This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk22: 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.
spk15: 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.
spk10: 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.
spk22: As a reminder, please press star 1-1 on your touchtone telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
spk04: Our first question comes from a line of Etienne Ricard with BMO Capital Markets.
spk14: Thank you and good morning. In your remarks, you mentioned that favorable competitive conditions are helping you acquire new customers. Do you believe this is more related to a challenging financing environment or more about the regulatory overhang from the 35% rate cap?
spk10: I think it's a combination of both. I mean, in today's environment where the rate cap change has not yet been implemented, It's clearly going to be more heavily influenced by inflationary environment, cost of capital, credit risk concerns. But I think that all companies know with that pending regulatory change that they have to try to adapt. And therefore, they're probably starting to try and test and figure out whether or not they can make the economics work, whether or not they can sufficiently acquire customers at an appropriate affordable CPA. So I do think the regulatory factor is a bit of a contributing element, but today it's probably a little bit more of the macro conditions.
spk14: Okay. One metric that stood out to me from the quarter is that new customers accounted for 71%. of loan advances. So that is significantly above your 60% long-term average. So I guess first part of my question is, is there a particular product or distribution channel explaining this dynamic? And the second part is, what's giving you the confidence to deviate from the historical 60% from a credit standpoint?
spk10: Yeah, so it's pretty well distributed across all of our products and channels, although we would slightly index in some of the newer, younger product categories, such as automotive financing, for example, simply because it's earlier stage in our development. But all products and channels experienced strong new customer growth. And The reason we're so comfortable and confident with that is that the quality of the new customers that we're acquiring today are better than our existing portfolio average and better than the quality of the new customer we would have acquired historically. So for perspective, the average generic credit score, albeit, again, we don't always use that in making a lending decision, but it's a good market proxy. the average score of those new customers is almost 30 points higher than what it was for the new customers we acquired at the same time, say, two years ago. And that just shows the gradual evolution of as we continue to attract and retain better quality customers through lower APR offers and the introduction of additional products, that continues to allow us to attract and retain a better customer. So we're quite happy with the new customer growth, particularly because it's of a good quality nature.
spk02: Great, thank you very much.
spk22: Our next question comes from the line of Gary Ho with Desjardins Capital Markets.
spk03: Hello, am I on?
spk17: Yep, hey Gary. Hey guys, sorry, I got cut off there. Sorry, just first question. Maybe going back to your three-year outlook, I think in those numbers, You guys budgeted it in Jan 1st, 2024 for the rate cap implementation date. Just wondering if you've gotten any updates from the regulators on when that will be put into place. And if it is delayed, how should we think about the sensitivities to revenue yield range for 2024, that 33 to 35%?
spk10: Yeah, so what we what we note at this moment is that they will be publishing a new set of regulations by the end of the year. You know, we would expect sometime between fall and early winter. So by the end of the year, a new set of regulations will be published. In those regulations, it will contain the effective date of the new rate cap, so the implementation date, as well as any potential exemptions from the new lower rate cap that they might consider. We believe that the assumption of an early 2024 implementation date is a conservative one. One would expect and hope that there's more time given for implementation. So it is certainly possible that the implementation date is sometime later in 2024, but we have always taken a more conservative approach to uncertain matters of this nature. In the event, to your question, that it is deferred and does not get implemented until later in the year, clearly that will mean that the rate of decline in the portfolio yield in 24 will be slower than what is otherwise in our current forecast, and that will be net accretive to next year's earnings. So consider, I think, the version that we've published as being the more conservative model, and then as we get more information, we'll be able to update everyone accordingly.
spk17: That makes sense. And then second question, just on the price increases, I think in the last call, you mentioned 200 basis points increase right after the rate cap announcement. Were there any subsequent increases in the quarter after that initial one? And maybe just comments on the pricing environment overall. What are your competitors doing?
spk10: Yeah, so we saw another sequential quarter on quarter increase in the weighted average coupon of our originations, particularly focused on the lower priced products that are already well below the future 35% rate cap. As we said, that was one of the pricing opportunities that existed to try to offset some of the future pressures associated to the reduction in the higher-end APRs. As a result, that's why you can see our quarter-on-quarter decline in total portfolio yield was quite modest. And as I noted earlier, our expectation for the total portfolio yield in the upcoming quarter and perhaps even beyond is to be quite stable. We're not, as a result, expecting much decline. So the net benefit of the lesser level of competitive tension, of course, is not only does that generate additional demand, allowing us to be more selective from an underwriting perspective, it also allows us to have a little bit more freedom from a pricing perspective as well. And to be clear, that's not solely us doing something to take advantage of the circumstances, all lenders, banks included. are clearly putting up the APRs that they charge given all lenders are facing a higher cost of capital. So we're really just falling in line with what would be market norm. But in our case, it's quite helpful to the total portfolio yield and the economics of the business.
spk17: And what would you say would be the cumulative price increase so far? It would be greater than that, $200. Is it like $250, $300 so far?
