goeasy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to GoEZ's 4th Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker for today, Farhan Alakhane.

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 Q4 ended December 31, 2023. The news release, was issued yesterday after the close of market is available on GlobeNewswire and on the Goeasy website. Today, Jason Mullins, Coedes' President and CEO will review the results for the Q4 and provide an outlook for the business. Pal Khoury, the company's Chief Financial Officer, will also provide an overview of our capital and liquidity position and Jifin Nappel, the company's Chief Risk Officer is also on the call.

Speaker 1

After the prepared remarks, we will then open up the lines for questions from investors. Before we begin, I remind you that this call is open to all investors and is being webcast at the company's investor website and supplemented by 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 the 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 However, we would ask that they do not quote callers unless an individual has granted their consent.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 the caution regarding forward looking statements included in

Speaker 2

the MD and A. I will now turn the

Speaker 1

call over to Jason Mullins.

Speaker 3

Thanks, Varun. Good morning, everyone, and thank you for joining the call today. The Q4 wrapped up another milestone year for the company. We were proud to have met or exceeded all the metrics provided in our commercial forecast, while producing record growth, consistently stable credit performance and improved operating leverage, further solidifying our position as a leader in the Canadian non prime consumer credit market. With over 9,000,000 non prime Canadians, of which 72% have been denied credit by banks, we play an Extremely important role in the financial system.

Speaker 3

In 2023 alone, we issued over 250,000 loans help everyday Canadians tackle their household financial needs. This included paying for bills and emergency expenses, helping them purchase a vehicle to get to work, complete renovations or repairs for their home or pay for an important healthcare expense. With originations exceeding $2,700,000,000 in the year, we have now proudly served over 1,300,000 Canadians. Furthermore, we've remained focused on providing our customers with a path to reduce their cost of borrowing when they have demonstrated consistent payment behavior by offering access to products with progressively lower rates of interest. Over time, we are proud to reduce the weighted average interest rate we charge our borrowers to approximately 30% today, passing on the benefits of our scale directly to the customer.

Speaker 3

Lastly, We have now helped over 200,000 customers graduate to Prime Credit so far. And with many of our active customers acquired just in the last few years, The number of borrowers that we plan to help improve their finances is only going to grow. 2023 was also another milestone year in building our high performance culture fueled by dedicated and ambitious people that care deeply about the financial well-being of our customers. During the year, we were recertified as a great place to work, recertified as one of Canada's most admired corporate cultures, named on the 2023 Best Workplaces in Ontario list and named on the 2023 Best Workplaces in Financial and Insurance Services list, a true testament to our team and their inspiring passion and leadership. Turning to the results for the Q4, it was another period of record volume of applications for credit at over 530,000 up 29% against last year.

Speaker 3

General consumer demand remained healthy, while broader macroeconomic conditions continue to create favorable competitive environment for those with scale. Loan originations during the quarter were $705,000,000 up 12% compared to $632,000,000 produced in the Q4 of 2022. Organic loan growth was $215,000,000 during the quarter with our loan portfolio finishing the year at $3,650,000,000 up 30%. All of our products and channels continued to perform well. Unsecured lending remains the largest product category, while healthcare financing more than doubled over the prior year And automotive financing volume exceeded $100,000,000 of originations during the quarter for the first time ever, up nearly 50%.

Speaker 3

The overall weighted average interest rate charged to our customers during the quarter was 30.25%. Combined with ancillary revenue services sources, the total portfolio yield finished within our forecasted range at 34.9%. Total revenue in the quarter was a record $338,000,000 up 24% over the same period in 2022. We also continue to be very confident in the quality of our loan originations. Originations in the quarter were the 2nd highest credit quality in our history based on future probabilities of default.

Speaker 3

Thanks to the proactive credit adjustments made throughout 2022 and the increasing proportion of secured lending, which now represents 42% of our portfolio, the major portfolio level credit metrics continue to look very positive. We have long maintained that managing the credit performance of the business is our highest priority. The decision to tighten credit criteria and focus on growing higher credit quality loan products has served us well during periods of economic stress. During the Q4, The annualized net charge off rate reduced to 8.8% from 9% in the same quarter last year. Commensurate with the improved loss ratio, Our loan loss provision rate reduced slightly to 7.28% compared to 7.37% in the 3rd quarter.

