goeasy Ltd. (GSY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you standing by, and welcome to goeasy's conference call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to you host, Mr. Farhan Ali Khan. Sir, you may begin.

Thank you, operator, and good afternoon, everyone. My name is Farhan Ali Khan, the company's Senior Vice President of Corporate Development and Investor Relations, and thank you for joining us to discuss goeasy's announced acquisition of LendCare. The news release, which was issued this afternoon, is available on Globenewswire. Both the news release and a supplemental investor presentation can also be found on the company's investor website. Today, Jason Mullins, goeasy's President and Chief Executive Officer, will provide some comments in detail on the announced acquisition of LendCare. After the prepared remarks, we will then open the line for questions from investors. Hal Khouri, the company's Chief Financial Officer; and Jason Appel, the company's Chief Risk Officer, are also on the call. Before we begin, I remind you that this conference call is open to all investors and is being webcast on the company's investor website. 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. Business media are welcome to listen 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 However, we would ask that they do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but I will direct you to caution regarding forward-looking statements included in the press release. I will now turn the call over to Jason Mullins.

Thanks, Farhan, and welcome, everyone. We are thrilled to have announced earlier today the acquisition of LendCare, one of Canada's leading point-of-sale financing platforms. The transaction is subject to customary closing conditions and regulatory approvals, and we are aiming to close by the end of the second quarter. During the call, we will provide a brief overview of LendCare, a summary of the key strategic benefits and highlights of the acquisition and review the terms of the transaction. Before I begin, on behalf of the company, I want to welcome LendCare's founders, Ali Mattel and Mark Shell, who will continue to remain with the company and manage the daily operations of the business along with their 185 team members and all of their merchant and business partners to goeasy. We truly look forward to working together. LendCare was founded in 2004 by Ali and Mark to fill a gap in the market for financing consumers every day large ticket purchases. Over the last 15 years, they have built one of Canada's leading point-of-sale financing platforms in the power sports, retail, health care and home improvement verticals. Through approximately 3,000 merchants, LendCare offers a convenient and consumer-focused loan origination platform that enables their partners to process installment loans quickly and easily for their customers, with rates between 9.9% and 34.9%. The company has deep and long-standing relationships with retailers, dealers and major name brand OEMs such as Bombardier recreational products and CFMOTO. LendCare consumers range across the entire credit spectrum with 2/3 in the non-prime segment where they have especially deep expertise in credit and underwriting in their respective verticals. As at year-end 2020, the company had over $400 million in consumer loans, approximately 50,000 active customers. And during the last 3 years, they have compounded the growth of their loan portfolio at over 47% resulting in compound earnings growth of over 50%. The acquisition of LendCare is a significant strategic fit for goeasy. It is directly in line with our existing strategy and will help accelerate our growth plans. First, it is a highly complementary and meaningful in-market acquisition, which increases our scale and extends the product line for customers. The first of our 4 key strategic pillars has been to expand the range of products for our borrowers. Together, products offered by LendCare and goeasy will span the nonprime credit spectrum with rates as low as 9.9%. Lowering the cost of borrowing for our consumers and providing everyday Canadians the ability to improve their credit and graduate to progressively lower interest rates has been core to our vision since the inception of our lending business. Secondly, LendCare expands our point-of-sale channel into 3,000 additional merchants and new industry verticals such as power sports, health care and home improvement. This supports the second of our 4 key strategic pillars, which has been to expand the channels through which our customers can access credit, a main component, which has been growing our point-of-sale channel since launching our first major brand relationship with Leon's 5 years ago, to our successful investment in prime partnership with PayBright, now a firm, we have been building a market-leading offering in the Buy Now, Pay Later channel. LendCare will help accelerate this growth by launching us into new categories that have been on our road map for future development. Lastly, the transaction improves and diversifies goeasy's overall risk profile with higher quality near prime borrowers and secured loans. On a pro forma basis, the credit quality of our average borrower will improve, the weighted average interest rate charged to our consumers will decline from approximately 38% to 34%, and the proportion of our loans secured by assets will increase from approximately 12% to 30%. In addition to the attractive high-growth and profitability of LendCare, the acquisition also produces meaningful and achievable revenue and cost synergies. The most important of these is the