rate environment, we do expect overall rates to increase. So by way of example, if we look at our current drawn debt on our securitization facility, as we've quoted in our PR document and through the call script, just south of 4.8% on a pre-swap basis. Post-swap, we're looking at in the range of 5.4% today. If we were to fast forward based on projected movements in the overnight rate through the course of the coming months, I would expect that to move into Q1 in or around the 5.85% range. And, you know, so naturally that will flow based on movements in the rate environment and the overall rate curve. But generally speaking, I think relative to overall expected movements in the rate environment, given our hedging strategy, we've really been able to mitigate that impact quite nicely.
spk06: Yeah, agreed. And that 5.85 that you're sort of quoting or forecasting for next quarter, that's new money rate, obviously the the actual interest expense would be quite a bit lower than that.
spk02: Correct?
spk06: Correct.
spk02: On our drawn debt, obviously, we would expect somewhere in the range, as we get into the tail end of this year, somewhere in the 20 to 30 basis point range in terms of movement, in terms of drawn debt.
spk06: Great. All right. Thanks very much. That's it for me.
spk01: Thank you. One moment for our next question, please. It comes from the line of Stephen Boland with Raymond James. Please proceed.
spk05: Thanks, guys. Maybe, Jason, you can just talk about the auto book because it is becoming a bigger portion, I think, going forward. Specifically on, has there been any changes with, and I know you inherited some of the book from LendCare, the processes. Are you dealing now with changes in the way you deal with late payments or Maybe you could just talk about repossession. Is that something that's being done internally? You outsource, remarketing, and do you have the staff to deal with that type of part of the business as it grows?
spk02: Yeah, great question. So I feel very good about our auto finance program. As you noted, when we acquired Let's Care, we identified that they had been in the auto market and done quite a number of years of testing in that space, accumulating data and experience that was very valuable to us given we were already on our way to wanting to build and enter that market. So we've been able to put our combined expertise together to really back and support and promote growing that particular product line. The LendCare business came with the majority of the existing infrastructure to support automotive financing. If you think about power sports lending and the infrastructure needed to assess a merchant and underwrite a merchant, the infrastructure to manage the servicing of the portfolio and the assets, the infrastructure to handle repossession, conditioning and remarketing an asset, all of the same skills and capabilities and technology that are needed for automotive exists in power sports. So we've been able to leverage that. The majority of that is all managed in-house. The actual people and the reconditioning centers and the remarketing centers are often third-party providers, but we manage and oversee those processes internally. And as I said, that's been a skill set accumulated over many years that's being replicated from what was developed in PowerSports. Obviously, over the last year, as we've been gradually growing that program, there have been many changes, changes to credit adjustment, changes to pricing adjustments, small changes to underwriting practices, nothing significant or material, but what I would just call the traditional ongoing optimization efforts that always exists when you're growing and building a new product. Obviously, we're tracking load level performance and vintage level performance. That's important because that tells us that as we make these enhancements and improvements, we're seeing signs of that in the performance of loans. Probably the most notable thing there is that as that year of time has passed and we've scaled the product, the quality of the originations we're writing now are even better than what they were in the earlier beginning of that product category. As I said earlier, incomes are up, average credit scores are up for that borrower as well. So we're pretty happy with where it's at. Okay.
spk05: And maybe a general macro question. I'm not sure if this is something that can be easily answered, but I look at the macro not so much from the credit side, but from the growth side. When I look back a couple of years ago through COVID, there was a big decision you made to shut down the growth. Maybe it was uncertainty, but now we're in a different period where we've got higher rates. Recessionary, I think, concerns have been raised, yet there doesn't seem to be any thought in slowing down growth. Maybe you could just compare the two periods and what you think is different, I guess, about 2022 versus 2020.
