ECN Capital Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 12 speakers on the call.

Operator

Good afternoon, and welcome to ECN Capital Corp's Third Quarter 2024 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host, Catherine Mora Deios. You may begin.

Speaker 1

Thank you, Ross. Good afternoon, everyone, and thank you all for joining this call. Joining us today on the call are Steve Hudson, Chief Executive Officer of ECN Jackie Weber, Chief Financial Officer of ECN Lance Hull, President of Triad Financial Matt Heidelberg, Chief Operating Officer of Triad Financial James Barry, Chief Financial Officer of Triad Financial Mike Optel, President of Source 1 and Hans Krause, Founder and CEO of IFG. The news release summarizing these results was issued this afternoon and the financial statements and MD and A for the 3 month period ended September 30, 2024 have been filed with SEDAR. These documents are available on our website at www.ecncapitalcorp.com.

Speaker 1

Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the Presentation section of the company's website. Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I will refer you to the cautionary statement section of the MD and A for a description of such risks, uncertainties and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectations of any forward looking statements will prove to be correct.

Speaker 1

You should note that the company's earnings release, financial statements, MD and A and today's call include references to non IFRS measures, which we believe help to present the company and its operations in ways that are useful to investors. A reconciliation of these non IFRS measures to IFRS measures can be found in our MD and A. All figures are presented in U. S. Dollars unless explicitly noted.

Speaker 1

With that, I will now turn the call over to Steve Hudson.

Speaker 2

Thank you, Kathy, and good evening. I'm very excited to announce our best quarter in 2 years with $0.05 of EPS compared to our guidance of $0.04 to 0.06 dollars I'd like to highlight 5 items for you on the Q3 overview. First, Hurricane Helene and Bilton impacted originations in Q3, but we are recovering in Q4. Notwithstanding a very active storm season with 5 hurricanes impacting our operating areas. Our operating businesses have performed exceedingly well.

Speaker 2

2nd, Jackie will speak in a moment to our extension of our senior line of credit. Well done, Jackie. 3rd, Triad's operating income for the quarter of $26,700,000 is $18,800,000 higher than Q3 of 2023. 4th, the operating income of our RV Marine business came in at 3,300,000 dollars which is up 43% year over year. And finally, the acquisition of Paramount Capital, our internal servicing platform for RV Marine closed in the Q3.

Speaker 2

This platform is consistent with ECN's proven playbook to develop strong non cyclic recurring revenue just like we did with Triad's $6,000,000,000 servicing business. Lance, over to you.

Speaker 3

Thank you, Steve. As Steve mentioned, our adjusted operating income for the quarter was up to $26,700,000 dollars It was driven in large part by a 74% year over year increase in origination revenue. However, it's important to note the contribution from our floor plan, rental and servicing businesses as well. In 2017, when ECN acquired Triad, the company had no commercial or servicing business as Triad was a strictly gain on sale operation. But again, consistent with the ECN playbook of adding and then growing relevant businesses, Triad established first an industry leading servicing team and then later an effective floorplan and rental business.

Speaker 3

We continue to expand those businesses and develop them into a diversified recurring and non cyclical revenue stream that represented 35% of our revenue in Q3, and we expect this balance to continue into 2025. Lastly, I'll just highlight the reference to our expanded flow arrangements. In order for us to continue to be the lender of choice for a growing number of homebuyers, we must continue to develop new and grow our existing funding partnerships. We were excited to announce the extension of the Blackstone program in October and that extension, along with the continued relationships with Carlyle Monroe and our many long standing bank and credit union relationships, brings our total funding arrangements to more than $1,900,000,000 year to date. Moving over to Slide 9, Steve also mentioned in his opening comments that we did see some negative impact to originations in September due to hurricanes And as Chaddell is our highest margin business, that helped drive a higher origination revenue margin for the quarter as well.

Speaker 3

And then lastly, on this slide, our community and rental originations were also up for the quarter, reflecting the completion of the flow agreement with Monro. On to Slide 10, a quick look at our approvals. Q3 approvals remained strong and our pipeline growing throughout the quarter. Chattel approvals increased 17% year over year in Q3 and remain up 21% year to date. And encouragingly, this trend is continuing into Q4 with October chattel approvals up 39% year over year.