Speaker 3

We also continue to put emphasis on extracting further value from scale through investments in technology and automation that increase efficiency to drive more operating leverage. During the Q4, our efficiency ratio, specifically operating expenses as a percentage of revenue, improved to 28.3%, a reduction of nearly 400 basis points from 32.2% in the Q4 of the prior year. As a function of receivables, operating expenses were 10.7% versus 12.9% during the prior year, producing over 200 basis points of margin to absorb lower yields and higher funding costs. After adjusting for unusual items and non recurring expenses, we reported record adjusted operating income of $141,000,000 an increase of 41% compared to $100,000,000 in the Q4 of 2022. Adjusted operating margin for the Q4 was a record 41.6%, up from 36.5% in the same period in 2022.

Speaker 3

Adjusted net income was a record $69,000,000 up 35% from $51,000,000 in the Q4 of 2022, while adjusted diluted earnings per share was a record $4.01 up 31.5% from $3.05 in the Q4 of 2022. Adjusted return on equity was 26.7% in the quarter, an increase of 210 basis points from 24.6% last year. With that, I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our new outlook. Thanks, Jason.

Speaker 4

The Q4 highlighted the health of our balance sheet, the confidence of our bank partnerships and the cash generating capability of business. During the quarter, free cash flow from operations before net growth in the loan portfolio was $151,000,000 in the Q4 of 2022. At today's run rate, we can support funding over $250,000,000 of growth the consumer loan portfolio purely from our internal cash generation. During the quarter, we also implemented several enhancements to our balance sheet. First, we increased our automotive securitization facility by $125,000,000 and incorporated several key modifications, including improved eligibility criteria resulting in increased funding capacity.

Speaker 4

The maturity of the facility was also extended by a year to December 16, 2025. The lending syndicate for the automotive securitization facility consists of Bank of Montreal and Wells Fargo Bank and continues to bear interest on advances payable at the rate of 1 month SEDAR plus 185 basis points. Based on the current 1 month SEDAR rate as of February 7, 2024, the interest rate on the facility would be 7.21%. We also continue to utilize an interest rate swap agreement to generate fixed rate payments on amounts drawn to assist in mitigating the impact of increases in interest rates. In November, we also refinanced our USD550 1,000,000 senior unsecured notes originally due in 2024 With a new 5 year term and a coupon rate of 9.25 percent, concurrently, we also entered into a cross currency swap agreement reduce the Canadian dollar equivalent cost of borrowing on the notes to 8.79 percent per annum.

Speaker 4

At quarter end, our weighted average cost of borrowing 6.4% and the fully drawn weighted average cost of borrowing was 6.9%. With these recent balance sheet enhancements, We now have approximately $900,000,000 in total funding capacity and remain confident we can raise additional debt financing to fund our organic growth forecast. Based on the 2023 adjusted earnings, the increasing level of cash flow produced by the business and the confidence in our continued growth and access capital going forward, the Board of Directors has approved an increase to the annual dividend from $3.84 per share to $4.68 per share, an increase of 22% or a payout ratio of approximately 33% on the prior year's adjusted earnings. Furthermore, this marks the 10th consecutive year of an increase in the dividend to shareholders. I'll now pass it back over to Jason to talk about our outlook and new forecast.

Speaker 3

Thanks, Al. With over 9,000,000 non prime Canadians carrying over $200,000,000,000 in consumer credit balances, We are a vital part of a large and underserved market. We have a resilient business model that is proven to perform well during economic cycles We have an award winning culture backed by over 2,400 incredibly talented team members that are inspired to help everyday Canadians. If not for us, millions of hardworking Canadian families would lose access to credit, an essential lifeline in today's credit driven economy, especially given the current cost of living. We are truly proud of the work that we do.

Speaker 3

In our release last night, we published a new 3 year commercial forecast as we have done annually for more than 10 years. These commercial forecasts are built bottom up using a detailed set of scenario based assumptions about product mix, pricing, economic conditions, funding sources, credit risk and expense requirements. We then stress test those assumptions to understand what a downside and upside case might look like before we ultimately decide on a range that we think captures the most probable set of outcomes. It is this process that has served us well as we have either met or exceeded nearly every metric with consistency for over a decade. We expect to organically grow the loan portfolio by nearly 65% to approximately $6,000,000,000 in 2026, driven by the growth and execution of our current suite of products and channels.