revenue synergies. The transaction presents the opportunity for LendCare to leverage goeasy's credit and pricing optimization models to lend to more non-prime borrowers by increasing the approval rate for its merchants, and producing increased originations and loan growth. Secondly, both LendCare and goeasy will have the opportunity to cross-market their respective sets of products to the large consumer base of each firm. goeasy consumers will benefit from offers to finance purchases at a lower cost of borrowing through LendCare's merchants, while LendCare customers will enjoy access to goeasy's unsecured and home equity installment loans, a true win-win for both businesses. On the cost side, the transaction presents the opportunity to leverage goeasy's mature and developed balance sheet to refinance a portion of LendCare's debt at a lower cost while ensuring the business has all the necessary lows capital it needs to fund its ambitious growth plans. Lastly, there will be the inevitable benefits of scale through which we can obtain better pricing from vendors and suppliers and gradually combine back-office functions for greater efficiency. Together, we expect these synergies to generate approximately $9 million in run rate annualized after-tax income at year-end 2022, and approximately $19 million in run rate annualized after-tax net income in 2023, continuing to grow each year after. We will use that as a segue to the financial consideration and aspects of value creation. The total purchase price of the transaction is $320 million, which represents approximately 13x the anticipated 2021 IFRS adjusted earnings of LendCare excluding the impact of any synergies realized, which represents a discount to the current goeasy trading multiple. In addition, we will also inherent approximately $415 million of liabilities, a portion of which we will refinance and a portion of which we will assume and utilize for future funding needs, making the enterprise value of the purchase approximately $735 million. The transaction will be funded through a combination of equity and the issuance of new unsecured notes similar to those we carry on our balance sheet today. As such, and concurrent with announcing the transaction, we have completed a $130 million bought deal equity financing of subscription receipts, led by BMO Capital markets. We are also pleased that LendCare's founders, Ali and Mark, have jointly elected to take $10 million of their total consideration in the form of goeasy common shares as a signal of their confidence in our outlook. We will then assume approximately $170 million of existing funding facilities on the LendCare balance sheet, leaving the balance for approximately $425 million and an additional approximately $20 million in transaction costs to be funded by the issuance of new unsecured senior notes. Based on the strength of the transaction and pro forma balance sheet, the entire financing package was also 100% fully committed by BMO. While the transaction will temporarily relever our business, our net debt to net capitalization will remain below the targeted 70% we have historically optimized for and the strong free cash flow of the business will result in a natural and gradual deleveraging, just as we have seen in our business to date. Furthermore, we continue to have an open dialogue with the rating agencies regarding our operating strategy and financial policies, and we feel confident that our corporate credit ratings will remain maintained. The ability of goeasy to use its strong balance sheet and capital position to invest in a profitable, high-growth business, combined with the highly complementary nature and strategic fit of the acquisition, enables us to produce both new revenue growth and cost synergies, leading to a compelling financial transaction that creates long-term value for shareholders. On a true discounted cash flow basis, the investment is an excellent allocation of capital projected to comfortably exceed our required rate of return. It is also immediately accretive to our adjusted earnings per share after normalizing for the onetime acquisition-related transaction expenses, an upfront IFRS provision and the amortization of acquired intangibles. We expect the accretion of the investment on adjusted earnings to then climb to approximately 10% in the first full year following the acquisition in calendar 2022, then rising further to approximately 15% in 2023. Lastly, the economic profile, attractive valuation and synergies will assist in continuing to produce a long-term return on equity of 25% plus for our business. As we have outlined in the past, our strategy has been to expand our range of products, grow our channels of distribution, widen our geographic reach and deliver a best-in-class experience for our customers, one that helps give them access to the credit they need today while gradually lowering their cost of borrowing and helping improve their credit. We have also shared that while we have an attractive organic growth plan, we would also be seeking acquisition opportunities that could accelerate the execution of our strategy and contribute to our 20-year track record of growing earnings at over 30%. We believe LendCare is the ideal opportunity meeting all of our key investment criteria for strategic fit, return on capital, overall size and long-term value creation for shareholders. We look forward to closing the transaction in the coming months and working with the LendCare team, as we continue on our journey to become Canada's leading non-prime consumer lender. With those prepared remarks concluded, we will open the line for questions.

