goeasy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 8 speakers on the call.

Operator

Welcome to the goeasy Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer You will then hear an automated message advising your hand is raised. 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.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. My name is Farhan Ali Khan, the company's Senior Vice President and Chief Corporate Development Officer, And thank you for joining us to discuss Goeasy Limited's results for the Q2 ended June 30, 2023. The news release, which was issued yesterday After the close of market is available on GlobeNewswire and on the Goeasy website. Today, Jason Mullins, Goeasy's President and Chief Executive Officer, will review the results The Q2 and provide an outlook to the business. Hallakuri, the company's Chief Financial Officer, will also provide an overview of our capital and liquidity position And Jason Nattel, the company's Chief Risk Officer is also on the call.

Speaker 1

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 is being webcast through the company's investor website and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our Investors site. All shareholders, 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 However, we would ask that they do not quote callers unless an individual has granted their consent.

Speaker 1

Today's discussion may contain forward looking statements. I'm not going to read the full statement, but will direct you to caution regarding the forward looking statements, including the MD and A. I will now turn the call over to Jason Mullins.

Speaker 2

Thanks, Tar Heel. Good morning, everyone, and thank you for joining the call today. The Q2 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.

Speaker 2

As inflation affects operating expenses, wage growth affects salaries, higher borrowing costs compresses margins As 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. Goeasy 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.

Speaker 2

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 Dentists, A national network of supported dental practices that provide a wide range of dental care to more than 800,000 Canadian patients And over 2,500,000 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 preapproved lending campaigns to existing and former borrowers, We choose our most advanced and predictive scoring models to assess risk.

Speaker 2

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 advanced and new customers in more than 5 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 667,000,000 up 6% over the Q2 of 2022.

Speaker 2

Organic loan growth was above our forecast at 210,000,000 At quarter end, our portfolio finished at $3,200,000,000 up 35% from the prior year. We also continue to execute on our strategy to pass out 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%.

Speaker 2

Total revenue in the quarter was a record $303,000,000 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, 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 2nd 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.

Speaker 2

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 Q2 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 the 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 Q2 of last year.

Speaker 2

After adjusting for the non recurring items, We reported record adjusted operating income of $114,000,000 an increase of 28.5 percent or the $89,000,000 in the Q2 of 2022. Adjusted operating margin for the Q2 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 $56,000,000 up 20% from the same period of 2022. Adjusted diluted earnings per share Was $3.28 up 16% from $2.83 in the Q2 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.

Speaker 2

Thanks, Jason. During the quarter, we successfully extended the maturity

Speaker 3

of our existing $1,400,000,000 evolving securitization warehouse 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 1 month CEDAR plus 195 basis points. Based on the current 1 month CEDAR rate of 5.37 As of August 4, 2023, the interest rate on new draws would be 7.32%. It's 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.

Speaker 3

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 Generate meaningful levels of free cash flow from operations. For the net growth in the loan portfolio, free cash flow in the quarter was 76,500,000 up 34% from $56,900,000 in the Q2 of 2022. Based on

Speaker 1

the cash at hand at the end

Speaker 3

of the quarter At the borrowing capacity under existing credit facilities, we had nearly $900,000,000 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 sufficient to fund our organic growth forecast. I'll now pass it back over to Jason

Speaker 2

to talk about our outlook. Thanks, Al. With the 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 $3,600,000,000 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 $205,000,000 $230,000,000 As we continue to optimize our pricing, we also expect to maintain the current total annualized portfolio yield, which should finish between 34.75 percent 35.75 percent. We also continue to expect resilient and stable credit performance with the annualized net charge off rate expected to decline to between 8.5% 9.5% during the 3rd quarter.

Speaker 2

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 All of our credit products across our brands 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.

Speaker 2

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 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 returns since 2,001 of all other financial stocks on Bay Street and Wall Street, we are still just a small fraction of the large and underserved $200,000,000,000 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.

Speaker 2

With those comments complete, we'll now open the call for any questions.

Operator

Please stand by while we compile the Q and A roster. Our first question comes from the line of Etienne Ricard with BMO Capital Markets.