spk02: Yeah, for sure. The big difference is that in 2020, when COVID hit, the primary driver behind the decision to scale back marketing spend that resulted in a moderation of growth, in fact, for one quarter, we had a slight pullback in the portfolio, was entirely based on consumer demand. The pandemic effect on stay at home orders meant that nobody was spending money everyone was sort of locked down and the need and the desire for credit completely dried up for a period of time. And so when there's no demand in the market, there's no interest from consumers to borrow and spend and grow and live their lives, we decided to temporarily curtail marketing spend and not try and chase a market that just wasn't looking for lending growth. Contrast that to today and you have a very different picture. You've got the highest levels of employment we've ever seen in generations. You've got pretty solid wage growth. You've got pent-up demand in a variety of categories from customers coming out of the pandemic. You've got travel returning. You've got all these great things that are creating a good overall healthy level of consumer demand and consumer spending. Certainly there is some economic headwinds that appear to be emerging, and inflation is putting some pressure in some pockets. And, you know, will that also continue to slow a little bit as rates continue to tighten and governments try to get inflation under control? Yes, probably at some level. But the broader environment for overall consumer demand for credit and the type of products that we're in still remains very, very strong. The other thing to note is that several of our product categories, if we just take automotive because we just spoke about it as an example, it's still very small and very early. So even if that category as a whole at the consolidated aggregate level were to experience a decline temporarily, that doesn't mean that we might not be able to grow that product category because we're starting from a very small base and we're building our market share. You know, we only have, as I said earlier, 1,900 auto dealerships in our network today. We think there's like north of 8,000 that over time can be part of our network. And so as you add more dealerships, just like when we added financial branches in the early years, you know, you're chipping your way into market share that even if that market as a whole isn't necessarily growing, doesn't mean we won't be able to capture more of the portfolio. Okay.
spk05: Okay. That's great. Thanks for the call.
spk01: Thank you. And as a reminder, to ask a question, simply press star 11 on your telephone.
spk00: One moment for our next question. Our question comes from the line of Marcel McLean with TD Securities.
spk01: Please proceed.
spk07: Okay, thank you. Most of my questions have been asked and answered so far, so I just have one on capital allocation. You kind of paused buybacks partway through the quarter when you announced your Canada Drives investment, and then since then you've increased the securitization facility where you said you're funded to Q2 25, I think. Just wondering what the thoughts are on buyback versus organic growth versus other strategies. Could you provide an update there?
spk02: Yeah, I'll just kind of reiterate Hal's comments from earlier. Organic growth is our top priority from a capital allocation perspective. Investing in new lines of business and new capabilities that will fuel growth in the future is our second priority. And then share buybacks follow in line thereafter. Obviously, depending on the price of our stock, the point at which we begin to reallocate capital away from those priorities and toward purchasing shares will vary. And the current state of our leverage and how much excess capital capacity we have between our current leverage and target leverage also determines how much capital we can allocate and deploy to those types of discretionary things. At the moment, We're at a very comfortable position in terms of leverage, although we do plan and think we will see continuing de-levering in the coming period. And we're experiencing very robust organic growth. So at the moment, our priority is to continue to allocate capital in that manner, which is why you would see less buyback activity today. If the cash flows of the business were to improve, growth were to slow, or the share price was to fall, there would obviously be an inflection point where we would reshift that priority. In fact, we've even done an analysis to establish for different portfolios of loans and the profitability of those loans, what is the appropriate share price level such that we'd be better off to allocate capital to repurchasing a share and it would actually be more accretive. So we kind of know what those various price levels are that that would become how we would reprioritize. But because the organic growth is so strong and it's the most profitable and generates the best long-term returns, that remains the priority. And then we just continue to kind of monitor the market and make adjustments from there.
spk07: Got it. Makes sense. Okay. Thank you. That's it for me.
spk01: Thank you. And there are no further questions in the queue. I will turn the call back to management for any final remarks.
spk02: Great. Well, thank you again, everyone, for joining today's call. And we look forward to... Fantastic rest of your day. Bye now.
spk01: And ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect. The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.
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