Speaker 3

Our outlook provides a range of guidance to account for unanticipated headwinds at one end the benefit of our initiatives performing better than planned at the other. We have also embedded the implementation of the new 35% maximum allowable rate of interest Alongside our own strategy to reduce the cost of borrowing for our customers by passing along rate reductions as we scale into the forecast. As such, our total yield inclusive of ancillary revenues will gradually decline to approximately 30% over the next 3 years. Our disciplined approach to managing and prioritizing credit risk combined with ongoing product mix and operational execution provide us confidence that the credit performance of our portfolio will remain stable. We expect the annualized net charge off rate of our business to gradually step down from 8.5% to 10.5% last year to 7.25% and 9.25% in 2026.

Speaker 3

We also believe there are further benefits from scale and additional operating leverage in the business. Inclusive of the declining risk adjusted yield, We still anticipate the operating margin to gradually expand by approximately 100 basis points each year. Underpinning this outlook is the same 4 pillar strategy that has driven our business priorities since 2017. The first pillar of our strategy is to continue building and promoting a wide range of lending products that position Goeasy to become the one stop solution for all the borrowing needs of non prime Canadians. The second pillar of our strategy is to expand our channels of distribution, making our products and services available easily and accessible in a convenient manner when and where consumers need credit.

Speaker 3

The 3rd pillar of our strategy is to expand geographically, optimizing our retail and merchant network across Canada, Then considering other markets where our business model could be successful. And the 4th pillar of our strategy is to help our customers improve their financial well-being Through credit education, products and services, improving their credit and gradually offering them a lower rate of interest and then serving as a bridge back to prime. In 2024, we will execute against 3 strategic initiatives that ultimately align to that 4 pillar strategy. First, we are thrilled to announce that we will be building a new revolving credit card product that we hope to begin testing in market by the end of the year. The various forms of this product will ultimately solve 2 significant needs in the marketplace.

Speaker 3

1st, a secured or partially secured credit card product will enable us to extend credit to the many tens of thousands of applicants that based on their risk profile, we are unable to serve today with an unsecured personal loan. This product will help them positively build a better credit history and enable us to gradually extend additional funds over time. Secondly, there remains a material void in the marketplace for a general purpose non prime credit card for the customer segment that we serve. Occupied by only one major market participant, non prime borrowers that are unable to get a card product from a traditional bank are often left with few options. We believe we can build a superior solution, one that will eventually have a loyalty and rewards component that helps our borrowers reduce their cost of borrowing over time.

Speaker 3

2nd, we will continue to invest in our new digital mobile app, Goeasy Connect. After just launching nationally late last year, We already have over 100,000 app downloads. As we are just getting started on promoting and cross selling our full range of products and services, Our mobile app will continue to provide our customers with experience that provides them with transparency, pre approved access to credit and the tools and education they need to rebuild their credit over time. Lastly, we are continuing to prioritize investments in our technology platforms To enable greater efficiency through automating business processes, leveraging data and business intelligence to produce more meaningful insights and providing our employees with better frontline tools, we can continue to scale the business and drive cost savings. Turning briefly to the upcoming quarter, we expect the loan portfolio to grow between $180,000,000 $200,000,000 while the total yield generated on the consumer loan portfolio will decline to between 33.75% 34.75% in the quarter, reflecting the typical seasonal decline we experienced in each 1st quarter period.

Speaker 3

We also continue to expect strong credit performance with the annualized net charge off rate expected to finish between 8.5% 9.5% in the quarter. In closing, I want to once again thank the entire GoEZ team for their drive and passion that helped produce another incredible year for our company. Our team truly cares deeply about delivering high quality financial products to our customers and merchant partners in a transparent and frictionless manner. Together, we are on a mission to put everyday Canadians on the path to a better tomorrow. And as I have said many times, we are truly just getting started.

Speaker 3

With those comments complete, we will now open the call for questions.

Operator

The first question for today will be coming from Nick Priebe of CIBC Sea Capital Markets. Your line is open.

