Propel Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone. Welcome to the Propel Holdings Third Quarter 2024 Financial Results Conference Call. As a reminder, this call is being recorded. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

Instructions will be provided at that time for research analysts to queue up for questions. I will now turn the call over to Devin Galani, PROPEL Senior Director, Capital Markets and Investor Relations. Please go ahead, Devin.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us today. Propel's Q3 2024 financial results were released yesterday after market close. The press release, financial statements and MD and A are available on SEDAR Plus as well as on the company's website, propelholdings.com. Before we begin, I would like to remind all participants that our statements and comments today may include forward looking statements within the meaning of applicable securities laws.

Speaker 1

The risks and considerations regarding forward looking statements can be found in our Q3, 2024 ND and A and Annual Information Form for the year ended December 31, 2023, both of which are available on our MCR Plus. Additionally, during the call, we may refer to non IFRS measures. Participants are advised to review the section entitled Non IFRS Financial Measures and Industry Metrics in the company's Q3 2024 ND and A for definitions of our non IFRS measures and the reconciliation of these measures to the most comparable IFRS measure. Lastly, all dollar amounts referenced during the call are in U. S.

Speaker 1

Dollars unless otherwise noted. I am joined on the call today by Clive Kinross, Founder and Chief Executive Officer and Sheldon Svetakovsky, Founder and Chief Financial Officer. Clive will provide an update on our existing operations and an overview of our Q3 results before Sheldon covers our financials and the recently announced acquisition of QuickMarket in more detail. Before we open the call up to questions, Clive will provide an update on PROPEL's strategy and growth initiatives for the remainder of 2024 and into 2025. With that, I will now pass the call over to Clive.

Speaker 2

Thank you, Devin, and welcome everybody to our Q3 conference call. This has been an extremely busy quarter for PROPEL and one that has seen us achieve big milestones and record results. It has never been a more exciting time to be at PROPEL. We'll get to what is ahead of us, but first, I want to speak about our existing business. Building on our strong first half, we achieved another record another quarter of record results, including record total originations funded revenue and ending CLAP.

Speaker 2

We continue to experience strong demand, leading to record total originations funded of $150,000,000 in Q3, which represents an increase of 36% over Q3 2023. We and our bank partners were able to originate record customer volume, while maintaining a prudent approach to underwriting. Our and our bank partners' ability to extend credit to more consumers, while maintaining strong credit performance is largely attributable to our AI powered technology. In Q3, we also had record revenue of $117,200,000 up 41% from Q3 2023, net income of $10,500,000 up 70% from last year and adjusted net income of $14,100,000 up 66% from last year. Our net income would have been even higher if it hadn't been adversely impacted by one time expenses of $2,500,000 from the QuickMarket transaction, which Sheldon will cover in more detail.

Speaker 2

We had strong credit performance in line with expectations and typical seasonality. Aided by our best in class AI underwriting capabilities, our provision expense as a percentage of revenue remained at 52% in Q3 from last year and our net charge offs as a percentage of CLab decreased to 11% in Q3 2024 from 12% in Q3 2023, driven by strong credit performance. Looking at the current macroeconomic backdrop, the U. S. Continues to experience strong employment with unemployment remaining at 4.1% in October and GDP growing at 2.8% and consumer spending accelerating to 3.7% in Q3.

Speaker 2

We are further encouraged by the cooling of inflation in the U. S. Dropping to 2.4% over the same period. These data points along with our own performance reaffirms our view that the U. S.

Speaker 2

Consumer segment is resilient. Meanwhile, in Canada, we continue to see differences in the broader economy compared to the U. S. Canada's unemployment rate is higher than the U. S.

Speaker 2

At 6.5%. Furthermore, we will observe that Canadian consumers have reduced their spending as demonstrated by muted retail sales in August. In response, the Bank of Canada has been more aggressive in its rate cuts, having cut the interest rate 4 times in 2024 to 3.75%. With inflation now below the Bank of Canada's target rate and interest rates already declining, we expect Canadian consumers will see some relief in the coming months. With respect to the Canadian regulatory environment, we anticipate the reduction to the maximum allowable rate of interest will come into effect January 1, 2025.

Speaker 2

In advance of the regulatory change, we have continued optimizing and refining our AR models for the sub-thirty 5 percent ACR market. Looking ahead, we will continue to grow our Canadian business. Last week, we officially launched our new partnership with coho, which will see us act as an embedded lender to them, providing the technology, underwriting, servicing and funding of lines of credits to qualified coho customers. United by a common mission of expanding financial access, this partnership between 2 of Canada's leading fintechs will bring more credit options to consumers overlooked by traditional financial institutions. This is a new partnership model for us and one that we believe represents a new avenue for growth.

Speaker 2

We are actively exploring additional embedded lending partnerships in Canada and the U. S. Turning to lending as a service, we have been operational for just over a year now. Since the launch, we have generated consistent growth by adding more states and purchases to the program. While onboarding these purchases has been slower than we originally contemplated, We have more purchases set to join and existing purchases are expanding their commitments, which positions us well for strong growth in 2025.