[Operator Instructions] Our first question comes from Jeff Fenwick of Cormark Securities.

Jason, so maybe I haven't -- wasn't able to forget the presentation. But can you just give us maybe a bit more detail on the loan mix there today. You gave us a few different I guess, verticals that they're in today, like what portion of that book would be secured? And is there one area that dominates or how balanced is that mix?

Yes, sure, happy to. So the -- if you look at the distribution of their portfolio by the verticals that we outlined, the presentation doesn't provide precise distribution. What we would say is that the predominant representation is in the power sports category, in particular, where LendCare has been particularly strong at building their position. If you look at the difference between our portfolio and theirs, given that they are lending in the majority of verticals where they are secured by some form of assets, where today, our portfolio, as you know, from our last set of disclosure, about 12% is secured and the majority unsecured, their portfolio would look almost to the identical inverse to that. And so when you put it together on a pro forma basis, that's where you get to about 30% of the portfolio would now be secured by the various assets and the verticals that they currently led to that I outlined.

Okay. And you mentioned OEM relationships were part of this as well. So is this a situation where someone like a Bombardier Recreational Products that have a direct relationship with LendCare and run sort of vendor finance programs for them?

Yes, that's exactly right. They have a myriad of relationships. They range from actual retailers and distributors themselves, all the way through to the OEMS, as you've highlighted, where they work directly with the OEM to help put in place a financing program that then gets passed down through all the distributors of those OEM products as a way to law for their consumer financing. Oftentimes, those OEMs will have their own very prime-like financing program that they may offer. And then, of course, LendCare has been well-positioned right behind to pick up the balance of the balance of the consumers looking for financing for purchases.

Okay. And maybe you could comment on technology. I know how central that is to goeasy. So how complementary is the technology here? Is it something where you can migrate their platform over in a reasonable period of time? Or are they going to continue to run on their technology for now?

Yes. Great question. So we think the technology is certainly complementary. We would intend to continue to have the LendCare business operate on as its own platform, certainly for a period of time. And then as we get more familiar with the way the 2 operating platforms work, we'll then look for ways to start to combine and leverage the mutual technology of both platforms. The platform that they've built over many years, we think, is very robust, provides the merchants within their network, a really easy and intuitive platform to be able to take and process applications, and they're in the process of enabling that technology so that a consumer can actually go online to their various merchant relationships and actually get preapproved for financing before they even go shopping with those particular merchant relationships. So we think quite highly of what they've built and our intention would be to leave it intact for a period of time. And then, of course, when we find ways we could leverage the best of both technologies, we'll start to think about putting the pieces together down the road.

And maybe just one last one on the debt financing. What are you seeing in that market today, I mean, the funding costs have been very attractive of late? Is this going to be something in the range of where we saw you were using DBS issue or any color you can offer there? I guess you can't really speak to it until you've completely done the offering, but...

Yes. I mean I would say we feel very confident about the conditions of the market and our position to issue into that market. Our existing notes have been trading at a premium for the last long while now. So on that basis, we would expect that a new issuance would garner a rate below where our previous one was issued. So certainly, we would expect that we would have a good response in the market, and we would have an attractive cost of capital that would be superior to the last issuance that we did would be how we think about it at the moment.

Our next question comes from Stephen Boland of Raymond James.

Congratulations on the deal. Maybe just my first credit -- or question is on credit. How -- what's been the performance of LendCare's credit performance over the past couple of years?

Yes, great question. Maybe I'll pass it over to Jason Appel. He's done some good work on looking at the credit. Jason, do you want to make a couple of comments there?

Sure. Happy to. Stephen, just really briefly, we've done a pretty thorough analysis of the LendCare book over the last several years, both internally and also using independent third-party assessors. I would have you think about their loss rate over the last couple of years as being in the low to mid-single digits, and that's mostly a byproduct of the fact that a good chunk of their portfolio, as Jason Mullins has already indicated they secured, and they've maintained that stable and attractive loss rate over the last several years. So a high degree of confidence in our ability to manage both the credit and the underwriting of the business there.

