Propel Holdings Inc. (PRL) Earnings Call Transcript & Summary

Good afternoon, everyone. Here with me is Co-Founder and CEO of Propel Holdings, Clive Kinross. I'll let you take the mic and go from here.

Cool. Thank you. Thanks a lot, and we'll see how to control everything over here, but good afternoon, everybody. Nice to see we've got a conscientious bunch of people in the audience over here late on a Monday afternoon. As Andrew said, I'm the Co-Founder and CEO of Propel Holdings. By way of background, I'm South African, in case you don't recognize the accent, and I'm immigrated to Toronto, Canada in the late '90s with my wife. And shortly after arriving there, started my first business, which was in the automotive industry, a business called OPENLANE, where we facilitated the sale and distribution of used motor vehicles over the Internet. There was a transformational business model, where we went up against the big brick-and-mortar auto auction companies. With the advent of the Internet, I thought there was a better way ultimately to distribute used cars. And over the course of 10, 11, 12 years, we built that business. Suffice to say, it was a really challenging business to build. Transforming any industry is not a straightforward endeavor and certainly transforming the auto industry and the way used cars are distributed wasn't straightforward either, but we ultimately did that. We became leaders in that market in both Canada and the U.S. Beat hot companies like ADESA and Manheim, brick-and-mortar auto auction companies, and we've taken that company public on the NASDAQ in '08. Unfortunately, we've got our timing wrong in that instance. And ultimately sold that business to ADESA to car holdings for just over $0.25 billion. I took off a little bit of time. I needed to catch my breath after that. I did a little bit of traveling. And as part of the traveling really stumbled on the industry that we're in now which is a consumer-lending business. I had no idea when I started my research about 11 years ago that about 1/4 of the U.S. population, was actually a higher number at the time, by the way, but about 1/4 of the U.S. population couldn't afford $400 in the case of an emergency expense. And as the $400 got up to $500, the percentage increased as well, quite staggering for the wealthiest country in the world. And obviously, as you can imagine, if that issue exists in the U.S., it exists all over the world as well. So at the end of the day, we went about finding a business, a fintech business that was focused on providing unsecured loans to that segment of the market. We define it as the underserved or underbanked segment of the market. And again, about 1/4 of the U.S. population would fall into that bucket. So about 60 million to 100 million people. It's a very, very big market. And we've been building that business over the last 10, 11 years. We were profitable in 2015, have been profitable ever since. And last year, in 2021, we took the company public on the Toronto Stock Exchange. So that was October of last year. And we've been a public company for a few months now, which has been a great experience. We're learning a lot. I'm learning a lot and certainly enjoying the ride. So a little bit about us. We're a consumer-based fintech platform. As I said, everything that we do is proprietary. The technology is proprietary. The AI and the machine learning algorithms and models that we've built are proprietary as well. One of the things that sets us apart from the competition is we have 3 unique bank partnerships, which I'll expand on in a few minutes' time, which really is fueling the growth of the company today, and I'll speak about our growth as well. And my team is quite outstanding. I know we hear a lot of that, but I founded the business with the 3 co-founders, so there were 4 of us. And they're all still with me today, doing better than ever today and adding more value each and every day. In addition to that, when we sold OPENLANE to ADESA, one of my cofounders went to ADESA as a COO and ultimately became the COO of the top company there, and I told him to come back and join me. So Gary Edelstein joined me about 6 years ago, and has also added tremendous value to the exec team, in particular, building on our leading-edge technology platform. So we're certainly a mission-based organization. We believe in credit inclusion. One of the few things that both Republic and Democratic agree on is credit inclusion, and certainly, we believe that anybody, who has the ability as well as the wherewithal to repay their loans, deserves access to credit. So credit inclusion is a big important part of our mission. As is evolution, underbanked and underserved consumers don't necessarily stay in that status for a particularly long period of time. And from that perspective, as they prove their ability to pay, we and our bank partners graduate them to better products