Speaker 4

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?

Speaker 2

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 But 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 officially 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.

Speaker 4

Okay. One metric that stood out to me from the quarter is that new customers accounted for 71% So that is significantly above your 60% long term average. So I guess first part of my question is,

Speaker 1

Is there

Speaker 4

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?

Speaker 2

Yes. 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.

Speaker 2

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, 2 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 of its of a good quality nature.

Speaker 5

Great.

Speaker 4

Thank you very much.

Speaker 6

Thanks, Justin.

Operator

Our next question comes from the line of Gary Ho with Desjardins Capital Markets.

Speaker 7

Hello, am I on?

Speaker 2

Yes. Hey, Gary.

Speaker 7

Hey, guys. Sorry, I got cut off there. Sorry, just first question, maybe going back to your 3 year outlook, I think in those numbers, you guys budgeted it in Jan 1, 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%?

Speaker 2

Yes. So what we note at this moment is that they will be publishing a new set of regulations By the end of the year, 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.

Speaker 2

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 2024 We'll 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.

Speaker 2

And then as we get more information, we'll be able to update everyone accordingly.

Speaker 7

Okay. 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 comment on the pricing environment overall, what are your competitors doing?

Speaker 2

Yes. 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% Great 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 production 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. But as I noted earlier, our expectation for the total portfolio yield in the Coming quarter and perhaps even beyond is to be quite stable. We're not, as a result, expecting much decline.

Speaker 2

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, that's taking advantage of the circumstances. All lenders, banks included, We're 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

Speaker 3

of the business.

Speaker 7

And what would you say would be the cumulative price increase so far? It'd be greater than 200, is it like 250, 300 so far?

Speaker 2

Well, I wouldn't think of it that way because we are constantly adjusting pricing in 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 is 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.

Speaker 2

So again, I would think of our current outlook that we've provided as being a little bit more Not conservative and reasonable and may have some further upside.

Speaker 7

Okay. Makes sense. If I can just sneak one more in, Jason, Good results here, something very robust demand. With the rebound in share price, would you consider an equity raise to help grow the I know last time when you did the smaller equity raise, you mentioned the net debt to adjustable Tangible equity calculation, the credit agency look at, maybe give us an update where that stands?

Speaker 2

Yes. 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 delever 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.

Speaker 2

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.

Speaker 7

Okay. Makes sense. Those are my questions. Thanks very much.

Operator

Our next question comes from the line of Jamie Gloyn with National Bank Financial.

Speaker 2

Hello. Hey, Jim.

Speaker 5

Hi. Okay.

Speaker 4

I wasn't sure if I got through.

Speaker 5

Good morning. First question is on the competitive environment and you called it out in the press release in a couple of other spots about Challenges that many companies in the industry are facing. 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.

Speaker 2

Yes. 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 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, powersports lending, Where if they don't have a high degree of operating leverage because they haven't achieved scale and they don't have Deep extensive list of bank relationships versus 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.

Speaker 2

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 An environment like this clearly means a lot. And as we 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.

Speaker 2

That would be the likes of Fairstone. That would be some of the non prime divisions 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 go easy.

Speaker 5

Okay, great. And with the stress, I guess, the question 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, there's 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 and I'm Thank you.

Speaker 5

Not in Canada specifically.

Speaker 2

Yes. 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 So, months 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.

Speaker 2

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.

Speaker 2

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 open and focusing on executing our Canadian operation as we have been.

Speaker 5

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 Your history is typically to sort of like test and learn and move slowly on these On some of these initiatives, I'm just wondering like where are we in that process of potentially raising rates? Is there opportunity to continue pushing that 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?

Speaker 5

Thanks.

Speaker 2

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. Optimizing the pricing Any given loan product at any given credit tier is really a never ending process because the environment is always changing, the competitive landscape is always changing.

Speaker 2

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 is 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 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 take these tests and learn from them.

Speaker 6

Great. Thank you.

Operator

Our next question comes from the line of Marcel MacLean with TD Securities.

Speaker 7

Good morning. Hello.

Speaker 6

So. 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?

