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

Good morning, everyone. Welcome to Propel Holdings First Quarter 2020 Financial Results Conference Call. As a reminder, this conference call is being recorded on May 10, 2022. [Operator Instructions] I will now turn the call over to Sarika Ahluwalia. Please go ahead, Sarika.

Thank you, operator. Good morning, everyone, and thank you for joining us today. Propel's first quarter financial results were released this morning. The press release, financial statements and MD&A are available on SEDAR as well as the company's website, propelholdings.com. Before we begin, I'd like to remind all participants that our statements and comments today may include forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions and management's plans for future operations or similar matters, which are subject to certain risks and uncertainties. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. The company's actual results could differ materially from those projected or suggested in the forward-looking statements due to several important factors or assumptions, many of which are beyond the company's control, including those risks and uncertainties described in our annual information form for the year ended December 31, 2021 filed on SEDAR. Any forward-looking statements we make today are only as of today's date. Except as required by applicable securities laws, we undertake no obligation to publicly update or review any forward-looking statements. Additionally, during the call, we may refer to non-IFRS measures. Participants are advised to read the section entitled Non-IFRS Financial Measures and industry metrics in the company's management discussion and analysis for the quarter ended March 31, 2022. For definitions of our non-IFRS measures and the reconciliation of these measures to the most comparable IFRS measure. I'm joined on the call today by Clive Kinross, Founder and Chief Executive Officer; and Sheldon Saidakovsky, Founder and Chief Financial Officer; Gary Edelstein, President of Propel, and I will also be available for the question-and-answer period. I will now pass the call over to Clive.

Thank you, Sarika, and welcome, everybody, to our Q1 2022 conference call. I will start today's conference call with a quick overview of our operations. I will then cover recent financial performance. Sheldon will provide a detailed analysis of our financial results, and I will end our prepared remarks with some comments on our outlook and strategy. Propel is a consumer-focused fintech lending platform with a track record of significant growth and profitable operations. Our primary objective is to facilitate access to credit for millions of underserved consumers and to execute on that objective, we have significantly increased our geographic presence across the United States, and we've expanded the credit options available through our platform. Since inception, we have facilitated over 878,000 loans and lines of credit for Propel and our bank partners, which totals over $750 million in total originations funded. Our Q1 2022 results reflected a continuation of our rapid growth trajectory with ending combined loans and advance balances increasing 134% over the prior year and 17% since year-end through March 31, during what is usually a seasonally lower growth quarter. These record portfolio balances were driven by several factors. First, we added 1 new bank partner in Q2 2021. Second, our bank partners roll their products out in 10 new states, each under the MoneyKey and CreditFresh brands over the course of 2021, expanding our collective product and service offerings geographically. Third, we have added marketing partners to our platform and expanded existing marketing channels. Fourth, our variable pricing and graduation programs continue to perform very well. And lastly, on a macro level, we have seen a return in consumer demand in the U.S. as well as an accelerated movement from brick-and-mortar to online. Our portfolio growth resulted in year-over-year revenue growth of 85% in Q1 2022. We have earned $9.7 million in adjusted EBITDA and $5.6 million in adjusted net income in Q1 2022. Our adjusted EBITDA margin was 19% this quarter as compared to 37% in Q1 2021, and our adjusted net income margin was 11% as compared to 21% in Q1 2021. For those of you that are familiar with the seasonality of our business, you know that our profitability margins are typically higher in the first calendar quarter of the year. This is because demand and growth rates soften after a strong holiday season, and our customers typically gain the windfall from tax returns. Q1 2022, however, was an exceptionally strong quarter for originations and portfolio growth. This was due to stronger demand for credit and lower tax refunds among our consumer base as many people received child tax credits in the second half of 2021, effectively pulling forward their tax refunds. As many of you know, in periods of higher growth, we recognized the cash data and acquisition costs, and we also booked significant noncash expenses related to provisioning on new originations under IFRS. In quarters like Q1 where the growth rate is much higher than the comparable period, we incurred both higher cash and noncash costs on originations with very little attributable revenue. Looking past the accounting dynamics that impact profitability in the short term, Propel has made great strides expanding its total addressable market, and we expect that the growth in our portfolio will lead to growth in revenue and profitability. With that, I will now pass the call over to Sheldon.