and by better products, we mean higher loan amounts with lower APRs. So graduation is another important philosophy of ours, as, of course, is providing a best-in-class consumer experience. We certainly did that in my first business. And we hear each and every day what an outstanding job we're doing for our customers. We've got a 4.7 or 4.8 Trustpilot rating, and we're absolutely committed to making sure that we provide a best-in-class experience to our customers. So as I said, about 1/4 of the U.S. population can't afford $400 in the case of an emergency expense, and there's lots of ways of segregating and bifurcating this market other than to say it's a big market in the U.S., comprising about 60 million to 100 million consumers. And at the end of the day, we are the fintech platform that ultimately is focused on providing access to credit to these consumers. So when you look at the market, you've got the mainstream banks and credit unions on the left-hand side over there. And if anything, they're not inclined to enter these consumers, they will lend that rates for the most parts, below 36%, and underserved customers can open up a bank account, but ultimately cannot get access to credit. Mainstream banks and credit unions will charge billions of dollars a year to these consumers in the form of overdraft fees, but they won't give them a loan. If anything, since the 2008 global financial meltdown, that's been -- that's gotten even worse, there's about $140 billion in unsecured credit that the banks used to provide that they don't provide any more. And if you look at branch closures across the U.S., there's been a disproportionate number of them in low-to-moderate income neighborhoods. Again, more data to suggest that banks -- mainstream banks are not interested in serving these consumers, which have left underserved consumers with very few options, and I'll point to the right-hand side of the page over there, see your payday loans and your lease to own, and your tribal lenders who invariably lend their rates in excess of 300%, either through brick-and-mortar, where there's about 15,000 storefronts across the U.S. or alternatively, there's online players as well. From our perspective, there's the opportunity, first of all, to disrupt your incumbents on the right-hand side over there, and we do it by distributing all of our products over the Internet, which is the preferred distribution mechanism, even more so over COVID, where there's been a rapid transition from brick-and-mortar to online, obviously. In addition to that, not all banks don't want to serve these consumers of what we've been able to do is forge relationships with banks who would like to be able to serve these consumers but don't necessarily have the core competencies to do so. In that case, we partner with them to provide them the ability to provide access to that type of credits. You could see where we are today. And as I said, we took the company public in October of last year, so we've reported 1 quarter of earnings. All the data that I'm going to show you today is as at the end of Q3 2020, so the quarter ended September 30. We're reporting our year-end results next week. So we'll be updating all of this, prior to then some of this is a little bit updated. You can see that the company is profitable. Once again, even though we're listed on the TSX, our businesses in the U.S., so everything is in U.S. dollars. 73% year-over-year growth for the 9 months ended September 30. You could see $23 million in adjusted EBITDA. And if anything, what you're seeing from a growth perspective, if anything is being accelerated, and once again, I'll elaborate on what's driving that. So our products. Our products are offered through 2 brands, MoneyKey and CreditFresh. The difference between the 2 brands, the underserved consumers is not ubiquitous. You wouldn't think they would be, there's 60 million to 100 million people, and they've got a fairly broad range of credit profiles. So from our perspective, MoneyKey service customers who are deeper subprime, if you will, and CreditFresh still subprime customers but with better credit profiles. The products that we offer are either installment loans or lines of credits, and the types of licenses we have is either we're the direct lender. So there's a few states, certainly under the MoneyKey brand, where we are the direct lender, and we're loaning and keeping those loans on our balance sheet. In addition to that, with CreditFresh and with MoneyKey, we've got a combined 3 bank partnerships, whereby banks are the originators of these loans. We provide all the servicing for the banks, and then we -- then a few days after the loans originated, we'll purchase a substantial percentage of the economic interest in those loans. So our main revenue model is from holding the principal risk in those loans today. And the other thing I'll say about our products is they