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

Good morning, everyone. Welcome to Propel Holdings First Quarter 2023 Financial Results Conference Call. As a reminder, this conference call is being recorded on May 10, 2023. [Operator Instructions] I will now turn the call over to Devon Ghelani. Please go ahead, Devon.

Thank you, operator. Good morning, everyone, and thank you for joining us today. Propel's first quarter 2023 financial results were released yesterday after market close. 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 would like to remind all participants that our statements and comments today may include forward-looking statements within the meaning of applicable securities laws. The risks and considerations regarding forward-looking statements can be found in our Q1 2023 MD&A and annual information form for the year ended December 31, 2022, both of which are available on SEDAR. Additionally, during the call, we may refer to non-IFRS measures. Participants are advised to review the section entitled Non-IFRS Financial Measures and Industry Metrics in the company's Q1 2023 MD&A for definitions of our non-IFRS measures and the reconciliation of these measures to the most comparable IFRS measure. I am joined on the call today by Clive Kinross, Founder and Chief Executive Officer; and Sheldon Saidakovsky, Founder and Chief Financial Officer. Clive will provide an update on our operations in the U.S. and Canada, including observations on the overall consumer market and will also discuss how AI and machine learning continue to play an integral role in our operations and growth strategy. Clive will then provide an overview of our record Q1 results before Sheldon covers our financials in more detail. Before we open the call up to questions, Clive will provide an update on Propel strategy and growth drivers for 2023. With that, I will now pass the call over to Clive.