Speaker 3

In addition to the growth in chattel, we continue to see activity increasing in our Land Home group. For the quarter, Land Home approvals were up 30 percent year over year, and these approval trends in both Land Home and Chattel, and our pipeline growth bode well for future originations. Moving over to Slide 11. This is a slide we shared in the past, and it shows the shipment growth trends continuing to rise through Q3. In fact, the industry now up 15% year over year, and it's good to see growth in activity for the industry.

Speaker 3

But the real takeaway for this slide is the impact from the overwhelmingly strong demand for affordable housing across the country. Developing solutions for affordable housing are key initiatives for both political parties and the demand has never been stronger. And for this reason, regardless of changes in interest rates or consumer sentiment, we see strong growth opportunities ahead for Triad and we're well positioned to capitalize on this opportunity. And now I'll ask Matt to share some portfolio updates.

Speaker 4

Thanks, Lance. Starting on Slide 12, we're happy to report that both delinquencies and net charge offs remain low, and our managed assets continue to grow, ending the quarter at $5,500,000,000 which will drive continued recurring revenues for Triad in future quarters. Moving you to Slide 13. Commercial balances ended the quarter at $425,000,000 which includes both rental and floor plan. Yields and performance remain strong.

Speaker 4

And as a reminder, these yields do float with market rates. Moving you on to Slide 14, give you a quick update on Champion Financing. Champion Finance continued to perform very well. Active balances you see on the bottom left of this chart are up 33% quarter over quarter, while still maintaining a growing pipeline you see in the approved orders and unused credit lines. These balances not only will drive diversified revenue, but also generate 2.5 times retail volume for us as these balances continue to grow.

Speaker 4

Lastly, moving you to Slide 15, you've seen this slide in the past. It gives you a quick update on our historical quarterly originations. And with that, I

Speaker 5

will hand it over to Hans. Thanks and great job to our team at Triad. Awesome, awesome quarter. Moving to Slide 17. We're firing on all cylinders and I'm excited to share some very positive updates from Marine and RV.

Speaker 5

Originations for the Q3. Operating income before tax was up 43% year over year. Originations of almost $275,000,000 was up 30% year over year. July August increased by a whopping 40%. September was only 3%, but that was due to the multiple hurricanes that we experienced.

Speaker 5

Turning to Slide 18. I'm only going to touch briefly on this slide, but it shows accelerated growth we are experiencing. Moving to Slide 19, IFG's business update. I'm excited to share some very positive updates from IFG, all of which make me incredibly proud. Let's dive into our Q3 results.

Speaker 5

We achieved an 18% year over year increase in originations, driven largely by a very strong July August. September, as I said before, was soft due to the impact of Hurricane Saladin. Even more encouraging is our October performance. Despite another Hurricane Milton, our team came back with exceptional performance and effort. We ended October up 41% year over year, testament to the team's resilience and dedication.

Speaker 5

Not only are we seeing robust consumer demand, but our bank partners continue to show strong interest in our loan products. This demand coupled with the growth in our dealer network is creating substantial momentum. As I mentioned in our last quarter, this year we have signed up more dealers than any other time in our company's history and this trend is continuing. This past quarter we welcomed 7 new sales staff who together bring over 150 years in marine lending experience. We expect this team to produce an additional $75,000,000 in originations over the next year.

Speaker 5

With this solid foundation in place, I'm confident we're poised for a very, very strong year end. And with that, I'll hand it off to Mike Opthal.

Speaker 6

Thank you, Hans, and congratulations on a great quarter. Good afternoon, everyone. Please turn to Slide 20. I'm very pleased to report that SourceOne's mix share, take share strategy is yielding strong results. Our Q3 originations increased by 63% and the 4th quarter started just as promisingly with October originations up nearly 70%.

Speaker 6

Despite expected seasonal slowdowns, we're well positioned with 3rd quarter approvals up 42% and October is up 46%, giving us a pipeline of nearly $40,000,000 as we move into winter. Looking ahead, 2025 is shaping up well as our growth initiatives gain momentum. We've added 4 new sales reps, expanding our reach to 46 states. We're actively executing our take share strategy with our look to book ratio up almost 19% and per dealer penetration increasing by 20%. Regarding ECN's acquisition of Paramount Capital, we're no longer dependent on an external servicer, allowing us to scale more confidently.