spk10: Well, I wouldn't think of it that way because we are constantly adjusting pricing at every credit tier and every product, and there are some credit tiers and some products where we are still bringing pricing down. I would think of it as that the portfolio mix shift would otherwise be moving the yield down, and the pricing increases we've been able to implement on the below 35 population has held that portfolio yield in amalgam flat. So we've been able to generate enough pricing increases to essentially prevent any further portfolio decline for the time being. There will be an additional spare step down as provided in our outlook when we have to move all lending to no more than 35. But I would suggest there is still some additional pricing opportunities there as well. So again, I would think of our current outlook that we've provided as being a little bit more conservative and reasonable and may have some further upside.
spk17: Okay. Makes sense. If I can just sneak one more in, Jason, just, you know, good results here. Sounds like very robust demand. You know, with the rebound in share price, you know, would you consider an equity raise to help grow the platform even faster? I know last time when you did the smaller equity raise, you mentioned the net debt, the adjustable tangible equity calculation, the credit agency look at, maybe give us an update where that stands today.
spk10: Yeah, no, leverage is in a very comfortable spot. We're comfortably below where we were late last year. So there's no need for equity and no plans for equity at this time. Our leverage is not only in a good spot today, but even inclusive of the growth in our business and our growth forecasts. we are expecting to continue to de-lever so we can achieve that organic growth forecast that we've provided without any additional equity and just continue to use the free cash flows and additional sources of debt. So no need for equity at this point. The growth that we've got in the business today was fully what we contemplated when we did the last round last year. So we're in a very good spot.
spk16: Okay. Makes sense. Those are my questions. Thanks very much.
spk22: Our next question comes from the line of Jamie Goyne with National Bank Financial.
spk25: Hello. Hey, Jamie. Okay. I wasn't sure if I got through. Good morning. First question is on the competitive environment, and you called it out in the press release a couple of other spots about challenges that many companies in the industry are facing. Can you... Can you provide a little bit more color as to what some of those specific challenges are and how you're better positioned against those competitors? And is it isolated to a type of competitor? Maybe you can add to that as well.
spk10: Yeah, so you should think of it in a fairly simple and generic sense, which is that the less scale that a company has, from our view, the more difficult the operating environment is. And so when we look at the competitive landscape, it isn't any one specific company or any one specific product. We see evidence of smaller scale companies in unsecured lending, automotive lending, power sports lending, where if they don't have a high degree of operating leverage because they haven't achieved scale, and they don't have a deep, extensive list of bank relationships for efficient sources of capital, then it's just much more difficult to operate. You layer on the fact that then you have to tighten credit because of economic concerns, which means that your funding ratios drop, and therefore your cost of acquisition is higher, and therefore it makes it very difficult to operate. And so those companies are now having to preserve more capital. They can't afford to spend as much on marketing and advertising. They maybe have to moderate their level of operating expenses and investments in new business initiatives. So those are the kinds of basic operating challenges that you have when you are in a position of less scale. So scale in an environment like this clearly means a lot. And as we've talked about before, if you look at our competitive landscape, in most of our product categories, there are a couple of large competitors. companies we compete with that do have scale. That would be the likes of Fairstone. That would be some of the non-prime positions of the banks in the automotive category. But there are also, in every one of those product categories, half a dozen smaller companies with which we compete directly for customers. And those would be the ones that appear to be having a little bit more difficulty. And then I think that drives some of that net volume to those like GoEasy.
spk25: Okay, great. And with this stress, I guess, you know, the question is like how long do you feel like they've been dealing with this environment? Obviously, there's a bit of runway here in terms of the backdrop that we're operating in that can further support some of these net volume wins for GoEasy. So organically, it seems like there's some runway here, but also on the inorganic side, have you noticed an uptick in any of those types of conversations for these businesses struggling in Canada specifically?
spk10: Yeah, so I think the environment, as we all know, has been getting progressively more difficult over the last year plus. And so it's been gradual, I think, that these companies have found it more difficult to operate. And I would suspect, based on the current economic outlook, it's probably a little while longer that it's going to be some choppier waters and more difficult for them as well. So, any incremental benefit that we're experiencing from less competitive tension, it might ebb and flow month to month, quarter to quarter, but I certainly would expect it will continue at some level for a little while, certainly until rates start to subside, concerns about the economic environment start to subside. Until then, I think most companies, especially, again, those with smaller balance sheets, are going to inherently be more conservative and be more risk adverse. So then that benefits us. Yes, we have had conversations, inbounds, and kept relationships active as it relates to new investment opportunities, both in Canada and abroad. Again, nothing that's imminent today. Our focus continues to be on the very healthy organic loan growth. where we're allocating all our capital at the moment. But as we've always said, we're always opportunistic, keeping our eyes and ears open for interesting opportunities in Canada, as well as nurturing relationships in other markets where it may make sense for our business in the future. But nothing in the near term. Right now, it's just keeping our eyes and ears open and focusing on executing our Canadian operation as we have been.
spk25: Okay, great. And then last one, just in terms of the pricing environment and the question Gary was going down the path of in terms of price increases on some of those lower rate products. The question is, I guess, how far along that path of price increases are you? Your history is typically to test and learn and move slowly on some of these initiatives. I'm just wondering, where are we in that process of potentially raising rates? Is there an opportunity to continue pushing that forward? Pushing those rates higher, forward demand doesn't seem to be too affected. So really, I guess it's just maybe around the credit performance. So what are some views on that runway as well? Thanks.
