goeasy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 7 speakers on the call.

Operator

Thank you. Mr. Farhan Ali Khan, you may begin your conference.

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 Goed Unlimited's results Q1 ended March 31, 2024. The news release, which was issued yesterday after the close of market, is available on Cision and on the Goeasy website. Today, Jason Mullins, Goeasy's President and CEO, will review the results for the Q1 and provide an outlook for the business. Hal Khoury, the company's Chief Financial Officer, will also provide an overview of our capital and liquidity position Jason Appel, the company's Chief Risk Officer, is also on the call.

Speaker 1

After the prepared remarks, we will then open the lines for questions from investors. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our Investors site. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management has finished their prepared remarks. The operator will poll for questions and will provide instructions at the appropriate time.

Speaker 2

Business media are welcome to listen

Speaker 1

to this call and to use management's comments and responses to questions and any coverage. However, we would ask that they do not quote callers unless an individual has granted their consent. Today's discussion may be containing 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 the MD and A. I will now turn the call over to Jason Mullins.

Speaker 2

Thanks, Varun. Good morning, everyone, and thank you for joining the call today. 2024 has gotten off to a great start. We produced strong loan growth and stable credit performance leading to record first quarter earnings, while also raising over $500,000,000 of additional capital and earning a spot in the top 50 best workplaces in Canada. All of this is a testament to our team and their passion for helping Canadians with non client credit get access to the financial products that support their lives.

Speaker 2

A continued increase in market share and favorable competitive dynamics led to a record volume of application of credit at over 610,000 up over 40% from Q1 last year, generating over 40,000 new customers into the business, an increase of 17%. Loan originations during the quarter were $686,000,000 up 12% compared to $616,000,000 produced in the Q1 of 2023. Organic loan growth was $207,000,000 during the quarter with our loan portfolio finishing at $3,850,000,000 up 29% year over year. Unsecured lending continues to be the largest product category at over 60% of loan originations and within our direct to consumer channel, the average loan portfolio across our branch network of 2 95 locations rose to a new high of 6,000,000 per branch, up 18%. We also continue to make very good progress in scaling our automotive financing with volume exceeding $100,000,000 of originations for the 2nd quarter in a row, an increase of 49% year over year.

Speaker 2

In the last year, we had expanded our automotive team, grown our dealer network from 2,800 dealers to over 3,005 100 dealers and experienced a meaningful increase in funding volume from multi location dealer groups, another positive sign that we are winning market share. As has been our strategy for the last 7 years, we continue to pass on the benefits of scale to consumers by shifting our mix of lending toward lower APR products. The overall weighted average interest rate charged to our customers during the quarter reduced to 30% even. Combined with ancillary revenue sources, the total portfolio yield finished at 35%. Total revenue in the quarter was a record $357,000,000 up 24% over the same period in 2023.

Speaker 2

We also continue to be very pleased with the quality of our loan originations and credit performance of the overall portfolio. The dollar weighted median credit score of our 1st quarter loan originations rose to an all time high of 629, highlighting the benefits of our credit adjustments and improving product mix. Secured loans now also represent a record 42.7% of our loan portfolio. Despite the softening economic environment and unemployment being 1 point higher year over year at 6.1 percent today, credit losses have remained stable and within our forecasted range. The annualized net charge off rate during the Q1 was 9.1% at the midpoint of our expectations for the quarter and full year.

Speaker 2

To account for weaker economic performance forecast in the near term, we've increased our loan loss provision rate slightly to 7.38% and 7.28% in the prior quarter. We continue to feel very confident in the credit quality of our portfolio and that we will continue to see stable losses in the quarters ahead. As has been the case for the past few years, we are continuing to experience the benefits of scale through operating leverage and productivity improvements. During the Q1, our efficiency ratio, specifically operating expenses as a percentage of revenue improved to 27 point 4%, a reduction of 570 basis points from 33.1% in the Q1 of the prior year. As a function of receivables, operating expenses were 10.3% versus 13% during the prior year, producing almost 400 basis points of margin to absorb the reduced APRs and higher funding costs.

