goeasy Ltd.

Good day and welcome to the Go Easy fourth quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker 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. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Farhan Ali Khan.

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 GoEP Limited's results of the fourth quarter ended December 31st, 2022. The news release, which was issued yesterday after the close of market, is available on Globe Newswire and on the GoEP website. Today, Jason Mullins, GoEasy's president and CEO, will review the results for the fourth quarter 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 positions. And 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. Before we begin, a reminder that this conference call is open to all investors and is being broadcast to the company's investor website. and supplemented by 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 their prepared remarks. The operator will pull through 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 However, we would ask that they do not quote callers unless that individual has granted their consent.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 will direct you to the caution regarding forward-looking statements included in the NDMA. I will now turn the call over to Jason Mullins. Thanks, Farhan. Good morning, everyone, and thank you for joining the call today. The fourth quarter wrapped up a year of record growth, strong credit performance, and improved operating leverage. further solidifying our position as a leader in the Canadian non-prime consumer credit market. We continue to experience a very strong growth environment, with another record quarter of applications for credit at over 400,000. General consumer demand remains healthy, while broader macroeconomic conditions have created a favorable competitive landscape for those with scale. Once again, the elevated level of applications led to originations in the quarter $632 million, up 25% over the fourth quarter of 2021. Organic loan growth in the quarter was $206 million, an increase of 54% over the same period last year and above our original expectations. By year end, our portfolio finished at $2.79 billion, up 38% from the prior year. Similar to the trend we experienced throughout the year, all our products and channels are performing well and are contributing to the current growth momentum. All equity lending, automotive financing, and healthcare financing all experienced a record quarter for originations, while unsecured lending, including the volume from cross-selling pre-approved loan offers to our existing customers, was the second largest quarter on record. While the rate of decline is moderated, the overall weighted average interest rate charged to our customers continued to gradually decline to 30.5%, down from 33.3% at the end of the fourth quarter last year. Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 36.2%. Total revenue in the quarter was a record $273 million, up 17% over the same period in 2021. We continue to be very confident in the quality of the originations being booked. In the recent quarter, we experienced the greatest proportion of originations in our highest credit years in our history, based on probabilities of future defaults. This is a signal that our credit model enhancements, combined with tightening credit criteria by prime lenders, are producing a greater proportion of lower-risk lending volume for GOEG. Furthermore, we continue to see that credit scores on new originations remain consistently above 600, while the loan-to-value ratios on our home equity lending program run below 65%, inclusive of our loans. and the portion of our portfolio now secured by hard assets reached almost 40% at quarter end, up from less than 33% one year ago. As we shared throughout last year, we began making proactive credit model enhancements in the fourth quarter of 2021 in anticipation of potential economic headwinds and to ensure we could deliver stable credit performance throughout. By gradually raising minimum credit, and adjusting our affordability calculations to moderate borrowing levels among higher-risk customer segments, we gradually improved the overall quality of our incremental lending activity, which served to de-risk the underlying loan portfolio. Between incremental loan growth and the natural portfolio turnover, nearly 75% of our loan book has been underwritten during or since Q4 2021 when we began making these changes. The combination of these proactive credit adjustments The higher loan quality in the originations, overall shift in the product mix towards secured loans, and improved operational execution has contributed to strong credit performance and helped to shelter our portfolio against weakness in the economic environment. The annualized net charge-off rate in the quarter reduced to 9%, down from 9.6% in the same quarter last year, and at the lower end of our target range of 8.5% to 10.5%. our loan loss provision rate remained broadly flat at 7.62%, which we believe reflects the appropriate level of credit risk going forward. As we suggested last quarter, we are also using this opportunity to further increase our scrutiny and discipline around managing expenses and capital expenditures. During the quarter, our efficiency ratio, specifically operating expenses as a percentage of revenue, reduced to 32.2%, down 200 basis points from 34.2% in the fourth quarter of the prior