Speaker 2

As prudent operators getting this program rights and ensuring that strong operational performance is critical. Next on our journey to becoming a global leader in building financial opportunity, we made a significant step forward with our pending acquisition of QuickMarkets. A leading U. K. FinTech lender, QuidMarkets is focused on the 20,000,000 underserved consumers in the U.

Speaker 2

K. The $71,000,000 acquisition is expected to be immediately accretive to our 2024 and 2025 adjusted EPS, excluding transaction costs and before any synergies. The all cash transaction is being financed by our recent board deal equity offering, which raised approximately CAD115 1,000,000 in gross proceeds and closed on October 3. This was our first time raising equity since going public 3 years ago and the Board deal was 2 times oversubscribed with several leading institutional investors participating. We continue to expect the QuickMarket transaction to close no later than Q1 2025.

Speaker 2

Moving forward, we expect the growth at QuickMarket to be further enhanced by leveraging Appel's AI powered technology, financial and operational expertise and capital resources. Sheldon just returned from the UK and will speak to his experience with the QuickMarket team shortly. I've spoken previously about the 3 criteria we have to meet before we would consider an acquisition. 1st, it needed to be in a favorable jurisdiction. 2nd, it needed to be a cultural fit.

Speaker 2

And third, it had to be financially accretive. This transaction has checked all three boxes and we are very excited about what it will deliver for our overall business. We've always had global ambitions for Propel and to see us into the UK and become a truly global company is exceptionally exciting. Lastly, given our continued strong results and solid capitalization, I'm pleased to announce that our Board of Directors has approved another increase to our dividend from $0.56 per share to $0.60 per share, that's in Canadian dollars by the way, on an annualized basis, representing a 7% increase to our Q3 dividends. We have increased our dividend every quarter this year and this is our 6th dividend increase since the beginning of 2023.

Speaker 2

With that, I'll now pass the call over to Shelton.

Speaker 3

Thank you, Clive, and good morning, everyone. We are very excited about the strategic initiatives and record results achieved during the quarter and the growth trajectory ahead of us. Consistent with the typical uptick in seasonal demand we experienced in Q3, we continue to observe strong consumer demand, which led to record originations. We experienced new customer originations that were consistent with Q2 and record originations from return and existing customers. Combined, the strong demand from both customer segments drove the record total originations funded of $150,000,000 leading to the 44% year over year growth in ending CLab, which ended Q3 at a record $432,000,000 Consistent with our strategy in recent quarters and given the ongoing strong credit performance in the portfolio, we and our bank partners continued to originate a high proportion of new customers through both the CreditFresh and MoneyKey brands and continue to expand for them.

Speaker 3

We experienced strong growth from our Canadian operations with Fora generating record revenues in Q3. Fora's revenue in C Lab grew significantly year over year and also on a sequential basis from Q2. Cora's record ending CLAB grew by 21% from Q2 2024. In our lending as a service program, we continue to fine tune and optimize loan performance and other KPIs. As Clive mentioned, we have additional purchasers set to come on board and existing purchasers are expanding their commitments, positioning us well for strong growth next year.

Speaker 3

Propel's overall record loans and advances receivable balance and ending C Lab drove record revenues of $117,200,000 for Q3, representing 41% growth over Q3 last year. The annualized revenue yield was 114% in Q3, a decrease from 116% in the prior year. The decrease was driven by several factors. Firstly, the record originations during Q3 from returning and existing customers who have typically qualified and or have graduated to lower cost products than new customers as a result of positive repayment histories. Secondly, the continued aging of the loan portfolio and associated graduation as well as the continued expansion of variable pricing functionality with our bank partners.

Speaker 3

And third, the ongoing expansion of ForRUP, which offers lower cost of credit than the MoneyKey and CreditFresh products. Turning to provisioning and charge offs. The provision for loan losses and other liabilities as a percentage of revenue remained the same at 52% in Q3 from Q3 last year. With respect to net charge offs, our net charge offs as a percentage of CLAB decreased to 11% this quarter from 12% in Q3 last year. This decrease is a result of firstly, the ongoing strong credit performance driven by the effectiveness of our proprietary AI powered underwriting and our success in continuing to move up the credit spectrum.

Speaker 3

And secondly, the continued consumer resiliency in addition to wage growth keeping up with inflation. The 52% in provision percentage and the 11% net charge offs as a percentage of CLAP are both well within our target range for the loan portfolio and we believe we'll continue generating strong unit economics and drive expanding growth and profitability going forward. We're very proud of our strong credit performance. We believe that the ability to grow our CLAB revenue and the overall origination significantly during the quarter, while maintaining our provision percentage and decreasing the net charge offs is a testament to our prudent and effective underwriting, our application of AI capabilities and our world class technology and process. Together, these capabilities with our exceptional team are leading to the high credit quality and excellent results.

Speaker 3

In Q3 2024, our net income increased to $10,500,000 from $6,200,000 in Q3 last year, representing 70% growth, while adjusted net income increased to $14,100,000 from $8,500,000 last year, representing 66% growth. Our net income year to date grew to $34,800,000 and adjusted net income increased to $45,000,000 both representing records for a 9 month period. On an earnings per share basis, our diluted EPS increased to $0.28 in Q3 from $0.17 in Q3 last year, while our diluted adjusted EPS grew to $0.38 in Q3 from $0.23 in Q3 last year. Our diluted EPS year to date grew to $0.93 and diluted adjusted EPS year to date increased to $1.21 both representing records for a 9 month period. As a reminder, all of these figures are expressed in U.