Speaker 2

After adjusting for unusual items and non recurring expenses, we reported record adjusted operating income of $144,000,000 an increase of 35% compared to $106,000,000 in the Q1 of 2023. Adjusted operating margin for the Q1 was 40.2%, up from 37.1% in the same period last year. Adjusted net income was $66,300,000 up 25 percent from $52,900,000 in the Q1 of 2023, while adjusted diluted earnings per share was $3.83 up 24% from $3.10 in the Q1 of last year. Adjusted return on equity was above our target level of return at 24.6% in the quarter, an increase of 70 basis points from 23.9% in the same period last year. With that, I'll now pass it over to Hal to give an update on our balance sheet and capital position before providing some comments on our outlook.

Speaker 1

Thanks, Jason. During the Q1, we continue to build our long track record of obtaining capital to support our growth. In February, we took advantage of the gradual improvements to the interest rate environment and issued US400 $1,000,000 of senior unsecured notes due in 2029. In connection with the offering, we concurrently entered into a cross currency swap agreement, which served to reduce the Canadian dollar equivalent cost of borrowing on the notes 7.2 percent per annum, a full 200 basis points better than the notes we issued last fall. Before giving effect to the cross currency swap, the coupon on the notes was 7.6% per annum.

Speaker 1

Based on the cash at hand at the end of the quarter and the borrowing capacity under our existing revolving credit facilities, we had approximately 1,260,000,000 total funding capacity. At quarter end, our weighted average cost of borrowing was 6.8% and the fully drawn weighted average cost of borrowing was 6.9%. We also continue to remain confident that the capacity available under our existing funding facilities and our ability to raise additional debt financing is sufficient to fund our organic growth forecast. The business also continues to produce a growing level of free cash flow. Free cash flow from operations before the net growth in the consumer loan portfolio was $77,000,000 in the quarter, while the trailing 12 months of free cash flow exceeded $375,000,000 As a result, we estimate we could currently grow the consumer loan book by approximately $250,000,000 per year solely from internal cash flows without utilizing external debt, while also maintaining a healthy level of annual investment in the business and maintaining the dividend.

Speaker 1

Once our existing and available sources of debt are fully utilized, we also could continue to grow the loan portfolio by approximately $450,000,000 per year solely from internal cash flows. Based on the current earnings and cash flows and the confidence in our continued growth and access to capital going forward, Board of Directors has approved a quarterly dividend of $1.17 per share, payable on July 12, 2024 to the holders of the common shares of record as at the close of business on June 28. I'll now pass it back over to Jason

Speaker 2

to talk about our outlook and forecast for the coming quarter. Thanks, Al. We remain very proud of the work that we do to serve the over 9,000,000 Canadians with non prime credit scores. We help them pay bills, purchase vehicles, pay for dental work, care for their pets, purchase furniture, renovate or repair their home or vehicle and finance many other day to day living expenses that fuel their lives. We are prepared to give them a second chance when the banks aren't an option and we provide access to credit in a transparent and responsible manner.

Speaker 2

Within 12 months of borrowing from us, 1 third of our customers graduate back to prime credit and over 60% experience an improvement in their credit score. We play an essential role in the financial system. With the Q1 behind us, we are well underway in executing our strategic priorities for the year. We have begun designing the pilot concept for a new general purpose credit card product and continue to assess potential platform partners. We have made numerous automation enhancements designed to improve productivity and reduce operating costs.

Speaker 2

And lastly, another 32,000 consumers downloaded our Goeasy Connect mobile app during the quarter with numerous enhancements in development for later this year. The progress against our strategic priorities and the momentum in our business is fueling a very strong Q2. In Q2, we expect to grow the loan portfolio at a record level of between 250 $1,000,000 $275,000,000 driving the full year towards the high end of our forecast range. While this heightened level of loan growth will create an additional drag on earnings in the quarter due to the extra provision expense for future loan losses, organic growth is the most accretive use of capital for future earnings. We expect the total yield on the consumer loan portfolio to be between 34% 35% during the 2nd quarter, reflecting the gradual decline in APRs driven largely by product mix.

