goeasy Ltd.

Good day and thank you for standing by. Welcome to the Go Easy second quarter 2023 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 the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Farhan Ali Khan. Please go ahead.

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 GoEFE Limited's results for the second quarter ended June 30th, 2023. 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 second quarter and provide an outlook to the business. Pala Khoury, the company's chief financial officer, will also provide an overview of our capital and liquidity position. And Jason Appel, the company's chief risk officer, is also on the call. After the company's 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 it's 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 their prepared remarks. The operator will pull for questions and then 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 However, we would ask that they do not quote callers unless an individual has granted their consent. Today's discussion may contain forward-looking statements. I am not going to read the full statement, but will direct you to caution regarding the forward-looking statements, including the MD&A. I will now turn the call over to Jason Mullins.

Thanks Farhan. Good morning, everyone, and thank you for joining the call today. The second quarter was the strongest in our history, characterized by record originations, stable credit, and record earnings. I'll start by describing some of the underlying trends that are producing the continued strength and performance for the company. First, as we have suggested during the last few quarters, a difficult macro environment benefits those with scale. As inflation affects operating expenses, wage growth affects salaries, higher borrowing costs compresses margins, and economic concerns require credit tightening, smaller subscale companies struggle. As a result, those with scale are often in a position to capture a greater share of the market and take advantage of that market disruption. Go Easy is currently benefiting from these dynamics today. By way of example, the number of companies bidding directly against us within Google Paid Search during the quarter was down nearly 40% year over year. Furthermore, the majority of prime lenders, specifically major banks, tighten their credit when they are concerned about macro conditions. As a result, we are continuing to experience high-quality borrowers using our products. Secondly, the business initiatives we have executed over the last few years continue to perform well. During the quarter, we added nearly 1,000 new merchants within our point-of-sale financing division, including a recently announced partnership with 123 Dentist, a national network of supported dental practices that provide a wide range of dental care to more than 800,000 Canadian patients and over 2.5 million patient visits annually. We also added over 200 more automotive dealerships to our auto network, leading to a record automotive financing volume in the quarter. Lastly, we continue to increase the use of targeted, pre-approved lending campaigns to existing and former borrowers, which use our most advanced and predictive scoring models to assess risk. 50% of our unsecured loan originations in the quarter were from these cross-selling efforts. The combination of less competition and strong-performing strategic business initiatives produced nearly 42,000 new customers, a company record for a single quarter. As a result, it led to the highest proportion of credit advance to new customers in more than five years, at 71% of all net lending volume. In line, we received a record number of applications for credit, at nearly 500,000, up 25% year over year. The elevated level of applications led to record originations in the quarter of 667 million, up 6% over the second quarter of 2022. Organic loan growth was above our forecast at $210 million. At quarter end, our portfolio finished at $3.2 billion, up 35% from the prior year. We also continue to execute on our strategy to pass on the benefits of scale to our consumers by offering them progressively lower rates of interest, although the level of decline in average rate has moderated given the realities of higher borrowing costs. During the quarter, the overall weighted average interest rate charged to our customers declined slightly to 30.1%, down from 31.7% at the end of the second quarter last year. Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 35.4%. Total revenue in the quarter was a record $303 million, up 20% over the same period in 2022. With healthy levels of consumer demand, less competitive tension, and our business initiatives performing well, it allows us to continue to be more selective with the credit we underwrite, which contributes to higher quality loan originations. By way of example, year over year, we are funding about 20% less applicants with an easy financial than we previously had. This selection process leads to better performing and more profitable loan vintages. the credit profile of our business remains strong as our secured portfolio has risen from 36% to over 41% of our book. And based on our internally generated custom credit models, this quarter saw the second highest quality loan originations in our history. So while we continue monitoring vintage level delinquency and loss rate trends closely, the loan portfolio continues to perform in line with our expectations, thanks largely to the combination of credit tightening and product mix. Furthermore, our consumer segment remains resilient. As we have described in the past, our borrowers have limited exposure to real estate