Speaker 3

S. Dollars. On a return on equity basis, our annualized ROE for Q3 was 34%, up from 27% in Q3 last year and our annualized adjusted ROE was 45% in Q3, an increase from 37% last year. Both metrics demonstrate strong returns to our investors as well as our ability to efficiently utilize shareholders' capital. The growth in our earnings is primarily a result of the overall growth of the business and inherent operating leverage in our business model and ongoing effect of cost management.

Speaker 3

In relation to this point in particular, our operating expenses, not including acquisition and data expenses, decreased to 15% of revenue for the quarter as compared to 16% in Q3 last year. We expect that the growth in our loan book and revenue will continue to outpace the growth in our operating expenditures, including salaries, infrastructure and other, thereby leading to ongoing margin expansion. With respect to acquisition and data costs, although new customer originations continue to grow meaningfully year over year, acquisition and data expenses decreased as a percentage of revenue to 11.7% in Q3 from 12.8% in Q3 last year. The ability to significantly expand our new customer originations while decreasing the expense as a percentage of revenue demonstrates the continued efficient management and overall operating leverage of the company. Our cost per funded origination of $0.091 in Q3 this year declined from 9.6% last year.

Speaker 3

However, our cost per new customer funded origination increased to $0.20 for Q3 from $0.19 in Q3 last year. This level of spend per dollar funded is well within the acceptable range to achieve targeted profitability during a period of significant growth. Overall, our net income margin increased to 9% in Q3 from 7% in Q3 last year and the adjusted net income margin increased to 12% in Q3 this year from 10% in Q3 last year. On a year to date basis, our net income margin increased to 11% in 2024 from 9% in 2023 and the adjusted net income margin increased to 14% in 2024 from 12% in 2023. Our net income and margins were adversely impacted by certain one time transaction expenses relating to the QuickMarket acquisition.

Speaker 3

The total amount was approximately $2,500,000 in this quarter with $400,000 including in salaries, wages and benefits and the remaining $2,100,000 included in G and A. The $2,100,000 in G and A mostly related to 3rd party professional fees we incurred as part of the diligence process, including financial, accounting, legal and regulatory. Excluding these one time expenses would have resulted in a net income and net income margin in Q3 of $12,400,000 11% respectively. Furthermore, our Q3 twenty twenty four diluted EPS and return on equity would have been $0.33 for the quarter and 40% respectively without these one time costs. Our margins are also starting to benefit from the decline in interest rates after 2 years of an elevated interest rate environment.

Speaker 3

Our overall cost of debt, which includes interest and other credit facility associated fees decreased to 13.4% in Q3 from 13.7% in the prior year. Given the floating nature of our credit facilities, we expect that the anticipated downward trajectory in interest rates on both sides of the border will provide a tailwind for our profitability. Turning to Propel's financial position. At the end of Q3, we remain well capitalized with a strong liquidity position to continue executing on our growth plan. As discussed on our last earnings call, our debt capacity was enhanced in July with the upsizing of our CreditFresh facility, increasing the capacity from $250,000,000 to $330,000,000 while also including new banks for the syndicate.

Speaker 3

As of September 30, the business had approximately $117,000,000 of undrawn capacity under our various credit facility. Our debt to equity ratio was 2x at the end of Q3 remaining at the same level as at the beginning of the year even with the significant growth in ending CLAB year to date. This is a result of the continued strong earnings and operating cash flow generated during the quarter. As Clive mentioned earlier, we also recently completed CAD115 million bought deal equity offering in connection with the pending US71 $1,000,000 acquisition of the Quid Market. Following the closing of the QuidMarket transaction, we expect our debt to equity ratio to decrease from the 2 times at the end of Q3.

Speaker 3

We believe that our strong financial position bolstered by additional lenders, capacity and the recent equity raise as well as our significant cash flow generating capability will be able to support the continued expansion of our existing programs, additional growth initiatives and to support our increased dividend. Also wanted to provide an update on the Quid Market transaction. A few weeks ago, I and several others took the opportunity to visit Nottingham and welcome the Quid Market team to Propel in person. While we had previously focused our time with senior management, this was the first opportunity after announcement we could meet the full team. Having spent quality time getting to know the broader team and many individuals, I came away feeling more enthusiastic than ever and feeling that we had found our cultural match.

Speaker 3

The Quid market team is also looking forward to be a part of PROPEL, share best practices, leverage our expertise in technology and join what is becoming a global leader. Together, we outlined a multi phased integration plan that will commence once the transaction is closed. Initially, we will focus on general integration and on some certain areas of infrastructure. Afterwards, we will start implementing a number of identified business initiatives that we expect will have a meaningful impact on both the top and bottom line growth at Quid Market starting in 2025. Integrating the UK operation and laying the foundation to grow Quid Market into the UK's market leader will be a key focus as we head into 2025.