Speaker 3

Okay. Thanks for the question. Just wondering if you could expand a little bit on the idea of introducing a cash secured credit card product and just describe how the expected economics might look in terms of the APRs and expected losses. I'm just wondering how I should expect or how you would expect to distribute and ramp that product and how the risk adjusted margins would compare to the rest of the product suite? Yes, great question.

Speaker 3

So, first of all, the anticipated benefits of the card product, whether it's secured or unsecured versions are not contemplated or included in our forecast or outlook. So Any benefits from those products over the next 3 years would be incremental or certainly help ensure we perform at the upper end of our ranges. In terms of the plan, if you think about our history launching and building products, typically takes us 6 to 12 months to design and build something. We then generally spend 6 to 12 months testing it in a smaller dollar limited capacity before we then get the comfort to be able to begin to scale. So in terms of thinking about when and how this might favorably affect the business, You're probably talking the end of 2025 and into 2016 before it becomes more meaningful, but that methodical and careful approach has always worked well for us and we think is the prudent way to go.

Speaker 3

In terms of the product, there's still a lot to be determined about the exact design, But it's safe to assume that the economics of those products we anticipate to be consistent with our existing products in the sense that While the geography of the yield and the operating costs and the losses will vary product to product as does our existing products, We would only build products that ultimately meet our return threshold. So I would imagine that the total yields are not that dissimilar to our overall portfolio. Clearly, the secured product losses are much lower because they're secured by cash and you're using that as a way to build credit. The unsecured product losses will be more typical of an unsecured credit product. But net net, both of them we would expect to be additive and meet our return threshold.

Speaker 3

Okay. That's good color. And maybe just staying in the same vein as items that would be incremental to your guidance. I think back in November, you'd alluded to the prospect of some portfolio M and A. I guess as we get closer to the implementation date of the new rate cap, have you seen more activity on that front?

Speaker 3

Just an update on the M and A pipeline would be helpful too. Yes. So, we have seen a few opportunities for portfolio type acquisitions of a smaller, more moderate nature in Canada. Nothing that we have gotten overly excited about yet. So still open minded there and looking at opportunities as they arise.

Speaker 3

We definitely continue to see that as smaller scale companies struggle that that is a net benefit to us and the companies with scale from a competitive tension point of view. So that continues to remain true. In terms of M and A more broadly, We are always looking at opportunities both here and in the other markets, particularly the U. S. As we've said for several years now.

Speaker 3

And we're very hopeful actually that we will find something that makes strategic sense and is a good financial investment accretive to shareholders. The challenge, of course, is the bar is high. We have very high standards when it comes to Strategic fit, cultural fit and certainly with a good organic growth profile, the financial hurdle rate is pretty high as well. So it's hard to say exactly when and where the opportunity might eventually come from, but we're hopeful And we're avidly exploring and hope to share something at some point down the road. Okay.

Speaker 3

That's great. That's it for me. Thank you.

Operator

Thank you. One moment for the next question. The next question will be coming from Etienne Ricard of BMO Capital Markets. Your line is open.

Speaker 5

Thank you and good morning. To circle back on the newer revolving card product, Historically, Goeasy has focused on installment loans that provide fixed predictable payment patterns to your customer base. Now with plans to introduce this new product, How do you take comfort, I guess, 1st in the underwriting and second on the payment performance of your customer base really in order to avoid debt shocks?

Speaker 3

Yes, great question. So two important points there. 1, we had always long said that the lower credit quality borrower, the more traditional subprime borrower, if you will, that revolving products were not healthy for them. And that's why we built our business initially on the installment products because they forced a regular consistent payment requirement that kept customers progressively getting out of the cycle of debt. As we fast forward now 15 plus years later, building a very wide range of products that serve the entire non prime credit spectrum, We now have a very large growing population of near prime customers, customers that are at or just below the credit quality of a prime borrower that would get credit from a traditional bank.

