Q4 2019 Earnings Call
Welcome to.
To the easy on capital fourth quarter, 29, 10 results conference call.
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I'd now like to turn the meeting over to Mr. John website. Please go ahead mr. once it.
Thanks, operator, good afternoon, everyone. Thank you for participating in our conference call to discuss CCN Capital's fourth quarter 2019 results announced earlier today, joining us our Stephen Hudson, Chief Executive Officer, Michael <unk>, Chief Financial Officer, a news release summarizing. These results was issued this afternoon.
The state and a financial statements Mdna for the three month period ended December 30, Onest 2019 haven't filed exceed our.
These documents are available on our website at Www Dot you see in capital Corp. Dot com presentation slides to be reference during the call are accessible in the webcast as well as in the PDF format under the presentation section of the company's website.
Before we begin I want to remind our listeners that some of the information we're sharing with you. Today includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties.
I will refer to you I refer you to the cautionary statements actually on the M&A for a description of such risks uncertainties and assumptions, although management believes that the expectations reflected in these statements are reasonable we can obviously give no assurance that the expectations. If any forward looking statements will prove to be correct.
You should note that the company's earnings release financial statements Mdna and today's call include references to a number of non <unk> for US measures, which you believe helped to present the company and its operations in ways that are useful to investors.
A reconciliation of these non <unk> for us measures to high for us measures can be found in our MTN <unk>.
You should also note that as of January Onest 2018 company change this presentation and functional currency from Canadian dollars to U.S. dollars. In addition readers should note that legacy operations were discontinued classified as held for sale as of the fourth quarter 2018. All figures are presented in U.S. dollars unless explicitly noted with these introductory remarks complete I'll now turn the call.
Skews on Chief Executive Officer.
Thank you John and good afternoon, let's turn to slide seven.
These are the three key takeaways from our recent Investor day, I just want to revisit those briefly with you first and foremost we have a resilient business model.
Proven taken make share working.
We also have proven growing pipeline see that manifests itself and monetizing our existing business model, coupled with adding complementary products.
Secondarily, we we are prudent managers, a capital with dividend and share repurchase and appropriate liquidity reserves. All this well maintain well all this while executing on our organic growth initiatives.
And finally, we are deepening our.
Our relationships with both existing and new financial institution Parkers.
These three takeaways drive our significant our confidence in our 2020 bps guidance of 36 to 41 share representing 42% growth over the mid point.
Turning to slide eight.
We've accomplished a management transition a triad dog, what's an approach me a year ago.
Asking too.
It could be elevated to the role as chairman we've completed this transition this natural evolution transition and the last two weeks.
Dawn is now chairman.
I told where many of you met Mike.
So at our Investor day has been brought up the president.
Management team has been enhanced with Matt Heidelberg, joining Matt is been tasked with adding new products and expanded funding will revisit that in the second.
And all this has been accomplished by keeping a senior management team with over 200 years of industry experience.
Transition also allows triad to reduce annual compensation by more than $1 million and eliminating $6 billion of incentive comp through 2022.
Think it's a good deal for members of management after dawn as well as per triad and for easy and we're happy that it's been.
<unk> has been completed.
Well the operating results turning to slide 10.
On service Finance Q4 results in line with management expectations and guidance adjusted operating income before tax of.
17 million 17.3 million I would note that that includes $100000 a pace wind down cost in the quarter 500000 for the full year.
Also of note in Q4. They team includes some lumpiness as that's a quarter, which includes solar originated solar loans originated throughout the year, which were sold in that quarter with the revenue approximately $4 million realized in the fourth quarter 2018.
[noise] origination growth, excluding pace of 30% year over year as healthy.
As well as a 42% growth and the managed portfolio.
On page 11, the Lennox volume.
Has fully recovered from the impact of the 2008 tornado and business interruption, we've seen 22% growth in fourth quarter origination.