Speaker 6

Their best in class platform and technology facilitated a quick and successful migration of our RV and Marine portfolios. The quality of reporting and transparency we now have offers a level of visibility into portfolio performance that was previously unavailable. With the ongoing integration of specific back office functions with IFG combined with better data to drive strategic growth, we are improving operational efficiency and cross structures across RV and Marine. Now on to Slide 21. Key takeaway.

Speaker 6

ISG and SourceONE are successfully executing their growth strategies, significantly outpacing the industry. To put our Q3 gains in context, the anticipated recovery in RV and Marine sales has been slow to materialize

Speaker 7

as a

Speaker 6

combination of high interest rates and election year uncertainty resulted in a slight decrease in unit registrations. However, wholesale shipments have increased for 4 consecutive quarters, following the pattern we saw in manufactured housing, and we are confident of the predicted recovery next year. Bearing that in mind, SourceOne originations are up 45% year to date and October originations matched our 2022 volume, making it our best October ever. With a 40% increase in approvals last month, IFG and SourceONE have robust pipelines as we close out the year. Our investments in systems, teams and combined synergies position us strongly.

Speaker 6

Similar to the recovery of Triad, we're confident that when the market rebounds in 2025, we'll be well placed to lead. Jackie, over to you.

Speaker 1

Thank you, Mike. Turning to Page 24 for our consolidated operating highlights. Overall, our Q3 operating results remain on plan with adjusted operating income of $19,500,000 compared to $2,300,000 in the prior year quarter, which was driven by increased revenues across each of our businesses. Adjusted net income to common shareholders was $13,100,000 or $0.05 per share, consistent with our guidance range of $0.04 to $0.06 per share. Turning to Page 25, looking at the balance sheet.

Speaker 1

Our total balance sheet is down approximately $85,000,000 from Q2 and over $200,000,000 from the prior year. I'd like to highlight that during the quarter, we completed a 3 year extension of our senior credit facility, which provides for $770,000,000 in funding through October 2027, which was within our target range of $750,000,000 to $800,000,000 Turning to Page 26. Loan origination revenues were $37,800,000 in the quarter, up from $23,000,000 in the prior year, which reflects loan mix and margin improvement at Triad and growth in origination volumes at RV and Marine. Servicing revenues were up to $17,500,000 driven by growth in managed assets at Triad as well as the launch of servicing at RV and Marine. Interest expense and interest income each decreased as a result of lower on balance sheet finance assets in 2024.

Speaker 1

On Page 27, manufactured housing operating expenses increased from the prior year, reflecting elevated expenses related to new funding agreements. RV and Marine operating expenses were up as a result of continued investments that we're seeing drive the business forward as well as the impact of the acquisition of Paramount. And lastly, on Page 28, we ended the quarter with under $300,000,000 in our on balance sheet portfolio, which includes just under $230,000,000 at Triad $70,000,000 at RV and Marine. And I'll turn over to Steve.

Speaker 2

Thanks, Jackie. Before commenting on Slide 30, our 2025 guidance, let me start by thanking the 700 members of our employees in the field. Many of our employees and our families had significant challenges during this very active season. So we thank you for your hard work. Vero Beach got hit by 19 hurricanes and it's just was shut down just for a day.

Speaker 2

It's amazing. By way of background to our 2025 guidance, I'd like to focus on the corporate simplification plan. The 2025 business plan provides for the completion of the corporate simplification plan. As many of you will note that was the first approved by ECN's board in the Q2 of 2023. The simplification plan will conclude in early part of 2023 by combining ECN and Triad, eliminating duplication of overhead costs at the 2 companies.

Speaker 2

Triad's Jacksonville, Florida office will become ECN's corporate headquarters. Corporate functions will be integrated with Triad, resulting in $5,500,000 to $6,500,000 of cost savings. As many of you remember in 2021 when we sold service finance, we were successful eliminating $12,000,000 of annual corporate costs. RV Marine will continue to operate as a strong and vibrant subsidiary. All of this is possible by Lance Hall's it's all possible because Lance Hall has built a deep and talented senior management team at Triad and that's the catalyst for us in terms of executing this expense reduction plan now.