Speaker 3

Lastly, before I turn the call back to Clive, I want to take a moment to congratulate my mentor and friend Clive on winning the Ernst and Young Entrepreneur of the Year for Ontario. My fellow co founders, John, Noah and I along with Gary were lucky enough to be able to cheer Clive on in person when he won his award. As Clive said, there are good and bad days in an entrepreneur's life and now is definitely a great day for all of us. Clive has been our leader for 13 years and for me personally somebody that I've learned a tremendous amount from deeply respect and try to emulate. We look forward to cheering him on on November 26 when the national winner will be announced.

Speaker 3

I will now pass the call back over to Clive.

Speaker 2

That's actually a lot to take in before I give my closing remarks over here. I think the first thing, Sheldon, that occurs to me is it's so nice when the student becomes the master, you know. So just hearing those comments was really, really cool. But in so many respects, you've not only surpassed kind of my expectation, but surpassed me as well. That doesn't just apply to you.

Speaker 2

It applies to our whole team. I remember when the founders that we were all together really, really grounding away in those early years, we continue to ground away today. Younger guys, lower John in the late 20s, you in your early 30s and to see the way you've all grown into world class executives today and surpassed any of my expectations and anything that I'm capable of in your respective areas has been a very, very gratifying thing. So all of that is unscripted by the way and thank you so much for those words. They mean a lot.

Speaker 2

So with that, I'm now back to the more scripted part of the discussion over here. And it really has been an amazing journey we've been on together. 2024 has been a record year and we're already deep into planning for 2025 and beyond. We've seen some significant we have some significant initiatives still ahead and many milestones on our journey to become a global leader. Well into Q4, we continue to observe strong credit performance and record levels of demand across our portfolio.

Speaker 2

In the U. S, we have faced a dynamic macro environment over the past several years. But based on recent Q3 GDP and September retail sales, as well as our own performance, we are encouraged that the economy and consumers continue to be resilient. Furthermore, inflation continues to decline and unemployment remains near record lows. Given this, we and our bank partners anticipate the strong demand and credit performance to continue through the rest of the year.

Speaker 2

The U. S. Remains a critical market for us. We believe there are many more years of profitable growth ahead. We will continue to adapt our products and partnership models to broaden our addressable markets and bring best in class products to who underserved consumers.

Speaker 2

In Canada, we are more determined than ever to become the leading fintech lending business in our home markets. Our new partnership with coho and our embedded lending model offer an additional avenue of growth. We also believe open banking and a younger population will support Canada's FinTech adoption rate moving closer to other FinTech leaders like the U. S. And the UK.

Speaker 2

Looking at our lending as a service program, as mentioned, we continue to fine tune and optimize loan performance and other KPIs as we onboard new purchases and look to expand into new states. We are well positioned for growth in 2025. Turning to quit market in the U. K. And Fiona, Tom, Ivana and others that I've seen on the call today, welcome.

Speaker 2

Nice to have you guys listening to our earnings call over here. And what you know and what we're telling everybody else, our investors and analysts on the call today, there really is a tremendous opportunity in the market with 20,000,000 underserved consumers in the UK. With a track record of profitability, this acquisition will be immediately accretive. Sheldon is leading the integration and the team have identified several initiatives to leverage Propel's experience and resources and expand QuickMarkets' market penetration even more. The QuickMarkets team in the UK are experienced and savvy operators and together we are going to build UK's leading Fintech lender.

Speaker 2

As we continue to plan our global expansion, QuickMarket is a critical next step. We're going to take the time to ensure that we integrate the business successfully and exceed all expectations. This quarter has also been award winning. In late September, we placed on the Globe and Mail report on businesses top growing companies list, which recognizes the fastest growing companies in Canada. We placed 128 out of 4 17 companies with 3 year revenue growth rate of 3 31 percent.

Speaker 2

And I'm always reminded that our growth has all been organic to date. I was also humbled to be honored as the EMI Propereneur of the Year Award for Ontario. It's an incredible recognition for the team and the business we've built. As Sheldon said, my co founders himself, Noah and John, along with Gary came to the event with me. We've experienced so many of the highs and lows of building a business together.

Speaker 2

So when my name was called out as the winner, it was an incredibly surreal experience obviously, but it was also fitting that they were there and the first ones to give me a big hug. It was very, very emotional moments, certainly moment in my life. That's for certain. In my speech, I reflected on about the early mornings, late nights and the sheer amount of hard work that come with building a business and by the way, continue to come with building a business. We have a saying at Propel that the only way to eat an elephant is one bite at a time.

Speaker 2

Each bite has been a lot of work, but we are driven by exceeding expectations for customers, employees, partners and investors. Building PROPEL has always been a team effort and this award is a team award. I look forward to competing in the national competition later in November and representing the entire team. Finally, yesterday morning, we announced as one of the enterprise 15 in the Deloitte FAST 50 ranking in Canada, recognizing the fastest growing technology companies in Canada. Sheldon and I opened up the TSX yesterday along with our other award winners.

Speaker 2

It was an amazing group of tech entrepreneurs and we are honored to be on the list. It's been a whirlwind fall for Propel. And while we have celebrated, we have also gone right back to work. When our acquisition of QuickMarket was announced, the team gathered, had a quick champagne toast and went right back to work. That is who the team is.