year. During the quarter, we also made the decision to terminate our agreement with a third-party technology provider that was contracted in 2020 to develop a new loan management system for ET Financial. Given the evolving needs of our business, we had decided that the performance of the platform development to date was inadequate. and the additional investment necessary to complete the development was no longer economical relative to the anticipated business value and other available options. As a result of this decision, we elected to write off capitalized software costs in 2022 in the amount of $20.5 million related to the system that was being developed by the third party. It is important to note this is a non-cash item, and this decision does not affect our ability to achieve our long-term organic growth forecast. and this technology initiative began prior to our acquisition of the LendCare point-of-sale financing technology, some of the features we initially intended to develop we have since acquired. Our existing systems are therefore sufficient to execute our business plan. Furthermore, we now also expect to reduce our capital expenditures over the next 24 months by approximately $20 million, preserving that capital to use for organic loan growth. After adjusting for the non-recurring items, including the aforementioned non-recurring write-offs, we reported adjusted operating income of $99.7 million, an increase of 15.5% over the $86.4 million in the fourth quarter of 2021. Adjusted operating margin for the fourth quarter was 36.5%, down slightly from 36.8% in the prior year, due solely to the increase in loan loss provisions required to be recorded on our higher net receivables growth. After adjusting to these non-recurring and unusual items on an after-tax basis, adjusted net income for the quarter was $51 million, up 7.1%, from $47.6 million in the same period of 2021. Adjusted diluting earnings per share was $3.05, up 10.5%, from $2.76 in the fourth quarter of 2021. As highlighted earlier, we experienced another quarter of accelerated organic growth at $206 million, or $72 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 7.62%, the additional $72 million in growth year-over-year resulted in approximately $0.24 of incremental provision expense on an after-tax per share basis. However, as we have clarified, the incremental growth is highly accretive to the long-term earnings of the business. 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. The fourth quarter rounded out another year during which we made significant enhancements to our capital structure to support the organic growth of our business. As Jason noted earlier, healthy consumer demand coupled with highly favorable competitive dynamics are producing meaningful levels of organic growth potential. is that organic growth is our highest priority use of capital and generates the greatest long-term returns for shareholders who are allocating every available dollar in that manner. In an effort to increase our balance sheet capacity so we could continue executing our accelerated growth plan, in November we completed a bought deal equity financing transaction by issuing approximately 489,000 common shares at a price of $118.50 per common share, for gross aggregate proceeds of $57.9 million. In doing so, we reduced our leverage level and expanded the capacity to increase our debt moving forward. In December, we then further expanded our funding capacity when we established a new $200 million revolving securitization warehouse facility, structured and underwritten by Bank of Montreal. The new facility was designed to securitize our growing automotive financing programs. The facility has an initial term of two years and interest on advance is payable at the rate of one month's Canadian dollar offer rate, or CDOR, plus 185 basis points. As we traditionally do, we also established an interest rate swap agreement to generate fixed rate payments on the amounts drawn to assist in mitigating the impact of increases in interest rates. With these new balances, balance sheet enhancements for our fully drawn weighted average cost of borrowing at the year end was 5.5%. and we finished with a net debt to net capitalization ratio of 71% in line with our target range. In addition to growing the capital stack, the business continues to produce a growing level of free cash flow. Free cash flow from operations before the net growth in the loan portfolio during the quarter was $66 million, up 11% for $59.5 million in the fourth quarter of 2021. At today's loan rate, we can support funding nearly $250 million of growth consumer loan portfolio purely from our internal cash. As a result, we can now fund our latest accelerated growth forecast using a combination of free cash flow and debt while maintaining a comfortable level of leverage that gradually reduces in the outer periods. Based on the cash on hand at the end of the quarter and the borrowing capacity under our existing revolving credit facilities, we had approximately $973 million in total debt capacity at year end. We remain confident that the capacity available on our existing funding facilities, coupled with our ability to raise additional debt financing, is sufficient to fund our organic growth forecast. Based on the 2022 adjusted earnings, the increased 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 $3.54 per share of to $3.84 per share, an increase of 5.5% for a payout ratio of approximately 