tend to be best in market from a pricing perspective when risk adjusted, and they have to be. We're in a competitive market. Consumers understand what their credit profiles are and what type of products are available to them. And if we're mispricing risk, they don't take loans from us. It's really as simple as that. We do obviously put the customer first. It's a real focus of ours. We've consistently lowered the cost of credit over time since we've been in business. And certainly, over the last 2 years or so, we've halved the cost of credit. We've done that, first of all, by being better at what we do, but in addition to that, gradually, we've been targeting a less risky consumer. And ultimately, as a result of that, we could offer better pricing. We do have the graduation programs, we have our best-performing customers, and they don't even need to be our best-performing customers, just customers who meet our criteria, get graduated to better products over time. In addition to that, we report to the big bureaus. And in so doing, our customers' credit profiles improve over time. At the end of the day, that also acts as a carrot and a stick. Insofar as if they don't repay the loans, their credit scores can deteriorate. And finally, we're committed to providing them with financial wellness and education that we do in partnership with a variety of best-in-class partners. So let's take a look at the platform quickly that we used to do that. Our proprietary technology is all built in house. It's leading edge. It's institutional grade, as you would expect, given the bank partners that we've partnered with. It's multi-tenanted, multicurrency, so we could bring on more bank partners. And the fact that it's multicurrency, it allows us to obviously roll out our products and services in other geographies. We've already told the market that we plan on expanding into Canada. So expect that certainly by the end of Q1 2023, if not sooner, if I've got anything to do with it. And again, some of this data has been updated, and we'll be doing that, providing updates on our earnings call next week. Certainly, from an underwriting perspective, unlike prime or super prime, where you kind of just need a FICO score to be able to give credit to somebody, something that I think even my mother can do, provided she could read the FICO score. As you go deeper and deeper into subprime, it becomes more challenging to figure out who to lend to and who not to lend to. And we do it really through sophisticated, complex machine learning, where we're looking at about 1,000 attributes of each consumer. We develop a profile for the consumer and based on that profile with our bank partners, we'll offer the appropriate product to our -- in the bank's borrowers. We also have a world-class operations team. The company is about 450 people today, about 200 of which work in operations. They're working on originations, customer service and obviously, the loans that we provide are oftentimes to risky consumers. So there's certainly a collections team as well. That's part of that operations team, and they're obviously doing quite outstanding job. Let's now take a quick look at the financial overview. And again, a lot of the numbers I'm going to present today were to the end of Q3 2021. I'll provide a quick update, operational update, Q4, and then we'll open it up for questions. You could see, again, companies growing its top line certainly to the end of Q3, just over 75%. Net income is growing as is adjusted EBITDA. I'm -- for purpose of today's discussion, I'm not necessarily going to get into the nuances of IFRS accounting, which is how we account other than to say that probably the best guide in terms of how we're growing the bottom line is the adjusted EBITDA number. And to the extent there are any questions, I'm happy to explain IFRS accounting and the impact that it has on our financials. You could see as well that our loan loss performance has been doing better and better over time. Again, there's a few reasons for it. One of the reasons for is we're just getting better and more experienced. We've been doing this for over 10 years now. So we understand how to score these consumers. In addition to that, our average consumer does look a little bit different today to what he or she looked like a few years ago, and that certainly helps from a risk perspective as well. And finally, certainly, 2020 and 2021 were very strong credit performance years with all the government stimulus. Our consumers had relatively strong balance sheets. There were certainly demand headwinds. So the growth that we're going through is despite the fact that there were demand headwinds. From a credit performance, I don't think credits ever performed better right across the spectrum and certainly in our segment of the market as well. We fund our loans through a combination of debt and equity. Invariably, our debt partners