Okay. And sorry, I'm still going through this presentation. Is the breakdown of the book -- is obviously 3,000 merchants. Is there a concentration in one segment or OEM like Bombardier, does that make up an unusual proportion of the book?

No. It's -- although power sports represents the largest share, it would be the largest portion, the balance is actually quite well distributed across all of the different categories. Power sports just being the largest of the group. And if you look at their total portfolio and all of their originations across all the merchant relationships, there is no one that has a high and material degree of contribution. So certainly, key relationships like the ones noted, are meaningful. But nothing that is material. It's a nice widely distributed network of relationships across all the categories and all the categories contribute a reasonable share to their overall business.

Okay. And maybe just I'll sneak one more in. Just your relationship then with PayBright and Affirm, does anything change there? I presume those LendCare and PayBright are somewhat as competitors? Do you anticipate anything change in there?

No, we don't actually. I think, if anything, there are perhaps opportunities to even think about ways we might work together. I mean, I think the reason why we don't see it as impacting those relationships are if you look at PayBright Affirm, there's a couple of key differences. One, they are much more very specifically a prime lender, whereas you can see as we noted, LendCare is 2/3 non prime, so they're a different credit segment that they're primarily focused on, first and foremost. So perhaps complementary in that respect. And then secondly, the PayBright Affirm, the company is focused more heavily on the traditional core retail products, furniture, appliances, fashion, household goods, that's not to say that they might not be can to expand in other channels before as a prime lender. But that's been the area they've definitely been primarily focused and continue to be focused on and where we work with them versus if you look at LendCare, again, very different, predominantly power sports, home improvement, those kinds of categories. So no change to the relationships. These are complementary businesses. LendCare looks much more like a goeasy than at Affirm or a PayBright. And so we think there's good opportunities to continue working together with all those partners.

[Operator Instructions] Our next question comes from Gary Ho of Desjardins Capital.

Maybe first question is for Jason Mullins. Can you maybe talk about the competitive landscape? And I guess, in particular, kind of LendCare's primary competitors there, their market share I didn't go through the slides yet, but any geographical mix that you can share with us?

Yes, sure. So from a competitive landscape, fairly similar to the competitive landscape we've discussed in the past. On the nonprime lending segment, you're going to have -- would have been goeasy as a predominant competitor, Fairstone still is a large and predominant competitor there. As you move up the credit spectrum and into the more near prime categories, then you're going to have a little bit of overlap with lenders that are already doing Buy Now, Pay Later point-of-sale financing in Canada, some Flexiti, some little bit of PayBright, in some other category like home improvement, you're going to have companies like Simplii group and finance it. So it differs depending on where exactly you are in the credit segment and where -- which verticals that you're in, but there's at least a couple of other competitors in each of those categories. But it's not an overwhelming number. It's certainly not a crowded space. It's just a good healthy amount of competition within each of those categories.

Okay. And then the other one is, can you talk, I think, a little bit about the revenue synergies. Can you talk about any overlap in customers between LendCare and goeasy and perhaps touch on maybe the average duration of the book?

Yes, sure. And maybe just as a bolt-on to your last question, I didn't touch on around geographic distribution. Their distribution is also national. So good representation in all the provinces. The distribution at the provincial level is a little different than population, but not dramatically. So a fairly nicely widespread national distribution. In respect to your question on the kind of overlap, limited overlap in the existing actual customer base today, given that, together, we collectively still only have a few hundred thousand customers out of 9 million prime Canadians. So naturally, we're still on a combination base is still a very small company in a significant market. So very little actual customer overlap, but great overlap in terms of the complementary nature of the portfolio. So as I mentioned in the prepared remarks around where some of the synergy opportunities lie, the revenue ones being most important, this is a great way for both companies to be able to offer a wider range of financial products to their customer base. We have not been in -- predominantly not been in the categories they're in. So our customers have never seen financing offers or the types of categories that they're in. Likewise, they've really done very little, if any, traditional direct-to-consumer lending for unsecured loans and the type of secured loans that we do. So again, very complementary in that respect. And again, on the pricing side, because the combination of their more near prime portfolio on our more non-prime portfolio crosses down the entire pricing spectrum, it just means that collectively, as a team, we're going to be in a better position to acquire as many customers as possible and price them at the exact appropriate rate that optimizes the conversion and the lifetime value of the customer.