So the growth that getting a 2020 in particular Lennox volumes were up almost 20% in January that up almost 30% in February I think we can tick.
The scorecard is this has now been completed.
As well, we like to mention to you that service finance as prudently raise FICO scores. We mentioned this in previous calls and price. It got sore loans. This has been done to protect our bank partners by enhancing the credit quality other portfolios that originator managed on their behalf.
And even though solar will continue to decline as a percentage overall originations, we're very confident and our full year origination guidance for 2020 of 1.9 billion the 2.1 billion.
Turning to slide 12.
[laughter] assets held for for trading.
We'll see that since fourth quarter 18 to the fourth quarter 19, they're down approximately $200 billion I think weve proven the ability to create new assets within our.
Expertise a credit and too.
Great homes for those with our institutional investors.
We also expect that there'll be additional assets sales in March of 2020.
At existing partners will prefer to buy these in bulk purchases for administrative fees I think where you are on try don't think we are on track.
To to flowing these these loans through our balance sheet I think the success has been proven over the last five quarters.
I will comment on slide 13, let's say that origination growth as I mentioned in two previous slides is significant and continuing in the first quarter of 2020.
Turning to Kessler group fourth quarter results slide 14, or in line with expectations EBITDA margin of 54% reflect Scott's operating efficiencies and better revenue performance.
We also announced in this quarter that we've acquired a card management business, which was a third party provider.
This part this card business will allow us to partner with additional institutional investors to originate in syndicate on credit portfolios.
And I want to emphasize as we did our Investor day, our intention is to limit future you see on capital investments, but to further build that our card management and performance fee based.
15, an important strategic shift, which we discussed in Investor day is shifting away from onetime revenue. So called transaction service revenue to more recurring revenue in the former partnership service as a marketing services I would give you a three points to referenced on slide 15 at the data transaction approximately two.
Thirds was recurring one third was transaction at the other night team that was 70 426, our forecast of 80 515 is well in hand based upon the first quarter first part of Q. What we think this shift to recurring revenue improved that improves the quality ability quality of the earnings from Kessler and allows.
More transparency into the fort fuel future forecast of Kessler.
Turning to slide six team.
We are raising the untried, we are raising the guidance for this business from 30 to 30 to 34 to 31, the 35, reflecting the results of the compensation savings from the management transition I just referred to the fourth quarter results were ahead of expectations originations came in at approximately 7% managed portfolios, a 12% growth and EBIT.
The growth of approximately 30%.
Assets held for trading were up modestly, but we've now.
Now completed a process to acquiring assets and on selling those two institutional investors, who prefer to buy them in minimum blocks minimum sides as opposed to a flow basis, but thats been done I.
I think an important update for you is that.
Matt Heidelberg and and other team.
Mike and Matt announced the brands initiative at the Investor Day, we're happy to announce that there is already 25 million approved in that program in January February that's a new initiative, an incremental loan if you will and a new institutional investor.
That should bode well for Tri, Ed and and Twentytwenty turning to floor plan on page 17.
Happy to see first bullet is that the active dealers have been doing decreased from 218 from 236 that calling if you will as we've gone through the team at Triad Lee and the members that there have gone through and removed.
[noise] floor plan dealers, who were providing loan product to us and that's part of running a very efficient low risk portfolio. As you know people who use floor planning their origination growth is three X that have someone who doesn't use floor planning. It for planning is strategically important initiative, albeit modest in size.
That drives the origination volume for tried it's still a very.
Attractive asset, where they realize yield of 8%.
Hi, good on 18 originations are strong and continuing a tri Ed.
I think Michael I'll pass it over to you.
Thank you Stephen good afternoon, everyone.
Turning to page 20 I.
Just for the Q4 consolidated highlights total originations for service finance and try and financial services 542 million in Q4, 2019 were up 17% compared to Q4 2018.
Q4, adjusted EBITDA was relatively flat year over year, primarily due to the impact of that held for treating fair value adjustment at service finance that Steve spoke to previously and elevated transaction revenue at Kate kg in Q4 2018.