Thank you, Clive, and good morning, everyone. Propel delivered record revenues in Q1 2022 of $50.5 million, increasing 85% over the prior year. There were many drivers to this record revenue growth, which we also believe will drive future revenue growth as well. We added a new bank partner in 2021. Geographic coverage was increased by our bank partners. We had new and maturing marketing partner relationships and channels. The launch of our variable pricing and graduation capabilities continues to be very impactful to our growth. And on a macro level, we benefited from the continued reopening of the economy, return of consumer demand and the transition to online lending. We realized an annualized revenue yield of 132% in Q1 relative to 162% in the prior year. This change in our yields is in line with our strategy of going up the credit spectrum to facilitate access to credit for more and more underserved consumers with lower credit risk profiles. Over the long term, we expect new programs like variable pricing and graduation to drive elevated portfolio growth and sustained profitability through lower provisioning and charge-offs, lower relative customer acquisition costs and through improved operating efficiencies. These trends in our portfolio are expected to continue going forward as we continue to execute on our strategy of credit inclusion. Turning to provisioning and charge-offs. In Q1 2022, you can see that provisions as a percentage of revenue have increased significantly over the prior year, while net charge-offs have remained flat. Provisioning as a percentage of revenue was 47% in Q1 2022 as compared to 25% in Q1 2021. The same period in 2021 is a challenging comparable given the government stimulus in place at the time and lower growth experienced in the quarter, leading to a more mature portfolio and lower provisioning as a result. We saw the opposite effect in Q1 2022 with the lack of government stimulus and as Clive mentioned, higher demand for credit from our consumer base as tax refunds to our consumers were softer than we would typically expect. In periods of growth like we experienced in Q1 2022, provisions as a percentage of revenue tends to be higher for 2 reasons. First, new customers have higher default rates relative to those in a mature portfolio. And second, under IFRS, we are required to book expected credit losses on new originations and accounts in good standing, which drives provisioning higher. We incurred net charge-offs as a percentage of funded loans of 21% in both Q1 2022 and 2021. While Q1 2021 net charge-offs were atypically low due to the COVID-related factors and stimulus I mentioned, our portfolio now incorporates variable pricing and graduation capabilities and is comprised of more originations through our bank programs that cater to consumers with lower credit risk profiles, which has offset any increase in net charge-offs, one would have expected given the return to higher growth. In Q1 2022, net income decreased to $3.9 million from $5.7 million in Q1 2021, while adjusted net income was down just slightly to $5.6 million. The change in net income is attributable to 3 factors: higher originations, which led to higher upfront costs, the additional operating expenses as we transition from a private company to a public company and a typically high profitability experienced in Q1 2021. We believe adjusted net income is a better representation of the business' core profitability as it removes provisioning against accounts in good standing. Again, the upfront costs associated with the 134% portfolio growth, including more new consumers in the portfolio as well as increased costs associated with being a public company were the primary drivers to the variance in year-over-year earnings. Before I pass the call back to Clive, I will provide an overview of Propel's financial position. We continue to be very well capitalized for future growth. As of March 31, we had over $73 million of undrawn capacity under our credit facilities, and our cost of credit has been steadily decreasing as well. The net proceeds from our IPO and the exercise of the overallotment option continue to be invested in the rollout of bank programs to new states and portfolio growth. As our other key growth initiatives materialize, we will deploy the proceeds accordingly. Our debt-to-equity ratio was approximately 0.9x as of March 31. Given the structuring of our senior debt facilities, which when fully utilized, provides us the capacity for well over 4x leverage and our retained earnings, we have significant existing financial capacity to execute on our growth plans. I will now pass the call back to Clive.