And then any color on the duration of the book?

Yes. So they have, on average, a higher loan size. You can denote from the earlier prepared comments about a $400 million portfolio and 50,000 approximate customers that we're acquiring. So that puts the average loan size around 8,000. To simply put, the average tenure of their loans is going to be in the kind of 5 to 8-year range because they're going to be generally larger and longer-term loans given the size. So very -- somewhat similar, I would say, to the upper echelon of our unsecured customers and the way we've done larger duration loans at lower price points to them to our best customers who are more near prime, that would be very similar to how their portfolio would look given the credit profile.

Okay. And then just last question. You provided some earnings accretion numbers in your prepared remarks. Can you maybe walk us through kind of some of the assumptions that's built in particularly on the loan growth side? Are you assuming kind of similar growth that they have seen in the last couple of years? And/or, it sounds like you're benefiting some of the -- from the refinancing costs, also kind of net charge-offs. Are you expecting that to decline or stay flattish from where we are?

Yes, sure. So I would say the way to think about the assumptions that underpin the outlook and the accretion. First of all, our base business, upon which we apply the impact of the accretion, we've got a base organic projection that's similar to what people have heard us talk about before is a set of what we feel are very reasonable projections that are based on the product categories we're in today, the initiatives and the projects that we already have live or underway. We've not been overly bullish about the outlook or including an impact of things we haven't done or haven't built yet. So a really good set of, we think, quite solid and reasonable projections. and as you would note from our prior ability goeasy stand-alone projections, those are -- that organic plan is still quite attractive on its own there. The LendCare business has its own projections. And through our process, we worked with the data and the information we had to build their own set of projections about their business and looked at all the categories they're in, the size of the market, the recent origination trends, the growth outlook for each of the categories they're in within Canada. We're able to then build our own set of what we think is very reasonable and realistic projections. Obviously, as you heard me mention, their growth profile because of their earlier stage of their company is very attractive. So when you put those things together, you get a natural accretion that just comes from the fact that we're using goeasy's balance sheet to purchase a profitable high-growth business. So a portion of that accretion just comes from purely and simplistically the transaction itself. And then another portion comes from the benefit of those synergies, which -- the way I would think about those is they're about half revenue related and about half cost related, putting the financing into the cost side of the ledger. So again, a nice, healthy contribution to accretion coming from just buying a profitable business with the goeasy balance sheet and the other portion coming from the synergy and then that synergy portion being broken down is split roughly proportionate between revenue benefit and cost benefit. Last thing I would say, which I think is consistent with the way goeasy has always historically managed over a long period, we think when we build our projections and our outlook that they're quite reasonable. And that certainly, there's upside opportunities to our projections as things go well and we really execute it and also LendCare flying more and more ways to work together.

Okay. And if I can just sneak one more in for maybe Jason Appel. Just last year through the COVID environment, can you comment how the book performed? And any numbers on deferrals or things of that nature?

Sure. Great question. In a testament, I think, to the power that Mark and Ali brought to their business. They -- much like we did experienced some very strong performance over the last, call it, 12 to 15 months. And praise should go to them because on balance, they did quite a modest level of what you would call customer modification type programs. In fact, they did it on a much lesser amount than we did comparably over the same period. And I think that's largely a function of 2 things. One would be the stronger relative credit quality of their book when compared to ours that Jason Mullins talked about. And the second one is the fact that a vast majority of the book is secured by hard assets. And as a result, there is a strong compulsion on the part of their customers to maintain ongoing payments, not just in good times. But also in times of economic uncertainty. So I would say their performance on balance over the last 15 months has been quite strong. They have not seen a meaningful increase in their overall loss performance. And we would expect them to follow our portfolio insofar as the directional movement of loss rates over time, but on a much smaller basis because they've just seen less movement overall.