Thank you, Devon, and welcome, everybody, to our Q1 2023 conference call. We are very proud of another record-setting quarterly performance amidst the dynamic economic environment and what is historically our slowest quarter of the year for originations. Propel delivered another record quarter on both the top and bottom line. Starting with our U.S. operations, we continue to see a resilient consumer, which is driving strong credit performance. The unemployment rate remains at a 50-year low and the job market continues to be strong, as shown by another robust job report of over 0.25 million jobs added last month. We also continue to observe positive real wage growth. In fact, when looking specifically at the underserved consumer markets, the data demonstrates a real wage growth has been the strongest for this particular group during the 4-year period ended in 2022, strengthening the financial position of this consumer base. This is all to say that we remain steadfast in our mission of providing access to credits for underserved consumers and are encouraged to see how resilient this segment of the consumer market continues to be. From a credit demand perspective, as we briefly mentioned on our last earnings call, our core business observed a more normalized seasonal pattern in Q1, insofar as we experienced a more standard tax season for the first time since the onset of COVID in early 2020. This resulted in consumers receiving higher lump sum tax refunds, repaying their debt balances at a faster pace and borrowing less, which is typical for what we experienced in the Q1 period before COVID. The credit scores and income levels we are seeing coming through our platform are higher than they've ever been, driven in part by the tightened underwriting and conservative credit posture implemented by us and our Bank Partners about a year ago. We also continue to benefit from an ongoing tightening of credit throughout the credit supply chain, which has pushed more higher credit quality consumers to our platform. We expect this trend to continue and even possibly increase in line of the regional banking turmoil in the U.S. Given this instability, it is very likely that financial lenders in our U.S. markets will tighten their standards even further, not to dissimilar to what transpired during the 2008, 2009 global financial crisis. And ultimately, as was the case coming out of that crisis, we expect that more consumers will be locked on traditional credit options and will continue to move to our segment of the market. Turning to Canada. We launched Fora Credit in British Columbia during the quarter, our third province after Ontario and Alberta. And just this morning, we entered Saskatchewan, our fourth province, ahead of schedule. While still in the early days, we are seeing strong demand and stable credit performance in Canada. Not unlike the U.S., Canada is also experiencing a strong labor market with 50-year low unemployment and with mainstream banks and other traditional credit providers appearing to tighten underwriting standards as well. This is shutting more and more Canadian consumers out of the credit market in an environment of rising interest rates and elevated inflation. Data shows that in excess of 50% of Canadian consumers are living paycheck to paycheck. Despite this backdrop, the Canadian federal government announced in late March, the intention to introduce legislation that would reduce the maximum allowable interest rate to 35% APR. We are disappointed with this decision, and we will believe this will putting to peril the very Canadians the government is trying to protect. At a time where more Canadians than ever are living paycheck to paycheck, the need for access to credit in Canada is as important as ever. Yet, under the proposed changes, the Canadian Lenders Association Risk Roundtable subcommittee estimates that roughly 4.7 million Canadians will lose access to fair and transparent credit, forcing many Canadians to turn to payday lenders or other high-cost alternatives that are approximately 10x more expensive. The fact is, as a result of our industry-leading AI and machine learning capabilities, we are able to provide products to Canadian consumers that cannot access mainstream credit products. And the products we provide are up to 90% less expensive on an APR basis than what would otherwise be available to them. The demand for credit will not change as a result of this proposed legislation. People still need to pay [indiscernible] and all this will do is cut off a critical and legitimate supply of credit. At Propel, we believe everybody deserves access to fair credit. As they work through this process, we urge the government to work with the industry to ensure that these risks can be somewhat mitigated. While the implementation timing is currently uncertain, we do not anticipate the change will have any impact on our 2023 guidance. Looking beyond this recent announcement, there remains a tremendous market opportunity for online access to credit for underserved consumers across Canada. We remain confident in our ability to adapt and for our Canadian brands to develop into a market leader over the longer-term, contributing to both revenue and profitability. Before turning to our Q1 performance, I wanted to spend a few minutes speaking about our industry-leading AI and machine learning platform as [indiscernible]. With AI so prevalent in the news lately, more and more people are starting to understand the power of the technology. But AI and machine learning is not new to us at Propel, we're one of the few fintechs in North America that can say we've been on the cutting edge of AI shortly after our inception and that has been driving our growth and profitability ever since. What sets our use of AI and machine learning apart is that it's not bolted on to existing systems and processes as many businesses are doing today. Rather, our AI and machine learning is fully integrated into every aspect of our operation. Unlike prime credit consumers, our addressable market has uneven with thin credit histories, and consequently, accessing data from mainstream credit bureaus is inadequate in underwriting these consumers. Our AI allows us to look beyond traditional credit scores and processors and triangulate millions of pieces of data to determine the creditworthiness of an applicant and also detect potential fraud. Our platform provides immediate and reliable feedback, which allows us to process applications in real-time, creating efficiencies for us, our partners, and ultimately, the more than 1 million consumers, we've been able to facilitate access to credit. Without the sophisticated technology we have been able to develop, this consumer segment would continue to be locked out of credit options or would be accessing credit at a materially higher cost than what we're able to provide. Our AI and machine learning has been built entirely in-house, allowing us to make smaller, faster and more predictive decisions to continue to help more consumers, and importantly, to drive our profitability. Lastly, while we internally recognize how powerful our platform and technology are, it has also been widely recognized in the industry and has become a key differentiator for us in generating the active new business development pipeline we currently have. I'm incredibly passionate about this technology and the talent behind it, and I'm confident it will continue to drive Propel's growth. Now, on to some highlights for the quarter. Propel has once again delivered record results in Q1 2023. Our ending combined loan and advance balances, or CLAB, increased by 57% to more than USD248 million, and revenue increased by 30% to a record of USD66 million. This quarter, Propel also delivered record adjusted EBITDA of more than $17 million, record net income of almost USD7.5 million and record adjusted net income of more than $8.3 million. All of these metrics represent significant increases from Q1 2022. The growth we experienced in Q1 2023 was driven by, first of all, the continued successful expansion and performance of graduation and variable pricing capabilities. Secondly, the growth of our Bank Programs. Thirdly, expansion of originations through growth in Canada and with key marketing initiatives. And fourth of all, at a macro level, strong consumer demand for credit driven in part by the continued focus on online lending as well as the tightening of credit criteria across the financial sector, which has resulted in a broader, higher credit quality consumer base seeking credit across our platform. Our record performance in Q1 2023 is a testament to our relentless focus on profitable growth and the scalability and operating leverage in our business model. Lastly, given our strong results, track record of profitable growth and solid financial position, I am pleased to announce that our Board of Directors has approved an increase to our annual dividend from CAD0.38 per share to CAD0.40 per share. This represents an increase of 5.3% and our first dividend increase as a publicly traded company. With that, I will now pass the call over to Sheldon.