Speaker 2

We are also very confident in the health and performance of our loan portfolio. We continue to expect stable credit performance with the annualized net charge off rate finishing between 8.5% and 9.5% in the quarter. Based on early trends, the net charge off rate is likely to be down slightly both year over year and quarter over quarter. We also plan to continue taking advantage of the elevated level of demand by further tightening credit in the coming months just to embed further conservatism into our business. In closing, I want to once again thank the entire Goeasy team as we owe the results and performance entirely to them.

Speaker 2

Today, we are over 2,500 team members, any of which are in our branches, stores, call centers, are out on the road acquiring and supporting our merchant network of over 10,000 partners. They are the ones working hard daily of over 10,000 partners. They are the ones working hard daily to help our customers get access to the credit they need while aiming to support them on the journey back to client credit. We have a strong balance sheet with over $1,000,000,000 in liquidity, a relentless focus on prudent risk management and underwriting so that we can set our customers up for success and an emphasis on operational improvements that allow us to drive more scale and ultimately reduce interest rates for borrowers. With this backdrop and only a 2% share of the total non prime lending market, we are excited to continue serving the millions of Canadians that rely on us for access to credit each and every day.

Speaker 2

As we always say, we are truly just getting started. With those comments complete, we will now open the call for questions.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer

Speaker 3

Could you please share an update on the competitive landscape given the continued strength in new customer acquisition? I mean to what extent are you still benefiting from prime banking institution institutions tightening credit as well as some subscale non prime competitors to retail new originations?

Speaker 2

Yes. Good morning, it's Jeff. So those trends continue to be true today. I think it's very clear that given the current economic environment, prime lenders and major banks continue to have a conservative credit posture. All the major banks and prime lenders talk about having more site credits today and continuing to tighten.

Speaker 2

So inevitably that pushes more borrowers into our segments. And we're continuing to see disruption within the competitive landscape, again, specifically smaller scale competitors. Just in the last 3 months or so, one competitor has filed insolvency, 2 others have announced they're doing strategic reviews to figure out how to manage or divest their portfolios. So those trends only continue and that's as we said before, we believe is just pushing more proportion of the market to go easy and others with scale. And I think that's evidenced in the material increase in the applications for credit that we've had in the last year.

Speaker 3

Okay. On the launch of the credit card, it's interesting to look at the experience of one of your peers in the U. S. In this regard. One feature I found interesting is that most non prime credit card payments as well as the servicing are made via the application.

Speaker 4

So do you expect this to also be the

Speaker 3

case with your new product? In other words, can the GoEasy Connect application support a similar experience and efficiency?

Speaker 2

Yes, most definitely. I think that one of the appealing things about a card product that is unique to all of the other installment products that we offer today is it creates a compelling reason for customers to come back into our digital app and engage on a more regular basis. Cards are generally used for everyday household expenses like gas and groceries. People commonly check their balances, make payments. We intend to build some form of loyalty reward into our program.

Speaker 2

People are incentivized want to come back and see how they're earning benefits and rewards to cash back. And so by building it into your digital app, even though we'll still offer the product and service the product from our branch network where we can build those meaningful relationships, the presence in the digital app just creates more sticky relationships, allows us to maintain ongoing dialogue with the customer and increase the regular usage of our products. So that's very much our intent over time with the product build as well.

Speaker 3

Okay. And just one last question for me. I'd like to cover the recent government proposal to count rent payments towards credit scores. How do you think this could impact the non prime spending industry? Do you think this would actually help improve your underwriting process or actually make it easier for new entrants to compete given greater data disclosure?

Speaker 2

I think generally speaking, any new data sources that a lender can obtain, allow them to strengthen the decisions that they make and the accuracy of their models. So we certainly welcome the inclusion of that data and getting access to that data, particularly given that the majority of our customers 80% are renters. And we don't always get great visibility to their rental payment history other than when we look into the banking transaction data, which we do still get on most borrowers. I will say that I think it's a ways out before the credit reporting agencies are able to figure out how to get the data and how to embedded into their bureaus and their credit scores. So I think like many things that announcement is still very early in terms of it being a practical source of data for us.