will fund anywhere from 85% to 90% of the receivable. The balance funded by equity, and that leads to a theoretical debt-to-equity ratio of about 4:1. Currently, we're at about 0.7:1. So there's lots of dry powder over there. The reason that we're so low is following our IPO, we did about $70 million IPO. And early in the year, we raised about $20 million. So collectively, we've got a strong balance sheet. The way our debt structure is a revolving facility, so we could pay it down or draw it up as the case may be. And certainly, after the IPO, we paid it down. So we've got a very strong balance sheet. There's plenty of dry powder available to continue to grow and expand the business. We did, as I said, put out an operational update, and you could see in the operational update, we, in essence, doubled our loan book from 2020 to 2021. For the most part, our revenues are a function of our loan book. It's really our loan book multiplied by our average revenue yield. And I didn't mention that, by the way. Our average product is roughly $1,200 to $1,500 line of credit. We've got a fairly big APR range, but our average APR is in that [ 1 35 to 1 40 ] range, given the customers that we're serving. So again, growth is a function of the growth in our loan book, which ultimately drives the revenue and our ability to manage costs, manage defaults drives growth in our bottom line. And as I'm sure you can appreciate, the costs increase at a slower rate to the rate that revenues and gross margin are increasing, particularly at this stage of the business. You'll also see that Q4 2021, we did about $90 million in originations. Contrast that to the whole of 2020, where we did $102 million in total, so you could see that the company is growing at an excellent rate, which we're obviously very pleased. And not only is it growing at an excellent rate when you're in the lending business, and certainly my experience of selling money, it's not a particularly difficult product to sell. The hard part is making sure you get the money back at the end of the day. And I do think there's a whole host of lenders out there, many of which are publicly traded, that are being valued or were valued a couple of months ago from a revenue multiple. And to me, it's quite shocking how quickly the world forgets what happens when you're tracing volumes, you'll end up making bad underwriting decisions and you'll end up putting loans in your books that you've got no place putting on your books just because it drives revenue at the end of the day. And the market was valuing these companies at lots and lots of money. It's turned around pretty quickly in the last few months, but I know a lot of those companies exceptionally well. And I could tell you that they were -- many of them were not -- were being poorly run. And they were being run to drive top line growth without regard to the bottom line. And when you're in the lending business, that's a really, really bad practice. Our growth is not a function of me setting mandates at the beginning of the year to say this is what our growth rate has to be. Our approach is to say the last loan that we write needs to be marginally profitable. And at the end of the day, the growth rate will be what it will be. It happened to translate to roughly 80% to 100% growth rate there, thereabouts, but that's a function of our underwriting, not a function of a top-down approach of saying we have to grow at a certain pace. These are the guidelines that we gave pursuant to the IPO a few months ago. We will be providing updated guidance next week on our call. What I'm learning, obviously, in this new publicly traded world, there's only so much information. I could share at different points in time. So this is our most current information, which will certainly be being updated next week. In terms of being ready for tomorrow, just our overall strategy, we will continue to graduate consumers up the credit spectrum. That's really important, and it's something that we and our bank partners are committed to. As we offer these better products to our existing consumers, in essence, it expands the market that we operate in because it allows us to then offer products to more and more still underserved consumers, but there are higher up the credit spectrum. So our market size is increasing all the time as we do that. As mentioned, we're in a global business. We have plans to launch in Canada in the not-too-distant future. In addition being a public company, we're in a global business, and we're in the midst of looking at lots of tuck-in acquisitions in other geographies that, in essence, provide the same products and services as we do and are always looking for adjacent products to add value to our consumers. So with that, I'm going to stop. There's a few minutes for questions, and I don't know how to best kind of moderate this, if anyone has any questions, please, by all means.