Thank you, Clive, and Good morning, everyone. I'm incredibly proud of our record quarter and our ability to continue growing the business while generating strong profits. As Clive discussed, we experienced a more typical Q1 for the first time in several years, which involve consumers and our Bank Partners target segment receiving greater tax refunds as compared to our experience during the pandemic. We also continued to operate through the quarter with a more prudent and tighter underwriting policy with our Bank Partners, similar to how we operated the business through most of last year. As a result, we experienced more modest originations and higher rates of loan repayment and lower credit utilization as compared to prior years. Notwithstanding the impact of this seasonality, Propel still delivered record revenues of $65.6 million, representing 30% growth over the prior year. The revenue growth is the result of record loan and advanced receivable balances during the quarter and ending CLAB, which was driven by the factors that Clive outlined earlier, which include the continued expansion of our Bank Programs, broadening our presence across the underserved consumer market through variable pricing and graduation initiatives, amongst other factors. I would also note that our Canadian operation, Fora Credit, contributed to the company's overall Q1 revenue and loan balance growth, albeit modestly, given the short time period since the launch in November 2022. The annualized revenue yield was 106% in Q1, a decline from 138% in the prior year. This change in yield is consistent with our strategy of moving up the credit spectrum to facilitate access to credit for more underserved consumers with lower credit risk profiles. Furthermore, as noted on our prior calls, the decline in the revenue yield was also driven by the disproportionate tightening of underwriting applied to the higher risk, and consequently, the higher cost of credit portions of the loan portfolio and a higher proportion of originations funded went to existing customers, which carry a lower cost of credit relative to new customers. Turning to the provisioning and charge-offs. The provision for loan losses as a percentage of revenue was 47% in Q1, the same as it was in Q1 of last year. Notwithstanding deteriorating macro conditions, including elevated inflation and interest rates, we believe this result is indicative of the effectiveness of our and our Bank Partners' credit risk management and a testament to the resilience of the underbanked consumer. Furthermore, you can also see that the provision for loan losses as a percentage of revenue has continued to decrease quarter-over-quarter from a high point of 58% in Q2 of 2022 to 47% in Q1 of 2023. To reiterate, this improving credit performance is being achieved during a time of heightened macroeconomic uncertainty. Finally, I would note that 47% is well in line with our target margins to support continued profitable growth. As Clive mentioned, our AI and machine learning capabilities are a key differentiator in achieving these strong results. With respect to net charge-offs, we have introduced a new non-IFRS measure to better illustrate the performance of credit in the loan portfolio. Net charge-offs as a percentage of CLAB is a more appropriate measure as it excludes seasonal fluctuations in funded originations and addresses the lagging and timing dynamic that influenced our prior measure. Furthermore, net charge-offs as a percentage of CLAB is also a more commonly used metric by other financial services companies similar to Propel. Net charge-offs as a percentage of CLAB remained the same at 13% in Q1 2023 as compared to Q1 2022. Consistent with the provision for loan losses as a percentage of revenue, this measure remained the same year-over-year and is indicative of strong credit performance in the portfolio. In Q1 2023, our net income increased to $7.4 million from $3.9 million in Q1 of 2022, while adjusted net income increased to $8.3 million in Q1 2023 from $5.6 million in Q1 last year. The growth in net income and adjusted net income is primarily a result of the overall growth of the business and ongoing effective and prudent cost management and operating leverage. The disciplined expense management and inherent operating leverage is evident in our decreasing operating expenses as a percentage of revenue. Our operating expenses, which include acquisition and data expenses, decreased to 28% of revenue for Q1 2023 as compared to 39% in Q1 of 2022. These cost efficiencies contributed to the net income margin increasing from 8% in Q1 of '22 to 11% in Q1 of 2023, and the adjusted net income margin increasing from 11% in Q1 of '22 to 13% in Q1 of '23. We do note that the margin would have been even higher if it were not for the following: firstly, the higher upfront cost and provisioning for loan losses related to our Canadian business, which is currently in its early growth phase; secondly, costs incurred related to the build-out of Pathward that is expected to launch imminently; and third, higher interest costs on our credit facilities due to the increasing interest rates over the past year. The increase in interest rates since the start of 2022 drove our overall cost of debt to 12.9% in Q1 from 8.9% in the prior year. We do note that this higher level of interest is factored into our outlook, and to the extent there are any rate reductions that will act as a tailwind. Before I pass the call back to Clive, I will provide an overview of Propel's financial position. At the end of Q1, we remain well funded to continue executing on our growth plan. As of March 31, we had approximately $140 million of undrawn capacity under our various credit facilities. This includes the increased capacity under our CreditFresh facility, which was upsized from $160 million to $250 million in February. Each of our credit facilities is supported by a syndicate of lenders, ensuring that we have redundancy across our funding partners. I would also note that none of the institutions that participate in our credit facilities have been directly impacted by the ongoing regional banking turbulence in the U.S. Our debt-to-equity ratio was approximately 1.7x as of quarter end, which is a decrease from where we ended 2022, given the seasonal impact as well as strong operating cash flow generated during the quarter. Given the structuring of our credit facilities, which provides us the capacity for 4x leverage, we continue to have ample debt capacity and liquidity to execute on our strategy. We are confident that our strong financial position and significant cash flow generating capability will be able to support the continued growth of our existing programs, the ongoing rollout of Fora, soon-to-be-launched Pathward initiative and to support our increased dividend. I will now pass the call back over to Clive.