and mortgage rates, with a home ownership level of less than 20%, and they carry 55% less total debt than the typical prime borrower. During the quarter, the annualized net charge-off rate continued to remain stable at 9.1%, down 20 basis points from 9.3% in the second quarter of last year. Our loan loss provision rate also reduced to 7.42% compared to 7.48% in the previous quarter, reflecting the improved portfolio mix and loss rate performance. With a strong level of demand for loan growth, we are also focused on initiatives that reduce expenses and increase operating leverage. During the quarter, our efficiency ratio, specifically operating expenses as a percentage of revenue, reduced to 31.2%, an improvement of 300 basis points from 34.2% in the second quarter of last year. After adjusting for the non-recurring items, we reported record adjusted operating income of $114 million, an increase of 28.5% over the $89 million in the second quarter of 2022. Adjusted operating margin for the second quarter was 37.7%, up from 35.3% in the same period last year. After adjusting for the after-tax effect of the non-recurring items, including mark-to-market gains recorded in the quarter, adjusted net income was a record $56 million, up 20% from the same period of 2022. Adjusted diluting earnings per share was $3.28, up 16% from $2.83 in the second quarter of 2022, while adjusted return on equity exceeded our target levels at 24.2%. With that, I'll now pass it over to Hal to discuss our balance sheet and capital position. Thanks, Jason. During the quarter, we successfully extended the maturity of our existing $1.4 billion evolving securitization warehouse facility through October 2025. The amendment incorporates modifications that improve eligibility criteria, resulting in increased usable funding capacity. The lending syndicate for this facility continues to consist of RBC, National Bank, and BMO. and bears interest based on one month CEDAWR plus 195 basis points. Based on the current one month CEDAWR rate of 5.37% as of August 4th, 2023, the interest rate on new draws would be 7.32%. It is important to note that nearly 90% of our existing debt balances have interest rate swap agreements in place in order to generate fixed payments on the amounts drawn and assist in mitigating the impact of future increases in interest rates. At quarter end, our weighted average cost of borrowing was 5.6%, while the fully drawn weighted average cost of borrowing increased to 5.9%. Equally important, the business continues to generate meaningful levels of free cash flow from operations. For the net growth in the loan portfolio, free cash flow in the quarter was $76.5 million, up 34% from $56.9 million in the second quarter of 2022. Based on the cash at hand, at the end of the quarter, and the borrowing capacity under our existing credit facilities, we had nearly $900 million in total funding capacity. While we have a strong balance sheet today, we are also continuously seeking new forms of funding that will diversify our balance sheet and optimize our flexibility and cost of capital. As such, we remain confident that the capacity available under our existing funding facilities, combined with our ability to raise additional debt financing, is sufficient to fund our organic growth forecast. I'll now pass it back over to Jason to talk about our outlook. Thanks, Hal. With a positive level of momentum in the business, we are now confident that we will meet or exceed the high end of our loan book forecast of $3.6 billion in 2023, while remaining on track to achieve all other metrics of our forecast through 2025. In the upcoming quarter, we expect the loan portfolio to grow between $205 and $230 million. As we continue to optimize our pricing, we also expect to maintain the current total annualized portfolio yield, which should finish between 34.75% and 35.75%. We also continue to expect resilient and stable credit performance, with the annualized net charge-off rate expected to decline to between 8.5% and 9.5% during the third quarter. The upcoming quarter will also mark the official national rollout of our new GoEasy Connect mobile app. after a successful pilot with many learnings over the past several months. As we've shared before, this transformational industry-first digital solution will provide GoEasy customers with a one-stop access to all of our credit products across our brand through a simple and easy-to-use digital interface. More importantly, the app will gradually become the vehicle to provide our borrowers with personalized pre-approved loan offers as we look to extend our customer relationships by meeting all of their future borrowing needs. The launch of this first version represents an exciting time for our business as we continue to build and evolve our full suite financial services offering. As always, I want to thank the entire GoEasy team for another record result. In May this year, we held our company national conference, providing us the opportunity to celebrate and recognize all of the incredible talent across our organization. I am more convinced than ever that we have a winning team who are deeply passionate about our vision and supporting our customers. Despite the success we've had, including generating the highest total shareholder return since 2001 of all other financial stocks on Bay Street and Wall Street, we are still just a small fraction of the large and underserved $200 billion non-prime credit market. In our view, it is still just the beginning of our journey. And as I've said many times before, we are truly just getting started. With those comments complete, we'll now open the call for any questions.