And do they have an insurance product as well similar to what, I guess, goeasy's loan book does?

They do have a similar product. They have a couple of ancillary products. You could think of the categories they're in, they're going to have a few different products, some that are more like a warranty products on the products that they actually are having consumer finance. They do have an insurance like product to ours. It's a little less mature, a little -- much less penetration. So that's an area where I think they've done a good job, and we think we can -- we can also be quite helpful to the business and the experience that we've got.

[Operator Instructions] Our next question comes from Jaeme Gloyn of National Bank Financial.

Yes. First question is on the prime customers. Can you just -- you mentioned it in the prepared remarks, I didn't quite catch it. Is the expectation that prime borrowers are going to roll off and you'll use that capital to further growth in your province some prime?

Yes. No, great question. So no, that's not the intent. As you noted, there is a there is about 1/3 of their portfolio that on a credit score definition basis is prime. And certainly, that's an important part of their offering to some of their merchants is that when there is a prime lender in front of them, especially, for example, it's an actual OEM financing offer that they're able to still serve a segment of borrowers that are more prime like. I would think of their customers in that prime segment as being more on the lower end of what you would define as prime. As evidenced by the fact, as I noted earlier, the rates kind of start at around 9.9%. So they don't quite have the same sort of very prime-like low single-digit highly subsidized type rates that you would see in a very traditional prime portfolio. But being able to serve a segment of those prime customers does create a really good full spectrum offering for their merchant partners. And more importantly, it actually then opens the door to being able to acquire and sort of that large share of non-prime customers. So over time, obviously, we're going to look to work with them to figure out how we continue to find ways to optimize the model, optimize the customers that we lend to, but no plans to make any changes to the business. We think the mix of their business by price, the mix of their business by customer segment is really strong, it's profitable. They underwrite and do the credit pretty well. And so our job is going to be -- continue to be there to support them and just find ways we can bring goeasy's expertise to bear to help just make it even stronger.

Okay. Great. That's helpful. And second question is related to the automotive vertical and the point-of-sale option there. How does that complement or help or further the expansion of your direct-to-consumer auto loan program that you would start this year?

Yes, it's a great question, and we didn't really highlight [Audio Gap]

I'm showing no further questions at this time. I'd like to turn the call back over to Jason Mullins for any closing remarks.

I think, operator, we may have lost Jason the line here. Are there any further questions, operator?

I'm showing no further questions at this time.

How do -- did we give a full answer to Jaeme's question on auto. I just want to -- it seemed to have cut out on my side. Maybe I missed it.

I believe it may have cut out there. Do you want to go ahead and address that particular point?

Sure, Jaeme. It's Jason Appel here. Just to sort of answer what Jason Mullins would have said, in terms of how we're thinking about their auto product. They've looked at distribution on their side. And very much rely on their merchant partners as a means of distribution. So auto for them is a natural bolt-on to their business. As we look to the offering that we're bringing to market later this year is a direct-to-consumer offering where we, at this point, are still primarily looking at the end consumer as our focal point with a secondary focus on the distribution side. I think what remains to be seen as we bring the 2 businesses together is how those 2 distribution platforms work in partnership with one another because I think we have the option of either enhancing what the good folks at LendCare have already built with the work that we've done and also learning how both businesses can be further optimized. So I'd say at this early stage of us coming together, we have the opportunity to be active and even stronger in both of those distribution channels, both the direct-to-consumer channel, and let's call it, what's known as the indirect automotive channel, which LendCare is already operating in. So hopefully, that gives you a bit of a flavor of how we're thinking about the 2 businesses at this point.

Thanks, Jason, for covering me off there. I apologize if I got disconnected, but I'm back. So thanks for stepping in.

[Operator Instructions] I'm showing no further questions. I'd like to turn the call back over to Jason Mullins for any closing remarks.

Yes, great. So thanks, everyone, for joining today's call. We appreciate your time, and we look forward to updating everyone on our Q1 release next month, where we'll provide further updates on the progress of the transaction and our full final Q1 results. Thanks, and have a fantastic day. Bye now.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day.