Speaker 2

But if and when it does happen, any of that additional data is just going to allow us to continue to refine and increase the predictability of the models that we build. So we're happy to have that happen.

Speaker 3

Great. Thank you very much.

Operator

Thank you. We have our next question coming from the line of Gary Ho from Desjardins Capital. Go ahead please.

Speaker 5

Thanks and good morning. Maybe just start off with a question on FLIs and unemployment rate. I think in the past you mentioned you have factored in a mild to moderate recession in your 3 year outlook and you quantify that by saying it's 6% to 7% unemployment rate. But when I look at the Moody's FLI that's in your disclosure, your neutral case calls for 6.23% and your moderately pessimistic is 8.46%. So can you help me reconcile that?

Speaker 5

And the second part of that question, Jason, as you mentioned, the March unemployment rate is already at 6.1%. At what point would you update your unemployment assumption looking out?

Speaker 2

Yes. So I can open up with a few comments and then I'll pass it to Jason to just add on here. So think about our base case continues to be that the economy will go into a mild to moderate recession. As you pointed, that assumes unemployment rate will rise as high as 7%. That base case is essentially the midpoint of our range.

Speaker 2

So unemployment could rise another full 1.7% and we believe that our current credit tolerance level would still be supportive of maintaining a loss ratio at the midpoint of our range. As the unplanned rises beyond that, if it were to rise beyond 7% to say 7.5% to 8% that would begin to push us into the upper end of our range. And if it went beyond 8%, we would now be considering to revise the range. However, as noted earlier, in order to contemplate reducing the risk of that probability, we're going to continue to make credit refinements. We've got a couple of credit tolerance adjustments that we're planning on making in the next couple of months.

Speaker 2

Again, to be clear, we see absolutely nothing in our data set that is of concern today. As noted earlier, the delinquency and the loss rates are very stable. I think they'll come even down slightly in the Q2. So notwithstanding the economic outlook, we'll feel very good, but we will continue to operate with more conservatism and discipline as we always have and take advantage of the robust demand to continue to tighten credit. Jason, do you want to add?

Speaker 4

Yes. Just really briefly just to add is just to remind folks that we do have a number of levers that we can pull with relative quickness to offset the types of risks, Gary, that you're talking about. Credit tightening certainly is one that Jason mentioned. We regularly refine and update and swap out our credit models out as we ingest and refine the data we get. The shifting product mix, which as Jason pointed out, now sits at an all time record high of just under 43%.

Speaker 4

And the fact that we do toggle the affordability calculations that we use on our customers, all of which really go into making sure that we can be highly selective. And I think that's best indicated by the fact that despite the fact that our application growth was substantially higher year on year and quarter on quarter, We're actually more discerning now than we've ever been in underwriting of customers that we do onboard. And we do that in part to reflect the changing economic circumstances that operate in the backdrop, it also allows us to be very selective on who we onboard as new customers and the kinds of credit performance we expect going forward. So those tools and levers really help us to stay well ahead of the game in combination with a very robust reporting we look at on a very regular basis.

Speaker 2

Let me just add Gary. The other thing to point out is that the provision rate we carry on the books today is still down from what it was last year. I think that despite there's going to be quarter to quarter oscillation, when you look at it over the long you can see clear evidence that we feel very good about the current trends and the performance of the business. And I would also just re highlight a comment I made in the prepared remarks. The median credit score on a dollar weighted basis of the loan origination that we did in this past quarter was the highest it's ever been.

Speaker 2

So as you onboard progressively better quality loan originations you progressively continue to tighten credit, you really set yourself up for a stable portfolio, despite some of those economic headwinds. So we're just as confident now as we've ever been that we can very safely navigate through any headwinds that might arise.

Speaker 5

Okay, thanks. Thanks for the detailed answer there. My next one just on the revenue yield was 35% that was above your Q1 guidance. Just curious kind of what drove the outperformance versus your expectations heading into the quarter? You perhaps maybe on the rope more unsecured loans than you expect?