Thank you, Sheldon. Current macroeconomic uncertainty and inflationary pressures, particularly in food and gasoline prices could impact consumers' ability to make payments. As a result, Propel and its bank partners have tightened credit policy as a proactive measure. The job market is strong. We are seeing solid wage growth and charge-offs remain within reasonable levels. We do not expect that this update to credit policy will impact our financial targets. And as such, our operating and financial targets for 2022 and 2023 remain unchanged. We are confident that the geographic expansion made in 2021, the variable pricing and graduation capabilities we have introduced on our platform, new and existing marketing partnerships as well as strong consumer demand for credit will drive growth this year and next. And as our platform continues to scale, we believe that the benefits of our growth will be realized through higher profitability margins as well. Before we open the call to Q&A, I will revisit our strategy for growth. Facilitating access to credit for more consumers, particularly up the credit spectrum will continue to be a key strategic pillar for Propel. It is our mission and the best opportunity to increase our addressable market. We continue to see opportunities to enter new geographies and add adjacent products, both organically through partnership or through acquisition. We continue to prepare for an entry into the Canadian market, and we are very keen to share more details with you soon. That concludes our prepared remarks. Operator, you may now open the line for questions.

[Operator Instructions] Your first question comes from Scott Chan from Canaccord Genuity.

You touched upon your targets -- your annual targets remaining unchanged despite the macro environment, but anything to call out Q2 to date. Obviously, a lot of things have changed over the past 5, 6 weeks. And I was just wondering if there's any data points that you can provide us that could be good or bad?

Yes. Scott, thanks a lot for that. Nice to be connecting with you here this morning. I think a couple of things. I think your first point over there is that we're reiterating the financial targets that we've already provided. And by the same token, as I mentioned on the call, between us and our bank partners, we've been proactive in tightening our underwriting policy. So the first thing I'd want to do is just frame that from an overall kind of demand standpoint and what the impact will be to our business as a result of that. And then let me speak about what we're seeing in the market this quarter. Certainly, I think that there's been tightening of underwriting right through what I would call the credit supply chain, if you will, right from your super prime lenders all the way down to your deep sub-prime lenders. And as a result of that, -- there are consumers who will otherwise, let's say, qualify for a near-prime loan that will be shut out of that segment of the market and drop into our segments of the market. So we're seeing growth in a number of applications as a result of that. In addition to that, our core segment of the market, we're seeing significant growth from that too. So as we and our bank partners tighten our credit policies, our accept rates meaning a number of applications that pass our underwriting decreases as a percentage. But the overall or the absolute number of new loans that we'll be putting on our books won't change that materially. It will go down a little bit from what we previously anticipated as a result of our proactive policies but not materially. And from a loan book standpoint, that will be offset by 2 variables. Number one, we're coming into Q2 with a higher loan book. And number two, we are seeing higher redraws and a higher return customer rate which, which to a large degree, will offset any reductions in new loans. In addition to that, any degradation in default rate, and I'll speak to that in a minute or 2, should be more than offset by, first of all, reductions in marketing costs. And second of all, because of the tightening underwriting policy, we expect that new customer default rates will come in line with what was initially anticipated. So that's how we're thinking of the market. And if you put all of that together, just to reiterate, again, our guidance remains intact. In terms of what we are seeing, I think Scott, since 2019, it's been very difficult to call out any seasonal trend. Seasonality has been impacted by so many external variables like, for example, government stimulus, the childcare tax credit, amongst other things. So it's very hard to say that we're into normal trends in this environment. To a large degree, it's a Goldilocks scenario where you've got close to full employment, coupled with inflation, that's normally an ideal circumstance for a company like ours. But obviously, there's a lot of, what I would call, headwinds, including inflation that's much higher than anybody predicted rising interest rates, and this could lead to -- this could ultimately lead to lower discretionary spending. And if that should happen, there will obviously be significant ripple effects on the economy, including not only a recession but potentially increases in the unemployment rates. And that's really why we've taken incredibly, call it, conservative posture that we've taken. With all of that said and in answer to your question about what we are seeing in the market, once again, overall applications is quite a bit higher than we thought it would be for all the reasons that I mentioned. While we are seeing increases in the default rates, the increases in the default rates are very much in line with plan. However, in line with what I would call the low end of our plan from a default rate standpoint. And that, coupled with our outlook for the future is one of the reasons that we're being proactive with our bank partners in tightening our underwriting even more.