Thank you, Sheldon. Propel has a lot in the works for the remainder of 2023. In Canada, we expect to continue our rollout across additional provinces and will be bolstering our marketing and communication efforts to further introduce the brand to Canadians. As already discussed, notwithstanding proposed regulatory changes, we remain confident in our ability to adapt and for our Canadian brand to develop into an industry leader over the long-term. Within our core U.S. business at roughly halfway through Q2, we observed continued strong credit performance across all our risk segments and a robust increase in demand for credit, in line with our expectations after the more seasonal Q1. With that in mind, while we and our Bank Partners will remain prudent with our underwriting, given the strong demand and credit performance, we anticipate a higher proportion of new customer originations as well as higher volumes in some of the higher APR product categories, which experienced the most tightening over the last year. With respect to our new initiatives, we are operationally ready and expect to officially launch our 5-year lending as a service partnership with Pathward imminently. As we have previously discussed, this partnership is an important step in our strategy of expanding our overall product and service offerings. As Pathward's lending as a service partner, we will white label our industry-leading technology and service solutions for Pathward's consumer lending capabilities, including loan management software, licensing of our AI-powered risk and response scores and credit servicing capabilities. The loans originated by Pathward will be sub-36% APR allowing us to help facilitate access to credit to an even larger number of consumers. Lending as a service is a natural extension of our core business and an area we are continuing to actively develop. Our goal is to effectively expand the products, services and geographies we operate in, and we are pursuing many other exciting possibilities. Our business development pipeline remains more active than ever, and we're excited at the opportunity to be able to announce some of these initiatives to the market in the near future. We have never, in the history of our company, being stronger or better positioned for growth, and there is so much more to come. That concludes our prepared remarks. Operator, you may now open the line for questions.