Speaker 5

And how do you manage that versus the credit risk that you're taking on? And I think, Jason, you mentioned tightening credit again in your prepared remarks.

Speaker 2

Yes. I mean, as you know, we've taken advantage of the opportunity to adjust pricing where we can. We like all businesses have to account for higher funding costs and every lender in the marketplace has put up pricing. So we've tried to take advantage of that where possible, where it makes sense. We also experienced a little bit better cash payments volume in the quarter.

Speaker 2

We have an extra day in the quarter this year versus comparability. So we didn't see anything material. I think that we just experienced a strong quarter in terms of payment performance, got to experience the benefits of a little bit of pricing increases. And then with the extra day in the quarter that helped us put the yield just a bit over the upper end of the range we previously forecasted.

Speaker 5

Okay, great. And then just my last question, just on the rate cap. I don't think we've seen an implementation date so far, and I think that compares to your mid year implementation expectation. Maybe can you share any scenario analysis in terms of what a no rate cap would do to your revenue yield expectations when we look at like 25, 26 numbers? Like would it just push it to your upper end of your range or would it be above that upper end?

Speaker 2

Yes. So just again to recap, we have embedded an assumption into our business and our forecasts that the new 35% maximum allowable rate will come into force in July of this year, given that the draft regulations indicated that once the final regulations have been published, that will be with 90 days of advance notice. That means that we're really already beyond the point at which the new rate will come into effect at that timeframe. We don't have any visibility or line of sight to when that date will come. I think it's possible it could get announced any day.

Speaker 2

It's also possible that it could continue to get delayed. Certainly, I think the federal government continues to have an appreciation for all of the points and concerns that we as the association have raised about how it will negatively affect the segment of borrowers. And I think that that message is resonating. So hard part to say exactly when it may take effect. To your question about what does that do to yield?

Speaker 2

Yes, essentially think about that for each quarter delayed beyond July that continues to then be net positive to the yield of the business. Or we can take advantage of the opportunity to continue to price loans or we can take advantage of the opportunity to continue to price loans competitively and grow more quickly and exceed the growth forecast and still stay within that yield range. So similar to the way we can toggle risk tolerance, we can also toggle the growth forecast in part because there is a degree of price elasticity. So net net, as that gets delayed, that's favorable either in the form of better yields and more in the upper end of the range or it gives us another tool and another leader to continue to drive very robust growth in business.

Speaker 5

Okay, great. Thanks for taking my questions.

Operator

Thank you. We have our next question coming from the line of Jeff Fenwick from Cormark Securities. Go ahead please.

Speaker 6

Hi there. Good morning. I wanted to follow-up on some of the questions on the credit front. Wanted to ask specifically about auto as that category continues to grow contribution overall. And maybe just some color from you on your expectations on credit performance or variability in that category.

Speaker 6

I tend to think about it as one as that might have a bit of a wider range of credit performance and it's influenced by obviously economic factors, used cars pricing, etcetera. So what's your thinking there? And how do you sort of manage that as you build that portfolio out?

Speaker 2

Yes, great question. So auto is one of the categories that when we look at the improving mix of our originations by credit and average score, Auto is one of the categories that has progressively improved and continued to help lift the average credit quality of the loans that we write. So in general, the quality of the loans we're issuing in the automotive financing category are better than the average credit that we issue across all the other product ranges and of our existing portfolio. So as we've been writing more auto business, that's actually been helping improve the quality of our portfolio. We also continue to within auto believe that we still maintain a fairly conservative credit posture.

Speaker 2

We are not buying as deep as some of the other deeper non prime lenders in that market. We tend to be competing in auto much more for a near prime customer alongside some of the non prime divisions even of the major banks. So it's a very good quality business. I would also add that if you look at the average car refinancing, we're talking about a vehicle that's 6 or 7 years old. The ticket price of that car is 18,000 to 20,000 dollars We're not exposed to a very high priced vehicle category.