spk10: Yes, still more opportunity. Our philosophy hasn't changed in our approach. So we have been implementing pricing adjustments in a gradual nature where month by month you make some small adjustments. monitor the application demand, monitor the conversion rates, monitor the impacts on the competitive environment, learn from it, and then make additional changes. You know, optimizing the pricing of any given loan product at any given credit tier is really a never-ending process because the environment's always changing, the competitive landscape's always changing, so it's not as though you can derive one optimal price for any given customer and then just count on that to be the optimal price forever. So it is an ongoing exercise, but as it relates to opportunities to optimize price as a way to account for the higher cost of borrowing, as a way to account for the future regulatory changes, I think we're still fairly early in that process and there are additional opportunities ahead. And, you know, the benefits of that competitive dynamic and that healthy demand, that really serves that journey well because not only can we make those pricing adjustments, but we can be a lot more selective with the credit that we underwrite as well. So it's an ideal situation for us to be able to kind of make these tests and learn from them.
spk06: Great. Thank you.
spk22: Our next question comes from the line of Marcel McLean with TD Securities.
spk06: Good morning. Hello. Hello.
spk13: Okay. Okay, thanks for taking my question here. So first one, just sort of following up on Etienne's question, just on that new customer metric, can you remind us how it's measured? Like, are these customers that are brand new to GoEasy, or could it be a cross-sell customer falls into that bucket or, you know, if they had a loan previously with Go Easy and now are back for a new one after having previously paid off a loan. You know, the reason I'm asking this is, you know, new customers are typically the riskiest of customers and the allowance ratio tends to stick down. So I'm just trying to take to that. I really want to understand how that metric is calculated.
spk10: Yep. So new customers are either brand new individuals we've never served before, or they're former customers that have not been active borrowers for a period of time. I don't recall the exact amount of period of time that we used to classify them as such, but they would have not been an active borrower for some period of time. So these are essentially not customers that have loans today. They haven't had loans very recently, and therefore we consider them to be new to the business. which is different than when we talk about lending to an existing customer where they already have a loan today or they just recently had a loan they paid out. We would classify them as existing customers. Your point is a valid one in which, in general, new customers carry higher credit risk than lending to existing customers. The existing customers afford us the ability to do more sophisticated credit decisioning and underwriting. However, Why in this instance, that mixed shift toward more new borrowers doesn't present the same concern that it might normally is because of the fact that those new customers are being onboarded at higher credit tiers and better products than the underlying existing back book. And so if you were operating in an environment where the mix shifted toward more new customers, but the credit quality and the product mix was the same as the existing portfolio you had, you would actually be accepting slightly more credit risk. But if the mix of new customers is offset by the fact that they're of a better credit quality or a better product mix, then that shift toward new may actually de-risk the portfolio. And so that's what gets us quite comfortable about that level of new customer volume.
spk13: Okay, understood. Okay, then secondly, with the strong demand that we've been seeing here, like record applications, record, new customers, record originations, all that. Now, you've listed out a number of factors that have sort of contributed to that. I think more customers are falling into the subprime bucket, maybe being declined from other places. Maybe some pandemic savings have sort of come down and need for credits increasing. You have new verticals. You have higher average loans per customer, decreased competitive dynamics, all those factors. Is there maybe – one or a handful of them that are driving the majority of this loan growth while the others maybe are contributing but not to the same degree. Are you able to sort of point to a few that would be, or is it more balanced, I guess, I guess is the question.
spk10: No, I think the two greatest drivers, which were kind of the two that I touched on in some of the prepared remarks, would be one, you know, we've implemented over the last several years a number of business initiatives with the introduction of some new products and new channels, such as automotive financing, point of sale, those existing products and channels are a lot of cases just early stage in their development. And so when you now have this more diversified business, your sources of acquisition and your sources for growth compared to a year ago compared to the year before that are much greater and so it's simply a case of the natural maturation cycle of more products and more channels it's very similar to uh you know 10 years ago a major driver of growth was just simply the maturation of the existing branch network as you open a new branch That branch goes through a five- or ten-year period where simply the existing branch in that existing market is going to continue to grow as it creates more brand awareness. So the largest driver continues to just be the execution of the existing business initiatives and existing products and channels. The second probably greatest contributor at the moment is it's being accelerated by the macro conditions. Those macro conditions, as I say, have really two prongs. One, less competitive tension from primarily subscale companies that we talked about. And two, prime lenders that sit above us in the credit spectrum tightening credit and pushing some near prime borrowers into our product categories. So think of it as primary drivers are the business initiatives, and then the macro conditions are simply acting as a further accelerator. And I think as we've talked about before, when we provide our loan forecasts and we provide a range, these are the kinds of things that we account for when we talk about the upper and the lower bounds. We talk about how if things go generally according to plan, we would expect that we would travel roughly at the midpoint of any given range of any given metric. But if things go well and there are some additional factors at play that are either headwinds or tailwinds, that would be the kind of thing that would push us to the upper or lower bound. This is a great example of that. The macro conditions, as it relates to demand and growth, are a tailwind, and hence why we're now projecting to finish at or above the high end of the growth range. So those would be the primary ways to think about what's driving long-term.