[Operator Instructions] Your first question comes from Adhir Kadve with 8 Capital.

I just wanted to talk about the Canadian market a little bit. Obviously, you've mentioned strong growth in that market relative to your expectations. Can you kind of give us a sense how this market has performed, both obviously, from a demand perspective, we're seeing a lot of strength, but more from a credit perspective versus the U.S. loan book? And from a competitive perspective, do you see yourself kind of taking share in this market? Or is it kind of net new customers?

Yes. Thanks for the question. What I would say for starters is the demand that we're seeing is certainly ahead of our expectations. We did extensive research before we went to market and build our models from a demand perspective based on the various partners that we work with, the different integrations we have or the research we did and so on. I mean, you never know exactly what that demand is going to look like when you go live. We've gone live without extensive marketing or communication support and rolled out 3 provinces, today our fourth. And I could tell you that the demand that we're seeing right across the board is stronger than we initially anticipated. From a credit performance standpoint, we're right in line with our expectations. It's very difficult to contrast what we're seeing in the Canadian market relative, say, to historical performance just because we are new in this market. In addition, contrasting it to the U.S. is also difficult just because the APR threshold is lower, and consequently, the customer segment that we're targeting is slightly -- has got a slightly better risk profile than our U.S. customers. And certainly, what we're seeing from a default perspective is consistent with that broader risk backdrop. What I will say that, I suppose, a little bit of a surprise is just that there hasn't been a dominant online market leader in Canada. In the U.S., when we started in the business, roughly 12 years ago, about 20% of the volumes at the time were happening online, 80% through brick-and-mortar store fronts, and today, about 60% of our volumes in the U.S. or the industry's volumes in the U.S. online. If I were to contrast that to Canada, the vast majority of lending to underserved consumers still takes place today through brick-and-mortar locations. I think the fact that we have entered this market and intend to be, obviously, a serious player with aspirations of being a market leader, I think, will change that dynamic. There's a law called [indiscernible] that suggests that supply begets demand, and we certainly think that the reason that we're seeing this uptick in demand is consumers were always there. They just didn't have the option. So we're growing consistently, albeit with a very tight underlining posture and expect the growth to continue potentially at an even more accelerated rate as we accelerate our marketing and communication efforts.

Excellent. Just one more for me. You kind of mentioned right towards the end of your prepared remarks that you expect higher originations in the higher risky set of loans. Can you kind of give us an understanding of how you expect that to kind of translate in terms of your margin profile moving forward for the balance of the year?

Yes. Yes, I'm happy to do that. And by the way, we expect there to be growth across all profiles, just contrasting Q1 of this year compared to Q1 of 2022. Q1 of 2022 wasn't a seasonal Q1 typically. And none of them have been in COVID prior to Q1 of this year, where we saw the normal tax refunds. That, coupled with the tightening by us and our Bank Partners of our underwriting led to lesser originations this year than, say, a year ago, all of which, as I say, is completely in line with the seasonality of the business. And now as we're coming into Q2, we're seeing a huge increase in demand for credit, coupled with, as I said in my prepared remarks, very strong credit performance. With that, we're also seeing, as I said, strong credit performance across all the risk segments. Our higher APR risk segments, those are consumers who without us really would be left with options that are materially less desirable than what we offer. And we're seeing relatively strong performance in that segment of the market. From our economic standpoint, those typically are characterized by higher APRs. But at the same time, because it is higher risk, the default rates tend to be a little bit higher as well. With all that said, we expect the overall margin performance in that category to be in line with the rest of our portfolio. We do expect the higher originations proportionately to be helpful in maintaining and perhaps even lifting our average revenue yields a little bit. I'm going to hand over to Sheldon, I can see he has a couple of comments as well.