As previously highlighted at Investor Day, we recorded an after tax provision of approximately.
$14 million related to our legacy aviation business.
We recorded an after tax provision of approximately 2 million related to the leadership transition of Tri, Ed, which again, Steve just spoke to previously.
As a result of the cost savings from this charge, we expect to get a payback and about two years.
Finally, we also incurred about 2 million and nonrecurring M&A related expenses in Q4, including just over 1 million in costs attributable to a transaction and we did not ultimately pursue.
And next closing at which we purchased the remaining 4% non controlling interest in kg for approximately 3 million shares Vcan. These shares. These shares will be issued in March and no gain or losses realized on this transaction.
As there is also this transaction we no longer have any non controlling interests in any of our operating subsidiaries.
Turning to page 21.
Just a few presentation.
Changes to highlight.
First we reclassified certain aviation assets from held for sale to inventory to give us more flexibility to realize on or capital.
Second the asset related to try adds reserve deposits is now presented gross with a matching liability as required by I address.
There is no impact on the retained reserve interest, which is what triad expects to recover from the reserve deposits and what we have previously reported this was simply a presentation change.
Finally, we have broken out marketing services revenue earned by kg as a separate line item on a consolidated income statement.
Turning to the next stage.
No significant changes in the balance sheet compared to Q3 total assets and total debt to were both down by about $20 million.
As a result of the acquisition of the card investment management platform managing advisory assets are now approximately $34 billion at the end of Q4 2019.
Turning to the next page.
Q4, adjusted EPS of eight cents per share was at the high end of our guidance range and up 60% compared to Q4 2018 for the year. Adjusted EPS was 27 cents per share up from 11 cents in the prior year the year over year growth in adjusted EPS reflects the strong performance of all three of our operating business.
Yes.
And finally, just to note our effective tax rate and adjusted net income was 21% in 2019 and 19% in the fourth quarter in line with our annual guidance range of 20% to 22%.
Operating expenses were down slightly compared to Q O Q4, 2018 prior due to lower expenses that kg and lower corporate operating expenses.
Partially offset by higher higher operating expenses and service finance.
Finally, turning to at the next page.
Well just continue to operate operations. There are no significant chan changes in our rail in CV assets, Frank MCV legacy assets from kick from Q3.
Aviation assets are down to $97 million into held for sale category and another 25 million and inventory.
Total legacy assets of approximately $330 million at the end of 22000, 1800 70 million at the end of 2019 and expect to be at or below 50 million by the end of 2020, we will continue to expedite the exit from the remaining assets as quickly and efficiently as possible with a view to maximizing value.
With that ill pass it back to John.
Thanks, Michael.
Steve asked me to speak to a couple of slide that we presented at Investor Day.
Starting on page 27.
While we intend to remain an asset light business services company enhance liquidity and balance sheet have been huge competitive advantages, we able to use our our balance sheet to develop foundation products, which are which have which are designed to drive core originations for our banking financial services partners, our operating companies enjoy the benefits Vcs.
Investment grade rating, making many programs possible, even so to the extent that we are using the balance sheet will either be actively selling through bulk sales or stick to lower duration product before we turn into flow.
Because we turned over the balance as rapidly the average age of the assets on the balance sheet of only four months represents very low risk newly originated production.
Our three largest largest programs to date and been solar and complimentary flow at service finance and our floor plan business a triad collectively through December 2019, we have originated more than $1.1 billion, where the paper under these programs, but had only 150 million on balance sheet at year end. These are effectively balance sheet light program.
Yes.
On page 28.
We are attempting to show the many programs that we've actively helped our operating partners watch some of the technology enhancements, we have spearheaded and other areas where you see on this helped grow our partners businesses in some cases partners have used our balance sheet like the solar and for planned initiatives that we discussed previously other cases are deep knowledge and experience in commercial.