Speaker 6

Like are these Customers that are brand new Goeasy or could it be a cross sell customer that falls into that bucket or if they had a loan previously with Goeasy And now are back for a new one after having previously paid off the loan. The reason I'm asking this is New customers are typically the riskiest of customers and the allowance ratio to stick down. So I'm just trying to I didn't really want to understand how that metric is calculated.

Speaker 2

Yes. So new customers are Either brand new individuals we've never served before or there are 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.

Speaker 2

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 To warn 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've had.

Speaker 2

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 For 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. Okay, understood.

Speaker 6

Okay. Then secondly, With the strong demand that we've been seeing here like record of applications, record new customers, record originations, all that, Now you've listed out a number of factors

Speaker 1

that have sort of contributed to that.

Speaker 6

I think more customers are falling into the subprime bucket, maybe being declined from other Places, maybe some pandemic savings are 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 1 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.

Speaker 2

No, I think the 2 greatest drivers, which were kind of the 2 That I touched on in some of the prepared remarks would be 1, 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 core 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 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 5 or 10 year period where simply the Existing branch in that existing market is going to continue to grow as it creates more brand awareness.

Speaker 2

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 It's being accelerated by the macro conditions. Those macro conditions, as I say, have really 2 prongs. 1, Less competitive tension from primarily subscale companies that we talked about and 2, 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.

Speaker 2

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 bound. 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.

Speaker 2

The macro conditions as it relates to demand and growth are a tailwinds 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

Speaker 6

Okay. That's helpful. Good to know. If I could

Speaker 1

just sneak in a third on

Speaker 6

the efficiency ratio, We did see a 300 basis point improvement year over year. Tracing that back, at 31.2% now, that was 40% plus just 2 years ago. Just wondering where you see that ratio sort of heading over the next 2 to 3 years? Like are we going to get to a point where Replaced holes

Speaker 2

are obviously the platform is highly scalable, but

Speaker 6

just curious your thoughts of how that trends over the next few years.

Speaker 2

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 of 100 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 the 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 It's quite accretive and that's what's just driving that reduction in OpEx ratio.

Speaker 2

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 3 or 4 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 scale.

Speaker 6

Okay, great. Thanks very much

Speaker 1

for taking my questions.

Operator

Our next question comes from the line of Stephen Boland with Raymond James.

Speaker 6

Hi. Can you guys hear me?

Speaker 2

We can. Hi, Steven.

Speaker 6

Okay. Thanks. Just one question, guys. The growth in auto financing and the point of sale, you continue to add dealers, add merchants. What's the value I mean, auto financing, very competitive, AxSys, Ripco, some of the like you said, some of the bank dealers.

Speaker 6

What's the value add that you're bringing to the dealers, especially on auto finance that some of the more established players 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 as a technology service combination. Maybe you could just explain that please?

Speaker 2

Yes. So I think we've talked a little bit about this before. We kind of I would break it down into 5 Very specific and simple things and I think we believe you have to do all 5 of them Well, at some level and if you can do 5 very well, then you can acquire and steal market share And grow a very good business. First of all, your approval rate, it 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 an application to the APR you offer, so that customer has to be competitive.

Speaker 2

If the dealer does not feel like the interest rates 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 It's going to be a meaningful factor because it's a sales environment and they want to try and get the sale closed. 4th, 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.

Speaker 2

I 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 5th, you have to have a competitor 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 1 quarter comes from the additional sale of additional products such as warranties and 1 quarter comes from the commission that they earn from a lender through financing.

Speaker 2

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've 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 200,000,000,000 Nonprime credit market at $60,000,000,000 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.

Speaker 2

So just inherently given the size of the market, your opportunity is even that much greater.

Speaker 6

Okay. That's all I had. Thanks guys.

Operator

That concludes today's question and answer session. I'd like to turn the call back to Jason Mullins for closing remarks.

Speaker 2

Great. Thank you. Well, since there are no more questions, again, we just want to thank everyone for participating in the conference call. And we look forward to updating everyone next quarter. Have a fantastic

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Earnings Conference Call
goeasy Q2 2023
00:00 / 00:00