Yes, please.

[indiscernible]?

I think a couple of things. First of all, our debt is LIBOR plus. So there's a LIBOR flow and LIBOR run. I was quite a bit below our flow. So interest rates need to go up quite a bit before our cost of capital starts to increase. And even still, interest in our business is roughly 3% to 4% of revenue. So really needs to go up quite a lot before we start to see any increases in our cost base. So I'm not overly concerned about that now. I think the other side of the interest rate question is about inflation. Interest rates are going to go up because there's inflation. So in my mind, the question is, how do we think inflation could impact the business or our consumer. And what we've seen so far, particularly consumers at the lower end of the credit spectrum, their wage and salary increases in this environment are outstripping the consumer price index. So that's good from a credit quality standpoint, certainly in theory. However, there could be shocks to the system, like we're seeing in oil and gas prices. We get a very quick feedback loop in our business, and we could see how defaults are doing. We haven't seen any degradation in the last few weeks. Defaults are certainly up relative to they were in the height of COVID, but we kind of expected that. Relative to what we expected, everything is in line. However, it's conceivable that things could get worse. My job isn't to be an economist and try and predict where this is going, just to make sure we have all the levers in the business to control everything should things get worse, and we could certainly do that. If default starts spiking, if credit quality deteriorates, we have levers in our business to slow down volumes. There's lots of variable elements on the origination side and the caustic side that we can control. But what I will say through many, many cycles, subprime has performed really relatively well during any economic downturn. The credit quality that becomes really tricky in an economic downturn is prime and super-prime. First of all, they don't have the margins necessarily to withstand those types of times. Second of all, if you're earning $100,000 a year and you lose your job for argument's sake, it's a long cycle to reget a job and chances are you'll be getting a job at a lower amount. And the other thing is oftentimes prime and super-prime consumers are not used to juggling their finances in challenging times. Our customers are used to it. And should they lose their job, it's very transitory to the next job, which ultimately will be at the same pay and they won't lose income for that long. There's a whole host of other reasons why subprime performs better than near-prime or super-prime, but I guess in answering your question, I'm concerned about inflation like anybody is, but right now, the business isn't seeing it. And even if that should happen, we'll slow down our growth and continue to operate profitably in every scenario we've looked at.

[indiscernible]?

So did everyone hear the question? $1,200 product, unsecured, what are the practical steps in getting -- look, in getting our money back, the first thing comes down to the underwriting. You need to understand who you're lending to in the first place. We've got almost 11 years' worth of data and experience to make sure that the models work and we're lending money to the right consumers. And I think for the most part, people want to be good people, and they want to repay their loans. And at the end of the day, we treat them like they're good people. We have a -- we don't pressurize them. We don't take a hard line with collections. We like to work with our consumers in the first place. But as I said, when you're writing unsecured loans, they have to be carrots and sticks. And the carrot is that your credit score will get better. The carrot is you'll graduate to a better product, you'll get a higher loan amount and those types of things are real incentives to these consumers. What's the stick at the end of the day, they know that we are their last resort for credit. And if they default on us, we're reporting to the bureaus and the impact is twofold. Number one is their credit score deteriorates, which impacts so many aspects of their lives, including their ability to get another loan from somebody else. And that disincentive keeps them paying their loans in time, but sometimes people just don't have the funds no matter how nicely you speak to them. And if that's the case, we write-off a lot, and we do write-off a lot. All of our models take that into account in how we construct the product on the outset, knowing amongst other things, what the default rate will be and when customers do default, what percentage we'll collect. And again, it's been another area, not only have defaults been low through COVID, but when there are defaults, our collections have also performed really well. Thanks for that question. Anything else? I've got one over there. But -- okay, last one, then we'll wrap it up. Unless -- no, no, no, ask the question, it's for everybody.

[indiscernible]?

Buy now pay later, I don't understand. It's been going on for the beginning of time. It's the credit card business. They changed the name, call it, buy now pay later, grow the top line at a ridiculous rate, get crazy multiples and have never turned a profit. I don't have any of them have ever turned a profit, but they're not competing with us. They charge the merchant a few percent commission. And at the end of the day, they lend you a couple of hundred dollars, $200, it's a really small ticket items, and don't charge any interest. So they're certainly not leading to our customers. And if anything, they're probably getting in the way of the credit card companies and folks like that. In our world, there's a lot of competition. It's a big market that we're going after. And we're not in a Google or Facebook-type business model where there's a winner takes all. We all market differently. We all underwrite differently, and I think we do it better than anybody else. By virtue of that, we've been able to forge several bank partnerships. We're in discussions with several more. And I suspect we'll be landing several more, and there's very, very few companies in our industry that have got the technology, the capital, the compliance systems and the sophistication to forge these types of relationships. So why are we outpacing our competition? I think because we do better than them, but they may say the same thing if you ask them that question. So thanks for all the questions. I really appreciate it from a fellow South African. And I didn't plant him in the audience, by the way. So on that note, I do know that we've run out of time. So thank you, everybody. I appreciate it. Thanks a lot.