Speaker 2

We don't rest on our laurels. We work hard and we stay humble. We are focused now as we were when we launched PROPEL 13 years ago and we are as excited as ever about the future. One of my questions the judge has asked me is what keeps me going every day. My answer was simple.

Speaker 2

It's 2 things. First, it's coming in every day and getting to lead this incredibly talented team. As an entrepreneur, one of the best parts of the job is being able to build a world class team who are aligned in our values, in our drive and in our culture. This is the smartest and most driven team I've ever had the opportunity to work with. 2nd, it's our commitment to our consumers.

Speaker 2

It is our mission to expand credit access, to help that single mom that can't make rates, to help the new Canadian start to build credits and to graduate them to better rates over time. The more we do this, the more we build financial opportunity for our consumers, while at the same time delivering outstanding results and returns to our investors. As we look into 2025, PROPEL will continue to evolve as an organization. Each year, we learn from the last and set our ambitions even higher. We have been explicit that we want to become a global leader in building opportunities for underserved consumers and we will be.

Speaker 2

Our acquisition is another step. There are 100 of millions of consumers globally who should have access to credits, but have been locked out. We are committed to building a new world of financial opportunity for them. There is so much more to come. That concludes our prepared remarks.

Speaker 2

Operator, you may now open up the line for questions.

Operator

Thank you, ladies and gentlemen. We will now begin the question and answer session. And your first question comes from Matthew Lee from Canaccord. Please go ahead.

Speaker 3

Hey, good morning guys.

Speaker 4

Thanks for taking my question here and congrats on the award. Maybe we start with more on the origination side. So it sounds like you made a bit of a strategic pivot this quarter, focus more on existing and recurring customers and that had an impact on yield, but also seems to benefit credit and profitability. Just want to know if something you saw in the feedback loop that pushed you to make that call or am I reading into that a little too much?

Speaker 3

Yes. Hey, Matt. Thanks a lot for the question. So yes, it's obviously a very dynamic business we operate in. And as we talked to you and told you about many, many times, right, like we have a very fast feedback loop.

Speaker 3

We look at our numbers coming in on a daily basis and we make decisions very quickly and on a weekly basis, we meet with our credit team and look at where the most optimal pockets of volume that we want to lean into are. So when we started the quarter, we saw a very, very strong demand. Typically Q3 from a seasonal perspective, you see an uptick in demand as well as an uptick in delinquency rates and that's fully typical in our seasonal business. But what we saw from existing and return customers was exceptionally strong demand, probably stronger than we anticipated. So we felt that the new customer, the level of new customers, we were very comfortable with maintaining, in a season where we experienced typically a higher uptick in delinquencies.

Speaker 3

So we were very comfortable maintaining the new customer levels and lean into the much stronger demand we saw from existing and returning customers. So on balance, I think we still beat our level of originations forecast. We're ahead on our CLAB balance as we head into Q4 and we were able to do that more a little bit more through return customers than new customers. And holistically and overall for the business, we're very, very comfortable with that position.

Speaker 2

Yes. Matt, let me just layer on to that as well and just say in Q4, existing from Q3, you typically see in Q4 a combination of very strong demand and you see an improving credit typically an improving credit story from a seasonal perspective. So that's certainly what we're seeing in Q4. And as a result of that, you're going to see very strong originations both on the new customer side and the return customer side. And we're able to lean into both of those because of a stronger credit profile in this quarter.

Speaker 4

Right. And then maybe it goes to my second question, which is on cloud guidance. I mean, I think you're still targeting 25% to 35% officially, but you did 44%, I think this quarter year over year. Is it fair chance to say that we end up above the top end of that estimate just given how growth has been accelerating? And obviously, as you mentioned, Q4 is seasonally your strongest quarter?

Speaker 3

Yes. I mean, I think that's a good observation, Matt. I think we're certainly trending towards the high end of the range. It is possible that we may exceed it. But Q4, we're in it now.

Speaker 3

As Clive mentioned, delinquencies are the credit performances has been outstanding now with October behind us. So we're feeling very, very good. And if things continue as they are today, it's possible we may take above the high end of the range, but we're still not prepared to officially state where we'll end.

Speaker 4

Yes, that's fair. And then maybe just one last one for me, a bigger picture question. I know there's been some questions around changing regulatory environment for alternative lenders in the U. S, but maybe it feels like the Republican led government might lend itself to a more friendly regulatory environment. Does that is that correct, 1st of all?

Speaker 4

And second of all, does it change your view on expanding your U. S. Footprint, maybe adding some products to the suite? Just any thoughts there.

Speaker 2

Yes. Let me take that. So first of all, it's come up from time to time the regulatory environment and we always suggest we're in a highly regulated industry and that's something that should always be kept an eye on. But that said, I think my position and our position for the last 13 years has been and maybe more recently, we've operated under several administrations starting with the Obama administration, then the first Trump presidency and then the Biden administration. And we've always maintained that from our perspective, we're able to operate effectively in all of them.