33% of the prior year's adjusted earnings. Furthermore, this marks the ninth consecutive year of an increase in the dividend to shareholders. While the level of increase in the dividend is half the level of increase for adjusted earnings, this decision strikes the right balance between increasing their turn for shareholders and preserving capital for the strong organic growth profile of the business. I'll now pass it back over to Jason to talk about our outlook and new forecast. Thanks, Al. With a total non-prime consumer credit market of nearly $200 billion, we remain at the early stages of our growth journey in Canada. Despite the challenging macroeconomic conditions, we remain confident in our ability to thrive during this period. As we have proven during many cycles before, our business model and our customer is highly resilient, and we have a team capable of navigating through adversity. At the moment, the momentum of our business initiatives and the favorable competitive dynamics have in fact created the best growth environment in many years. This in turn provides us with greater choice and flexibility, the capacity to be more selective with our lending decisions, the capacity to determine the growth rate that we think reflects the ideal scale and capacity of the organization, and the capacity to choose which products and verticals we want to focus on. In our disclosures yesterday, we published a new, more accelerated three-year commercial forecast. These commercial forecasts are built bottom-up using a detailed set of scenario-based assumptions about product mix, pricing, economic conditions, funding sources, credit risk, and expense requirements. We then stress test those assumptions to understand what both the downside and upside case might look like before we ultimately decide on a range that we think captures the most probable set of outcomes. It is this process that has served us well for over 10 years now. Over that period, we have met or exceeded nearly every single metric with consistency. We expect to organically grow the loan portfolio by over 70% to nearly $5 billion in the end of 2025, driven by the growth and execution of our current suite of products and channels. Our outlook provides a range of guidance to account for unanticipated headwinds on one end and the benefit of our initiatives performing better than planned on the other. We also remain on a quest to reduce the cost of borrowing for our customers. By optimizing for an after-tax return on receivables of 7% to 8%, which produces over a 20% plus 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 few years, our strategy will bring down the weighted average interest rate we charge our customers to below 30%, while our total yield, inclusive of ancillary revenues, gradually declines between 33% and 35%. The combination of our credit risk management, product mid-shift, and operational execution provides us confidence that the credit performance of our portfolio remains stable and resistant. We expect the annualized net charge-off rate of our portfolio to oscillate between 8.5% and 10.5% throughout 2023, then gradually decline in the outer years. We also continue to benefit from scale and operating leverage. Despite declining risk-adjusted margins, we anticipate the operating margin of business to gradually expand by approximately 100 basis points per year. To achieve this forecast, we will continue to execute on the four-pillar strategy that has driven our business priorities since 2017. First, our strategy is to continue building and promoting a wide range of lending products that meet all our customers' credit needs. Newer categories such as automotive financing and healthcare financing are still very early stage, and we have yet to begin cross-promoting our entire range of products to our borrowers. Second, our strategy is to expand our channels of distribution. During the first quarter, we will open our 300th EZ Financial branch and launch our new GoDB Connect mobile app, and we now serve a growing merchant base of over 6,500 partners. Third, We continue to increase our retail, digital, and point-of-sale presence coast-to-coast with untapped expansion opportunities still in Quebec and other major urban markets. And fourth, we will remain focused on helping our customers improve their finances through understanding and improving their credit and gradually offering them a lower rate of interest, starting to be a stepping stone and a bridge back to prime credit. Turning specifically to the upcoming quarter, we expect the loan portfolio to grow between $185 and $210 million. We expect the total yield generated on the consumer loan portfolio to decline to between 34.75 and 35.75% in the quarter, partially reflecting the typical seasonal decline we experience in each first quarter period. We also continue to expect strong credit performance. Based on current delinquency trends, we expect the annualized net charge-off rate to finish between 8.5% and 9.5% in the quarter. In closing, I want to once again thank the entire BOEG team for their tremendous effort and performance. We have a passionate and driven team that works hard to put everyday Canadians on the path to a better tomorrow, to help our merchants grow their businesses, and to produce industry-leading performance for our shareholders. As I've said many times before, we are truly just getting started. With those comments complete, we will now open the call for questions.