Finance has moved in new growth program for it like commercial MH commercial HVAC.
We announced several new programs at Investor Day in January that we're very excited about and we definitely look forward to updating you on our progress later in 2020.
Finally on page 29.
Oh, sorry, skip the pace there.
Yes, sorry about that finally on page 29, we've successfully how each of our businesses expand operating margins well, obviously tried and kg from the chart. If we adjust SFC or service finance is very high absolute margins in Q4 2018 for the bulk sale of held for trading assets to dissolve.
So upward sloping we expect continued improvement for each of these businesses in 2020.
Then spent an enormous amount of time and resource resources doing deeper views on the businesses to identify areas for efficiency growth and other improvement each of our businesses haven't experienced business analysts responsible for analytics and issue identification and effect, we have married exceptional entrepreneurial businesses with experience corporate culture.
Drive improved performance. So we are thrilled with the results.
With that I'll turn it.
On slide 30, a few quick closing comments before we open the call happy to report eight cents in line with guidance of seven to eight cents full year of 27 cents compared compares favorably to earning our increased guidance of 25 to 28 cents, which was updated.
From the original 23 to 25 cents, we're highly confident as a management team and our 36 to 41 cents of guidance for 2020.
In terms of capital management quarterly dividend remains at two and a half sense, which as you know was raised in the third quarter of 19.
Our 2000 1920 NC ideas authorized at our senior credit fills facility has been extended to 2023.
With that operator, I'd like to open the call for questions.
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There will be a brief pause while the participants register for questions. Thank you for your patience.
The first question comes from Tom Mackinnon.
With BMO capital markets.
Please go ahead.
Yes, thanks, good afternoon, everyone.
Just a couple of questions here with respect to the M&A related expenses and the leadership transition expenses.
We are those all part of the 18 and a half million adjusted net income.
For continuing operations, where any of those put below the line.
Hi, Tom It's Michael you have all we put those charges below the line both of those charges were recognized there that you can yes.
Okay.
And then the.
Yes, what why was the.
Service finance it looked like the general and admin expenses seem to be running quite a bit higher than there are no more run rate in the fourth quarter is there any kind of seasonality or how should we be looking at those.
On the flip side, the corporate seem to be a little bit lower.
Not sure how you may have treated.
M&A related expenses incorporate in the past as well so maybe some color with respect to those.
I think Tom on on service Finance, you're probably will look to confirm opposed to call, but expect you're seeing those.
The buildout costs related to the multi lender platform being expensed not capitalized.
I think I'm sure. That's the majority of it but let me will confirm that after the call.
Okay, and then interest expense if I look at that it seems to be a.
5.2 million I mean, as things have been jumping all over the place, but it's been a lowest what has been for the last three quarters I'm just not sure how we should be thinking about that given the use of your balance sheet going forward for 2020.
Well I think as we said at Investor day. Thanks.
We anticipate debt levels to stabilize around where the are now given the.
Organic growth opportunities in front of the business so.
I think a Q4, the Q4 run rate of interest expense.
Probably a reasonable way to look at it for 2020.
Okay. So you did come down came down from Q Q1, 600 million in the end of Q1 to approximately four and around the Fourthirty to 450 million range and we anticipate that.
For.
Levels are for through 2020.
And then the all in costs from that including amortization defining car financing cost us approximately 5%.
Yes, I'm looking at on page 23 to five point.
183 million interest expense, that's what I'm, referring to.
It seems to be quite a bit lower than previous quarters in east, you're telling us that that probably should be the run rate for that.
Yes, yes, Okay, and then just a couple of quick wins here the guidance for Kessler hasn't changed but now that you should we.
Soon somehow that now it wouldn't it be 4% higher as a result of the bye.
We.
Paid and the buyout of the non controlling interest when we did our guidance. So there's no change there. Okay. So the guidance did have at Investor day did have a 100%.
Yes, I was at 100% basis, yes.
And the reason for the lifting the triad was that.