Speaker 2

Our guidance for 2025 is between $0.19 $0.25 and I would reference you on a midpoint of $0.22 James?

Speaker 8

Thank you, Steve. Turning to Slide 31. Triad is guiding to $1,700,000,000 to $1,900,000,000 of originations in 2025 inclusive of the Champion Finance JV activity. This represents year over year growth of 23% at the midpoint. In terms of mix, our highest margin channel product is expected to grow 17% and represents 70% of total 2025 originations.

Speaker 8

Our community rental and land home offerings are expected to grow at a higher rate of approximately 40% and will comprise 25% and 5% of total loan production respectively. Turning to Slide 32, this table converts our expected production mix into forecasted origination revenue. We expect blended origination revenue yield of 6 0.5% with higher margin channel offset by lower margin community rental and land home volume. Slide 33 summarizes our 2025 origination and managed balance KPIs along with our forecasted P and L. Origination revenue generated from our target 2025 loan production is expected to comprise 55 percent of total revenue with the balance of revenue driven by growth in managed balances from our commercial and servicing businesses to $6,750,000,000 at the midpoint.

Speaker 8

Operating expenses includes additional overhead and interest expense from the corporate simplification plan of integrating ECN corporate functions into Triad in 2025. And with that, I'll turn it back to Steve to review the RBM 2025 outlook.

Speaker 2

Thank you. Turning to Slide 34. Let me highlight 3 items on this slide. The originations of $1,200,000,000 to $1,400,000,000 I would anchor you more in the $1,400,000,000 If you look to H2 'twenty four, we have an average about $290,000,000 a quarter. So I think the $1200,000,000 is a low watermark, the $1,400,000,000 is a better mark.

Speaker 2

Managed assets reflect Mike's earlier comment about Paramount Financing. We like that because of the recurring stable income. And that ties into my last comment on the adjusted operating income of 16% to 26%. I would anchor you more to the higher end. 40% of that income is driven by our servicing business.

Speaker 2

Turning to Page 35 in terms of the cadence of our $0.19 to $0.25 Quarter by quarter has been laid out for you. I would comment specifically in the Q4 of 20 25, which historically has been a seasonal quarter, but with larger servicing revenue and commercial finance revenue, floor plan and rental, we now been able to smooth out the seasonality of our business. And finally on page on Slide 36, which is the consolidated 2025 forecast for both dryad and RV, Marina and Servicing, strong earnings of $61,000,000 to $78,000,000 for the year, coupled with, as I mentioned earlier, the strong recurring non cyclic servicing revenue and the cost reductions we've announced earlier this evening. And finally, on Page 38, my closing comments. We've had an exceptional Q3, our strongest in 2 years with $0.05 of earnings.

Speaker 2

Triad's earnings remain ahead of plan. Origination momentum in RV Marine is strong. As many of you know, the MH industry turned around in 2024. Our view is that the RV Marine business will see that same similar turnaround in 2025. In fact, we're seeing it in the 4th quarter.

Speaker 2

And the revenue guidance includes the corporate simplification cost takeouts. We believe our 2024 earnings will approximate current consensus, withstanding the hurricane season and we're issuing guidance of $0.19 to $0.25 and our dividend is maintained. With that, operator, I'd open the call for questions.

Operator

And our first question comes from Nik Priebe from CIBC. Please go ahead, Nik.

Speaker 9

Yes, thanks. So you alluded to some changes that you made to the senior credit facility. And I'm aware that you've got a series of bonds that go current at the end of the year. Is that part of the plan to address the refinancing there? Like it is extinguishing the bonds using the capacity on the senior credit facility and option for you?

Speaker 2

Yes. We hey Nick, it's we believe that those bonds are due in December 31 this year. We believe we'll refinance those bonds. The senior line is dedicated to financing on balance sheet assets. That said, we have strong cash flow, which could be another source, but we feel very confident in our ability to refinance those December 31st debentures.