Speaker 2

And candidly doesn't make that big a difference when you're on the ground operating day to day. With that said, I certainly think that a Republican regime tends to be better for financial services in general. There tends to be less regulation. I suspect that the Trump administration can will fire the head of the CFPB, which is Rohit Chopra. And when they do that, obviously, they tend to put their own appointee in and their own appointee does tend to be more call it pro business.

Speaker 2

We could see something similar with the OCC and the FDIC, which will probably lead to more pro business, which will encourage more innovation. And that ultimately is probably good for financial services and FinTechs as a whole. But that said, we don't foresee it to have that big a difference to our business one way or another. We've operated very effectively under the Biden administration and can continue to operate very effectively even if that were to continue on a go forward basis.

Speaker 3

All right. Thanks guys. Good luck at

Speaker 4

the national competition. I'll pass the line.

Speaker 2

Thank you.

Operator

And your next question comes from Adir Kadvi from 8 Capital. Please go ahead.

Speaker 5

Hey, good morning guys. And Clive, let me add my congratulations on the UI Entrepreneur of the Year and we'll definitely be pulling for you at the national competition. So one question I had is just maybe on the last question that was asked that you guys aren't comfortable saying whether you're going to be going above the guidance in terms of the C lab. In the last 2 months of the year here, what would you like to see or what would you need to see in order to kind of make a decision one way or the other to really kind of push on growth or pull back on growth in that core U. S.

Speaker 2

Market? So, first of all, thanks for the warm congratulations. And yes, it's good to know that you're going to be pulling for me. That's nice to hear. Look, at the end of the day, we're managing several things in the business.

Speaker 2

We're obviously one who manage according to our guidance. And as you would expect, we want to try come somewhere towards the top end of the guidance or even exceeded both from a revenue and profitability standpoint. So that's something we constantly need to have our eye on, particularly in line with the fact that we're a public company. We're a private company based on the strong demand and credit performance that we're seeing right now. We will probably lean in even more and grow even faster in Q4 than what otherwise would be the case.

Speaker 2

With that said, we're seeing strong demand, we're seeing strong credit performance as recently as Monday of this week, a few days ago, we broke our record for the daily number of originations, for the daily number of applications. I would tell you that it's relatively early in the year to be breaking these records. With that said, if we're all going to break them, the 1st Monday in November is not particularly unusual, but certainly that was ahead of schedule for us. We're pleased with credit performance, pleased with the demand. So I suspect we will continue to originate volumes and quality of loans commensurate with the high end of our guidance.

Speaker 5

Okay, great. And then maybe on the Canadian business, just in your prepared remarks and in the MD and A, you kind of said that you increased the velocity of loans in Canada, but credit performance is maintaining very strong cadence. Would it be fair to say that your overall credit model now is at a place where you're comfortable? And you obviously have some visibility on what's going on in the broader regulatory environment where you can kind of increase that velocity. I think we're about 1 year past the launch of the Fora platform.

Speaker 5

So just kind of any thoughts on that?

Speaker 2

Yes. It's been a really dynamic year in Canada. If you go back and you reflect on the journey we've come from, there was that rate change last year. We were operating earlier this year thinking that the rate change from 47% to 35% may actually not come into effect. And then I think as we got towards the back end of Q2, early Q3, the build did pass and they said that effective January 1 next year, the 35% will come into effect.

Speaker 2

So really what that means from our perspective is we move more into the sub-thirty 5 percent market sooner rather than later, really so that we could learn underwriting and demand for that product and pivot it away from 47%. All of which is to say when you contrast the volume or the originations in the first half of the year to the back half of the year, the first half of the year was call it sub 47% APR consumers and this time of year is sub 35% APR consumers. So it's slightly different consumers and that's the context that I'll now answer the next part of your question. I can tell you that we continue to see really strong demand. Obviously, this Cohort partnership, which is in its very early days, we think is going to fuel the demand exponentially, if anything.

Speaker 2

So we're really excited to get that going. In addition to that, from an underwriting perspective and from a risk perspective, we continue to refine the model and believe that we absolutely understand how to underwrite the sub-thirty 5 percent APRs. And that's being proven out by the KPIs that we look at each and every day, which not only will generate good profitable loans to our investors, but in addition to that, our trend is towards continuous improvement in that regard as well.

Speaker 5

Okay, excellent. And last question for me before I pass the line. Just on the lending as a service partnership, you mentioned that some of your purchasers consistently see good ROI and some of them are coming back from more. What's the typical amount of time where your purchasers will buy the loans, look at them, get the ROI and then they come back and say, hey, you know what, this has been good performance, we want to buy more. Just any color around that?

Speaker 2

So, Adira, it hasn't been going for particularly long. So again, to the extent that we're answering it, I'm answering it with roughly 12 months to 14 months of history over here. But typically, the purchases have come on with smaller commitments than they obviously upsized to. They've typically started a little bit slower than we've encouraged them to start at just because we understand the market and the model so well. After a month or 2, they see that everything that we told them would happen does happen.

Speaker 2

And if anything, it's even better than what we told them we would have would happen. We like to under promise and over deliver, at which point they tend to put their foot on their gas, which then necessitates them upsizing their commitments a little bit more. If you said to me put that into quantify that, I would say that anywhere from 3 to 6 months is when they're upsizing their commitments. So we're now in the process of seeing those upsizings. Some of them happened at the beginning of this quarter.