Speaker 3

And I think the near prime customer, customers with scores in the 600s or low 700s is very different than the customers with scores in the high 400s or low 500s in terms of the products, the pricing and the credit risk that can work and make sense for those consumers. So 1st and foremost, putting aside the secured product for a sec because that's got a very different purpose, but an unsecured card would be meant For the upper bands of credit quality of customers that we currently serve, which is one area that we get comfort from. I would again point to, for example, in the U. S, OneMain, which would be a large market participant in our industry that serves that predominantly near prime customer built and launched a card a few years ago and that continues to appear we've been monitoring carefully to be going well. The second thing I would say is that We would intend to design a card product that makes sense for our customer segment.

Speaker 3

And the biggest flaw in the traditional card product is the fact that the minimum payment requirement is so small that it becomes too enticing to make a very small payment and just allow the balance to carry over 1 month to the next. We would intend to in our product depending on the credit risk of the customer increase the size of that minimum payment, so that as the credit risk of the customer is greater, the required repayment to then be able to pay down a portion of that principal would be more requiring and that will allow us to ensure that that customer does demonstrate regular payment behavior and has a system designed to help them make sure they continue to get out of the cycle of debt. But being able to have a product that's transactional where they can use it for gas and groceries and earn some type of loyalty or reward mechanism that can give them cash back or it can help lower their interest rate in the future, that can net net actually end up being quite positive and beneficial to the customer.

Speaker 5

As a follow-up, we know demand for unsecured installment loans tends to be driven more by specific events, such as unexpected expenses. As it relates to this new product, for what purpose do you expect it to be used? And second part of the question, how will that influence the distribution strategy?

Speaker 3

Yes. So two thoughts there. 1, there are still lots of smaller dollar unexpected expenses and needs that our customers have That maybe a larger installment loan product, like $5,000 loan might not be necessary. So there might be an unexpected expense that's $300 or $400 or $500 that if they had the access on a revolving card to be able to satisfy that might be all that's needed. So I don't think that the use of the credit to deal with everyday household expenses would be any different in the purpose of that card.

Speaker 3

It would be very consistent in that way, but meant for a very different type of smaller dollar, smaller dollar expense more than anything. The second reason why it's appealing is that it also allows us to capture more share of wallet and develop more ongoing relationships with the customers. Our products today that are all installment driven are very event driven financing products. So they get a loan for a very specific larger dollar expense. They get a loan to be able to repurchase a vehicle and that creates extended breaks in the relationship with the customer.

Speaker 3

We think that if again we can offer a value add product that is net beneficial to the customer, that's a critical bar that has to be met. We have feel confident it can be a value for the customer, which we believe we can do, that the card allows us to then maintain a more continuous relationship to be able to communicate with the customer, provide financial literacy tools and education, maintain an ongoing dialogue with the customer, maintain the ability to monitor their credit on an ongoing basis. Today, for example, if a customer takes an installment loan, once the loans been paid, We only have the ability to monitor their credit for a designated period of time following the last repayment before we then lose the capacity to monitor that customer's credit, maybe serve them something that is useful for them in the future, this product can allow for a more continuous relationship. So Notwithstanding the unsecured personal loan meets a big bulk of the credit demand and it's obviously a performing and largest product, there's still quite a number of additional reasons why this would make sense in our suite.

Speaker 5

Great. Thank you very much.

Speaker 1

You're welcome.

Operator

Thank you. One moment for the next question. Our next question will be coming from Gary Ho of Sarjens Capital Markets. Your line is open.

Speaker 6

Thanks. Good morning. Maybe just staying on the revolving credit card product. How does your Brim Financial partnership or investment help in that in the build out here, get the product off the ground, Perhaps maybe on the loyalty side of things.

Speaker 3

Yes. So, Brim is a card platform provider, and as you've noted, we have an investment in. So they would be one of the platforms that we would consider using. Our investment in the business doesn't require us to have to use their platform, but Obviously, there's a natural fit for us to want to evaluate if they're the right partner. We haven't not finalized the selection of a partner to provide the platform To do the card products, they are one of a number of companies that we're looking at as potential partners And we'll likely end up concluding on which partner we'll use in the next couple of months.

Speaker 3

But there's some great options out there where companies like Brim can provide the platform, a lot of the card technology out of the box. So it's not an overly significant investment to stand up or to maintain, which is great because there's a lot of sort of SaaS like products and Brim would be one of them. So they'll be one of the companies we'll obviously look carefully at in determining who we want to partner with.