Speaker 2

And so with vehicles of that age, when you look at the depreciation of those vehicles relative to the rate that the loans repay down, we're often still finding today we're able recover the majority of our loan balances when we do need to have a customer surrender the vehicle or repossess the vehicle. So we're constantly fine tuning our underwriting criteria, constantly adjusting our loan to value ratios to account for fluctuations in prices. But net net, that product loss ratio sits well below the portfolio average. It's obviously secured by a hard asset and it's better credit quality customers than the average across the rest of our business. So, yes, it's a growing product for us, but it's actually one that's actually helping the overall credit and helping pull this.

Speaker 2

We're quite comfortable.

Speaker 6

Yes. That's very helpful color. Thank you. And on a second topic here, I noticed in your earnings adjustments, there was $2,500,000 associated with advisory services. So I just was wondering if this is related to maybe looking at some strategic opportunities in the market.

Speaker 6

I know in the past you have articulated the U. S. As an area of interest, but perhaps to this period of time in Canada as well, are you seeing maybe some opportunities if there are competitors or complementary businesses that might be up for sale?

Speaker 2

Yes. So a couple of non recurring items in there. One is in corporate development. As we said many times before, we are very open minded to acquisitions and strategic investments. And so we are on a regular basis evaluating opportunities.

Speaker 2

In that times those opportunities require us to work with certain advisors to help do the work on assessing those opportunities. Obviously, can't share specifics about them until such time as something becomes real and live. But you should expect that from time to time you will see us incur some costs related to exploring new strategic investments. So there's certainly some of that in the business. And then also, as you know, we over the last period of time had a fairly robust undertaking in the government relations area to continue to bring forth the attention to the unintended consequences of a federal rate cap change.

Speaker 2

And so we have incurred a little bit of advisory costs in that domain that were one time in nature related to our GR campaign. So just think of it as corporate development and kind of general government relations and corporate affairs, both one time costs that will no longer be kind of in the run rate of our corporate costs going forward.

Speaker 6

Okay. Thanks for that. And then maybe one last one here on EasyHome. We don't speak about it often given that it becomes a smaller component of the total, but certainly a notable move in the margin there in the quarter and some commentary on efficiency gains. So is that operating margin in that business looking like it's going to settle in around that higher run rate going forward?

Speaker 2

Yes. Generally, think about the operating margin in the leasing business or in Easy Home as an operating unit being a function of the growing proportion of revenues and profits in that division coming from Lendly. As you know from many, many years ago, the core standalone leasing proposition would typically run with operating margins between 15% 20%, whereas in an easy financial branch, we would have margins between 40% 50%. And so as the proportion of the revenue streams inside easy home stores continues to shift progressively and gradually toward lending, so that's helping improve the margin profile of those overall 4 walls. So it's really just that dynamic.

Speaker 2

And yes, we would expect that dynamic to continue to gradually be present in the business.

Speaker 6

Okay. That's all I had. Thank you.

Operator

We have our next question coming from the line of Jack Cohen from National Bank Financial. Go ahead please.

Speaker 3

Yes, hi, thanks. Just one question for me today. I was wondering if you could provide a little bit of color, if you could, on the plans for the potential share

Speaker 2

split? Sure. Yes. So as some may have noted in the preparation for our AGM that we've got later this afternoon, we have asked shareholders to approve our right to conduct a share split. We do not have an imminent plan at this moment to complete a share split.

Speaker 2

But as we've had continued growth in the share price and we still maintain a fairly large retail investor base, we have contemplated a share split in the future. And so it's regular and normal course to go and obtain shareholders approval to do that at an AGM. And so we're just putting that on the docket for shareholders to consent to. And of course, we'll provide more update in the future as we consider split at some point.

Speaker 3

Okay. Thank you.

Operator

Thank you. There seems to be no further questions at this time. I'd now like to turn the call back over to the company for final closing comments.

Speaker 2

All right. Well, since there are no more questions, again, we'd like to thank everyone for participating in the conference call. Remind all that we'll be hosting our Annual General Meeting of Shareholders virtually this year that will take place later this afternoon. And we also look forward to updating you on our progress in 2024 at the next quarterly call in August. So then have a fantastic rest of your day.

Speaker 2

Thank you, everyone. Bye now.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

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