Speaker 9

Got it. And just sticking on the same topic, I've always kind of struggled with the concept of leverage for your business model specifically because the credit facility that you have is a bit of a hybrid facility. If I look through the debt that is drawn specifically for the purpose of funding finance receivables, how levered is ECN today or how do you think about leverage in that context?

Speaker 1

So our senior credit facility in the drawn balance is fully supported by our on balance sheet assets.

Speaker 9

Okay. So there wouldn't be like a 70% advance rate or something of that nature. I can think of it as being essentially 100%.

Speaker 1

There is an advance rate. But if you look at our accounts receivable and our finance assets across both businesses, it exceeds the senior line balance.

Speaker 9

Okay. Okay. I see. And then just last question. I'm just trying to understand exposure to some of these disruptive weather events like deepland of hurricane season.

Speaker 9

Can you give us a rough sense for what proportion of originations will be based in the state of Florida or the Southeast U. S. In general?

Speaker 3

Yes. Triad, Florida is our 3rd largest state for origination. So it's a significant portion of our origination business. And I don't see this as being a permanent disruption by any means. It's a temporary slowdown in businesses as our retailers and for that matter, the conditions for site placement of homes improves.

Speaker 3

And as they dry up and as we get these cleared up, I think we'll be right back on track.

Speaker 2

And if I could just add one other thing, Nick, as you know, these are all HUD approved, both on design and construction and delivery. These homes have a 40 to 50 year life. We're only aware of one claim for a home that was materially damaged. It's really been the conditions are such that you can't what they call set a home. If the ground's wet or you can't get in, you can't set the home.

Speaker 2

But we've seen Hans commented earlier that we've seen a nice recovery in the marine business in October and we're starting to see that in the manufactured housing sector.

Speaker 9

Got it. Okay, that's great. I'll pass the line. Thank you.

Operator

And our next question comes from Jamie Gloyn from National Bank Financial. Please go ahead, Jamie.

Speaker 10

Yes. Thanks. Question on the 2025 guidance, I suppose. Just broadly speaking, what gives you the confidence to be able to achieve this guidance that you've set out today, especially in light of what we've seen recently in with previous guidance provided? Just want to get a sense as to like what is the foundation to be able to provide this guidance at this stage?

Speaker 2

I'm not sure about the comment about previous guidance. We're not going to revisit 23, but we've been on the mark, Jamie, for the last several quarters, last three quarters with our guidance. In terms of what gives us the confidence as a team, it's the forward order book at our strategic partnership with Champion, increasing deliveries. You've seen the deliveries from Champion into the field and further penetration into that joint venture book. It also gives us guidance that we've been able to streamline the business under Lance leadership with Matt Heidelberg and with James Barry taking out significant cost.

Speaker 2

And finally, we've had increased demand for our institutional investors for our loan product. We've been able to materially increase the economics on the gain on sale and the loan servicing rights values. And as I mentioned earlier in my opening remarks, Jimmy, that the RV Marine business, particularly looking at this quarter is recovering and we believe it's going to go through the same cyclic recovery that MH did in 2024 as we're starting to see now in 2025.

Speaker 10

Yes, understood. On the guidance or in Triad, where would we see the JV with Champion show up in this guidance? Or how much is it contributing to the 2025 guidance that you're providing today?

Speaker 4

Yes. Jaeme, this is Matt. Unfortunately, our partner there in Champion is another publicly traded company. So we're sensitive to that. We give you an update on the floor plan kind of how that's tracking, but we want to be sensitive to other partner without giving too much information

Speaker 2

on their behalf. We did cut and paste the quote from Mark Joost on the Champion call, which speaks to the success of the joint venture and their view on they're very happy with the joint venture.

Speaker 10

Okay. All right. Thank you very much.

Operator

And our next question comes from Tom MacKinnon from BMO. Please go ahead, Tom.

Speaker 11

Yes, thanks. Good afternoon. With respect to Slide 33 and the Triad guidance, you talked about additional expenses there as a result to kind of folding in the head office into Triad. Can you quantify what those additional expenses that you've added in there are to reflect that?

Speaker 2

Interesting.

Speaker 1

On the expense side, Tom, so there's some corporate overhead. It's primarily interest though. So the interest that you used to see in the corporate segment is primarily now it will be pushed down to the businesses.