Yes. I just wanted to mention, as we've said in prior quarters through the tightening of our -- through our tightened underwriting posture, the higher cost of credit portions of the portfolio were tightened disproportionately just given our risk stance. The performance in those -- and for example, those include MoneyKey portfolio or the MoneyKey portfolios. And then within CreditFresh itself, the higher cost of credit portions of that portfolio, which were disproportionately tightened. We're seeing incredible credit performance in those segments. So our intent, as Clive mentioned, is to lean into that demand and drive some of those originations moving forward. And from a margin profile perspective, given where credit is performing right now, it should bode very well for our margins. And from a provision for loan losses, as we target it will remain in the 50% range of -- as a percentage of revenue. That's a target for continuing the profitable growth.

Excellent.

Your next question comes from Scott Chan with Canaccord Genuity.

Clive, you talked a few times about increasing your marketing and communication efforts in Canada. Can you elaborate on that? And how do you do that, I guess, targeting your set of -- your certain set of consumer sets out there in Canada?

Yes. Happy to. And Scott, the starting point for the response, obviously, is to understand where we are currently. And we're working with various different channels, both organic, which are things like SEO and PPC as well as through partners and partners obviously send us applications from consumers across the country. We're working in a very controlled fashion with all of those partners today. We have limited budgets once we spend our daily marketing budget, which invariably happens relatively early on in the day, we stop our marketing spend, have updated originations and obviously monitor that very carefully on the default side to ensure that everything is working according to plan before expanding our efforts from there. So as a simple starting point, we don't really need to diversify our existing channels. There's so much robust growth on our existing channels. We just need to extend our budgets and extend the time over the course of the day and week that we're extending access to credit and access to our services. In addition to that, we expect to see a couple of new channels introduced to the market. We're exploring what may be best from that standpoint or with a view of generating profitable growth [indiscernible] this growth in and of itself. So stay tuned to see some of the new channels we'll be rolling out over the course of the remainder of the year.

Good. And just in terms of the 2023 guidance, that was [indiscernible] last quarter, nice really uptick in margins in terms of EBITDA and adjusted net income. But in terms of loan growth, which is about flat quarter-over-quarter on a lending basis, which is not a bad thing in this market. How do we think about that 45% to 55% target relative to kind of your tightened credit underwriting standards near-term?

Yes. Thanks for that, Scott. And maybe as a starting point, and I know I've already said this a couple of times. So just bear with me, as I said, again, I think it's important to have the right context for understanding the numbers. Bear in mind, Q1 2022, we hadn't yet tightened our underwriting. If you recall correctly, we saw a spike in default rates in Q2 of last year, and that's what really led to us tightening our underwriting materially. In addition -- us and our Bank Partners, in addition to that, last year was not a typical seasonal Q1, whereas this year was a typical seasonal Q1. So you take all of those variables into account would explain why this year's Q1 was lower originations than last year. With that said, we're now coming out of that seasonal Q1, and we're seeing significant increases in origination growth. I think the top line growth that we saw last quarter of 30% will be our lowest year-over-year revenue increase. And Q2 of last year, we did $54 million in revenues, I expect it to be a lot more than 30% increase of that this year. Q3 was $59.7 million. Again, it will be a lot higher than 30% above that this year. Similarly, Q4 was $62.5 million last year. This year will be a lot more than 30% of that. All of that will ultimately, in terms of our current view, work perfectly for the guidance that we provided to the Street. I'd also like to add on top of that top line performance, our net income has grown the last 4 quarters from $2 million to $4.2 million to $5 million to the most recent quarter of $7.4 million. So you're seeing acceleration in bottom line growth even as the top line continues to grow, which is obviously an outstanding metric from our perspective. So Scott, all is to say we're right on track with that plan. We've seen the market rebound significantly from a demand perspective in Q2, even with the tightened underwriting posture. And the best part about it is we continue to see a very, very strong and resilient consumer.