Success of the brands was and then that 25 million that Steve spoke of in the bronze program at Tri Ed is that is that origination and is that included in the sort of the six.
Need to 720 originations that we that you had guided case.
Two messages there Tom the reference on Bronto, just to give you a sense of.
Well the new programs, we launched a number of new programs at Investor Day.
And that's that's 25 million of approvals, which over half of those will funded originations that was just to give color on that the reason for the guidance increase and Tri Ed was.
With the transition complete we are now eliminating.
Management compensation expenses so we.
Having invested capital in the transition we want to show you those there was an appropriate buyback.
Okay, and say going out with time here the last in terms the.
How much in terms of which the servicing and originations with complementary flow and how should we be thinking about that going forward.
Yes commentary flows was probably 10% to 15% of originations in the quarter.
And is that in the guidance for 2020 is that kind of what we should be thinking that it. It is it has to offer that flow as you know is being originally on behalf of four to five bank partners, we originated into a minimum portfolio size and sell through.
Has the same yield those same care same yield in same credit characteristics as the as critical to core business.
Okay, well, thanks for taking my time thanks.
Thanks.
Once again, if you have a question. Please press Star then one.
The next question comes from Jamie glowing with National Bank Financial. Please go ahead.
Yes. Thank you.
First question just related to the west.
Credit card team can you just walking through the.
What you're getting out of this business where did that come from.
Just want to get a little bit are sending us too.
What this team represents and and maybe talk about the purchase price.
For August.
[music].
Yeah. Thanks, Jimmy the the team was we it was an external firm.
Got it worked with us on all before credit card transactions that we have.
Closed.
And my thought was at some point once we had done enough work with them we would internalize.
That team that team had management fees associated as part of their platform.
While these asked that required so we did purchase price was leave the present valuables management fees.
So is it fair it's a it's a good price for us a fair deal for them, but a good price for us because we're being.
The management fees they receive when those four portfolios the other benefit for us or is that these senior executives deep history and credit cards are now carrying the full kessler the full coke kg menu. If you will so there are no out marketing in addition to sourcing.
Got it card opportunities for institutional investors. There also marketing things like risk based management and other products. So that part isn't in the forecast.
So it was it was kind of a wait and see on my part to see how these first transactions when we were happy with how they won.
We were able to cut a deal which the PV of the fees, which I think as a.
Conservative valuation for us a good valuation and we're happy to help him aboard and I think that will be.
A lot of success from this team over and above identifying credit cards for institutional investors to purchase price was $10 million, which the PV of the fees.
Okay, and and are the expenses tied to this team are they included in the existing guidance for Tussler group as well.
Yes, they are.
Great second questions then around.
Capital deployments and.
Just thinking about buybacks versus dividend increases.
How.
How does the I guess.
Right Downs of the.
I guess the assets and maybe just for all of some of those assets held for future years does that impact.
How you're viewing share buybacks and.
And dividends going forward.
Yeah, I think JV the the increase valuation was allowed us to.
More flexibility on.
Increase the.
To accelerate the timetable return of capital don't think that we're giving that back to the people who would be illiquid.
There was it give us more flexibility. So our intention is still recover the capital here and have a positive.
Very I'd say more than what we'd given the valuation that capital as you point, though.
A lot of it as a leveraged we're showing this portfolio going down somewhere between zero.
25, sorry, 50 million by year end, our target is to be able to us business by the NFV took 2020, you might have a little piece left.
But you can rest assured that every every dollar we get back here is going to go back into redeployment of capital as you point as you point out in the past.
That has been a function of.
Principally has been used for for for our tender offer.
Yes, and while we were active in our can see I'd be in the fourth quarter before what are the blackout.
When you look at the current valuation, we still believe it to be very attractively undervalued.
Okay. Thank you I'll turn it over.
Yeah. No question is registered at this time. This concludes today's conference call. You may disconnect. Your lines. Thank you for participating and have a great day.
[music].