spk13: Okay, that's helpful. Good to know. If I could just speak in a third on the efficiency ratio, we did see a 300 base point improvement year over year, You know, tracing that back, you know, at 31.2% now, that was 40% plus just two years ago. I'm just wondering where you see that ratio sort of heading over the next two to three years. Like, are we going to get to a point where it plateaus or, you know, obviously the platform is highly scalable, but just curious your thoughts of how that trends over the next few years.
spk10: So I think we can confidently say, based on the way we've communicated the operating margin expansion, that you have at least a couple hundred basis points of additional efficiencies to be gained each year going forward. I think as that off-ex ratio gets down into the mid-20s, you start to get closer to the point where you're operating almost at your variable contribution margin, and you're at a meaningful level of scale where you will continue to get some level of leverage, but the rate of improvement will slow. We're in that period right now where the business is experiencing sort of its maximum benefit of operating leverage because we've spent the last 15 years building out what is now a fairly mature branch network, building out what is now a fairly mature corporate office, building out what is now a fairly mature technology infrastructure. And so we're really at that stage, that ideal stage in a company where the majority of the investments you need to make in your business platform and your distribution network have already been invested. And therefore, all of the incremental growth comes at a high margin and is quite accretive. And that's what's just driving that reduction in OpEx ratio. So you should expect that for the next few years, there's still 100, 200 plus basis points of annual improvement in the efficiency ratio. And then as you get maybe three or four years out, depending on the rate of growth of the business, that rate of improvement might start to slow a little bit as we get closer to more meaningful scale.
spk06: Okay, great. Thanks very much for taking my questions.
spk22: As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touchdown telephone. Our next question comes from a line of Stephen Boland with Raymond James.
spk23: Hi. Can you guys hear me?
spk19: We can. Hey, Steven. Okay. Thanks. Just one question, guys. You know, the growth in auto financing and the point of sale, you know, continue to, you know, add dealers, add merchants. What's the value? I mean, auto financing, very competitive, Axis, Rivco, some of the, like you said, some of the bank dealers. You know, what's the value add that you're bringing to the dealers, especially on auto finance, that some of the more established players, you know, have not been able to do. I presume you're taking market share there as opposed to adding dealers that don't have a financing option. So I'm just wondering what you're doing better, is it technology, service, combination? Maybe you could just explain that, please.
spk10: Yeah. So I think we've talked a little bit about this before. I would break it down into five very specific and simple things and I think we believe you have to do all five of them well at some level and if you can do all five very well, then you can acquire and steal market share and grow a very good business. First of all, your approval rate has to be highly competitive. A dealer has to believe that when they submit an application for credit, that based on your credit and underwriting algorithm, there's a good chance that borrowers are going to get qualified or you just won't receive an application. To the APR you offer, the customer has to be competitive. If the dealer does not feel like the interest rate can be competitively offered to the customer and that they're going to get a lower APR elsewhere, they're not going to present your offer. For the speed of that credit decision, And the capability of your technology to turn the deal around quickly is going to be a meaningful factor because it's a sales environment and they want to try and get the sale closed. Fourth, you have to have great merchant support. They have to be able to pick up the phone and call someone and get a hold of them during all operating hours during the week and on the weekend. And know that if they've got questions, if they've got problems working on a potential customer loan, they can get a hold of someone that can help them and get through the situation. And then fifth, you have to have a competitive dealer reserve. Lender financing is a key part of the economics of most used car retailers. The average used car retail profit comprises of the markup of the vehicle, which is about 50% of the gross margin. And then one quarter comes from the additional sale of additional products, such as warranties. And one quarter comes from the commission that they earn from a lender through financing. So that financing commission has to be competitive in the market as well. So I think we've obviously leveraged 15 years of experience through LendCare, building the PowerSports network, knowing how to assess, onboard, and support merchants. We have benefited from 15 plus years of underwriting the non-prime borrower and understanding how to manage and think about credit risk. And all of that has contributed to the success. But as it relates to the specific things you have to do in that channel, in that product, to be successful and win market share, if you can do those five things and execute them all very well, which is much more difficult to do than to say, then you can have a great business there. And we've really tried to do all of those things well, and so far it's worked to our advantage. I would also highlight that and we've talked about this before, automotive financing is the single largest product category in that $200 billion non-prime credit market at $60 billion. So you're also talking about a market that is 20%, 30% larger than the installment loan market where all of our other products all operate combined within that market. So just inherently, given the size of the market, your opportunity is even that much greater.
spk27: Okay, that's all I had. Thanks, guys.
spk22: That concludes today's question and answer session. I'd like to turn the call back to Jason Mullins for closing remarks.
spk10: Great, thank you. Well, since there are no more questions, again, we just want to thank everyone for participating in the conference call. We look forward to updating everyone next quarter. Have a fantastic rest of your day. Thank you.
spk22: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you. 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.
spk15: 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 30, 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. Hal Akure, 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 proper 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 included in the MD&A. I will now turn the call over to Jason Mullins.