Speaker 2

Some of them are happening effective actually in the month of November. So what we're seeing is more and more volume coming in from purchases to support the exceptional demand we're seeing in our lending as a service side. I will tell you there that I think Q4 as a whole will be a little bit less on the lending as service side than we thought it would be. But I certainly think the month of December itself will have caught up to what we thought December would have been. And we're exceptionally enthused about 2025.

Speaker 2

The other thing that's happening on the purchaser side is we are now speaking to what I would call A grade institutional investors who are talking about committing much larger sums. It's a slower sales process, if you will, or onboarding process, if you will. But I fully expect that we'll have a few of them on board over the course of 2025 and the medium to longer term prospects of this program. If anything, I believe will exceed even our expectations.

Speaker 5

Awesome. Thanks a lot guys. Congrats on the quarter

Speaker 6

and I'll pass the line.

Speaker 3

Thank you. Thank you.

Operator

And your next question comes from Robert Gough from Vantum. Please go ahead.

Speaker 7

Thank you very much for taking my question. And let me echo the congratulations on the growing recognition for your performances in the marketplace. It's quite very exceptional.

Speaker 2

Thank you. Thank you.

Speaker 7

There's been some talk about politics, but could you also talk to your leverage to lower tax rates in the U. S. And how that may impact your capital allocation in the U. S?

Speaker 3

Yes. Hey, Rob, great to have you on the call over here. Thanks for the question. So we're not planning for anything at the moment. We're sort of this is all very fresh information.

Speaker 3

We'll see what's and if any changes kind of come into play. I think right now that's not factoring into a significant extent. But what's interesting is we always compare kind of the tax rates between the different jurisdictions that we operate in and we have tax structures in place and transfer pricing in place between Canada and the U. S. And now will be the UK as well to optimize our tax position.

Speaker 3

So we'll see what happens over there in the U. S, not only from a tax perspective, but in every perspective, interest rates, what the new Trump presidency will do. Clive talked about mentioned some stuff on the regulatory side. So we're monitoring everything very closely and we'll make the right moves accordingly.

Speaker 2

Yes. And I think if I could just provide my thoughts over there, I certainly don't think Rob, first of all, thanks for the warm congratulatory words and really great to have you on the call over here. I do think that at the end of the day to pay taxes, you need to be making profits in the 1st place. All of which is to say we're not going to change our overriding originations and posture in how we run the business. If anything, if taxes are lowered, it will just leave a greater return for investors at the end of the day.

Speaker 2

Ultimately, as you know, we've got more than enough capital to continue to grow and expand the business and pay a dividend at the same time. We have increased our dividend now for the Q4 of this year. So we've done that every quarter of the year. We still materially below, quarter, our targeted dividend rates. So there's room to continue to increase the dividends.

Speaker 2

And I think in a minimum, if indeed there is a lower tax rate, ultimately that will mean there's more profits that go to the bottom line that will help not only our retained earnings, but in addition to that, I suppose it will provide us with more of a cushion to increase the dividends at an even faster rate, if and when that would have happened.

Speaker 7

Thank you. And if I may, as a follow-up, your comments with respect to the potential for grade A investors to become a source of funding. Could you perhaps talk to how you might see that unfolding be it in 2025 or over the longer term?

Speaker 2

Yes. So Rob, and just hearing you say grade A investors, I'm hopefully, the other investors that are listening on the 4th don't think that they're not grade A investors. So let me just clarify. First of all, I think that the institutions that are on already are grade A investors and they're outstanding. And some of them obviously have become tremendous partners of ours.

Speaker 2

In fact, they all have become tremendous partners of ours. I think we're speaking when I think my reference was to institutions that typically manage more money than the existing folks who have invested. And because they manage more money, the check sizes that they write to be able to move the needle are quite a bit larger than the initial commitments we have from the folks that we're working with. As a result of that, there's 2 things that tend to happen. 1 is, they've got 4 investment committees and the steps that they need to go through to get their various approvals.

Speaker 2

And the other thing is they need to know that they could put a significant amount to work from day 1. So unless they know that there's a material amount of money they could put to work, even if they love the ROIs, they're not going to do it. Fortunately, in our case, there is a lot that they could put to work and there's a lot of what I would call a lot as in roughly 4 or 5 larger institutions that we're speaking to. I suspect that the majority of those will be on boarded over the course of 2025, probably as early as Q1. For 1, maybe 2 of them and then the balance in Q2, I suspect that we will have a balanced, call it, purchases relative to the volume of applications that we see on the forward flow side, probably by around the back end of Q2 of next year.

Speaker 2

Until then, I suspect that there'll be way more applications than we could fund. But by that point, I said that it will probably be a balanced scenario, if you will. On the path with forward flow, if I could just contrast the 2, because my reference there was more to the credit risk forward flow. On the path with forward flow, we're still very much refining that model. We're really pleased with the progress that we've seen over there, in particular from the KPIs that we're generating over there.

Speaker 2

But I think that's going to be a slightly slower build over the course of 2025. And will also be slightly slower in terms of attracting more an incremental program for that program relative to the credit fresh forward flow.

Speaker 7

Very good. Thank you very much.