Speaker 11

Okay. So right now corporate is kind of running at, I don't know, dollars 2,500,000 a quarter, dollars 10 a year. You're going to say $5,000,000 to 6 say. Is the rest just what happens to the rest then? Like essentially you're losing all the corporate expenses, which are running at a run rate of 10.

Speaker 11

You're not it doesn't look like you're adding any of those overhead expenses into Triad and yet the guidance doesn't have any corporate expenses at all as I see it then. So are you really actually going to cut like $10,000,000 in corporate expenses in this plan?

Speaker 2

Yes. You're eliminating ECN, Tom. If I take you back to 2023, when Champion made their investment with us, we committed to a corporate simplification plan. Lance has created a very strong and robust team in Jacksonville. We don't think you don't need 2 legal departments, you don't need 2 risk departments, you don't need others.

Speaker 2

So it will be complete elimination of ECN.

Speaker 11

Okay. So from what we're seeing that's producing $2,500,000 or $2,500,000 in expenses this quarter will be completely eliminated?

Speaker 2

Yes. It starts Tom. We have 1 quarter delay. You're doing all the work now. We're deep into it.

Speaker 2

Let's say it's for finally all of it's completed by March 31. I think you try to reconcile the 10 back to the 5.5 to 6.5. So it's 3 quarters of that.

Speaker 11

Right. Okay. And then I guess the second is, what would be driving some of this increase in service revenue that you're seeing at Triad right now? Is that just a managed assets floor plan? Is there anything else that is helping drive that increase in servicing revenue that we're seeing here?

Speaker 8

Yes. Hi, Tom. This is James from Triad. So servicing yield during the quarter benefited from 2 factors. It's the mix of our servicing loan portfolio and then total loan sale volume during the quarter.

Speaker 8

So the servicing fees for our silver and bronze product are roughly 40% and 150% higher than our core product respectively. So as we originate more of these products to meet the demand of our investor partners, tried servicing yield will increase. And separately, we sold $165,000,000 more loans to investor partners quarter over quarter, increasing our managed assets and servicing revenue. And as previously noted in the guidance, we expect to realize a servicing yield of 80 basis points to 90 basis points in 2025.

Speaker 7

Okay.

Speaker 11

All right. That's great. Thanks so much.

Operator

And our next question comes from Stephen Bowen from Raymond James. Please go ahead,

Speaker 7

Stephen. Sorry, I jumped on late, maybe just address. But following up on Tom's questions, obviously, the service revenue is benefiting and sorry, there was a little bit blip there in terms of you said it was 80, sorry, was it 80 to 90 or I can't remember, couldn't hear that number?

Speaker 8

Yes, I was referring to the 2025 guidance. It's 80 to 90 basis points in 2025.

Speaker 7

Okay. And again, I haven't had time to dig into these numbers, but even the loan origination revenue seems quite robust quarter over quarter. Is there anything like that's kind of one time there or change in mix, change in funding partners, things like that?

Speaker 8

Yes. So it's a similar story where it's Q3 benefited from higher gain on sale margin from the mix of sold production and the total loan sale volume. So we sold $150,000,000 increase quarter over quarter on our highest margin core channel product. And then we also had increased land home sales activity, which was up $14,000,000 quarter over quarter. So this higher loan sale activity coupled to being weighted to a higher margin product drove an increase in gain on sale margin during the quarter.

Speaker 8

And as we previously mentioned, we expect the gain on sale margin to approximate 6.5% in 2025.

Speaker 2

I think Steve, it's important to note that when you reported on these in the first loan flow program with Blackstone, we were in the 80% 10% 10% silver and 10% bronze. Today, these mixes with various partners are 60% core, 30% silver and 10% bronze. Silver and bronze are more profitable. Again, those mixes are driven by the institutional investor demand on us, but it does help our margins.

Speaker 7

Okay. I appreciate that. Thanks for clarifying that. That's all I had. Thanks.

Operator

And that was our last question. At this time, I want to thank everybody for joining today's conference call and webcast. You may now disconnect and have a great night.

Powered by Quartr
Earnings Conference Call
ECN Capital Q3 2024
00:00 / 00:00