Speaker 6

Okay. Makes sense. And then while I have you describe how rigorous the process is to put together your bottoms up Kind of 3 year outlook, I guess to achieve the $6,000,000,000 loan book target for $26,000,000 can you walk us through kind of what are the some of the risks Or potential challenges your team sees in hitting that number?

Speaker 3

I mean, it would be the usual things that could come along and create unexpected headwinds, major shift in macroeconomic conditions, major changes in the competitive landscape. I don't think there's anything We see that would be sort of normal course that should affect that trajectory. They would have be pretty big unexpected macro kinds of changes. We've always built forecasts that are grounded in The data and the performance of the business that we have experienced to date, and we know, for example, that If we add incremental auto dealers, approximately how much business we can generate in automotive financing volume for the dealers that we incrementally add. We know that if we put additional marketing and advertising spend into the market, approximately what response rate that will generate.

Speaker 3

So We're using a fair amount of data and history to inform how the market will respond to our various actions. And then we, of course, layer on the ranges that we think account for some downside and some upside potential. But the ranges themselves really represent a down the fairway and very reasonable set of assumptions that we feel good about. And As I said in my prepared remarks, we've essentially better exceeded those ranges on almost every metric for almost the entire full 10 year period that we've used that approach.

Speaker 6

Okay. That makes sense. If I can just sneak one more in. Just on the 22% to be increase, just the rationale for such a big increase, why not retain more of that capital for organic growth?

Speaker 3

Yes. So obviously the dividend policies reviewed by the Board every year. We have been pretty consistent now for the last 10 year period that we've done dividend increases with stepping up the dividend in proportion to the increase in the earnings. As you may recall last year, we had stepped down the payout ratio slightly 35% of the prior year earnings to 33%. This dividend increase is consistent with that 33% Historical trailing payout ratio.

Speaker 3

So no change to the philosophy around the payout ratio approach. That's just reflecting the increase in earnings. We look at very carefully our growth outlook, our liquidity and our access to debt and our leverage to garner comfort in being able to implement a dividend increase. And when we do so, it's on the basis that we can sustain that dividend Even if there is a series of unexpected headwinds that we might face, because the business is now generating amount of free cash flow and that's causing the business even at these growth levels to gradually delever every year, this year included. That gives us the capacity to be able to then still step the dividend up commensurate with earnings and I feel confident that it's a level we can to sustain as a way to contribute to the total shareholder return.

Speaker 1

Okay. Great. Those are my questions.

Speaker 3

Thanks.

Operator

Thank you. One moment for the next question. Next question will be coming from Jeffrey Kwan of RBC. Your line is open.

Speaker 2

Hi, good morning. I just had one question. And it was You've got a much wider product offering. You've got the omni channel distribution strategy. What products channels or even kind of combination of a certain product through a certain channel would have higher margins versus the overall book.

Speaker 2

Just trying to understand how the operating margin might change, depending on how the origination mix compares versus what you're modeling out in your guidance?

Operator

Yes.

Speaker 3

So, I'll answer it a little bit generically, but then can drill down, if needed. So If you look across our range of products, there's one common denominator, which is that they all meet our target return hurdle rate, which again as we've talked about before is we take the target ROE threshold of a minimum of 20%. We reverse engineer into then a return on those receivables or assets that are necessary based on our standard leverage profile and then that becomes the return on asset hurdle rate that needs to be produced. When you then go above that hurdle rate on the return on the receivables, the geography across our products and channels differs vastly. There are products where there are higher yields and higher losses and higher operating costs, but they get to that target return and others with lower yields, lower losses and lower operating costs, but they get to that same approximate target return.

Speaker 3

There's of course some variability, some products a little bit more, a little less profitable than others, but they all sort of meet that target return. The examples I would provide is First on the credit side, obviously higher APR products tend to be given to higher risk borrowers that come with higher losses. So that would bridge sort of that explanation and likewise the inverse that would be one example. 2nd would be the secured products often paired with lower APRs because they're secured and have lower losses. So again, the geography would look different compared to unsecured.