Speaker 2

Thanks for the questions.

Operator

Your next question comes from Stefan Bolan from Raymond James. Please go ahead.

Speaker 6

Just on the Quidd acquisition, I know you said it's accretive day 1. Can you once you get approval, like how quick or what are the next steps in terms of obviously they're going to continue to run their business, but you putting in extra credit facility, starting on the pricing segmentation, what helps us do you think that will all be implemented within closing?

Speaker 3

Hey, Stephen, thanks a lot for the question. So, firstly, just at the outset, I do want to reiterate that this is an outstanding business. They're currently generating, as we mentioned that they'll probably be somewhere between $30,000,000 $35,000,000 of revenue this year and doing 30% to 35% net income margins and growing by a CAGR of somewhere in excess of 40%. So this is a very strong business. So we're not necessarily in a rush as soon as closing to start changing things.

Speaker 3

I think initially what we'll do over the first phase, over the 1st couple of months after close, which we anticipate will be this quarter or next quarter at the latest. We will build out some infrastructure, particularly on the reporting side, bolster some of their infrastructure to public accounting, our public company standards, and just sort of make the communication between our offices and the UK very seamless as we integrate our culture. So that's kind of the first phase, which I would say is the 1st probably quarter. And then we're going to start focusing on a lot of the optimization opportunities that we have been discussing with the team for many months now. And it's not only the technology integration that we can provide our AI capabilities and our tech platform in general.

Speaker 3

I think that'll do a lot for them from an efficiency standpoint and from the underwriting and acquisition standpoint. There's going to be a number of operational type optimization activities within their call center that we've identified. And then on the product side, risk based pricing, graduation that we do on our platform so well is something will help the quit market implement in the UK market and then the capital side as well. So I think back really to your question on when this will kick off and how fast it will be, I think we'll start looking at implementing a lot of these optimization type initiatives early in 2025. And I think a lot of them will be live and pushing the business faster and increasing their revenue and profitability towards that part of 2025 relative to their initial forecast, which already contemplates about 40% growth next year.

Speaker 3

So that any of these synergies will be above and beyond that growth that they're expecting on both the top and bottom line.

Speaker 6

Okay. Okay, that's good. And then maybe just on the main business, just in terms of funding, obviously, you've increased the facilities. You did that issuance, which is great. What's the plan you think over the next 12 months for in terms of funding optionality that you're thinking of putting in place over the next year?

Speaker 2

So a couple of things. First of all, we've upsized our CreditFresh facility to $330,000,000 We went to market to fund this to fund the quick market transaction. We are raising initially CAD100 1,000,000. We landed up doing CAD115 1,000,000 as the underwriters took up their over allotments. So that puts us exceptionally well capitalized and we've had nice tailwinds from the reduction in rates.

Speaker 2

And as you know, our facilities on both sides of the border have a sofa or floating components. So to the extent that rates come down, we recognize the benefits of it. So I think Steve, if I could break down your question into 2 components. The one is, do we have sufficient debt to fund the growth of the business? And the other is, the cost of capital issue.

Speaker 2

And I think as it relates to, having sufficient capital to fund the growth of the business, we certainly do and then some and not only do we have sufficient capital and then some, but as I've already mentioned, we believe that we could do that and with our increased profitability on a go forward basis, also increase the dividend at the same time. Let's not speak about the cost of capital element of it. Obviously, there's tailwinds from what is fed reduction in rates on both sides of the border that we'll benefit from. In addition to that, given our size, given our profitability and given the stage that we're as a business, we certainly believe there's an opportunity to potentially negotiate different debt structure, which amongst other things will come with potentially materially lower rates. So that's something else that we're giving lots of thought to and suspect that that will also be on

Speaker 3

the roadmap in 2025. And just quickly to add to that, Stephen, we're getting to a scale right now. We're being approached by, call it, the Tier 1 banks and a lot of potential new lenders. And we do have an opportunity to diversify our debt stack. Currently, we have the facilities that underpin each one of our programs individually, but can we do a corporate level facility with a much lower rate?

Speaker 3

We can. Can we do a high yield bond offering potentially? That's an opportunity. So we're looking at all of those things and I think they're coming sooner than later.

Speaker 6

Okay. That's great. And I think that's all I have. Thanks guys. Thanks

Speaker 2

Steve.

Operator

At this time, we have no other questions. Please proceed.

Speaker 2

Great. Thank you. We're going to end this call just in time for the market opening over here. So really want to thank everybody again for attending the call this morning. I would also like to thank our investors.

Speaker 2

Many of you have been investors for a long time. So I want to thank you for your continued support. And those of you that are new investors, really want to welcome you and thank you for your belief in PROPEL and our vision of building a new world of financial opportunity. Rest assured, we are working hard for you each and every day. And obviously and really importantly, want to thank our tremendous team here at Propel, almost 600 employees today, want to welcome unofficially still the folks from QuickMarket who are now listening in today.

Speaker 2

Thank you all for all of your hard work. Have an excellent day. And on that note, operator, you may end the call.

Operator

Ladies and gentlemen, this concludes the conference. You may now disconnect your lines.

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Earnings Conference Call
Propel Q3 2024
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