spk10: 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 volumes. 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 homeownership 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 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.
spk22: As a reminder, to ask a question, please press star 1-1 on your touchtone telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
spk04: Our first question comes from a line of ATN Ricard with BMO Capital Markets.
spk14: Thank you, and good morning. In your remarks, you mentioned that favorable competitive conditions are helping you acquire new customers. Do you believe this is more related to a challenging financing environment or more about the regulatory overhang from the 35% rate cap?
spk10: I think it's a combination of both. I mean, in today's environment where the rate cap change has not yet been implemented, It's clearly going to be more heavily influenced by inflationary environment, cost of capital, credit risk concerns. But I think that all companies know with that pending regulatory change that they have to try to adapt. And therefore, they're probably starting to try and test and figure out whether or not they can make the economics work, whether or not they can sufficiently acquire customers at an appropriate affordable CPA. So I do think the regulatory factor is a bit of a contributing element, but today it's probably a little bit more of the macro conditions.
spk14: Okay. One metric that stood out to me from the quarter is that new customers accounted for 71%. of loan advances. So that is significantly above your 60% long-term average. So I guess first part of my question is, is there a particular product or distribution channel explaining this dynamic? And the second part is, what's giving you the confidence to deviate from the historical 60% from a credit standpoint?
spk10: Yeah, so it's pretty well distributed across all of our products and channels, although we would slightly index in some of the newer, younger product categories, such as automotive financing, for example, simply because it's earlier stage in our development. But all products and channels experienced strong new customer growth. And The reason we're so comfortable and confident with that is that the quality of the new customers that we're acquiring today are better than our existing portfolio average and better than the quality of the new customer we would have acquired historically. So for perspective, the average generic credit score, albeit, again, we don't always use that in making a lending decision, but it's a good market proxy. the average score of those new customers is almost 30 points higher than what it was for the new customers we acquired at the same time, say, two years ago. And that just shows the gradual evolution of as we continue to attract and retain better quality customers through lower APR offers and the introduction of additional products, that continues to allow us to attract and retain a better customer. So we're quite happy with the new customer growth, particularly because it's of a good quality nature.
spk02: Great, thank you very much. Thanks, Justin.
spk22: Our next question comes from the line of Gary Ho with Desjardins Capital Markets.
spk03: Hello, am I on?
spk17: Yep, hey, Gary. Hey, guys, sorry, I got cut off there. Sorry, just first question. Maybe going back to your three-year outlook, I think in those numbers, You guys budgeted it in Jan 1st, 2024 for the rate cap implementation date. Just wondering if you've gotten any updates from the regulators on when that will be put into place. And if it is delayed, how should we think about the sensitivities to revenue yield range for 2024, that 33 to 35%?
spk10: Yeah, so what we what we note at this moment is that they will be publishing a new set of regulations by the end of the year. You know, we would expect sometime between fall and early winter. So by the end of the year, a new set of regulations will be published. In those regulations, it will contain the effective date of the new rate cap, so the implementation date, as well as any potential exemptions from the new lower rate cap that they might consider. We believe that the assumption of an early 2024 implementation date is a conservative one. One would expect and hope that there's more time given for implementation. So it is certainly possible that the implementation date is sometime later in 2024, but we have always taken a more conservative approach to uncertain matters of this nature. In the event, to your question, that it is deferred and does not get implemented until later in the year, clearly that will mean that the rate of decline in the portfolio yield in 24 will be slower than what is otherwise in our current forecast, and that will be net accretive to next year's earnings. So consider, I think, the version that we've published as being the more conservative model, and then as we get more information, we'll be able to update everyone accordingly.
spk17: That makes sense. And then second question, just on the price increases, I think in the last call, you mentioned 200 basis points increase right after the rate cap announcement. Were there any subsequent increases in the quarter after that initial one? And maybe just comments on the pricing environment overall. What are your competitors doing?
spk10: Yeah, so we saw another sequential quarter-on-quarter increase in the weighted average coupon of our originations, particularly focused on the lower-priced products that are already well below the future 35% rate cap. As we said, that was one of the pricing opportunities that existed to try to offset some of the future pressures associated to the reduction in the higher-end APRs. As a result, that's why you can see our quarter-on-quarter decline in total portfolio yield was quite modest. And as I noted earlier, our expectation for the total portfolio yield in the upcoming quarter and perhaps even beyond is to be quite stable. We're not, as a result, expecting much decline. So the net benefit of the lesser level of competitive tension, of course, is not only does that generate additional demand, allowing us to be more selective from an underwriting perspective, it also allows us to have a little bit more freedom from a pricing perspective as well. And to be clear, that's not solely us doing something to take advantage of the circumstances, all lenders, banks included. are clearly putting up the APRs that they charge, given all lenders are facing a higher cost of capital. So we're really just falling in line with what would be market norm. But in our case, it's quite helpful to the total portfolio yield and the economics of the business.
spk17: And what would you say would be the cumulative price increase so far? It'd be greater than that, 200. Is it like 250, 300 so far?