And maybe a couple of questions for Sheldon just on the financials. In terms of the costs, I noticed the salaries, wages and benefits costs were actually down quarter-over-quarter on an absolute basis. Is that a function of like trying to hire or not being able to hire people in this environment? Or I just want to kind of translate into the growth that you had this quarter, but your costs are kind of down in that line. And any like guidance would be helpful.

Well, yes, thanks a lot, Scott, I think we're -- we're hiring a little bit slower than we had anticipated. So that's part of what's driving that. But I think overall, nothing has really changed with our plan. And I think what you're seeing, certainly relative to Q1 2021, the salary growth has grown a lot slower. It was a 43% growth over Q1 2021. So you're seeing some significant operating leverage over there. We did a lot of hiring in Q4 with the higher demand that we were seeing and also sort of proactively building out the infrastructure, both general cost infrastructure as well as people costs to continue supporting the significant growth as well as supporting the potential future business development and corporate development initiatives that we have on the go. So I think from a people perspective, we're very well set and we don't see significant increases moving forward.

Okay. And just on the APR Sheldon, seems to be declining a bit faster than I think your initial target, which may be a good thing, because I think it's moving up the credit spectrum with all the variable plan graduation programs. Can you confirm that? And is that kind of near-term trend going to continue on the APRs.

Yes, absolutely. I think, Scott, we've been able to execute on our mission, probably faster than we had anticipated originally, and particularly on the graduation and variable risk programs that we rolled out just before Q4 of 2021. So our mission is credit inclusion across the credit spectrum. So ideally, we're going to execute on bringing better and better consumers into our portfolio. And what that means is funding lower-risk consumers at lower APRs. So that's just happened faster than anticipated. You're not yet fully seeing that flow through the financials because as we've talked about in periods of high growth, you take a lot of the upfront costs. So you're seeing the revenue yields come down a bit faster, but ultimately, in relatively short term, the net charge-offs will continue coming down and match that decline in yields. So overall, very, very positive for the business. I think for the remainder of the year, we should see revenue yields probably in the 120% to 130% range for the remainder of the year. And again, that's very positive for our business and also from a just general, call it, lifetime value of our customers in our portfolio. That's very positive because these consumers stay with us and our bank partners for a longer period of time and work with us for all of their credit needs.

And Scott, if I could just add a couple of points to that as well. Certainly, from a competitive standpoint, there's obviously pricing sensitivity. So to the extent that all other things being equal, we could have market-leading products, which includes, obviously, pricing that has many benefits to us. And we believe, on a risk-adjusted basis between us and our bank partners, we do have market-leading products. And if anything, we proactively took steps to reduce APRs in some areas across the different programs that we measure or that we run. So certainly, that also would have impacted the lower yields. But if you recall, when we launched graduation and variable pricing in the back half of last year, we said it will dramatically expand our addressable market. We went in, I think, with a relatively conservative set of assumptions as to how large the incremental market was. And if anything, what we've learned is that segment of the market is way larger than we thought it would be, number one. And number two, in this environment where everybody is tightening their underwriting, there's lots of consumers, as I mentioned earlier, who would otherwise qualify for a sub-prime loan that are dropping into our segment of the market. Those consumers will be picked up and invariably, one of our bank partners will fund them at probably their lowest APR type products. So those are the variables that collectively are leaning to or leading to lower I think your opening comment was it's potentially a good thing. And I certainly think it's a good thing. I think it's good from a consumer standpoint that they're getting better products, number one. And number two, we're certainly seeing the corresponding KPIs that will improve very much in line with our expectations. And that improvement means we can ultimately continue to drive growth for these products, expand our addressable market and do it in a way that's obviously highly profitable from our perspective, which is a critical factor as well.

[Operator Instructions] And there are no further questions at this time. I will turn the call back over to Clive for closing remarks.

Thank you again to everybody for attending this morning's call. As always, I would like to extend a big thank you for the Propel team for your contribution in building Propel into a high-growth and continuously innovative lending platform and to our shareholders that provide us the support to the best in our people, our customers and our operations. I encourage you all to reach out to our team if you have any questions about the quarter or our long-term growth plans. Have a great day. Operator, you may end the call.

This concludes today's conference call. You may now disconnect. Thank you.