Speaker 3

And then on the channel side, there's a really big difference between direct and indirect lending. And we have a very large presence in both channel categories. Direct lending being you're going to spend the marketing and advertising dollars to promote your business And you're going to acquire the customer and do all the origination activity and you're going to do it through many points of distribution, call center or a large retail network. That's direct lending. Direct lending comes with higher operating costs, because again, you've got to spend the acquisition expense and the origination expense and you service those loans through a multiunit operating model.

Speaker 3

In indirect lending, which is again automotive financing, powersports financing and point of sale, don't really have any cost of acquisition that's being done by your merchant partner to sell their good or service. You don't really have origination costs they're very small because most of the legwork and activity is done by the retailer or the merchant to get the sale and use our technology. And your servicing costs are all done generally from 1 or more call centers where your operating costs are therefore more efficient as well. So Depending on which dimension you're looking at, whether it's credit quality, whether it's secured versus unsecured or whether it's channel of distribution, indirect versus direct, Those will all influence what you would see in the makeup or the composition of yield losses and OpEx to get to the target return.

Speaker 1

Okay. Thank you.

Operator

Thank you. One moment for the next question. And the next question will be coming from Doug Cooper of Beacon Securities. Your line is open.

Speaker 7

Good morning, gentlemen. Can you hear me okay?

Speaker 3

We can. Good morning, Doug.

Speaker 7

Good morning. I just want to touch on the operating leverage Just looking at the 2023 overhead numbers versus the down year over year. Does that have something to do with the level of competition? Occupancy fairly flat as you're not really opening any new stores and then the other bucket. Maybe just talk a little bit about your expectations of the overhead expenses.

Speaker 3

Yes. So, two things that are driving the operating leverage and the Expense ratio in the business. One is to link back directly to the point made on the last question. As the mix of the business continues to shift and grow toward indirect lending products and secured products to better quality credit customers, those channels and products have lower OpEx ratios. And so when you then aggregate the total business, that gradual mix shift just like the effect it has on our loss rate makes the effective operating costs to run the business, continue to reduce.

Speaker 3

So in our expanding operating margins is the benefit of the sort of mix and shift towards channels and products that are generally less expensive to operate. Secondly, as we've talked about for the last year or 2 and then also in the prepared remarks as far as the strategic initiative is We have been focused in a macroeconomic environment like the one we're in, all companies are, we've been focused on trying to be more prudent with expense management and make investments in technology that will allow us to become more efficient. So I'll give you examples. There are business processes involved in our lending and collections that we have automated and have removed the need for human involvement. There is technology we put in our call center that improve the efficacy of the amount of contacts we can make to customers.

Speaker 3

Even in back office functions, like our finance department, we've got some accounting and financial automation that will again reduce the amount of human labor to process transactions and to run financial reports. So there's all these areas where The investments are paying dividends in terms of making the business perform with less operating costs as revenues grow. So those two things are really what's underpinning why we continue to see ongoing improvements in operating leverage and margin.

Speaker 7

Okay. And then just can you just remind us how big a market the subprime or nearprime credit card market is? Maybe in comparison to the automotive market?

Speaker 3

Yes. So it's not quite as large as automotive. If you break down that $200,000,000,000 of Non prime credit balances, auto is the single largest category at $60,000,000,000 The card market though is about $40,000,000,000 Now like all the categories, a big chunk of that is customers who got their credit from a major bank and then they've hit a speed bump and their credit's fallen down. So The balances show up as really having been held by banks, but the customer is pretty much unable to then get incremental credit if they hit the next Speed bump. So it's comparable in size to the installment market, a little bit smaller, Installments closer to $50,000,000,000 but if you think installments $50,000,000,000 auto is $60,000,000,000 Card at $40,000,000,000 still a very significant size market.

Speaker 3

The bulk of our customers either have or would use a general purpose credit card to manage everyday costs, especially if they can get a decent reward benefit for that loyalty.

Speaker 7

Great. That's it for me. Thanks very much.

Operator

Thank you. There are no more questions in the queue. I would like to turn the call back over to management for closing remarks.

Speaker 3

Great. Well, thank you everyone for taking the time to participate in the conference call today and we look forward to updating you at our next quarterly results in May. We appreciate your time.

Speaker 6

Have a fantastic day.

Operator

Thank you everyone for joining the conference. You may disconnect.

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Earnings Conference Call
goeasy Q4 2023
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