spk10: Well, I wouldn't think of it that way because we are constantly adjusting pricing at every credit tier and every product, and there are some credit tiers and some products where we are still bringing pricing down. I would think of it as that the portfolio mix shift would otherwise be moving the yield down, and the pricing increases we've been able to implement on the below 35 population has held that portfolio yield in amalgam flat. So we've been able to generate enough pricing increases to essentially prevent any further portfolio decline for the time being. There will be an additional spare step down as provided in our outlook when we have to move all lending to no more than 35. But I would suggest there is still some additional pricing opportunities there as well. So again, I would think of our current outlook that we've provided as being a little bit more conservative and reasonable and may have some further upside.
spk17: Okay, makes sense. If I can just sneak one more in, Jason, just, you know, good results here. Sounds like very robust demand. You know, with the rebound in share price, you know, would you consider an equity raise to help grow the platform even faster? I know last time when you did the smaller equity raise, you mentioned the net debt, the adjustable tangible equity calculation, the credit agency look at, maybe give us an update where that stands today.
spk10: Yeah, no, leverage is in a very comfortable spot. We're comfortably below where we were late last year. So there's no need for equity and no plans for equity at this time. Our leverage is not only in a good spot today, but even inclusive of the growth in our business and our growth forecast. we are expecting to continue to de-lever so we can achieve that organic growth forecast that we've provided without any additional equity and just continue to use the free cash flows and additional sources of debt. So no need for equity at this point. The growth that we've got in the business today was fully what we contemplated when we did the last round last year. So we're in a very good spot.
spk16: Okay. Makes sense. Those are my questions. Thanks very much.
spk22: Our next question comes from a line of Jamie going with national bank financial.
spk25: Hello. Okay. Wasn't sure if I got through. Um, good morning. Uh, first question, uh, is, is on the competitive environment and, uh, and you called it out of the press release, a couple other spots about, uh, challenges that, uh, many companies in the industry are facing. Can you, uh, Can you provide a little bit more color as to what some of those specific challenges are and how you're better positioned against those competitors? And is it isolated to a type of competitor? Maybe you can add to that as well.
spk10: Yeah, so you should think of it in a fairly simple and generic sense, which is that the less scale that a company has, from our view, the more difficult the operating environment is. And so when we look at the competitive landscape, it isn't any one specific company or any one specific product. We see evidence of smaller scale companies in unsecured lending, automotive lending, power sports lending, where if they don't have a high degree of operating leverage because they haven't achieved scale, and they don't have a deep, extensive list of bank relationships for efficient sources of capital, then it's just much more difficult to operate. You layer on the fact that then you have to tighten credit because of economic concerns, which means that your funding ratios drop, and therefore your cost of acquisition is higher, and therefore it makes it very difficult to operate. And so those companies are now having to preserve more capital. They can't afford to spend as much on marketing and advertising. They maybe have to moderate their level of operating expenses and investments in new business initiatives. So, those are the kinds of basic operating challenges that you have when you are in a position of less scale. So, scale in an environment like this clearly means a lot, and as we've talked about before, if you look at our competitive landscape, in most of our product categories, there are a couple of large companies we compete with that do have scale. That would be the likes of Fairstone. That would be some of the non-prime positions of the banks in the automotive category. But there are also, in every one of those product categories, half a dozen smaller companies with which we compete directly for customers. And those would be the ones that appear to be having a little bit more difficulty. And then I think that drives some of that net volume to those like GoEasy.
spk25: Okay, great. And with this stress, I guess, you know, the question is like how long do you feel like they've been dealing with this environment? Obviously, there's a bit of runway here in terms of the backdrop that we're operating in that can further support some of these net volume wins for GoEasy. So organically, it seems like there's some runway here, but also on the inorganic side, have you noticed an uptick in any of those types of conversations for these businesses struggling in Canada specifically?
spk10: Yeah, so I think the environment, as we all know, has been getting progressively more difficult over the last year plus. And so it's been gradual, I think, that these companies have found it more difficult to operate. And I would suspect, based on the current economic outlook, it's probably a little while longer that it's going to be some choppier waters and more difficult for them as well. So, any incremental benefit that we're experiencing from less competitive tension, it might ebb and flow month to month, quarter to quarter, but I certainly would expect it will continue at some level for a little while, certainly until rates start to subside, concerns about the economic environment start to subside. Until then, I think most companies, especially, again, those with smaller balance sheets, are going to inherently be more conservative and be more risk adverse. So then that benefits us. Yes, we have had conversations, inbounds, and kept relationships active as it relates to new investment opportunities, both in Canada and abroad. Again, nothing that's imminent today. Our focus continues to be on the very healthy organic loan growth. That is where we're allocating all our capital at the moment. But as we've always said, we're always opportunistic, keeping our eyes and ears open for interesting opportunities in Canada, as well as nurturing relationships in other markets where it may make sense for our business in the future. But nothing in the near term. Right now, it's just keeping our eyes and ears open and focusing on executing our Canadian operation as we have been.
spk25: Okay, great. And then last one, just in terms of the pricing environment and the question Gary was going down the path of in terms of price increases on some of those lower rate products. The question is, how far along that path of price increases are you? Your history is typically to test and learn and move slowly on some of these initiatives. I'm just wondering, where are we in that process of potentially raising rates? Is there an opportunity to continue pushing that forward? Pushing those rates higher, borrower demand doesn't seem to be too affected. So really, I guess it's just maybe around the credit performance. So what are some views on that runway as well? Thanks.
spk10: Yes, still more opportunity. Our philosophy hasn't changed in our approach. So we have been implementing pricing adjustments in a gradual nature where month by month you make some small adjustments. monitor the application demand, monitor the conversion rates, monitor the impacts on the competitive environment, learn from it, and then make additional changes. You know, optimizing the pricing of any given loan product at any given credit tier is really a never-ending process because the environment's always changing, the competitive landscape's always changing, so it's not as though you can derive one optimal price for any given customer and then just count on that to be the optimal price forever. So it is an ongoing exercise, but as it relates to opportunities to optimize price as a way to account for the higher cost of borrowing, as a way to account for the future regulatory changes, I think we're still fairly early in that process and there are additional opportunities ahead. And, you know, the benefits of that competitive dynamic and that healthy demand, that really serves that journey well because not only can we make those pricing adjustments, but we can be a lot more selective with the credit that we underwrite as well. So it's an ideal situation for us to be able to kind of make these tests and learn from them.
spk06: Great. Thank you.
spk22: Our next question comes from the line of Marcel McLean with TD Securities.
spk06: Good morning. Hello. So.
spk13: Okay. Okay, thanks for taking my question here. So first one, just sort of following up on Etienne's question, just on that new customer metric, can you remind us how it's measured? Like, are these customers that are brand new go easy, or could it be a cross-sell customer falls into that pocket or, you know, if they had a loan previously with Go Easy and now are back for a new one after having previously paid off a loan. You know, the reason I'm asking this is, you know, new customers are typically the riskiest of customers and the allowance ratio tends to stick down. So I'm just trying to take to that. I really want to understand how that metric is calculated.
spk10: Yep. So New customers are either brand-new individuals we've never served before or they're former customers that have not been active borrowers for a period of time. I don't recall the exact amount of period of time that we used to classify them as such, but they would have not been an active borrower for some period of time. So these are essentially not customers that have loans today. They haven't had loans very recently, and therefore we consider them to be new to the business. which is different than when we talk about lending to an existing customer where they already have a loan today or they just recently had a loan they paid out. We would classify them as existing customers. Your point is a valid one in which, in general, new customers carry higher credit risk than lending to existing customers. The existing customers for us the ability to do more sophisticated credit decisioning and underwriting. However, Why in this instance, that mix shift toward more new borrowers doesn't present the same concern that it might normally is because of the fact that those new customers are being onboarded at higher credit tiers and better products than the underlying existing back book. And so if you were operating in an environment where the mix shifted toward more new customers, but the credit quality and the product mix was the same as the existing portfolio you had, you would actually be accepting slightly more credit risk. But if the mix of new customers is offset by the fact that they're of a better credit quality or a better product mix, then that shift toward new may actually de-risk the portfolio. And so that's what gets us quite comfortable about that level of new customer quality.
spk13: Okay, understood. Okay, then, secondly, with the strong demand that we've been seeing here, like, you know, record applications, record new customers, record originations, all that, now you've listed out a number of factors that have sort of contributed to that. I think, you know, more customers are falling into the subprime bucket, maybe being declined from other places, maybe some pandemic savings have sort of come down and need for credit's increasing, you have new verticals, you have higher average loans per customer, decreased competitive dynamics, you know, all those factors. Is there maybe one or a handful of them that are driving the majority of this loan growth while the others maybe are contributing but not to the same degree? You know, are you able to sort of point to a few that would be, or is it more balanced, I guess, I guess is the question.
spk10: No, I think that the two greatest drivers, which were kind of the The two that I touched on in some of the prepared remarks would be one, you know, we've implemented over the last several years a number of business initiatives with the introduction of some new products and new channels, such as automotive financing, point of sale. Those existing products and channels are, in a lot of cases, just early stage in their development. And so when you now have this more diversified business, your sources of acquisition and your sources for growth compared to a year ago compared to the year before that are much greater. And so it's simply a case of the natural maturation cycle of more products and more channels. It's very similar to, you know, 10 years ago, a major driver of growth was just simply the maturation of the existing branch network. As you open a new branch and That branch goes through a five- or ten-year period where simply the existing branch in that existing market is going to continue to grow as it creates more brand awareness. So the largest driver continues to just be the execution of the existing business initiatives and existing products and channels. The second probably greatest contributor at the moment is it's being accelerated by the macro conditions. Those macro conditions, as I say, have really two prongs. One, less competitive tension from primarily subscale companies that we talked about. And two, prime lenders that sit above us in the credit spectrum tightening credit and pushing some near prime borrowers into our product categories. So think of it as primary drivers are the business initiatives, and then the macro conditions are simply acting as a further accelerator. And I think as we've talked about before, when we provide our loan forecasts and we provide a range, these are the kinds of things that we account for when we talk about the upper and the lower bounds. We talk about how if things go generally according to plan, we would expect that we would travel roughly at the midpoint of any given range of any given metric. But if things go well and there are some additional factors at play that are either headwinds or tailwinds, that would be the kind of thing that would push us to the upper or lower bound. This is a great example of that. The macro conditions, as it relates to demand and growth, are a tailwind, and hence why we're now projecting to finish at or above the high end of the growth range. So those would be the primary ways to think about what's driving long-term.
spk13: Okay, that's helpful. Good to know. If I could just speak in a third on the efficiency ratio, we did see a 300 base point improvement year over year, You know, tracing that back, you know, at 31.2% now, that was 40% plus just two years ago. I'm just wondering where you see that ratio sort of heading over the next two to three years. Like, are we going to get to a point where it plateaus or, you know, obviously the platform is highly scalable, but just curious your thoughts of how that trends over the next few years.
spk10: So I think we can confidently say, based on the way we've communicated the operating margin expansion, that you have at least a couple hundred basis points of additional efficiencies to be gained each year going forward. I think as that OpEx ratio gets down into the mid-20s, you start to get closer to the point where you're operating almost at your variable contribution margin. And you're at a meaningful level of scale where you will continue to get some level of leverage, but the rate of improvement will slow. We're in that period right now where the business is experiencing sort of its maximum benefit of operating leverage because we've spent the last 15 years building out what is now a fairly mature branch network, building out what is now a fairly mature corporate office, building out what is now a fairly mature technology infrastructure. And so we're really at that stage, that ideal stage in a company where the majority of the investments you need to make in your business platform and your distribution network have already been invested, and therefore all of the incremental growth. comes at a high margin and is quite accretive. And that's what's just driving that reduction in OPEX ratio. So you should expect that for the next few years, there's still 100, 200 plus basis points of annual improvement in the efficiency ratio. And then as you get maybe three or four years out, depending on the rate of growth of the business, that rate of improvement might start to slow a little bit as we inch closer to more meaningful scales.
spk06: Okay, great. Thanks very much for taking my questions.
spk22: As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touch-tone telephone. Our next question comes from the line of Steven Boland with Raymond James.
spk23: Uh, hi, can you guys hear me?
spk19: We can.
spk23: Okay.
spk19: Thanks. Just, just one question guys. Um, you know, the, the growth in, in auto financing and the point of sale, you're, you know, continue to, you know, add dealers, add merchants. What, what's the value? I mean, auto financing, very competitive access, Rivco, some of the, like you said, some of the bank dealers, uh, you know, what's the value add that you're bringing to the dealers, especially on auto finance that some of the more established players, you know, have not, you know, been able to do, you know, I presume you're taking market share there as opposed to, you know, adding dealers that don't have a financing option. So I'm just, I'm just wondering what, what you're doing better as a technology service combination. Maybe you could just explain that please.
spk10: Yeah, so I think we've talked a little bit about this before. I would break it down into five very specific and simple things. And I think we believe you have to do all five of them well at some level. And if you can do all five very well, then you can acquire and steal market share and grow a very good business. First of all, your approval rate has to be highly competitive. A dealer has to believe that when they submit an application for credit, that based on your credit and underwriting algorithm, there's a good chance their borrowers are going to get qualified or you just won't receive an application. to the APR you offer, the customer has to be competitive. If the dealer does not feel like the interest rate can be competitively offered to the customer and that they're going to get a lower APR elsewhere, they're not going to present your offer. The speed of that credit decision and the capability of your technology to turn the deal around quickly is going to be a meaningful factor because it's a sales environment and they want to try and get the sales closed. Fourth, you have to have great merchant support. They have to be able to pick up the phone and call someone and get a hold of them during all operating hours during the week and on the weekend and know that if they've got questions and they've got problems working on a potential customer loan, they can get a hold of someone that can help them and get through the situation. And then fifth, you have to have a competitive dealer reserve. Lender financing is a key part of the economics of most used car retailers. The average used car retail profit comprises of the markup of the vehicle, which is about 50% of the gross margin. And then one quarter comes from the additional sale of additional products, such as warranties. And one quarter comes from the commission that they earn from a lender through financing. So that financing commission has to be competitive in the market as well. So I think we've obviously leveraged 15 years of experience through LendCare, building the PowerSports network, knowing how to assess, onboard, and support merchants. We have benefited from 15 plus years of underwriting the non-prime borrower and understanding how to manage and think about credit risk. And all of that has contributed to the success. But as it relates to the specific things you have to do in that channel, in that product, to be successful and win market share, if you can do those five things and execute them all very well, which is much more difficult to do than to say, then you can have a great business there. And we've really tried to do all of those things well, and so far it's worked to our advantage. I would also highlight that and we've talked about this before, automotive financing is the single largest product category in that $200 billion non-prime credit market at $60 billion. So you're also talking about a market that is 20%, 30% larger than the installment loan market where all of our other products all operate combined within that market. So just inherently given the size of the market, your opportunity is even that much greater.
spk27: Okay, that's all I had. Thanks, guys.
spk22: That concludes today's question and answer session. I'd like to turn the call back to Jason Mullins for closing remarks.
spk10: Great, thank you. Well, since there are no more questions, again, we just want to thank everyone for participating in the conference call. We look forward to updating everyone next quarter. Have a fantastic rest of your day. Thank you.
spk22: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer